-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CSoxZW50iuQpXUBOTHQrmKJ+lerXZsY27ol5ZD2qccvSsMLOiN36aNjCyojymFhc XeRE1sgCMTY4BaHdultrDA== 0000950144-96-006962.txt : 19961011 0000950144-96-006962.hdr.sgml : 19961011 ACCESSION NUMBER: 0000950144-96-006962 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19961010 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENAL CARE GROUP INC CENTRAL INDEX KEY: 0000920052 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 621622383 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-13813 FILM NUMBER: 96641429 BUSINESS ADDRESS: STREET 1: 1801 WEST END AVENUE STREET 2: SUITE 1100 CITY: NASHVILLE STATE: TN ZIP: 37203 BUSINESS PHONE: 6153271513 S-1 1 RENAL CARE GROUP, INC. FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- RENAL CARE GROUP, INC. (Exact name of Registrant as specified in its charter) --------------------- DELAWARE 8092 62-1622383 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) incorporation or organization) Classification Code Number)
2100 WEST END AVE, SUITE 800 NASHVILLE, TENNESSEE 37203 (615) 321-2333 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------------- SAM A. BROOKS, JR. RENAL CARE GROUP, INC. 2100 WEST END AVE, SUITE 800 NASHVILLE, TENNESSEE 37203 (615) 321-2333 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- COPIES TO: STEVEN L. POTTLE, ESQ. PETER J. ROMEO, ESQ. ALSTON & BIRD HOGAN & HARTSON L.L.P. ONE ATLANTIC CENTER 555 THIRTEENTH ST., N.W. 1201 WEST PEACHTREE STREET WASHINGTON, D.C. 20004 ATLANTA, GEORGIA 30309-3424 (202) 637-5600 (404) 881-7000
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable on or after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / --------------------- CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value per share................................ 3,450,000 $36.25 $125,062,500 $37,898 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
(1) Includes 450,000 shares subject to an over-allotment option granted to the Underwriters by the Company. (2) Estimated pursuant to Rule 457(c) solely for the purpose of computing the amount of the registration fee. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED , 1996 3,000,000 SHARES [LOGO] RENAL CARE GROUP, INC. COMMON STOCK Of the 3,000,000 shares of Common Stock of Renal Care Group, Inc. ("Renal Care Group" or the "Company") offered hereby (the "Offering"), 1,500,000 shares are being offered by the Company and 1,500,000 shares are being offered by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sales of shares of Common Stock by the Selling Stockholders. The Common Stock of the Company (the "Common Stock") is quoted on the Nasdaq National Market System (the "Nasdaq Stock Market") under the symbol "RCGI." On October 7, 1996, the last sale price of the Common Stock as reported by the Nasdaq Stock Market was $36.25 per share. --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=================================================================================================== PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS - --------------------------------------------------------------------------------------------------- Per Share.................. $ $ $ $ Total(3)................... $ $ $ $ ===================================================================================================
(1) See "Underwriting" for a description of indemnification arrangements with the Underwriters. (2) Before deducting expenses of the Offering, payable by the Company, estimated at $ . (3) The Company has granted the Underwriters a 30-day over-allotment option to purchase up to an additional 450,000 shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total "Price to Public," "Underwriting Discount" and "Proceeds to Company" will be $ , $ and $ , respectively. See "Underwriting." --------------------- The Common Stock is offered by the several Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by them and subject to approval of certain legal matters by counsel for the Underwriters. The Underwriters reserve the right to reject orders in whole or in part and to withdraw, to cancel or to modify the offer without notice. It is expected that delivery of certificates representing the Common Stock will be on or about , 1996. EQUITABLE SECURITIES CORPORATION HAMBRECHT & QUIST MORGAN KEEGAN & COMPANY, INC. NEEDHAM & COMPANY, INC. The date of this Prospectus is , 1996 3 MAP --------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Prospective investors should also review carefully the information set forth under "Risk Factors." Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Renal Care Group is a specialized provider of nephrology services to patients with kidney disease, including patients suffering from chronic kidney failure, also known as end-stage renal disease ("ESRD"). The Company provides dialysis and ancillary services to approximately 5,000 patients through 77 outpatient dialysis centers in 12 states and manages an additional eight dialysis centers in five states in affiliation with leading medical centers such as Vanderbilt University Medical Center and The Cleveland Clinic Foundation. In addition to its outpatient dialysis center operations, Renal Care Group provides acute dialysis services through contractual relationships with 42 hospitals, staff-assisted dialysis services to 37 skilled nursing facilities and physician practice management services to 16 of the 59 nephrologists who are affiliated with the Company's outpatient dialysis centers. Renal Care Group was formed by leading nephrologists with the objective of creating an entity with the clinical and financial capability to manage the full range of care for ESRD patients on a cost-effective basis. The Company is working in conjunction with its affiliated physicians to develop fully integrated nephrology networks that will implement clinical protocols designed to improve outcomes and reduce costly medical complications associated with ESRD. Nephrology is the specialized practice of medicine dedicated to providing care to patients with ESRD and other kidney-specific ailments. A key component of the nephrologist's practice is the dialysis facility, where ESRD patients receive their dialysis treatments three times per week in a technologically advanced outpatient setting. Outpatient dialysis facilities generally are owned by nephrology groups and comprise an integral component of the nephrologist's practice because of the critical role that dialysis plays in the treatment of ESRD patients. According to the Health Care Financing Administration ("HCFA"), there were in excess of 2,800 dialysis centers in the United States at the end of 1995. The Company believes that approximately 38% were owned by multi-center dialysis companies, 32% were owned by independent physicians and 30% were hospital-based centers. Although numerous nephrology groups have in the past sold their dialysis centers to entities engaged in the business of owning and operating such facilities, the Company believes that many nephrology groups recognize the need to affiliate with an entity having broader capabilities that can provide clinical, financial and business expertise to help them manage the increasingly complex and time-consuming aspects of both their dialysis center operations and their nephrology practices. In addition, many hospitals are motivated to sell or outsource management of their dialysis facilities as they refocus their resources on their core business in response to increasing competitive pressures. ESRD is the state of advanced renal impairment that is irreversible and imminently lethal. ESRD patients require dialysis or kidney transplantation to sustain life, with dialysis being the form of treatment provided to approximately 94% of ESRD patients in 1995. Since 1972, individuals with ESRD have been entitled to Medicare benefits regardless of age or financial circumstances. According to data published by HCFA, the number of patients receiving chronic dialysis services in the United States has grown at a compound annual growth rate of 8.9%, from 66,000 patients in 1982 to approximately 200,000 in 1995. According to the United States Renal Data System ("USRDS"), the ESRD incidence rate among Medicare-eligible patients increased by 97.3% from 1984 to 1993. The USRDS estimates that the total direct medical charges for ESRD were approximately $11.1 billion in 1994. The Company attributes the growth in the number of ESRD patients principally to the aging of the general population and better treatment and survival of patients with hypertension, diabetes and other illnesses that lead to chronic kidney disease. In addition, improved technology has enabled older patients and those who previously could not tolerate dialysis due to other illnesses to benefit from this life-sustaining treatment. The Company believes these trends will result in 3 5 continued growth in the number of ESRD patients and increased demand for dialysis and associated nephrology services. Renal Care Group's objective is to develop fully integrated nephrology provider networks to assume and manage the clinical and financial risk associated with providing renal disease management services on a capitated basis. The Company seeks to achieve this objective by (i) acquiring, developing and managing outpatient and university-based dialysis centers, (ii) integrating its dialysis centers with affiliated nephrology practices, (iii) developing a protocol-driven ESRD management model to enhance clinical outcomes and (iv) providing an appropriate range of ancillary services to ESRD patients. The Company believes an integrated network of nephrologists and dialysis centers, combined with the Company's clinical expertise, management experience and access to capital, will provide significant advantages to patients and third-party payors by improving the quality of care while reducing the overall costs associated with treating patients with all forms of kidney disease, including those who have ESRD. RECENT DEVELOPMENTS On September 30, 1996, the Company completed a merger with RenalWest, L.C. ("RenalWest") which was accounted for as a pooling of interests. RenalWest, which has 18 affiliated nephrologists, operates 19 freestanding hemodialysis centers and three home peritoneal dialysis centers serving approximately 1,200 patients in the state of Arizona. RenalWest also provides inpatient dialysis services to 16 acute care hospitals and staff-assisted dialysis services to 37 skilled nursing facilities. THE OFFERING Common Stock offered by the Company.......... 1,500,000 shares Common Stock offered by the Selling Stockholders............................... 1,500,000 shares Common Stock to be outstanding after the Offering(1)................................ 14,125,954 shares Use of proceeds.............................. For general corporate purposes, which may include potential future acquisitions. See "Use of Proceeds." Nasdaq Stock Market symbol................... RCGI
- --------------- (1) Excludes (i)1,831,993 shares subject to options outstanding at a weighted average exercise price of $19.47 per share, (ii) 220,000 shares subject to warrants outstanding at an exercise price of $7.50 per share and (iii) 184,000 shares of Common Stock that may be issued upon conversion of $1,380,000 in principal amount of Convertible Senior Subordinated Promissory Notes (the "Convertible Notes"). See "Management -- Stock Option and Stock Purchase Plans" and "Capitalization." 4 6 SUMMARY COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) The following presents summary combined financial and statistical data for the periods indicated of Renal Care Group, five companies (the "Founding Companies") acquired in simultaneous transactions in February 1996 (the "Combination"), Main Line Suburban Dialysis Centers, Inc. ("Main Line") acquired in April 1996 and RenalWest acquired in September 1996. The financial data set forth below are unaudited and have been derived from the financial statements of Renal Care Group and the Founding Companies included elsewhere and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31,(1) SIX MONTHS ENDED JUNE 30,(1) ----------------------------------------- ----------------------------- PRO FORMA PRO FORMA 1993 1994 1995 1995(2) 1995 1996 1996(3) ------- -------- -------- --------- ------- ------- --------- INCOME STATEMENT DATA: Net revenue................ $80,442 $110,670 $115,329 $ 115,329 $56,253 $62,736 $62,736 Patient care costs......... 58,314 75,366 80,417 79,949 39,137 43,883 43,883 General and administrative expenses................ 6,799 12,616 12,866 15,466 6,346 6,417 6,417 Provision for doubtful accounts................ 2,010 2,914 3,995 3,995 2,031 1,196 1,196 Depreciation and amortization............ 2,416 3,414 3,661 3,914 1,648 2,158 2,158 Merger expenses............ -- -- -- -- -- 680 680 Income from operations..... 10,903 16,360 14,390 12,005 7,091 8,402 8,402 Income before income taxes................... 10,443 15,714 13,377 11,499 6,714 8,549 8,549 Net income................. 7,129 5,300 Earnings per share......... $ 0.64(4) $ 0.40 Weighted average shares outstanding............. 11,080(4) 13,087
JUNE 30, 1996 ------------------------ ACTUAL AS ADJUSTED(5) ------- -------------- BALANCE SHEET DATA: Working capital..................................................... $32,019 $ 83,311 Total assets........................................................ 85,643 136,935 Total debt.......................................................... 6,805 6,805 Stockholders' equity................................................ 55,431 106,723
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, --------------------------- ----------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- STATISTICAL DATA: Treatments(6).................................. 470,035 598,228 625,413 309,162 331,280 Patients at period-end(7)...................... 3,697 4,063 4,246 4,093 4,416 Outpatient centers at period-end(8)............ 70 72 75 73 77 Acute service agreements at period-end......... 43 43 44 44 42
- --------------- (1) The Combination was accounted for using historical cost, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48, because no single owner group from any of the Founding Companies held more than a 50% equity interest in the Company as of the closing of the Company's initial public offering. Accordingly, the Company has recorded the net assets acquired at the Founding Companies' historical cost basis, as determined by generally accepted accounting principles. (2) Pro forma information for the year ended December 31, 1995 gives effect to (a) the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes; (b) additional estimated corporate overhead of approximately $2.6 million that would have been incurred 5 7 had the Combination occurred at the beginning of 1995; and (c) certain other adjustments to reflect the Combination and the initial public offering. See Pro Forma Combining Financial Statements of Renal Care Group, Inc. (of Delaware). (3) Pro forma information for the six months ended June 30, 1996 gives effect to the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes. See Pro Forma Combining Financial Statements of Renal Care Group, Inc. (of Delaware). (4) The calculation of pro forma earnings per share for the year ended December 31, 1995 excludes 1,156,000 shares of Common Stock issued in the initial public offering. The net proceeds from these shares were used for general corporate purposes and therefore are excluded from the calculation. All subsequent periods reflect the full impact of all shares issued in the initial public offering. (5) Adjusted to reflect the sale of 1,500,000 shares offered by the Company hereby at an assumed public offering price of $36.25 per share and the application of the net proceeds therefrom. (6) Treatments include all hemodialysis treatments provided in outpatient facilities, as well as all home dialysis treatments and acute care treatments provided in hospitals. Peritoneal dialysis treatments are stated in hemodialysis equivalents. Excludes treatments provided at centers managed by the Company. (7) Number of ESRD patients under care of outpatient centers at period-end, including patients receiving treatments at the Company's outpatient centers and in the patient's homes. Excludes patients receiving care at centers managed by the Company. (8) Includes centers managed by the Company. 6 8 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of Common Stock offered hereby. This Prospectus contains certain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of the risk factors set forth below and other factors described elsewhere in this Prospectus. LIMITED COMBINED OPERATING HISTORY Renal Care Group has conducted operations as a combined entity only since February 1996, when it acquired the Founding Companies effective upon the closing of its initial public offering. Since the initial public offering, the Company has made several additional acquisitions of entities that, in some cases, have been part of the Company's combined operations for only a few weeks or months. In particular, the Company's recent acquisition of RenalWest may place significant demands on the Company's management and other resources, and there can be no assurance that the Company will be able to integrate the business operations of RenalWest successfully or that there will be any operating efficiencies or economies of scale between the businesses. Further, there can be no assurance that the Company will be able to integrate the dialysis centers, information systems and related operations of the entities acquired by it or to continue operating them profitably. Nor can there be any assurance that the Company's management group will be able to implement effectively the Company's operating and growth strategy while it is engaged in acquisition activity. Failure to integrate successfully the centers and other operations acquired by the Company or to implement effectively the Company's operating and growth strategy could have a material adverse impact on the Company's results of operations, financial condition and business. See "Business -- Strategy." DEPENDENCE ON GOVERNMENT REIMBURSEMENT Renal Care Group is reimbursed for dialysis services primarily at fixed rates established under the ESRD program administered by HCFA. Under this program, once a patient becomes eligible for Medicare reimbursement, Medicare is responsible for payment of 80% of the composite rate determined by HCFA for dialysis treatments. Since 1972, qualified patients with ESRD have been entitled to Medicare benefits regardless of age or financial circumstances. The Company estimates that approximately 68%, 68% and 67% of its net revenue for the years ended December 31, 1994 and 1995 and for the six months ended June 30, 1996, respectively, consisted of reimbursements from Medicare under the ESRD program, including revenue for the reimbursement of the administration of a bio-engineered hormone, erythropoietin ("EPO"), to treat anemia. Since 1983, Congressional actions have resulted in occasional changes in the Medicare composite reimbursement rate, and the Company is not able to predict whether future rate changes will be made. In August 1996, HCFA announced that an increase in the composite rate may be appropriate within the next few years. However, in making this announcement, HCFA also noted that any rate increase must be considered in the context of Medicare budgetary concerns. HCFA stated that it may recommend an update to the composite rate for fiscal year 1998. Legislation or regulations may be enacted in the future that may significantly modify the ESRD program or otherwise affect the amount paid for the Company's services. Any such action could have a material adverse effect on the Company's results of operations, financial condition and business. Furthermore, increases in operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in prescribed rates, may have a material adverse effect on the Company's earnings in the future. The Company is also unable to predict whether certain ancillary services, for which the Company currently is reimbursed separately, may in the future be included in the Medicare composite rate. See "Business -- Reimbursement -- Medicare Reimbursement Rates." Since June 1, 1989, the Medicare ESRD program has provided reimbursement for the administration of EPO to dialysis patients. EPO is beneficial in the treatment of anemia, a medical complication frequently experienced by dialysis patients. The Company believes that in excess of 80% of its patients receive EPO. Revenues from the administration of EPO (the substantial majority of which are reimbursed through Medicare and Medicaid programs) were approximately 18%, 17% and 18% of the net revenue of the Company 7 9 for each of the years ended December 31, 1994 and 1995 and for the six months ended June 30, 1996, respectively. EPO reimbursement significantly affects the Company's earnings. Any reduction in reimbursement rates for EPO could have a material adverse effect on the Company's results of operations, financial condition and business. EPO is produced by a single manufacturer, and any interruption of supply or product cost increases could have a material adverse effect on the Company's business. See "Business -- Reimbursement -- Medicare Reimbursement Rates." All of the states in which the Company currently operates dialysis centers provide Medicaid (or comparable) benefits to qualified recipients to supplement their Medicare entitlement. The Company estimates that approximately 8%, 7% and 7%, of the Company's net revenue for the years ended December 31, 1994 and 1995 and for the six months ended June 30, 1996, respectively, were funded by Medicaid or comparable state programs. The Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, all of which may have the effect of decreasing program payments, increasing costs or modifying the way the Company operates its dialysis business. See "Business -- Reimbursement -- Medicaid Reimbursement" and "Business -- Government Regulation." DEPENDENCE ON OTHER SOURCES OF REIMBURSEMENT The Company estimates that approximately 24%, 25% and 26% of its net revenue for the years ended December 31, 1994 and 1995 and for the six months ended June 30, 1996, respectively, were derived from sources other than Medicare and Medicaid. Substantially all of this revenue comes from private insurance for chronic dialysis treatments and payments from hospitals with which the Company has contracts for the provision of acute dialysis services. In general, private insurance reimbursement and payments for treatments performed at hospitals are at rates significantly higher than Medicare and Medicaid rates. The Company believes that if Medicare reimbursement for dialysis treatment is reduced in the future, these private payors may be required to assume a greater percentage of the costs of dialysis care and, as a result, may focus on reducing dialysis payments as their overall costs increase. In addition, the Company believes that health maintenance organizations ("HMOs") and other managed care providers may have a strong incentive to reduce further the costs of specialty care and may seek to reduce amounts paid for dialysis. The Company is unable to predict whether and to what extent changes in these private reimbursement rates may be made in the future. Any reduction in the rates paid by private insurers and hospitals or a significant change in the Company's payor mix towards additional Medicare or Medicaid reimbursement could have a material adverse effect on the Company's results of operations, financial condition and business. Similarly, increases in operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in private reimbursement rates, could have a material adverse effect on the Company's results of operations, financial condition and business. See "Business -- Operations" and "-- Reimbursement." RISKS ASSOCIATED WITH GROWTH STRATEGY The Company's strategy includes expanding its dialysis business through the acquisition and development of dialysis centers and the acquisition and management of nephrology practices. Competition for acquisitions in the dialysis industry has increased significantly in recent years and, as a result, the cost of acquiring dialysis centers has increased. There can be no assurance that the Company will be able to identify, acquire or profitably integrate acquired dialysis centers and nephrology practices. Acquisitions involve a number of risks related to integration, including adverse short-term effects on the Company's reported operating results, diversion of management's attention, dependence on retention, hiring and training of key personnel, including Medical Directors for each dialysis center, some or all of which could have a material adverse effect on the Company's results of operations, financial condition and business. In addition, there can be no assurance that acquired or managed dialysis centers will achieve net revenue and earnings that justify the Company's investment therein or expenses related thereto. In order to implement its growth strategy, the Company may require substantial capital resources and need to incur, from time to time, short- and long-term bank indebtedness. The Company also may need to issue, in public or private transactions, equity or debt securities, the terms of which will depend on market and other conditions. There can be no assurance that any such 8 10 additional financing will be available on terms acceptable to the Company, if at all. To the extent that the Company is unable to acquire dialysis centers or acquire or manage nephrology practices, to integrate such centers and practices successfully, or to obtain financing on terms acceptable to the Company, its ability to expand its business could be reduced significantly. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Strategy." DEPENDENCE ON PHYSICIAN REFERRALS The Company's dialysis centers depend upon their Medical Directors and other local nephrologists for referrals of ESRD patients for treatment and one or a few physicians typically account for all or a significant portion of the patient referral base at a center. The loss of one or more referring physicians at a particular center could have a material adverse effect on the operations of such center, and the loss of a significant number of referring physicians could have a material adverse effect on the Company's results of operations, financial condition and business. The illegal remuneration provisions of the Social Security Act and similar state laws prohibit the payment of remuneration to induce referrals. Furthermore, in many instances stockholders of the Company are the primary referral sources for the dialysis centers operated by the Company. If such ownership is deemed to violate applicable federal or state law, such physician owners may be forced to dispose of their stock in the Company. The Company cannot predict the effect such disposition would have on its business or stock price. See "Business -- Operations -- Relationships With Referral Sources; Medical Directors" and "Business -- Government Regulation." OPERATIONS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION The Company is subject to extensive federal, state and local regulation regarding, among other things, fraud and abuse, patient referral, health and safety, environmental compliance and toxic waste disposal. Much of this regulation, particularly in the area of patient referral, is complex and open to differing interpretations. There are two general frameworks under which patient referrals are regulated. First, the illegal remuneration provisions of the Social Security Act make it illegal for any person to, among other things, solicit, offer, receive or pay any remuneration in exchange for referring, or to induce the referral of, a patient for treatment which may be paid for by Medicare, Medicaid or a similar state program. Second, certain provisions contained in the Omnibus Budget Reconciliation Act of 1989 and the Omnibus Budget Reconciliation Act of 1993 ("Stark I" and "Stark II," respectively) prohibit physician referrals for clinical laboratory services and "designated health services" (including some of the specific services offered by the Company) to entities with which a physician or an immediate family member has a "financial relationship." These laws contain certain statutory exceptions, and federal agencies have promulgated regulations clarifying certain of these provisions and exceptions and creating certain additional exceptions, or "safe harbors," from such prohibitions. Many states have enacted similar provisions of law, which may not have identical prohibitions or exceptions, but which may apply regardless of whether Medicare or Medicaid funds are involved. However, due to the breadth of the statutory provisions and the absence in many instances of regulations or court decisions addressing the specific arrangements by which the Company conducts its business, it is possible that some of the Company's practices might be challenged under these laws. Violations of the federal laws are punishable by civil sanctions, including disqualification from participation in the Medicare or Medicaid programs, and, in the case of the federal illegal remuneration provisions, criminal sanctions. There can be no assurance that the Company's practices will not be challenged by governmental authorities, or that the Company will not be subject to sanctions under such laws or be required to alter or discontinue certain of its practices. In addition, there can be no assurance that if the Company is required to alter its practices, that it will be able to do so successfully. The occurrence of any of these events may result in a material adverse effect on the Company's net revenues and earnings. See "Business -- Government Regulation." A number of proposals for health care reform have been made recently to provide greater governmental control of health care spending and to provide broader access to health care services. For example, the Health Insurance Portability and Accountability Act of 1996 was signed into law in August 1996. This law, among other things, provides for insurance portability for individuals who lose or change jobs, limit exclusions 9 11 for pre-existing conditions, and establish a pilot program for medical savings accounts. It is uncertain what additional health care reform legislation, if any, ultimately will be implemented or whether other changes in the administration or interpretation of governmental health care programs will occur. The Company cannot predict what effect future health care legislation or other changes in the administration or interpretation of governmental health care programs may have on the Company's operations. See "Business -- Government Regulation -- Health Care Legislation." SUBSTANTIAL COMPETITION The dialysis industry is fragmented and is consolidating rapidly. Accordingly, the industry is highly competitive, particularly from the standpoint of competition for the acquisition of existing dialysis centers and the development of relationships with referring physicians. Many of the Company's competitors have substantially greater financial resources and more established operations and infrastructure than the Company and may compete with the Company for acquisitions of dialysis centers and nephrology practices. In addition, the Company may also experience competition from referring physicians who open their own dialysis centers. There can be no assurance that the Company will be able to compete effectively with any such competitors. See "Business -- Competition." DELAYS AND COSTS OF IMPLEMENTING INTEGRATED OPERATING SYSTEMS The Company is in the process of implementing and integrating certain information and operating systems for its centers, all of which have been acquired within the last several months. The Company may experience delays, complications and expenses in implementing, integrating and operating such systems, any of which could have a material adverse effect on the Company's results of operations, financial condition and business. Furthermore, while the Company believes that the technology that it implements will be adequate for the Company's current needs, such systems may require modification, improvement or replacement as the Company expands or if new technologies render the Company's systems obsolete. Such modifications, improvements or replacements may require substantial expenditures to design and implement and may require interruptions in operations during periods of implementation, any of which could have a material adverse effect on the Company's results of operations, financial condition and business. See "Business -- Operations." DEPENDENCE ON KEY PERSONNEL The Company is dependent upon the services of certain key executive officers and the Chairman of the Board. The Company's growth will depend in part upon its ability to attract and retain skilled employees, for whom competition is intense. The Company believes that its future success will also depend on its ability to attract and retain qualified physicians to serve as Medical Directors of its dialysis centers. The Company does not carry key-man life insurance on any of its officers. The loss by the Company of any of its executive officers or the Chairman of the Board, or the inability to attract and retain qualified management personnel and Medical Directors, could have a material adverse effect on the Company's results of operations, financial condition and business. See "Management." SIGNIFICANT INFLUENCE BY MANAGEMENT AND PHYSICIAN STOCKHOLDERS Upon completion of the Offering, the Company's directors, executive officers and physician stockholders will beneficially own approximately % of the outstanding shares of Common Stock ( % if the Underwriters' over-allotment option is exercised in full). The Company's Amended and Restated Certificate of Incorporation and Bylaws do not provide for cumulative voting. Although directors, executive officers and physician stockholders do not have any arrangements or understandings among themselves with respect to the voting of the shares of Common Stock beneficially owned by such persons, such persons acting together would be able to significantly influence the election of directors and might be able to approve or disapprove any matter submitted to a vote of stockholders, including a change in control in the Company. See "Management" and "Principal and Selling Stockholders." 10 12 POTENTIAL CONFLICTS OF INTEREST The Company is a party to Medical Director agreements with Stephen D. McMurray, M.D., W. Tom Meredith, M.D., Thomas A. Lowery, M.D., John D. Bower, M.D. and Kenneth E. Johnson, M.D., each of whom is a director and stockholder of the Company. In addition, the Company leases space from Dr. Bower, Dr. Lowery, and an entity in which Dr. Meredith owns a one-third interest. The chairman of the Company, Harry R. Jacobson, M.D., serves as Deputy Vice Chancellor of Health Affairs at Vanderbilt University, and the Company has an agreement with Vanderbilt University Medical Center to manage its outpatient dialysis facility. The outside interests of these directors may give rise to certain conflicts of interest concerning the fulfillment of their responsibilities as directors of the Company, and such conflicts of interest could result in decisions that may not reflect the interests of all stockholders equally. See "Certain Transactions." ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS The Company's Amended and Restated Certificate of Incorporation and Bylaws contain a number of provisions that could inhibit a change in control of the Company by means of a tender offer, merger, proxy contest or otherwise, including advance notice and super-majority voting provisions, provisions that establish a classified board of directors, and provisions that enable the Board of Directors to issue "blank check" preferred stock. See "Description of Capital Stock -- Special Provisions of the Amended and Restated Certificate of Incorporation, Bylaws and Delaware Law." POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Common Stock may fluctuate substantially in response to variations in the Company's operating and financial results, changes in earnings estimates by securities analysts, general economic and market conditions, and other factors. See "Price Range of Common Stock." POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market or the availability of such shares for sale following the Offering could adversely affect the prevailing market price for the Common Stock. After completion of the Offering, the Company will have 14,125,954 shares of Common Stock outstanding (14,575,954 if the Underwriters' over-allotment option is exercised in full). Of those shares, approximately 7,485,000 shares, including the 3,000,000 shares offered hereby (7,935,000 and 3,450,000 shares, respectively, if the Underwriters' over-allotment option is exercised in full), will be freely tradeable without restriction or further registration under the Securities Act, unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). In addition, up to 1,831,993 shares of Common Stock are issuable upon the exercise of options which will be freely tradeable without restriction unless purchased by an "affiliate." The remaining approximately 6,640,954 shares outstanding, plus up to 404,000 shares of Common Stock which may be issued upon exercise of warrants or conversion of convertible securities, will become eligible for future sale in the public market in accordance with Rule 144 under the Securities Act, as currently in effect, beginning in February 1998. The Company has granted certain "piggyback" registration rights with respect to shares of Common Stock to the holders of a total of approximately 6,640,954 shares of Common Stock and 220,000 shares issuable upon the conversion of warrants, such "piggyback" registration rights not being exercisable except in connection with a Company registration. The Company's officers and directors, and certain stockholders of the Company, who upon completion of the Offering will own an aggregate of approximately shares of Common Stock, have agreed not to, directly or indirectly, offer, sell, contract to sell, grant any option to purchase or otherwise sell or dispose of any shares of Common Stock or other capital stock or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock or other capital stock for a period of 180 days after the Offering, without the prior written consent of Equitable Securities Corporation. See "Shares Eligible for Future Sale." 11 13 THE COMPANY Renal Care Group is a specialized provider of nephrology services that was founded in June 1995 to focus on the provision of care to patients with kidney disease, including patients suffering from chronic kidney failure. In February 1996, the Company commenced its business with the simultaneous acquisition in the Combination of the five Founding Companies: Kidney Care, Inc. and Medical Enterprises Ltd. ("MEL" and collectively "Kidney Care"); D.M.N. Professional Corporation ("DMN"); Tyler Nephrology Associates ("Tyler"); Kansas Nephrology Association ("Kansas"); and Renal Care Group, Inc., a Tennessee corporation ("Tennessee"). At the time of the Combination, the Founding Companies had an aggregate of 41 dialysis centers serving approximately 2,663 patients in eight states. The aggregate consideration paid by the Company in the Combination was approximately 4,834,000 shares of Common Stock with an aggregate value at the time of the Combination of approximately $87.0 million, $32.8 million in cash, $7.3 million in notes payable and $13.8 million of assumed debt. On April 26, 1996, the Company completed a merger with Main Line Suburban Dialysis, Inc. ("Main Line"). Main Line, based in Wynnewood, Pennsylvania, operates five dialysis centers serving approximately 350 patients in the suburban Philadelphia area. The Company acquired Main Line in exchange for shares of Common Stock with an aggregate value of approximately $18.2 million at the time the Company and Main Line entered into the merger agreement. The merger was accounted for as a pooling of interests. On July 1, 1996, the Company completed a merger with The Nephrology Centers, Inc. ("TNC"), which is based in Pensacola, Florida and operated two dialysis centers serving approximately 250 patients in the Pensacola and Crestview, Florida areas. TNC constructed two additional satellite centers which opened in September 1996. The Company acquired TNC in exchange for shares of Common Stock with an aggregate value of approximately $10.2 million at the time the Company and TNC entered into the merger agreement. The merger was accounted for as a pooling of interests. On September 30, 1996, the Company completed a merger with RenalWest, which has 18 affiliated nephrologists and operates 19 freestanding hemodialysis centers and three home peritoneal dialysis centers serving approximately 1,200 patients in the state of Arizona. RenalWest also provides inpatient dialysis services to 16 acute care hospitals and staff-assisted dialysis services to 37 skilled nursing facilities. The Company acquired RenalWest in exchange for shares of Common Stock with an aggregate value of approximately $72.0 million at the time the Company and RenalWest entered into the merger agreement. The merger was accounted for as a pooling of interests. In February 1996, the Company entered into an agreement to develop a dialysis center for the University of Louisville. In April 1996, the Company announced an agreement to operate and manage the outpatient dialysis activities of The Cleveland Clinic Foundation located in Cleveland, Ohio. The Cleveland Clinic Foundation operates two dialysis facilities staffed by 11 nephrologists serving approximately 370 patients. The Company's address is 2100 West End Avenue, Suite 800, Nashville, Tennessee 37203, and its telephone number is (615) 321-2333. 12 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,500,000 shares of Common Stock offered by it, at an assumed public offering price of $36.25 per share, are estimated to be approximately $51.3 million after deducting estimated underwriting discounts and offering expenses payable by the Company, (or approximately $66.8 million if the Underwriters' over-allotment option is exercised in full). The net proceeds will be used for working capital and general corporate purposes, including the potential acquisition and development of additional dialysis centers. The Company continually reviews and evaluates acquisition candidates as part of its growth strategy and is at various stages of evaluation, discussion or negotiation with a number of such candidates. The Company is not a party to any definitive agreement or letter of intent regarding any material acquisition, nor are there any material acquisitions that it considers probable. Pending application of the net proceeds as described above, the Company intends to invest the net proceeds in short-term, interest-bearing, investment-grade securities. The Company will not receive any proceeds from the sale of shares of Common Stock offered by the Selling Stockholders. See "Principal and Selling Stockholders." PRICE RANGE OF COMMON STOCK The Common Stock is quoted on the Nasdaq Stock Market under the symbol "RCGI". The following table sets forth the high and low sales prices for the Common Stock for the quarters indicated as reported on the Nasdaq Stock Market.
PRICE RANGE ------------------- HIGH LOW ------ ------ YEAR ENDING DECEMBER 31, 1996: First Quarter(1)....................................................... $28.75 $23.25 Second Quarter......................................................... 36.00 27.75 Third Quarter.......................................................... 39.00 25.50 Fourth Quarter(2)...................................................... 37.00 36.25
- --------------- (1) Represents trading of the Common Stock from February 7, 1996 through March 31, 1996. (2) Represents trading of the Common Stock from October 1, 1996 through October 7, 1996. The last reported sale price of the Common Stock on the Nasdaq Stock Market on October 7, 1996 was $36.25. As of October 7, 1996 there were approximately 1,800 stockholders of record. DIVIDEND POLICY The Company has never paid any cash dividends on its capital stock. The Company currently anticipates that all of its earnings will be retained to finance the growth and development of its business and, therefore, does not anticipate that any cash dividends will be declared or paid on the Common Stock in the foreseeable future. Any future declaration of dividends will be subject to the discretion of the Company's Board of Directors and its review of the Company's results of operations, financial condition, capital requirements and surplus, contractual restrictions to pay such dividends and other factors it deems relevant. 13 15 CAPITALIZATION The following table sets forth the short-term indebtedness and consolidated capitalization of the Company as of June 30, 1996 and as adjusted to give effect to the sale by the Company of 1,500,000 shares of Common Stock offered by it at an assumed public offering price of $36.25 per share and the application of the net proceeds therefrom as set forth under "Use of Proceeds." This table should be read in conjunction with the Company's Combined Financial Statements and related notes appearing elsewhere in this Prospectus.
JUNE 30, 1996 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt........... $ 4,361 $ 4,361 ====== ====== Long-term debt and capital lease obligations........................... $ 2,444 $ 2,444 Stockholders' equity: Preferred Stock, $0.01 par value (10,000,000 shares authorized, no shares issued and outstanding).................................... -- -- Common Stock, $0.01 par value (22,000,000 shares authorized, 12,625,954 shares issued and outstanding; 14,125,954 shares issued and outstanding as adjusted)...................................... 126 141 Additional paid-in capital (stockholders' equity)...................... 53,004 104,281 Retained earnings...................................................... 2,301 2,301 Total stockholders' equity................................... 55,431 106,723 Total capitalization......................................... $57,875 $ 109,167 ====== ======
14 16 SELECTED HISTORICAL AND COMBINED FINANCIAL DATA The Selected Historical Financial Data -- Renal Care Group, Inc. represent the historical results of operations of the Company and includes the results of operations of Main Line and RenalWest, which were acquired during 1996 in pooling-of-interests transactions; however, this information does not include the results of operations for the Founding Companies for any periods prior to the six months ended June 30, 1996 except on a pro forma basis. The Selected Combined Financial Data -- Renal Care Group, Inc. and Founding Companies represent the results of operations had the Founding Companies and the Company been combined on January 1, 1991 without giving effect to the initial public offering for periods prior to February 1, 1996 except on a pro forma basis. The Combination was accounted for using historical cost, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48, because no single owner group from any of the Founding Companies held more than 50% equity interest in the Company as of the closing of the Company's initial public offering. Accordingly, the Company has recorded the net assets acquired at the Founding Companies' historical cost basis, as determined by generally accepted accounting principles. The Selected Historical Financial Data -- Renal Care Group, Inc. for the years ended December 31, 1994 and 1995 and the Selected Combined Financial Data -- Renal Care Group, Inc. and Founding Companies for the years ended December 31, 1993, 1994 and 1995 are derived from audited data included elsewhere in this Prospectus. The unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements and, in the opinion of management, contain all adjustments consisting of normal, recurring accruals necessary for a fair presentation of the combined financial position and the combined results of operations for the periods presented. The following data should be read in conjunction with the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that appear elsewhere in this Prospectus. 15 17 SELECTED HISTORICAL FINANCIAL DATA -- RENAL CARE GROUP, INC. (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,(1) SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------- ------------------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995(2) 1995(1) 1996(3) 1996(4) ----------- ----------- ------- ------- ------- --------- ----------- ----------- --------- INCOME STATEMENT DATA: Net revenue....... $ 7,367 $ 8,713 $18,126 $41,627 $42,971 $115,329 $21,242 $55,358 $62,736 Patient care costs........... 5,336 6,309 13,034 25,003 26,908 79,949 13,307 38,461 43,883 General and administrative expenses........ 1,725 1,626 3,649 8,721 8,701 15,466 4,384 5,821 6,417 Provision for doubtful accounts........ 147 170 584 1,418 2,355 3,995 1,153 1,071 1,196 Depreciation and amortization.... 147 153 601 1,484 1,580 3,914 666 1,970 2,158 Merger expenses... -- -- -- -- -- -- -- 680 680 ------ ------ ------- ------- ------- -------- ------- ------- ------- Total operating costs and expenses........ 7,355 8,258 17,868 36,626 39,544 103,324 19,510 48,003 54,334 ------ ------ ------- ------- ------- -------- ------- ------- ------- Income from operations...... 12 455 258 5,001 3,427 12,005 1,732 7,355 8,402 Interest income (expense), net............. (33) (44) (128) (363) (452) (506 ) (221) 240 147 ------ ------ ------- ------- ------- -------- ------- ------- ------- Income (loss) before income taxes........... $ (21) $ 411 $ 130 $ 4,638 $ 2,975 11,499 $ 1,511 7,595 8,549 ====== ====== ======= ======= ======= ======= Provision for income taxes.... 4,370 1,980 3,249 Net income........ $ 7,129 $ 5,615 $ 5,300 ======== ======= ======= Earnings per share........... $ 0.64 (5) $ 0.43 $ 0.40 ======== ======= ======= Weighted average shares outstanding..... 11,080 (5) 13,140 13,087
DECEMBER 31,(1) --------------------------------------------------------------- 1991 1992 1993 1994 1995 JUNE 30, 1996 ----------- ----------- ------- ------- ------- ------------- BALANCE SHEET DATA: Working capital............................. $ 303 $ 774 $ 3,519 $ 3,172 $(1,418) $32,019 Total assets................................ 2,242 2,613 14,393 17,318 20,765 85,643 Total debt.................................. 425 367 5,248 5,420 7,340 6,805 Stockholders' equity........................ 1,057 1,468 4,926 5,919 4,566 55,431
- --------------- (1) The financial information for each of the years and six month period ended June 30, 1995 does not include the Founding Companies except on a pro forma basis. See "Selected Combined Financial Data" for financial information of the Company including the income statement and balance sheet data of the Founding Companies. (2) Pro forma information for the year ended December 31, 1995 gives effect to (a) the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes; (b) additional estimated corporate overhead of approximately $2.6 million that would have been incurred had the Combination occurred at the beginning of 1995; and (c) certain other adjustments to reflect the Combination and the initial public offering. See Pro Forma Combining Financial Statements of Renal Care Group, Inc. (of Delaware). (3) The financial information for the six months ended June 30, 1996 include the results of operations for the Founding Companies since February 1996 when they were acquired by the Company simultaneously with its initial public offering. (4) Pro forma information for the six months ended June 30, 1996 gives effect to the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes. See Pro Forma Combining Financial Statements of Renal Care Group, Inc. (of Delaware). (5) The calculation of pro forma earnings per share for the year ended December 31, 1995 excludes 1,156,000 shares of Common Stock issued in the initial public offering. The net proceeds from these shares were used for general corporate purposes and therefore are excluded from the calculation. All subsequent periods reflect the full impact of all shares issued in the initial public offering. 16 18 SELECTED COMBINED FINANCIAL DATA -- RENAL CARE GROUP, INC. AND FOUNDING COMPANIES (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,(1) SIX MONTHS ENDED JUNE 30,(1) --------------------------------------------------------------------- --------------------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995(2) 1995 1996 1996(3) ----------- ----------- ------- -------- -------- --------- ----------- ----------- ----------- INCOME STATEMENT DATA: Net revenue.... $56,575 $64,309 $80,442 $110,670 $115,329 $115,329 $56,253 $62,736 $62,736 Patient care costs........ 40,516 46,752 58,314 75,366 80,417 79,949 39,137 43,883 43,883 General and administrative expenses..... 5,409 4,423 6,799 12,616 12,866 15,466 6,346 6,417 6,417 Provision for doubtful accounts..... 1,131 1,309 2,010 2,914 3,995 3,995 2,031 1,196 1,196 Depreciation and amortization... 1,752 1,895 2,416 3,414 3,661 3,914 1,648 2,158 2,158 Merger expenses..... -- -- -- -- -- -- -- 680 680 ------- ------- ------- -------- -------- ------- ------- -------- -------- Total operating costs and expenses..... 48,808 54,379 69,539 94,310 100,939 103,324 49,162 54,334 54,334 ------- ------- ------- -------- -------- ------- ------- -------- -------- Income from operations... 7,767 9,930 10,903 16,360 14,390 12,005 7,091 8,402 8,402 Interest income (expense), net.......... (693) (570) (460) (646) (1,013) (506 ) (377) 147 147 ------- ------- ------- -------- -------- ------- ------- -------- -------- Income before income taxes........ $ 7,074 $ 9,360 $10,443 $ 15,714 $ 13,377 11,499 $ 6,714 $ 8,549 8,549 ======= ======= ======= ======== ======== ======= ======== Provision for income taxes........ 4,370 3,249 ------- -------- Net income (loss)....... $ 7,129 $ 5,300 ======= ======== Earnings per share........ $ 0.64 (4) $ 0.40 ======= ======== Weighted average shares outstanding.. 11,080 (4) 13,087
DECEMBER 31,(1) --------------------------------------------------------- JUNE 30, 1991 1992 1993 1994 1995 1996(1) ----------- ----------- ------- -------- -------- ------------- BALANCE SHEET DATA: Working capital..................................... $ 6,244 $ 9,638 $14,761 $ 18,158 $ 12,237 $32,019 Total assets........................................ 24,864 28,670 42,770 49,918 60,899 85,643 Total debt.......................................... 4,514 4,037 8,265 8,620 15,915 6,805 Stockholders' equity................................ 14,475 18,506 24,236 26,825 25,358 55,431
- --------------- (1) The financial information for each of the years and six month periods represents the results of operations of Renal Care Group and Founding Companies Combined without giving effect to the Company's initial public offering for periods prior to February 1996 except on a pro forma basis. (2) Pro forma information for the year ended December 31, 1995 gives effect to (a) the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes; (b) additional estimated corporate overhead of approximately $2.6 million that would have been incurred had the Combination occurred at the beginning of 1995; and (c) certain other adjustments to reflect the Combination and the initial public offering. See Pro Forma Combining Financial Statements of Renal Care Group, Inc. (of Delaware). (3) Pro forma information for the six months ended June 30, 1996 gives effect to the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes. See Pro Forma Combining Financial Statements of Renal Care Group, Inc. (of Delaware). (4) The calculation of pro forma earnings per share for the year ended December 31, 1995 excludes 1,156,000 shares of Common Stock issued in the initial public offering. The net proceeds from these shares were used for general corporate purposes and therefore are excluded from the calculation. All subsequent periods reflect the full impact of all shares issued in the initial public offering. 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial information referenced in the Index to Financial Statements, including the notes thereto, and the other financial information appearing elsewhere in this Prospectus. OVERVIEW Renal Care Group is a specialized provider of nephrology services to patients with kidney disease, including patients suffering from chronic kidney failure. The Company commenced operations in February 1996 when it acquired the Founding Companies simultaneous with the completion of its initial public offering. At the time of the Combination, the Founding Companies were established businesses engaged in the operation of outpatient dialysis centers as separate, independent entities for an average of 14 years. For all periods presented, the Combined Financial Statements include the financial information of the Founding Companies, Main Line, a merger which was completed in April 1996, and RenalWest, a merger which was completed in September 1996. Both the Main Line and RenalWest mergers were accounted for as poolings of interests. RenalWest was organized in September 1993; consequently, the Combined Financial Statements do not include a full year of operating results for that period. Because the Founding Companies, Main Line and RenalWest were independent entities that had not been operated by the Company's management prior to their respective dates of acquisition, the historical results prior to such times may not be indicative of future performance. In addition, the Combined Financial Statements do not give effect to any operating efficiencies prior to such dates of acquisition that the Company believes typically would be attainable in an integrated organization. Renal Care Group believes that its dialysis centers, on an individual basis, generally did not have the management, capital and other resources prior to the Combination and the Company's acquisition that are required to generate sustainable growth in the increasingly competitive dialysis industry. By combining the dialysis centers under an experienced executive management team and providing the combined entity with access to greater financial and other resources, management believes the Company is positioned to pursue an aggressive growth strategy comprised of increased internal growth and strategic acquisitions. Significant factors that influence internal growth in the dialysis industry include the number of nephrologists associated with a company's dialysis centers and the availability of capital to fund the development of new centers. The Company plans to increase internal growth by providing management, capital and other resources required to develop new centers and to recruit additional nephrologists to increase utilization of the Company's existing network of dialysis centers. Since the Combination, the Company has completed four acquisitions, including Main Line and RenalWest, which added approximately 2,000 ESRD patients, and management believes that additional acquisition candidates will be available as the dialysis industry continues its rapid consolidation. Renal Care Group has implemented company-wide supply, insurance and other agreements that have resulted in lower operating costs for the combined entity. Other operating efficiencies that the Company has realized include consolidation of employee benefits, cash management and other similar functions. The Company believes it will be able to realize economies of scale in both acquired and managed operations by consolidating corporate and regional management expenses. However, a portion of any operating efficiencies that may be achieved will be offset by the need for increased general and administrative expenses as the Company adds support services at the corporate headquarters. SOURCES OF NET REVENUE The Company's net revenue has been derived primarily from the following sources: (i) outpatient hemodialysis services; (ii) ancillary services associated with dialysis, primarily the administration of EPO; (iii) home dialysis services; (iv) inpatient hemodialysis services provided pursuant to contracts with acute care hospitals and skilled nursing facilities; (v) management contracts with hospital-based and medical university dialysis programs; and (vi) laboratory services. ESRD patients typically receive 156 dialysis 18 20 treatments per year, with reimbursement for services provided primarily by the Medicare ESRD program based on rates that are established by HCFA. For the six months ended June 30, 1996, approximately 74% of the Company's net revenue was derived from reimbursement under the Medicare and Medicaid programs. Medicare reimbursement is subject to rate and other legislative changes by Congress and periodic changes in regulations, including changes that may reduce payments under the ESRD program. For patients with health insurance, dialysis generally is reimbursed at rates higher than Medicare during the first 18 months of treatment, after which time Medicare becomes the primary payor. Reimbursement for dialysis services provided pursuant to a hospital contract is negotiated with the individual hospital and generally is higher on a per treatment equivalent basis than the Medicare rate. Because dialysis is a life-sustaining therapy used to treat this chronic disease, utilization is predictable and is not subject to seasonal fluctuations. RESULTS OF OPERATIONS The results of operations for all periods in the table below and in the period comparisons that follow reflect the historical operations of the Company, including the operations of Main Line and RenalWest, combined with the operations of the Founding Companies. However, management of the Company did not operate the Founding Companies until February 1996, Main Line until April 1996 and RenalWest until September 1996, the respective dates of acquisition of such companies. The following table sets forth, for the periods indicated, the percentage of net revenue represented by the respective financial items:
SIX MONTHS YEAR ENDED DECEMBER ENDED JUNE 31, 30, --------------------- ------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net revenue........................................ 100.0% 100.0% 100.0% 100.0% 100.0% Patient care costs................................. 72.5 68.1 69.7 69.6 69.9 General and administrative expenses................ 8.5 11.4 11.2 11.3 10.2 Provision for doubtful accounts.................... 2.5 2.6 3.5 3.6 1.9 Depreciation and amortization...................... 3.0 3.1 3.2 2.9 3.4 Merger expenses.................................... -- -- -- -- 1.1 ----- ----- ----- ----- ----- Total operating costs and expenses................. 86.4 85.2 87.5 87.4 86.6 ----- ----- ----- ----- ----- Income from operations............................. 13.6% 14.8% 12.5% 12.6% 13.4% ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 Net Revenue. Net revenue increased from $56,253,000 for the six months ended June 30, 1995 to $62,736,000 for the six months ended June 30, 1996, an increase of $6,483,000, or 11.5%. This increase resulted primarily from a 7.2% increase in the number of treatments from 309,162 in the 1995 period to 331,280 in the 1996 period and a 3.3% increase in the average revenue per treatment from $183 in the 1995 period to $189 in the 1996 period. The revenue per treatment increase was due to an increase in EPO utilization and acute treatments. The remaining revenue increase resulted from management fee income. Patient Care Costs. Patient care costs consist of costs directly related to the care of patients, including direct labor, drugs, and other medical supplies and operational costs of facilities. Patient care costs increased from $39,137,000 for the six months ended June 30, 1995 to $43,883,000 for the six months ended June 30, 1996, an increase of $4,746,000, or 12.1%. This increase was due to the increase in the number of treatments, which caused a corresponding increase in the use of drugs, supplies and labor. Patient care costs as a percentage of net revenue increased slightly from 69.6% in the 1995 period to 69.9% in the 1996 period, with such increase caused primarily by higher patient care costs at Main Line and RenalWest. Average patient care cost per treatment increased from $127 in the 1995 period to $132 in the 1996 period. This increase was due to normal health care inflation, increased EPO utilization and the increase in higher cost acute treatments. General and Administrative Expenses. General and administrative expenses include corporate office costs and clinic costs not directly related to the care of patients, including clinic administration, accounting, 19 21 billing and information systems. General and administrative expenses increased from $6,346,000 for the six months ended June 30, 1995 to $6,417,000 for the six months ended June 30, 1996, an increase of $71,000, or 1.1%. General and administrative expenses as a percentage of revenue decreased from 11.3% in the 1995 period to 10.2% in the 1996 period. The net increase was a result of increased corporate overhead expenses partially offset by reduced compensation to prior physician owners. Provision for Doubtful Accounts. The provision for doubtful accounts decreased from $2,031,000 for the six months ended June 30, 1995 to $1,196,000 for the six months ended June 30, 1996. The provision for doubtful accounts as a percentage of net revenue decreased from 3.6% in the 1995 period to 1.9% in the 1996 period. This decrease represented a return to a normal level of provision for doubtful accounts in the 1996 period from the 1995 period when additional expense was recorded due to a deterioration in the aging of accounts receivable. The provision for doubtful accounts is a function of patient mix, billing practices and other factors. It is the Company's practice to reserve for doubtful accounts in the period in which revenue is recognized based on management's estimate of the net collectibility of accounts receivable. Depreciation and Amortization. Depreciation and amortization increased from $1,648,000 for the six months ended June 30, 1995 to $2,158,000 for the six months ended June 30, 1996, an increase of $510,000, or 30.9%. This increase was due to the purchase of patient care facilities previously leased, higher than normal replacement of dialysis machines and the purchase of a clinical computer system. Merger Expenses. Merger expenses of $680,000 represented legal, accounting and compensation expenses related to the Main Line acquisition. Merger expenses for the RenalWest acquisition have not yet been determined. Income from Operations. Income from operations increased from $7,091,000 for the six months ended June 30, 1995 to $8,402,000 for the six months ended June 30, 1996, an increase of $1,311,000, or 18.5%. Income from operations as a percentage of net revenue increased from 12.6% in the 1995 period to 13.4% in the 1996 period. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net Revenue. Net revenue increased from $110,670,000 for the year ended December 31, 1994 to $115,329,000 for the year ended December 31, 1995, an increase of $4,659,000, or 4.2%. This increase resulted primarily from a 4.5% increase in the number of treatments from 598,228 in the 1994 period to 625,413 in the 1995 period. Average revenue per treatment remained constant for the 1994 and 1995 periods at $185. Patient Care Costs. Patient care costs increased from $75,366,000 for the year ended December 31, 1994 to $80,417,000 for the year ended December 31, 1995, an increase of $5,051,000, or 6.7%. This increase was due to the increase in the number of treatments, which caused a corresponding increase in the use of drugs, supplies and labor. Patient care costs as a percentage of net revenue increased from 68.1% in the 1994 period to 69.7% in the 1995 period. Average patient care costs per treatment increased from $126 in the 1994 period to $129 in the 1995 period. This increase was the net result of normal health care inflation and lower EPO utilization costs. General and Administrative Expenses. General and administrative expenses increased from $12,616,000 for the year ended December 31, 1994 to $12,866,000 for the year ended December 31, 1995, an increase of $250,000, or 2.0%. General and administrative expenses as a percentage of net revenue decreased from 11.4% in the 1994 period to 11.2% in the 1995 period. General and administrative expenses decreased in the 1995 period due to the growth in revenue during the period. Provision for Doubtful Accounts. The provision for doubtful accounts increased from $2,914,000 for the year ended December 31, 1994 to $3,995,000 for the year ended December 31, 1995. The provision for doubtful accounts as a percentage of net revenue increased from 2.6% in the 1994 period to 3.5% in the 1995 period. This increase was due to additional bad debt expense recorded as a result of a revision in the estimated collectibility of accounts receivable for RenalWest to reflect the Company's accounts receivable valuation policy. 20 22 Depreciation and Amortization. Depreciation and amortization increased from $3,414,000 for the year ended December 31, 1994 to $3,661,000 for the year ended December 31, 1995, an increase of $247,000, or 7.2%. Depreciation and amortization as a percentage of net revenue increased from 3.1% in the 1994 period to 3.2% in the 1995 period. Income from Operations. Income from operations decreased from $16,360,000 for the year ended December 31, 1994 to $14,390,000 for the year ended December 31, 1995, a decrease of $1,970,000, or 12.0%. Income from operations as a percentage of net revenue decreased from 14.8% in the 1994 period to 12.5% in the 1995 period. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Net Revenue. Net revenue increased from $80,442,000 for year ended December 31, 1993 to $110,670,000 for the year ended December 31, 1994, an increase of $30,228,000, or 37.6%. This increase resulted primarily from a 27.3% increase in the number of treatments from 470,035 in the 1993 period to 598,228 in the 1994 period, with a significant component of treatment growth resulting from the full-year impact in 1994 of RenalWest which operated for only four months in 1993. In addition, the average revenue per treatment increased 7.6% from $172 in the 1993 period to $185 in the 1994 period due to an increase in acute treatments and greater EPO utilization. Patient Care Costs. Patient care costs increased from $58,314,000 for the year ended December 31, 1993 to $75,366,000 for the year ended December 31, 1994, an increase of $17,052,000, or 29.2%. This increase was due to the increase in the number of treatments, which caused a corresponding increase in the use of labor, drugs and supplies. Patient care costs as a percentage of net revenue decreased from 72.5% in the 1993 period to 68.1% in the 1994 period. Average patient care costs per treatment increased 0.8%, from $125 in the 1993 period to $126 in the 1994 period. This increase was due to normal health care inflation, increased EPO utilization, increased acute treatments and the inclusion of RenalWest as of September 1993. General and Administrative Expenses. General and administrative expenses increased from $6,799,000 for the year ended December 31, 1993 to $12,616,000 for the year ended December 31, 1994, an increase of $5,817,000, or 85.6%. General and administrative expenses increased as a percentage of net revenue from 8.5% in the 1993 period to 11.4% in the 1994 period due primarily to the inclusion of RenalWest as of September 1993 and increases in compensation to prior physician owners. Provision for Doubtful Accounts. The provision for doubtful accounts increased from $2,010,000 for the year ended December 31, 1993 to $2,914,000 for the year ended December 31, 1994. The provision for doubtful accounts as a percentage of net revenue increased from 2.5% in the 1993 period to 2.6% in the 1994 period. Depreciation and Amortization. Depreciation and amortization increased from $2,416,000 for the year ended December 31, 1993 to $3,414,000 for the year ended December 31, 1994, an increase of $998,000, or 41.3%. This net increase was due to the purchase of patient care facilities in the normal course of business and the inclusion of RenalWest as of September 1993. Income from Operations. Income from operations increased from $10,903,000 for the year ended December 31, 1993 to $16,360,000 for the year ended December 31, 1994, an increase of $5,457,000, or 50.1%. Income from operations as a percentage of net revenue increased from 13.6% in the 1993 period to 14.8% in the 1994 period. LIQUIDITY AND CAPITAL RESOURCES The Company requires capital primarily for the acquisition and the development of dialysis centers, the purchase of property and equipment for existing centers and to finance working capital requirements. At June 30, 1996, the Company's working capital was $32,019,000, cash and cash equivalents were $31,292,000 and the Company's current ratio was 2.2:1. 21 23 The Company's net cash provided by operating activities was $10,767,000 in the six months ended June 30, 1996. Generally, cash provided by operating activities resulted from net income before depreciation and amortization expense, partially offset by increases in accounts receivable. The Company's net cash used in investing activities was $40,740,000 in the six months ended June 30, 1996. Cash used in investing activities resulted from $39,699,000 of cash, working capital and certain other distributions to the Founding Companies (including approximately $6,899,000 in distributions to former stockholders of the Founding Companies) and $4,972,000 of capital expenditures, partially offset by the $3,893,000 cash balances of the Founding Companies acquired at the time of the Combination. Cash provided by financing activities was $59,631,000 for the six months ended June 30, 1996. The Company's initial public offering in February 1996 resulted in the sale of 4,485,000 shares from which the Company received $71,842,000 after offering costs. Long-term debt repayments totaled $9,694,000 and distributions to owners which occurred prior to the initial public offering were $2,597,000. The Company's line of credit allows for borrowings of up to $35,000,000 to be used for acquisitions, working capital and capital expenditures. The line of credit requires payments of interest only until May, 1998 with the balance outstanding at that time amortized quarterly over the next three years. The credit facility bears interest at one of two floating rates selected by the Company: (i) the base rate plus a margin ranging from 0.00% to 1.00% or (ii) LIBOR plus a margin of 0.95% to 2.70%. At October 8, 1996, the Company had $1,380,000 of outstanding Convertible Notes due in December 1996 that are convertible into Common Stock at a price of $7.50 per share. A significant component of the Company's growth strategy is the acquisition and development of dialysis centers. The Company believes that the net proceeds from the Offering, existing cash and funds from operations, together with funds available under the line of credit, will be sufficient to meet the Company's acquisition, expansion, capital expenditure and working capital needs through at least the end of 1997. In order to finance certain large strategic acquisition opportunities, the Company may incur from time to time additional short and long-term bank indebtedness and may issue equity or debt securities, the availability and terms of which will depend on market and other conditions. There can be no assurance that such additional financing, if required, will be available on terms acceptable to the Company. IMPACT OF INFLATION A substantial portion of the Company's net revenue is subject to reimbursement rates that are regulated by the federal government and do not automatically adjust for inflation. The Company is unable to increase the amount it receives for the services provided by its dialysis business that are reimbursed under the Medicare composite rate. Increased operating costs due to inflation, such as labor and supply costs, without a corresponding increase in reimbursement rates, may adversely affect the Company's earnings in the future. 22 24 BUSINESS Renal Care Group is a specialized provider of nephrology services to patients with kidney disease, including patients suffering from chronic kidney failure, also known as end-stage renal disease. The Company provides dialysis and ancillary services to approximately 5,000 patients through 77 outpatient dialysis centers in 12 states and manages an additional eight dialysis centers in five states in affiliation with leading medical centers such as Vanderbilt University Medical Center and The Cleveland Clinic Foundation. In addition to its outpatient dialysis center operations, Renal Care Group provides acute dialysis services through contractual relationships with 42 hospitals, staff-assisted dialysis services to 37 skilled nursing facilities and physician practice management services to 16 of the 59 nephrologists who are affiliated with the Company's outpatient dialysis centers. Renal Care Group was formed by leading nephrologists with the objective of creating an entity with the clinical and financial capability to manage the full range of care for ESRD patients on a cost-effective basis. The Company is working in conjunction with its affiliated physicians to develop fully integrated nephrology networks that will implement clinical protocols designed to improve outcomes and reduce costly medical complications associated with ESRD. According to HCFA, there were in excess of 2,800 dialysis centers in the United States at the end of 1995. The Company believes that approximately 38% were owned by multi-center dialysis companies, 32% were owned by independent physicians and 30% were hospital-based centers. Although numerous nephrology groups have in the past sold their dialysis centers to entities engaged in the business of owning and operating such facilities, the Company believes that many nephrology groups recognize the need to affiliate with an entity having broader capabilities that can also provide clinical, financial and business expertise to help them manage the increasingly complex and time-consuming aspects of both their dialysis center operations and their nephrology practices. In addition, many hospitals are motivated to sell or outsource management of their dialysis facilities as they refocus their resources on their core business in response to increasing competitive pressures. As a result of these and other factors, the dialysis services industry is undergoing rapid consolidation. INDUSTRY OVERVIEW End-Stage Renal Disease ESRD is the state of advanced renal impairment that is irreversible and lethal unless treated. This condition is most commonly a result of complications associated with diabetes, hypertension, certain renal and hereditary diseases, old age and other factors. In order to sustain life, individuals with ESRD require either dialysis for the remainder of their lives or successful kidney transplantation. According to the USRDS, the total estimated direct medical charges for ESRD exceeded $11.1 billion during 1994. Of the total direct medical charges for ESRD, approximately $8.3 billion was paid by the federal government through the Medicare program. As a result of legislation enacted in 1972, the federal government provides Medicare funding for patients who are diagnosed with ESRD regardless of their age or financial circumstances. Based on Medicare ESRD enrollment data published by HCFA, the number of ESRD patients in the United States requiring dialysis treatments has grown from approximately 66,000 at the end of 1982 to approximately 200,000 at the end of 1995. Based on USRDS data, the ESRD incidence rate among Medicare-eligible patients for all age groups was approximately 219 patients per million in 1993 as compared to 111 patients per million in 1984. Furthermore, USRDS data indicates that the incidence rate in patients ages 65 to 74 increased 130% from 1984 to 1993, and in patients ages 75 and older the incidence rate increased 189% over the same period. The Company attributes the growth in the number of ESRD patients principally to the aging of the general population and the improved treatment and increased survival rate of patients with diabetes, hypertension and other illnesses that lead to ESRD. Moreover, improved dialysis technology has enabled older patients and those who previously could not tolerate dialysis due to other illnesses to benefit from this treatment. 23 25 Treatment Options for End-Stage Renal Disease Currently, the three treatment options for ESRD are (i) hemodialysis, which is performed either in a hospital setting, an outpatient facility or a patient's home, (ii) peritoneal dialysis, which is generally performed in the patient's home, and (iii) kidney transplant surgery. According to HCFA data, in 1995 approximately 83% of patients on dialysis in the United States received outpatient hemodialysis treatment and approximately 17% received hemodialysis or peritoneal dialysis in their homes. - Hemodialysis is the most common form of ESRD treatment and is generally performed either in a freestanding center or in a hospital. The process of hemodialysis uses a dialyzer, essentially an artificial kidney, to remove certain toxins, fluid and chemicals from the patient's blood and a device to control external blood flow and to monitor certain vital signs of the patient. The dialysis process occurs across a semi-permeable membrane that divides the dialyzer into two chambers. While the blood is circulated through one chamber, a pre-mixed dialysis fluid is circulated through the adjacent chamber. The toxins and excess fluid contained in the blood cross the membrane into the dialysis fluid. Hemodialysis treatment usually requires approximately four hours and is administered three times per week for the life of the patient pursuant to a nephrologist's plan of care. - Peritoneal dialysis is generally performed by the patient at home and uses the patient's peritoneal, or abdominal, cavity to eliminate fluids and toxins in the patient's blood. Although there are several variations of peritoneal dialysis, continuous ambulatory peritoneal dialysis ("CAPD") and continuous cyclic peritoneal dialysis ("CCPD") are the most common. CAPD uses a sterile dialysis solution which is introduced through a surgically implanted catheter into the patient's peritoneal cavity. Toxins in the blood continuously cross the peritoneal membrane into the dialysis solution. After several hours, the patient drains the used solution and replaces it with fresh solution. CCPD is performed in a manner similar to CAPD, but utilizes a mechanical device to cycle dialysis solution through the peritoneal membrane while the patient is sleeping or at rest. Patients treated at home are monitored monthly either through a visit from a staff person from a designated outpatient center or by the patient visiting the center. - Kidney transplantation, when successful, is the most desirable form of therapeutic intervention. However, the shortage of suitable donors severely limits the availability of this surgical procedure as a treatment option. Approximately 6% of patients with ESRD undergo kidney transplantation. Typically, transplant surgery is performed by transplant surgeons and not nephrologists. Ancillary Services Nephrologists provide ancillary services to ESRD patients, the most significant of which is the administration of EPO. EPO is a bio-engineered protein that mimics a hormone found in a normal kidney by stimulating the production of red blood cells. EPO is utilized in connection with all forms of dialysis to treat anemia, a medical complication experienced by almost all ESRD patients. EPO reduces or eliminates the need for blood transfusions in these patients. Other ancillary services provided by nephrologists to or in connection with ESRD patients may include but are not limited to (i) certain laboratory tests required by Medicare to determine the effectiveness of dialysis treatments, (ii) intradialytic parenteral nutrition ("IDPN"), which are nutrients added to a patient's blood during hemodialysis, (iii) studies to test the degree of a patient's bone deterioration, an ESRD complication, (iv) electrocardiograms, (v) nerve conduction studies to test for deterioration of a patient's nerves, another ESRD complication, (vi) Doppler flow testing for the effectiveness of the patient's vascular access for dialysis, and (vii) blood transfusions. Nephrology Practice Caring for ESRD patients is the primary clinical activity of nephrologists. Other clinical activities of a nephrologist include the post-surgical care of kidney transplant patients, the diagnosis and treatment of kidney diseases in patients who are at risk for developing ESRD, and the diagnosis, treatment, and management of clinical disorders including hypertension, kidney stones and autoimmune diseases. Because of the complexity involved in treating patients with chronic kidney disease, the nephrologist typically assumes the role of primary 24 26 care physician for the ESRD patient. The Company believes that while some nephrologists practice independently or are members of multi-specialty groups, most nephrologists practice in small single-specialty groups. Nephrology groups typically provide services in relatively large geographic areas, and it is common for a major part of a metropolitan area to be served by a single nephrology group. Most nephrologists also have a significant office practice and consult on numerous hospitalized patients who are not on dialysis. A nephrologist typically derives income from services rendered (i) during office visits, (ii) for the treatment of patients in acute care hospitals and (iii) for the treatment of patients receiving dialysis services. Medicare reimburses nephrologists based on a fixed fee per month for outpatient services rendered in treating ESRD patients and based on designated rate schedules for services to ESRD patients who are hospitalized. STRATEGY Renal Care Group's objective is to develop fully integrated nephrology provider networks to assume and manage the clinical and financial risk associated with providing renal disease management services on a capitated basis. The Company seeks to achieve this objective by (i) acquiring, developing and managing outpatient and university-based dialysis centers, (ii) integrating its dialysis centers with affiliated nephrology practices, (iii) developing a protocol-driven ESRD management model to enhance clinical outcomes and (iv) providing an appropriate range of ancillary services to ESRD patients. The Company believes an integrated network of nephrologists and dialysis centers, combined with the Company's clinical expertise, management experience and access to capital, will provide significant advantages to patients and third-party payors by improving the quality of care while reducing the overall costs associated with treating patients with all forms of kidney disease, including those who have ESRD. Following is a discussion of the key components of the Company's growth strategy. Acquire, Develop and Manage Outpatient and University-Based Dialysis Centers Renal Care Group believes that the acquisition and development of dialysis centers is the first step in the development of a fully integrated nephrology management company. When considering the acquisition or development of dialysis centers, the Company's most important criteria are the ability to secure significant market share, the availability of one or more leading nephrologists to serve as medical director(s) of the center and the quality of care provided by such center. In addition, the Company also considers factors such as financial results and the potential financial impact on the Company, the growth potential and demographic characteristics of the market, the convenience of the location for patients and physicians, the condition of the center and its equipment, the local labor conditions, and the availability of qualified clinical personnel. The Company's acquisition and development strategy contains two primary elements. First, physicians affiliated with the Company explore acquisition opportunities from among their contacts with nephrologist owners of dialysis centers throughout the country. Second, the Company seeks to acquire and/or develop dialysis centers in underserved or expanding population areas that are contiguous to the present markets of the Company. In addition to acquiring and developing freestanding centers, the Company develops and operates dialysis centers by entering into arrangements with leading hospitals and university medical dialysis programs for the management of ESRD care. The Company currently has inpatient dialysis contracts with 42 hospitals. The Company also manages dialysis programs in affiliation with leading medical centers such as Vanderbilt University Medical Center and The Cleveland Clinic Foundation. The Company believes that contracts with medical centers and university dialysis programs provide access to relevant studies and other research that will enable the Company to determine measurable ESRD outcomes and thereby enhance both the quality and cost-effectiveness of care. In addition, the Company believes such affiliations may expand relationships with highly qualified independent nephrologists and result in increased opportunities to acquire the dialysis centers of such nephrologists. See "Business -- Operations." 25 27 Integrate Dialysis Centers with Nephrology Practices Renal Care Group intends to integrate its dialysis centers with affiliated nephrologists into regional delivery networks. In order to facilitate this integration, the Company attempts to acquire or enter into management agreements with the practices of affiliated nephrologists. The Company believes that increased managed care, capitation and other forms of risk-sharing between payors and providers will require providers to offer integrated nephrology services through a network of dialysis centers and nephrology practices. The Company believes such arrangements will enable nephrologists to coordinate and manage the delivery of care to ESRD patients more effectively. In addition, the Company believes that a large, well-managed and well-capitalized nephrology group will have an advantage in recruiting newly-trained nephrologists. The Company believes that nephrology groups increasingly are recognizing the need for professional, management and clinical services to assist in the management of their practices and in the development and administration of the most effective care for ESRD patients. The Company believes that nephrologists typically practice independently or in small groups and lack (i) the capital to expand or develop information systems, (ii) the ability to realize economies of scale to manage resources or negotiate with suppliers, and (iii) the ability to develop cost-effective clinical outcome strategies critical to contracting with managed care payors. The Company currently manages the practices of 16 nephrologists who have practice privileges at 15 of its centers. In addition, the Company has certain rights of first refusal with respect to any proposed arrangement with a third party for the sale or management of the practices of 27 additional nephrologists who have practice privileges at 34 of its centers. The Company provides billing, information systems and general administrative services to the nephrology practices it manages and is paid a management fee for such services. See "Business -- Nephrology Practice Management." Develop a Protocol-Driven ESRD Management Model to Enhance Clinical Outcomes Renal Care Group believes that the provision of high quality care to ESRD patients significantly reduces the aggregate costs associated with ESRD by decreasing the number of days an ESRD patient spends in the hospital and thereby limiting the most expensive component of ESRD health care. The Company believes that access to medical research regarding causes and effects of ESRD, including causes and lengths of hospitalization and resulting gross and standardized mortality rates, and different types of treatment outcomes, is crucial to the successful management of ESRD. The Company believes that its affiliation with university-based dialysis programs provides it with access to such outcomes research and to clinically advanced treatment protocols. For example, according to data published by the USRDS, during 1993, the average number of days spent in a hospital by dialysis patients less than 65 years of age was 11.5, and for patients older than 65 years was 12.0. Similarly, the USRDS calculated the overall mortality rate of dialysis patients during the first year of therapy (starting in the 91st day after initiation of therapy) to be 25.7% in 1993. Treatment protocols designed to address such issues as adequacy of dialysis, nutrition, and management of hemodialysis access complications can significantly improve mortality and decrease hospitalization rates. The Company believes that the protocols it has implemented in the dialysis program at Vanderbilt have been effective in maintaining an overall mortality rate of approximately one-half of the national average and in reducing the average hospitalization rate for all age groups to less than 10 days a year per patient. The Company is in the process of implementing clinical protocols at its centers and believes that such implementation will enhance outcomes and improve operating efficiencies. Provide an Appropriate Range of Ancillary Services Renal Care Group provides a variety of ancillary services necessary for the treatment of ESRD patients, the most significant of which is the administration of EPO. EPO is a bio-engineered protein which stimulates the production of red blood cells and is used in connection with all forms of dialysis to treat anemia, a medical complication frequently experienced by ESRD patients. Other ancillary services offered by the Company include studies to test the degree of bone deterioration; electrocardiograms; nerve conduction studies to test the degree of deterioration of nerves; Doppler flow testing to test the effectiveness of the patient's vascular 26 28 access for dialysis; and blood transfusions. The Company estimates that less than 0.5% of its net revenue for the six months ended June 30, 1996 was reimbursement for the administration of IDPN. In addition, the Company requires the services of a clinical laboratory to perform certain blood testing in connection with dialysis treatment. Pursuant to a management contract with Kidney Care, the Company provides certain management services to and uses as a reference lab a full service laboratory owned by Kidney Care with capacity to perform clinical testing services for up to approximately 7,000 ESRD patients. Due to certain regulatory constraints, the Company was not able to acquire the laboratory at the time of the Combination, but has an option to purchase the assets of such laboratory expiring in April 1999, by which time the Company expects to be in a position to exercise the option if it so desires. See "Certain Transactions" and "Business -- Government Regulation." OPERATIONS Location, Capacity and Use of Facilities Renal Care Group operates 77 outpatient dialysis centers in 12 states with 59 affiliated nephrologists and 1,111 certified dialysis stations, excluding eight centers managed by the Company. The Company leases 58 centers and owns 19 centers. The Company also provides inpatient dialysis services to 42 acute care hospitals and 37 skilled nursing facilities. Excluding managed centers, 625,413 and 331,280 hemodialysis treatments were provided at the Company's facilities during the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. The Company estimates that its centers were operating at approximately 64% of capacity as of June 30, 1996, based on the assumption that a dialysis center is able to provide up to three treatments a day per station, six days a week. The Company believes it may increase the number of dialysis treatments at its centers without making additional capital expenditures. Operation of Facilities Renal Care Group's dialysis centers provide outpatient hemodialysis and related services to ESRD patients in a convenient setting. A majority of the Company's centers utilize volumetric dialysis equipment that accommodates high flux and high efficiency dialysis treatments. In addition to dialysis stations, the Company's centers generally contain a nurses' station, a patient waiting area, examination rooms, a supply room, a water treatment space to purify water used in hemodialysis treatments, a dialyzer reprocessing room, staff work areas, offices, and a staff lounge. Many of the Company's centers also have a designated area for training patients in home dialysis and also offer certain amenities for the patients. In accordance with conditions for participation in the Medicare ESRD program, each of the Company's centers is supervised by a qualified Medical Director. Each center is managed by an administrator, typically a registered nurse, who is responsible for the day-to-day operations of the center and its staff. The staff of each center typically includes registered nurses, licensed practical or vocational nurses, patient care technicians, social workers, registered dietitians, a unit clerk, and biomedical equipment technicians. Each center is staffed in a manner that allows the number of personnel to be adjusted according to the number of patients receiving treatments. Home Dialysis All of Renal Care Group's centers offer various forms of peritoneal and home hemodialysis, primarily CAPD or CCPD. As of June 30, 1996, approximately 13% of the patients treated by the Company received home dialysis. The Company's home dialysis services consist of providing equipment and supplies, training, patient monitoring and follow-up assistance to patients who prefer and are able to receive dialysis treatments in their homes. The Company intends to expand its home dialysis program, which the Company believes is important to the development of a fully integrated nephrology services company. 27 29 Hospital and Skilled Nursing Facility Care Certain of Renal Care Group's centers provide dialysis services through contracts with 42 hospitals located within their respective service areas. Under these contracts, the Company's centers typically provide equipment, supplies and personnel required to perform hemodialysis and peritoneal dialysis in connection with the hospital's inpatient services. Such inpatient dialysis services are required for patients with acute renal failure resulting from accidents, medical and surgical complications, patients in the early stage of renal failure and ESRD patients who require hospitalization for other reasons. The terms of these contracts are individually negotiated and vary by contract. Most of the Company's hospital contracts specify predetermined fees per dialysis treatment, although the Company believes that such fees may be subject to negotiation in the future as the provision of health care services becomes increasingly influenced by managed care and subject to capitated arrangements. The Company also provides staff-assisted dialysis services to 37 skilled nursing facilities in the Phoenix metropolitan area. A central office dispatches equipment, supplies and personnel required to perform dialysis treatments in connection with the extended care services of skilled nursing facilities. University Division Renal Care Group currently manages the dialysis programs at Vanderbilt University Medical Center, The Cleveland Clinic Foundation and Case Western Reserve University, provides home dialysis services for a group of patients at the University of Arkansas, provides consulting services to the University of Michigan Medical Center regarding its dialysis program and is developing a dialysis center for the University of Louisville. The Company intends to expand its university management program and is currently in various stages of discussions with a number of university-based dialysis programs. In addition, the Company also intends to acquire or develop university-based dialysis centers. The Company believes that its affiliation with leading nephrology groups will enhance its ability to attract and maintain agreements to manage the dialysis programs of university medical centers. Furthermore, the Company expects that affiliation with university medical centers will provide a greater number of patients, including the potential for the development of new centers and access to highly qualified Medical Directors and outcomes research. Relationships with Referral Sources; Medical Directors A key factor in the success of a dialysis center is its relationship with local nephrologists. An ESRD patient generally seeks treatment at a center where the patient's nephrologist has practice privileges. Consequently, Renal Care Group relies on its ability to attract and to meet the needs of referring nephrologists in order to receive and gain new referrals. The Company has engaged practicing, board-eligible or board-certified nephrologists to serve as Medical Directors for each of its centers. Each of the Company's Medical Directors provides services pursuant to an independent contractor agreement between the Company and the physician or his or her professional practice group. Medical Directors' responsibilities primarily consist of the administration and monitoring of the Company's patient care policies, including patient education, administration of dialysis treatment, development and training programs and assessment of all patients. Coordination of the delivery of care is important in maintaining ESRD patients' general level of health and in avoiding medical complications that might necessitate hospitalization. The Company typically enters into Medical Director agreements with nephrologists at each of its centers containing terms of seven years with three-year renewal options. The Company's Medical Director agreements typically provide for its Medical Directors to be paid fees for their supervisory services and include non-competition clauses with specific limitations on their ability to compete with the Company for certain periods of time and in certain geographic areas. In consideration for such non-competition agreements, the Company has granted options to purchase shares of Common Stock to the physicians serving as Medical Directors or their professional practice groups. 28 30 Nephrology Practice Management Renal Care Group currently manages the practices of 16 physician nephrologists pursuant to the terms of management service arrangements. Under these arrangements, the Company typically provides to the physicians, in exchange for a management fee, certain equipment, supplies and administrative services, including billing, collection, accounting, human resources and information systems. Each physician retains exclusive control of the provision of medical services to his or her patients. QUALITY ASSURANCE In order to optimize therapy and improve outcomes, Renal Care Group establishes and maintains quality criteria for its clinical operations, monitors patient outcomes in all of its centers, utilizes a Medical Advisory Board to develop a protocal-driven clinical management model and involves its patients in their own care. Quality Criteria Renal Care Group actively involves its Medical Advisory Board in the establishment of quality criteria for both owned centers and its acquisition candidates. Regular evaluation of the prescribed dialysis treatments and the key physiological parameters of patients constitutes part of the continuous quality improvement that is the Company's primary clinical objective. The Company employs a registered nurse as a corporate Quality Assurance Coordinator to oversee the Company's continuous quality assurance program. In addition, each center has a quality assurance committee that typically includes the Medical Director, the center administrator and nurses, as well as other technical personnel. This committee meets regularly to monitor the quality of care in the center and to assure compliance with applicable regulations. Outcomes Data Renal Care Group believes that an important factor in the successful management of ESRD is access to a broad database of treatment-specific outcomes information from which clinical pathways may be defined. The Quality Assurance Coordinator oversees the collection of patient outcomes and cost data in the Company's centers to assist in implementing clinical pathways to enhance patient outcomes while reducing the cost of care. Management believes that the implementation of such clinical pathways is necessary to improve the overall quality and operating efficiencies of its dialysis centers and to contract more effectively with payors in a health care environment increasingly influenced by managed care. Medical Advisory Board Renal Care Group's Medical Advisory Board meets quarterly to monitor the development and implementation of clinical protocols and to review patient outcomes. The Medical Advisory Board is chaired by Raymond Hakim, M.D., Ph.D., the Company's Chief Medical Officer, and is composed of affiliated nephrologists. In addition, the Medical Advisory Board is responsible for establishing, implementing and monitoring the Company's quality assurance policies and procedures, identifying therapy deficiencies, and evaluating technological changes. The Medical Advisory Board's principal task is the development of a protocol-driven clinical management model that will enable the Company to manage effectively the financial risk associated with ESRD capitation. Patient Involvement The Company also attempts to ensure quality care by instructing all ESRD patients before and after the initiation of dialytic therapy on methods for participating in their own care to the fullest extent possible. In addition, in some of the Company's centers, "self-care" units are formed in which self-reliance is fostered through instruction and support. 29 31 REIMBURSEMENT The following table sets forth information regarding the Company's reimbursement sources:
SIX MONTHS YEAR ENDED DECEMBER ENDED JUNE 31, 30, ---------------------- ------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Medicare.......................................... 72 % 68 % 68 % 68 % 67 % Medicaid.......................................... 7 8 7 7 7 Private and other payors.......................... 15 18 20 20 21 Hospital inpatient dialysis services.............. 6 6 5 5 5 --- --- --- --- --- Total................................... 100 % 100 % 100 % 100 % 100 % === === === === ===
The Social Security Act (the "Act") provides for Medicare coverage for certain individuals who are medically determined to have ESRD. Once an individual is medically determined to have ESRD, the Act specifies that one of two conditions must be met before entitlement begins: (i) a regular course of dialysis must begin, or (ii) a kidney transplant must be performed. The Act provides that entitlement begins the third month after the month in which a regular course of renal dialysis is initiated. ESRD is currently defined in federal regulations as that stage of kidney impairment that appears irreversible and permanent and requires a regular course of dialysis or kidney transplantation to maintain life. Under the Medicare ESRD program, the reimbursement rates per treatment are fixed but have been adjusted from time to time by legislation. Although this form of reimbursement limits the allowable charge per treatment, it provides the Company with predictable and recurring per treatment revenue. The Medicare composite rate, set by HCFA, governs the Medicare reimbursement available for a designated group of dialysis services, including the dialysis treatment, supplies used for such treatment, certain laboratory tests and medications. The Medicare composite rate is subject to regional differences based on certain factors, including regional differences in wages. Certain other services and drugs are eligible for separate reimbursement under Medicare and are not part of the composite rate, including certain drugs such as EPO and certain physician ordered tests provided to dialysis patients. The Company generally submits Medicare claims monthly and is usually paid within 30 days of the submission. Medicare Eligibility Set forth below are summaries of the general requirements for participation in the Medicare ESRD program: - Medicare generally covers those who are ages 65 and over, as well as those who are under age 65 and who have been medically determined to have ESRD. However, Medicare coverage is secondary for some patients who have qualifying employer group health insurance. - For patients eligible for Medicare based solely on ESRD (generally, those under age 65), Medicare coverage begins three months after the month in which the patient begins dialysis. During this three-month waiting period, Medicaid (if the patient is eligible), private insurance, or the patient is responsible for payment for dialysis services. This waiting period is waived for individuals who participate in a self-care dialysis training program. - For ESRD patients under age 65 who have any employer group health insurance coverage (regardless of the size of the employer or the individual's employment status), Medicare coverage is secondary to the employer coverage during the 18-month period following the establishment of Medicare eligibility based on ESRD. Medicare continues to be secondary regardless of whether the individual becomes eligible for Medicare based on age or disability before the expiration of the 18 months. - During the period of secondary coverage, the employer group health plan is responsible for paying primary benefits at its negotiated rate or, in the absence of such a rate, at the Company's usual and customary rates. Medicare generally pays the difference between what the employer group health plan paid and the gross amount payable by Medicare. 30 32 - For patients over ages 65 for whom Medicare already is the primary payor and who later develop ESRD, Medicare remains the primary payor. (Some group health coverage does not render Medicare coverage secondary for beneficiaries eligible for Medicare based on age or disability.) However, if the patient's employer group health coverage already was primary to Medicare (based on the size of the employer and the patient's employment status), then Medicare remains secondary for the 18-month period. - When Medicare is the primary payor, it reimburses 80% of the amount set by the Medicare prospective reimbursement system for each treatment. The beneficiary is responsible for the remaining 20%, as well as any unmet Medicare deductible amount, although Medicare supplemental insurance, Medicaid, or other private health insurance may pay on the beneficiary's behalf. Following amendments in 1993 to the Medicare Secondary Payor ("MSP") provisions, HCFA required employer group health plans to serve as the primary payor during the 18-month period in situations where the beneficiary was entitled to Medicare Benefits on the basis of both age and ESRD. In April 1995, HCFA revised its interpretation of the 1993 MSP amendments to require Medicare to serve as primary payor for the 18 month period only where employer coverage was already secondary to Medicare for individuals eligible for Medicare benefits on the basis of both age and ESRD. This change eliminates for some dually-eligible individuals the 18-month period commencing 90 days after the start of treatment during which the employer coverage would serve as primary payor source and reimburse the Company at a rate that the Company believes is higher than Medicare. Furthermore, HCFA also announced that the revised interpretation would apply retroactively to August 1993 and, as a result, amounts collected from employer-based group health plans as primary payors between August 1993 and April 1995 were to be refunded if the plan was not already serving as primary payor. In June 1995, the United States District Court for the District of Columbia issued a preliminary injunction prohibiting HCFA from applying this revised interpretation retroactively to August 1993, although a final ruling on the issue has not yet been issued by the court. The Company has established reserves for the retroactive application of the revised HCFA interpretation and believes that the amount of such reserves is adequate. Medicare Reimbursement Rates The Medicare composite rate for outpatient dialysis services currently averages $126 per treatment and may vary depending on regional wage differences. Medicare reimbursement rates are adjusted periodically based on certain factors, including legislation and executive and congressional budget reduction and control processes, inflation and costs incurred in rendering the services, but in the past have had little relationship to the cost of conducting business. The Medicare ESRD composite reimbursement rate was unchanged from commencement of the program in 1972 until 1983. From 1983 through December 1990, numerous Congressional actions resulted in net reductions of the average composite reimbursement rate from a fixed fee of $138 per treatment in 1983 to approximately $125 per treatment in 1986. Congress increased the ESRD composite reimbursement rate, effective January 1991, resulting in an average rate of $126 per treatment. The Medicare ESRD composite reimbursement rate has been the subject of a number of reports and studies. In April 1991, the Institute of Medicine, an organization chartered by the National Academy of Sciences and an advisor to the federal government, released a report recommending that the composite rate be adjusted for the effects of inflation. In March 1996, the Prospective Payment Assessment Commission ("PROPAC") recommended that the ESRD composite reimbursement rate be increased by 2.0% for freestanding facilities for fiscal year 1997. In August 1996, and in response to the March 1996 report of PROPAC, HCFA announced that an increase in the composite rate may be appropriate within the next few years. In making this announcement HCFA also stated that any rate increase must be considered in the context of Medicare budgetary concerns. Nevertheless, HCFA stated that it may recommend an update to the composite rate for fiscal year 1998. In January 1996, HCFA announced a three-year demonstration project involving the enrollment of ESRD patients in managed care organizations. The demonstration project would adjust payment rates based upon treatment status, age groups, and the cause of renal failure. Based upon the 31 33 results of the demonstration project, HCFA has stated it would make recommendations to Congress concerning the appropriateness of paying for ESRD services on a capitated basis. Congress is not required to implement these recommendations and could either raise or lower the reimbursement rate. During the last congressional session, there were various proposals for the reform of numerous aspects of Medicare. The Company is unable to predict what, if any, future changes may occur in the Medicare composite reimbursement rate. Any reductions in the Medicare composite reimbursement rate could have a material adverse effect on the Company's results of operations, financial condition and business. From June 1989 through December 1990, the Medicare ESRD program added $40 per administration of EPO to the dialysis center's allowable composite rate for dosages of up to 9,999 units per administration. For higher dosages, an additional $30 per treatment was allowed. Effective January 1991, the Medicare allowable prescribed rate for EPO was changed to $11 per 1,000 units, rounded to the nearest 100 units. Subsequently, legislation was enacted to reduce the Medicare prescribed rate for EPO by $1 to $10 per 1,000 units for administration of EPO in 1994. For subsequent periods, the Secretary of the Department of Health and Human Services ("HHS") is authorized to determine an appropriate rate, which currently is $10 per 1,000 units administered. Medicaid Reimbursement Medicaid programs are state administered programs partially funded by the federal government. These programs are intended to provide coverage for patients whose income and assets fall below state defined levels and who are otherwise uninsured. The programs also serve as supplemental insurance programs for the Medicare co-insurance portion and provide certain coverages (e.g., oral medications) that are not covered by Medicare. State regulations generally follow Medicare reimbursement levels and coverages without any coinsurance amounts. Certain states, however, require beneficiaries to pay a monthly share of the cost based upon levels of income or assets. The Company is a licensed ESRD Medicaid provider in all states in which it does business. Private Reimbursement/Acute Care Contracts The Company receives reimbursement from private payors for ESRD treatments prior to Medicare becoming a patient's primary payor at rates significantly higher than the per treatment rate set by Medicare. After Medicare becomes a patient's primary payor, private secondary payors generally reimburse the Company for 20% of the Medicare per treatment rate. The Company has negotiated managed care contracts with certain payors at rates that are higher than the Medicare rate. The Company also receives payments from hospitals under 21 acute care contracts at rates significantly higher than the Medicare composite rate. GOVERNMENT REGULATION General The Company's dialysis center operations are subject to extensive governmental regulation at the federal, state and local levels. These regulations require the Company to meet various standards relating to, among other things, the management of centers, personnel, maintenance of proper records, equipment and quality assurance programs. The dialysis centers are subject to periodic inspection by state agencies and other governmental authorities to determine if the premises, equipment, personnel and patient care meet applicable standards. To receive Medicare reimbursement, the Company's dialysis centers must be certified by HCFA as meeting certain Medicare conditions of coverage. All of the Company's dialysis centers are so certified. HCFA has announced that it is in the process of revising the current Medicare Conditions of Coverage for ESRD services. The Company is unable to predict what, if any, future changes may occur in the Medicare Conditions of Coverage for ESRD facilities. Any changes to the Medicare Conditions of Coverage, or any loss by the Company of its federal certifications, its authorization to participate in the Medicare or Medicaid programs or its licenses under the laws of any state or other governmental authority from which a substantial portion of its revenues is derived or a change resulting from health care reform reducing dialysis reimbursement or reducing or eliminating 32 34 coverage for dialysis services would have a material adverse effect on the Company's operations, revenues and net earnings. To date, the Company and its subsidiaries have maintained their licenses and their Medicare and Medicaid authorizations. The Company believes that the health care services industry will continue to be subject to intense regulation at the federal, state and local levels, the scope and effect of which cannot be predicted. No assurance can be given that the activities of the Company will not be reviewed and challenged by government regulators or that health care reform will not result in a material adverse change to the Company. Furthermore, the Company potentially could be held responsible for actions previously taken by entities it has acquired. As part of its announced regulatory agenda for 1996, HHS intends to issue a proposed rule that would automatically assign to the new owner of a Medicare provider or supplier liability for any Medicare overpayments, violations, or sanctions incurred by or imposed on, the previous owner. There can be no assurance that previous operating practices of the Company's acquisitions will not be reviewed and challenged by government regulators or that the Company will not be liable for such practices. Fraud and Abuse The Company's operations are subject to the illegal remuneration provisions of the Social Security Act (sometimes referred to as the "anti-kickback" statute) and similar state laws that impose criminal and civil sanctions on persons who knowingly and willfully solicit, offer, receive or pay any remuneration, whether directly or indirectly, in return for, or to induce, the referral of a patient for treatment, or, among other things, the ordering, purchasing, or leasing, of items or services that may be paid for in whole or in part by Medicare, Medicaid or similar state programs. Federal enforcement officials may attempt to impose civil false claims liability with respect to claims resulting from an anti-kickback violation. Violations of the federal anti-kickback statute are punishable by criminal penalties, including imprisonment, fines and exclusion of the provider from future participation in the Medicare or Medicaid programs. Civil penalties for violations of the federal anti-kickback statute are punishable by criminal penalties, including imprisonment, fines and exclusion of the provider from future participation in the Medicare or Medicaid programs. Civil suspension from participation in Medicare or Medicaid for anti-kickback violations also can be imposed through an administrative process, without the imposition of civil monetary penalties. Some state statutes also include criminal penalties. While the federal anti-kickback statute expressly prohibits transactions that have traditionally had criminal implications, such as kickbacks, rebates or bribes for patient referrals, its language has been construed broadly and has not been limited to such obviously wrongful transactions. Court decisions state that, under certain circumstances, the statute is also violated when one purpose (as opposed to the "primary" or a "material" purpose) of a payment is to induce referrals. Congress has frequently considered federal legislation that would expand the federal anti-kickback statute to include the same broad prohibitions regardless of payer source. In fact, effective January 1, 1997, the Health Insurance Portability and Accountability Act of 1996 expands the anti-kickback statute to certain other "Federal Health Care Programs," such as CHAMPUS. In July 1991 and in November 1992, the Secretary of HHS published regulations that create exceptions or "safe harbors" for certain business transactions. Transactions that satisfy the criteria under applicable safe harbors will be deemed not to violate the federal anti-kickback statute. Transactions that do not satisfy all elements of a relevant safe harbor do not necessarily violate the statute, although such transactions may be subject to scrutiny by enforcement agencies. The Company seeks to structure its various business arrangements to satisfy as many safe harbor elements as possible under the circumstances, although not all of the Company's arrangements satisfy all of the elements of a safe harbor. Although the Company has never been challenged under any anti-kickback statute and the Company believes it has a reasonable basis for concluding that it complies in all material respects with the federal anti-kickback statute and all other applicable related laws and regulations, there can be no assurance that the Office of the Inspector General (the "OIG") within HHS or other governmental agency will not take a contrary position or that the Company will not be required to change its practices in a manner which will cause, or will not otherwise experience, a material adverse effect as a result of any such challenge or any sanction which might be imposed. 33 35 In July 1994, the Secretary of HHS proposed a rule that would modify the original set of safe harbor provisions to give greater clarity to the rule making's original intent. The proposed rule would make changes to the safe harbors on personal services and management contracts, small entity investment interests and space rentals, among others. The Company does not believe that its current operations, as set forth above, would change if the proposed rule were adopted in the form proposed. However, the Company cannot predict the outcome of the rule making process or whether changes in the safe harbors rule will affect the Company's position with respect to the federal anti-kickback statute. Nephrologist Ownership. At the closing of the Combination and the Company's recent mergers, shares of Common Stock were issued to certain nephrologist owners of the facilities. In addition, pursuant to the terms of the Company's agreements with its Medical Directors or their professional practice groups, the Company pays fees for medical director services and has granted options to purchase shares of Common Stock to individual Medical Directors or their respective practice groups. Because these physicians refer to the Company's centers, the federal anti-kickback statute could be found to apply to referrals by nephrologists to the Company's facilities. However, the Company believes these ownership relationships are in material compliance with the federal anti-kickback statute. Also, the Company believes that the value of Common Stock issued and options granted to nephrologists have and will be consistent with the fair market value of assets transferred to, or services performed by such nephrologists for, the Company and there is no intent to induce referrals to the Company's facilities. There is a safe harbor for certain investments in large public companies, and the Company believes that there are good arguments that its physician ownership relationships meet at least a majority of the criteria for this safe harbor. However, these relationships do not satisfy all of the criteria of a safe harbor and there can be no assurance that these relationships will not subject the Company to investigation or prosecution by enforcement agencies. Medical Director Relationships. The Conditions of Coverage under the Medicare ESRD program mandate that treatment at a dialysis center be under the general supervision of a medical director who is a licensed physician. Generally, the medical director must be board eligible or board certified in internal medicine or pediatrics and have had at least 12 months of experience or training in the care of patients at ESRD centers. The Company has engaged Medical Directors at each of its centers under contracts with physicians, nephrologists or group practices. The compensation of the Medical Directors and other physicians under contract with the Company is separately negotiated and generally depends upon competitive factors in the local market, the physician's professional qualifications and responsibilities and the size and utilization of the center or relevant program. The aggregate compensation of the Medical Directors and other physicians under contract with the Company is generally fixed in advance for periods of one year or more by written agreement and is set to reflect the fair market value of the services rendered and does not take into account the volume or value of patients referred to the Company's facilities. Because in all cases the Medical Directors and the other physicians under contract with the Company refer patients to the Company's centers, the federal anti-kickback statute could be found to apply. However, the Company believes it has a reasonable basis for concluding that its contractual arrangements with these physicians are in material compliance with the federal anti-kickback statute. In all instances, the Company seeks to comply with the requirements of the personal services and management contract safe harbor when entering into agreements or contracts with its Medical Directors and other physicians. Acute Dialysis Services. Under the Company's acute inpatient dialysis service arrangements, the Company agrees to provide a hospital with supervised emergency or acute dialysis services, including qualified nursing and technical personnel and technical services, and, in some cases, equipment. Because physicians under contract with the Company may refer patients to hospitals with which the company has an acute dialysis service arrangement, the federal anti-kickback statute could be found to apply. However, the Company believes it has a reasonable basis for concluding that its contractual arrangements with hospitals for acute inpatient dialysis services are in material compliance with the federal anti-kickback statute. In all instances, the company seeks to comply with the requirements of the personal services and equipment lease safe harbors when entering into agreements or contracts for acute inpatient dialysis services. Certain Relationships with Laboratories, IDPN Suppliers, and Hospitals. The Company enters into arrangements for purposes of obtaining laboratory services. Such services include testing currently reimbursed 34 36 under the Medicare composite rate, as well as testing reimbursed separately from the Medicare composite rate. In October 1994, the OIG published a Special Fraud Alert which stated that the federal anti-kickback statute could be violated when a dialysis center obtains discounts from a laboratory for testing encompassed within the Medicare composite rate in return for referring all or most of the dialysis center's non-composite rate testing to the laboratory. In addition, the Company enters into arrangements with suppliers of IDPN. In May 1993, the OIG issued a report indicating its belief that many ESRD patients receive IDPN despite not meeting Medicare coverage guidelines for the treatment. Furthermore, in July 1993, the OIG issued a Management Advisory Report indicating that "administration fees" paid by IDPN suppliers to dialysis centers for administering IDPN to patients during dialysis could violate the federal anti-kickback statute where the payments made to the dialysis centers are unreasonably high (the report cited fees in the range of $30 per administration as raising anti-kickback law questions). Moreover, the Company enters into acute inpatient dialysis service arrangements under which the Company agrees to provide a hospital with supervised emergency or acute inpatient dialysis services, including qualified nursing and technical personnel and technical services and, in some cases, equipment and supplies. Because physicians under contract with the Company may refer patients to hospitals with which the Company has an acute dialysis service arrangement, the federal anti-kickback statute could be found to apply. The Company believes that the current arrangements of the Company with nephrologist owners, medical directors, laboratories, IDPN suppliers, hospitals, and other persons or entities who either refer patients to the Company's dialysis centers or from whom the Company purchases items or services generally are in material compliance with the federal anti-kickback statute. Specifically, the Company believes that such arrangements now generally provide, and will provide for reasonable compensation to or by the Company for the items and services it buys from or furnishes to such persons or entities. Moreover, the Company intends that IDPN therapy will be furnished in accordance with specified utilization protocols consistent with Medicare coverage guidelines, and only to patients for whom it is deemed medically necessary, as demonstrated by physician-authorized Certificates of Medical Necessity. However, there can be no assurance that the Company's future arrangements will not be challenged or subject to sanctions for any of the Founding Companies' past arrangements. Any such challenge or change, including any related sanctions which might be assessed, could have a material adverse effect on the Company's operations, net revenue and earnings. Stark II Provisions enacted as part of the Omnibus Budget Reconciliation Act of 1993 ("Stark II") restrict physician referrals for certain designated health services to entities with which a physician or an immediate family member has a "financial relationship." The entity is prohibited from claiming payment under the Medicare or Medicaid programs for services rendered pursuant to a prohibited referral and is liable for the refund of amounts received pursuant to prohibited claims. The entity also can incur civil penalties of up to $15,000 per improper claim and can be excluded from participation in the Medicare or Medicaid programs. Provisions enacted as part of the Omnibus Budget Reconciliation Act of 1989 ("Stark I") imposing comparable restrictions to clinical laboratory services became effective in 1992. Stark II provisions applicable to "designated health services" that may be relevant to the Company became effective in January 1995. A "financial relationship" under Stark II is defined as an ownership or investment interest in, or a compensation arrangement between, the physician (or an immediate family member) and the entity. The company has entered into compensation agreements with its Medical Directors or their respective professional practices. The Medical Directors or their professional practices also will own shares, and options to purchase shares, of Common Stock. Accordingly, the Medical Directors will have a "financial relationship" with the company for purposes of Stark II. For purposes of Stark II, "designated health services" include, among other things: clinical laboratory services; parenteral and enteral nutrients, equipment and supplies, including IDPN; prosthetics; orthotics; prosthetic devices; physical and occupational therapy services; outpatient prescription drugs; durable medical equipment; and inpatient and outpatient hospital services. Dialysis is not a designated health service under Stark II. However, the Stark II definition of "designated health services" includes items and services that are components of dialysis or that may be provided to a patient in connection with dialysis, if such items and 35 37 services are considered separately rather than collectively as dialysis. Under the final Stark I regulations published in August 1995, HCFA provided an exception from Stark I for clinical laboratory services reimbursed under the Medicare "composite rate" for dialysis. The Company believes it likely that, when final Stark II regulations are published, they will contain a similar exception for "designated health services" reimbursed under the composite rate. However, there can be no assurance that HCFA will adopt such a position. Even if the final Stark II regulations contain such an exception, the Company's provision of, or arrangement and assumption of financial responsibility for, outpatient prescription drugs, including EPO, enteral and parenteral nutrients, such as IDPN, clinical laboratory services, center dialysis services and supplies, home dialysis supplies and equipment, and services to hospital inpatients and outpatients, includes services and items that are reimbursed separate from the Medicare composite rate and therefore are likely to be construed to be "designated health services" within the meaning of Stark II. In addition, the Company obtains clinical laboratory services from the laboratory that currently is operated by Kidney Care, a tax exempt entity under Section 501(c)(3) of the Internal Revenue Code. The Company holds an option to purchase the assets of this laboratory. The Company has also entered into a management agreement under which it provides certain management and administrative services, equipment and technical support to the laboratory for a fee. The Company believes, based on the fact that there is no direct or indirect physician ownership of the laboratory and that the option relates only to the assets of the laboratory (and not the entity that owns them or any earnings therefrom) and, with respect to the management agreement, that the terms of the contract with the laboratory comply with the material provisions of the personal services and equipment and space lease exceptions under Stark II, that there are sound arguments that the existence of the option and the management agreement will not create an indirect ownership or compensation arrangement between the laboratory and the Company's nephrologist owners or Medical Directors that would prohibit the Company's dialysis centers from obtaining services from this laboratory that are reimbursed separate from the Medicare composite rate in the absence of a Stark II exception. However, there can be no assurance that HCFA or the OIG would adopt or agree with this position. Although the Company has learned that HCFA officials responsible for drafting implementing regulations for Stark II have tentatively taken the informal position that administration of certain prescription drugs that would not be needed but for a patient's need for dialysis (e.g., EPO) will not be treated as outpatient prescription drugs subject to the Stark II prohibition on self-referral, this informal position is not binding on HCFA, and there can be no assurance that final Stark II regulations will adopt such a position. With respect to the other items and services provided by the Company that are likely to be deemed to be "designated health services" subject to the Stark II prohibition, the language of Stark II and of the Stark I final regulation suggest that the Company will not be permitted to offer such services in the absence of a Stark II exception. Stark II contains exceptions for ownership or compensation arrangements that meet certain specific criteria set forth in the statute or in forthcoming regulations. With respect to ownership, certain qualifying in-office physician or ancillary services provided by or under the supervision of physicians in a single group practice are exempt from both ownership and compensation arrangement restrictions. With respect to compensation arrangements, exceptions are available for certain qualifying arrangements in the following areas: (a) bona fide employment relationships; (b) personal services contracts; (c) space and equipment leasing arrangements; (d) certain group practice arrangements with a hospital that were in existence prior to December 1989; and (e) purchases by physicians of laboratory services, or of other items and services at fair market value. In order to be exempt from the Stark II self-referral prohibition, it is necessary to meet all of the criteria of a particular exception for each financial relationship existing between an entity and a referring physician. The Company believes that several of its financial relationships with referring physicians will meet the criteria for an exception. For example, the company believes, based on the language of Stark II, that its agreements with Medical Directors of their professional practices materially satisfy the exception for compensation pursuant to a personal services contract. Similarly, the company believes, based in part on the legislative history to Stark II, that it has a reasonable basis for concluding that its contractual relationships with hospitals for acute inpatient dialysis services should be deemed to satisfy the criteria for the exceptions for personal services or leased equipment arrangements. In the case of certain other financial arrangements, however, there may be no exception available. 36 38 Stark II also includes an exception for a physician's ownership or investment interest in securities listed on an exchange or quoted on the NASDAQ Stock Market which, in either case, meet certain criteria. Such criteria include a requirement that the issuer of such securities have at least $75.0 million in stockholder equity at the end of the issuer's most recent fiscal year or on average during the previous three (3) fiscal years. Prior to the Offering, the Company has not had stockholder equity of at least $75.0 million, but expects that the net proceeds to the Company from the Offering will enable it to meet that requirement as of the end of 1996. Because physicians under contract with the Company may refer patients to hospitals with which the Company has an acute inpatient dialysis service arrangement, Stark II may be interpreted by HHS to apply to the company's acute dialysis arrangements with hospitals. However, Stark II contains exceptions for certain equipment rental and personal services arrangements, and the company believes it has a reasonable basis for concluding that its contractual arrangements with hospitals for acute inpatient dialysis services are in material compliance with the requirements of such exceptions to Stark II. Consequently, if it were to apply, Stark II may require the Company to restructure certain existing compensation agreements with its Medical Directors or, in the alternative, to refuse to accept referrals for designated health services from such physicians. Moreover, since Stark II prohibits Medicare or Medicaid reimbursement of items or services provided pursuant to a prohibited referral, and imposes substantial civil monetary penalties on entities which present or cause to be presented claims for reimbursement in such cases, the Company could be required to repay amounts reimbursed for items and services that HCFA determines to have been furnished in violation of Stark II, and could be subject to substantial civil monetary penalties, either or both of which could have a material adverse effect on the Company's operations, net revenue or earnings. The Company believes that if Stark II is interpreted to apply to the Company's operations, the Company will be able on a prospective basis to bring its financial relationships with referring physicians into material compliance with the provisions of Stark II, including relevant exceptions, although prospective compliance would not affect amounts or penalties determined to be owed for past conduct, and there can be no assurance that such prospective compliance, if possible, will not have a material adverse effect on the Company's operations, net revenue or earnings. If Stark II is interpreted by HHS to apply to the Company and the Company is determined to be liable for past violations of Stark II by itself or one or more of the entities it has acquired, the application of Stark II could have a material adverse effect on the Company. STATE REFERRAL REGULATIONS Several states have enacted statutes prohibiting physicians from holding financial interests in various types of medical centers to which they refer patients. The Company believes, based on its understanding of such state laws, that its arrangements with physicians are in material compliance with such state laws. However, given the recent enactment of such state laws, there is an absence of definitive interpretative guidance in many areas and there can be no assurance that one or more of the practices of the Company might not be subject to challenge under such state laws. If one or more of such state laws is interpreted to apply to the Company and the Company is determined to be liable for violations of such state laws by itself or one or more of the entities it has acquired, the application of such state laws could have a material adverse effect on the Company. FALSE CLAIMS The Company is also subject to federal and state laws prohibiting an individual or entity from knowingly and willfully presenting claims for payment (by Medicare, Medicaid, or other third party payers) that contain false or fraudulent information. These laws provide for both criminal and civil penalties. Furthermore, providers found to have submitted claims which they knew or should have known were false, fraudulent, or for items or services that were not provided as claimed, or for medically unnecessary services may be excluded from Medicare and Medicaid participation, required to repay previously collected amounts, and/or subject to substantial civil monetary penalties. Although dialysis centers are generally reimbursed by Medicare based upon prospectively determined composite rates, the submission of Medicare cost reports and requests for payments by dialysis centers will be covered by these laws. The Company believes that it has procedures to 37 39 ensure the accurate completion of cost reports and requests for payment. However, there can be no assurance that cost reports or requests for payment filed by the Company's dialysis centers will be materially accurate or will not be subject to challenge under these laws. Furthermore, there can be no assurance that cost reports or payment requests previously submitted by any of the entities acquired by the Company will not be challenged under these laws. Any such challenges, including any related sanctions which might be assessed, could have a material adverse effect on the Company's operations, net revenue and earnings. STATE LAWS REGARDING PROVISION OF MEDICINE AND INSURANCE The laws of many states prohibit physicians from splitting fees with non-physicians and prohibit non-physician entities from practicing medicine. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. Although the Company believes its operations as currently conducted are in material compliance with existing applicable laws, many aspects of the Company's business operations, including the structure of the Company's relationship with physicians, have not been the subject of state of federal regulatory interpretation. There can be no assurance that review of the Company's business by courts or regulatory authorities will not result in determinations that could materially adversely affect the operations, revenues or net earnings of the Company or that the health care regulatory environment will not change so as to restrict the Company's existing operations or their expansion. In addition, expansion of the operations of the Company to certain jurisdictions may require structural modifications of the Company's form of relationships with physician groups, which could have a material adverse effect on the operations, revenues and net earnings of the Company. Most states have laws regulating insurance companies and HMOs. The Company is not qualified in any state to engage in the insurance or HMO business. As the managed care business evolves, state regulators may begin to scrutinize the practices of, and relationships between, third-party payers, medical service providers and entities providing management and other services to medical service providers with respect to the application of insurance and HMO laws and regulations. The Company believes, based on its general knowledge of the health care, HMO and insurance industries as operated in the states in which its centers are located, that its practices are consistent with those of other health care companies and should not subject it to such laws and regulations. However, given the limited regulatory history with respect to such practices, there can be no assurance that states will not attempt to regulate the Company as an insurer or HMO. If the Company is subject to prosecution or other enforcement proceeding by state regulatory agencies, it may be required to change or discontinue certain practices which could have a material adverse effect on the operations, revenues and net earnings of the Company. HEALTH CARE LEGISLATION Because the Medicare program represents a substantial portion of the federal budget, Congress takes action in almost every legislative session to modify the Medicare program for the purpose of reducing the amounts otherwise payable by the program to health care providers in order to achieve deficit reduction targets, among other reasons. Legislation or regulations may be enacted in the future that may significantly modify the Medicare ESRD program or substantially reduce the amount paid for the Company's services. For example, the 1995 budget reconciliation bill sent by Congress to the President (and subsequently vetoed by the President) proposed extending the period during which Medicare payment for ESRD would be secondary to a patient's employer group health plan from 18 to 30 months. In addition, the conference report to the reconciliation bill called for HHS to report to Congress not later than December 31, 1999 with recommendations on expanding the definition of individuals eligible to enroll in the bill's proposed MedicarePlus managed care plans to include ESRD patients, and the President's response would have immediately made such persons eligible for participation in such plans. The Health Insurance Portability and Accountability Act of 1996, signed into law in August 1996, will, among other things, provide for insurance portability for individuals who lose or change jobs, limit exclusions for preexisting conditions, and establish a pilot program for medical savings accounts. In addition, this legislation also greatly expands federal efforts at combating health care fraud and abuse by making numerous amendments to the Social Security Act and the federal criminal code. Among other things, the new 38 40 legislation creates a new "Health Care Fraud and Abuse Control Account," provides for the issuance of "advisory opinions" by the OIG regarding the application of the anti-kickback statute, extends certain criminal penalties for Medicare and Medicaid fraud to other federal health care programs, expands the exclusion authority of the OIG, extends Medicare and Medicaid civil monetary penalty provisions to other federal health care programs, increases the amounts of civil monetary penalties, and establishes a criminal health care fraud statute. Most of the Act's fraud and abuse provisions take effect on January 1, 1997. Furthermore, statutes or regulations may be enacted which impose additional requirements on the Company to maintain eligibility to participate in the federal and state payment programs. Such new legislation or regulations may have a material adverse effect on the Company's operations, revenue or earnings. OTHER REGULATIONS The Company's operations are subject to various state hazardous waste disposal laws. Those laws as currently in effect do not classify most of the waste produced during the provision of dialysis services to be hazardous, although disposal of non-hazardous medical waste is also subject to regulation. OSHA regulations require employers of workers who are occupationally subject to blood or other potentially infectious materials require employers of workers who are occupationally subject to blood or other potentially infectious materials to provide those workers with certain prescribed protections against blood borne pathogens. These regulatory requirements apply to all health care centers, including dialysis centers, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide hepatitis B vaccinations, personal protective equipment, infection control training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, and engineering and work practice controls. Employers are also required to comply with certain record-keeping requirements. Some states have established certificate of need ("CON") programs regulating the establishment or expansion of health care centers, including dialysis centers. The Company believes that it is in material compliance with the foregoing laws and regulations. The Company believes it is in material compliance with all applicable laws and regulations. No assurance can be made that in the future the Company's business arrangements, past or present, will not be the subject of an investigation or prosecution by a federal or state governmental authority. Such investigation could result in the imposition of any combination of the penalties discussed above depending upon the agency involved in such investigation and prosecution. None of the Company's business arrangements with physicians, vendors, patients or others have been the subject of investigation by any governmental authority. No assurance can be given that the Company's activities will not be reviewed or challenged by regulatory authorities. The Company monitors legislative developments and would seek to restructure a business arrangement if the Company determined that one or more of its business relationships placed it in material noncompliance with such a statute. The Company believes that in the near future the health care service industry will continue to be subject to substantial regulation at the federal and state levels, the scope of which cannot be predicted by the Company. Any loss by the Company of its various federal certifications, its authorization to participate in the Medicare and Medicaid programs or its licenses under the laws of any state or other governmental authority from which a substantial portion of its revenues are derived would have a material adverse effect on its operations, revenues and net earnings. COMPETITION The dialysis industry is fragmented and highly competitive. Competition for qualified physicians to act as Medical Directors is also significant. According to HCFA, there were in excess of 2,800 dialysis centers in the United States at the end of 1995. The Company believes that approximately 38% were owned by multi-center dialysis companies, 32% were owned by independent physicians and 30% were hospital-based centers. Certain of the Company's competitors have substantially greater financial resources than the Company and may compete with the Company for acquisitions, development and/or management of dialysis centers and nephrology practices. The Company believes that competition for acquisitions has increased the cost of acquiring dialysis centers and will likely increase the cost of acquiring nephrology practices. The Company may also experience competition from centers established by former Medical Directors or other referring 39 41 physicians. There can be no assurance that the Company will be able to compete effectively with any such competitors. PROPERTIES Excluding the eight managed centers, the Company operates 77 dialysis centers in 12 states, of which 58 are located in leased facilities and 19 are owned. Certain of the premises are leased from physicians who practice at the center and who are stockholders of the Company. The Company's leases generally have terms ranging from one to 15 years and typically contain renewal options. The sizes of the Company's centers range from approximately 400 to 17,000 square feet. The Company leases office space in Nashville, Tennessee for its corporate headquarters and university division under leases that expire in 2002 and 1999. The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. Expansion or relocation of the Company's dialysis centers would be subject to compliance with conditions relating to participation in the Medicare ESRD program. In states that require a certificate of need, approval of an application submitted by the Company would be necessary for expansion or development of a new dialysis center. The Company generally owns the equipment used in its outpatient centers. The Company considers its equipment to generally be in good operating condition and suitable for the purposes for which it is being used. LEGAL PROCEEDINGS The Company is subject to claims and suits in the ordinary course of business, including those arising from patient treatment, which the Company believes will be covered by malpractice insurance. The Company is not currently a party to any material legal actions. 40 42 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The table below sets forth certain information concerning each of the directors and executive officers of the Company.
NAME AGE POSITION - ----------------------------------- --- ---------------------------------------------------- Harry R. Jacobson, M.D.(1)......... 49 Chairman of the Board Sam A. Brooks, Jr.(1).............. 57 President, Chief Executive Officer and Director Gary Brukardt...................... 50 Executive Vice President, Chief Operating Officer Joseph A. Cashia................... 40 Senior Vice President -- Development Ronald Hinds....................... 48 Executive Vice President, Chief Financial Officer, Treasurer and Secretary Raymond Hakim, M.D., Ph.D.......... 51 Executive Vice President and Chief Medical Officer John D. Bower, M.D.(1)............. 64 Vice Chairman of the Board Joseph C. Hutts(2)(3).............. 55 Director Kenneth Johnson, M.D............... 52 Director Thomas A. Lowery, M.D.(3).......... 53 Director Stephen D. McMurray, M.D.(2)....... 49 Director W. Tom Meredith, M.D.(2)(3)........ 61 Director
- --------------- (1) Member of the Nominating Committee. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. Dr. Jacobson has been Chairman of the Board of Directors of the Company since June 1995. He currently serves as Deputy Vice Chancellor for Health Affairs at Vanderbilt University, a position he has held since August 1995, and as Professor of Medicine and Director of the Division of Nephrology, Department of Medicine, Vanderbilt University Medical Center, and Staff Physician/Nephrologist, Veterans Administration Hospital in Nashville, positions he has held since 1985. Dr. Jacobson received a B.S. degree from the University of Illinois and his M.D. from the University of Illinois Abraham Lincoln School of Medicine. He completed his internal medicine training at Johns Hopkins Hospital and his nephrology training at Southwestern Medical School in Dallas, Texas. Mr. Brooks has been President and Chief Executive Officer of the Company since June 1995, served as Treasurer from June 1995 to November 1995, and has been President of Tennessee since February 1994. He also currently serves as President of MedCare Investments Corp., a health care investment company, and Chairman of the Board of National Imaging Affiliates, Inc., an owner of outpatient diagnostic imaging centers, and has held such positions since June 1991 and April 1992, respectively. Mr. Brooks is a director of Kinetic Concepts, Inc., a manufacturer and distributor of specialty hospital beds; Quorum Health Group, Inc., an owner, operator and manager of acute care hospitals; Nationwide Health Properties, Inc., a health care real estate investment trust; and PhyCor, Inc., an operator of multi-specialty medical clinics. Mr. Brukardt has been Executive Vice President and Chief Operating Officer of the Company since August 1996. From 1991 to August 1996, Mr. Brukardt served as Executive Vice President of Baptist Health Care Affiliates in Nashville, Tennessee, where he was responsible for the development and operation of physician practice management organizations and the management of four hospitals and 22 outpatient facilities. In addition, from 1991 to August 1996, Mr. Brukardt served as Chairman and President of HealthNet Management, Inc., a managed care company. Mr. Cashia has been Senior Vice President -- Development since June 1996 and served as Chief Operating Officer of the Company from June 1995 to June 1996. Mr. Cashia also has served as Chief Operating Officer of Tennessee since April 1994. He served as Vice President of Operations for REN Corporation-USA, an operator of dialysis centers and laboratories, from 1989 to 1993. Mr. Cashia was 41 43 employed by Community Dialysis Centers (now Vivra, Inc.), a provider of outpatient dialysis services, from 1983 to 1989 in various positions, the last of which was Vice President of Western Region Operations. Mr. Cashia attended the University of Alabama and received his nursing degree from Samford University and his M.B.A. from Vanderbilt University's Owen Graduate School of Management. Mr. Hinds has been an Executive Vice President and Chief Financial Officer of the Company since August 1995. He was an audit partner with Deloitte & Touche LLP from 1981 to 1994 where he managed the health care practice of the Nashville office. During his tenure at Deloitte & Touche, Mr. Hinds also served as a Regional Health Care Partner for the firm. Mr. Hinds received his B.A. in accounting from Middle Tennessee State University. Dr. Hakim has been Executive Vice President and Chief Medical Officer of the Company since June 1995. He has published extensively on the adequacy of dialysis and the clinical aspects of bio-compatibility. From 1992 to 1995, Dr. Hakim served as Medical Director for the Vanderbilt Dialysis Program. He served as a member of the Medical Board of Vanderbilt in 1992, as Chairman of the Ambulatory Services Committee of Vanderbilt in 1990 and 1991, and as Director, Clinical Nephrology of Vanderbilt from 1987 to 1991. He received his M.S. from Rensselaer Polytechnic Institute, his Ph.D. from Massachusetts Institute of Technology and his M.D. from McGill University. Dr. Hakim performed his residency at Royal Victoria Hospital and his renal fellowship at Brigham and Women's Hospital. Dr. Bower has been a director of the Company since January 1996. He is a board certified nephrologist trained at Medical College of Virginia and has been practicing in Mississippi since 1972. He has been a Professor of Medicine and Chief, Division of Nephrology at University of Mississippi Medical Center since July 1976 and June 1990, respectively. In addition, he has served as Chairman of the Board and President of MEL since October 1977, and served as Chief Executive Officer of MEL from December 1993 to January 1995. He also has served as Chairman of the Board and President of Kidney Care since August 1973. Mr. Hutts has been a director of the Company since December 1995. He has been Chairman of the Board, President and Chief Executive Officer of PhyCor, Inc., an operator of multi-specialty medical clinics, since 1988. Mr. Hutts was formerly with Hospital Corporation of America in various positions, the last of which was President, HCA Health Plans. From 1986 to 1988, Mr. Hutts was Vice Chairman and Chief Operating Officer of Equitable HCA Corporation d/b/a Equicor. Mr. Hutts serves on the board of directors of Response Technologies, Inc., a provider of cancer treatment services, and Quorum Health Group, Inc. Dr. Johnson has been a director of the Company since September 1996. He is a board certified nephrologist trained at the University of Utah. In 1975, Dr. Johnson was a founding partner of Arizona Nephrology Associates and RenalWest. Dr. Johnson has served as the director of the Critical Care Units of two hospitals and serves as chairman of several Departments of Medicine in the East Valley area of Mesa, Arizona. Dr. Johnson is a member of the Medical Review Board of the Regional End Stage Renal Disease Network. Dr. Lowery has been a director of the Company since January 1996. He is a board certified nephrologist trained at Baylor College of Medicine and the University of Alabama, Birmingham. He has served on the Executive Committee of Southwest Organ Bank and has been the Director of the Renal Transplant Program of East Texas Medical Center in Tyler, Texas. In addition, he has been practicing as a partner of Tyler since 1979. Dr. McMurray has been a director of the Company since January 1996. He is a board certified nephrologist trained at Indiana University Medical Center and has been practicing nephrology in Fort Wayne, Indiana, since 1977. He has been President of the Medical Staff at Lutheran Hospital in Fort Wayne, Indiana, and has been affiliated with DMN since 1991. Dr. Meredith has been a director of the Company since January 1996. He is a board certified nephrologist and has been practicing in Wichita, Kansas, since 1969. He has been Clinical Associate Professor Department of Internal Medicine, The University of Kansas School of Medicine, Wichita, since 1977. In addition, he has been the President of Kansas since November 1979 and the President of Kansas Nephrology Physicians, P.A. since August 1990. 42 44 BOARD OF DIRECTORS Board Classes. The Company's Board of Directors is composed of three classes, designated Class I, Class II and Class III. The initial term of the Class I directors shall be until the 1997 annual meeting of stockholders of the Company, the initial term of the Class II directors shall be until the 1998 annual meeting of the stockholders of the Company, and the initial term of the Class III directors shall be until the 1999 annual meeting of the stockholders of the Company. Each succeeding term of a director in Class I, Class II or Class III shall be for three years or until his or her successor is elected. Currently, the members of the three classes are as follows: Class I -- Mr. Brooks and Dr. McMurray; Class II -- Mr. Hutts and Dr. Lowery; Class III -- Dr. Jacobson, Dr. Bower, Dr. Meredith and Dr. Johnson. Board Committees. The Board of Directors has established a Compensation Committee, a Nominating Committee, and an Audit Committee. The Company's Compensation Committee, composed solely of non-employee directors, is responsible for establishing salaries, bonuses, and other compensation for the Company's executive officers and administering any stock option and other employee benefit plans of the Company. The Company's Nominating Committee is responsible for considering nominations of Directors to the Company's Board of Directors. The Company's Audit Committee, composed solely of nonemployee directors, recommends the annual appointment of the Company's auditors, and, in conjunction with such auditors, reviews the scope of audit and other assignments and related fees, accounting principles used by the Company in financial reporting and internal auditing procedures, and the adequacy of the Company's internal control procedures. Compensation of Directors. Employees of the Company who are members of the Board of Directors of the Company do not receive any compensation for serving on the Company's Board of Directors. Each non-employee member of the Board of Directors receives a fee of $2,000 for each meeting of the Board of Directors attended by such director, and $1,000 for each committee meeting not attended on the same day as a meeting of the Board of Directors. All directors of the Company, including members who are employees, receive reimbursement of out-of-pocket expenses incurred in connection with attending Board of Directors or committee meetings thereof. In February 1996, Dr. Jacobson was paid $75,000 by the Company for his efforts related to the initial public offering. In January 1996, the Company adopted the Renal Care Group, Inc. 1996 Stock Option Plan for Outside Directors (the "Director Plan") to provide for grants of options to its non-employee directors. See "Management -- Stock Option and Stock Purchase Plans." Supplemental to the Director Plan, Mr. Hutts has been granted options to purchase an aggregate of 15,000 shares of Common Stock, of which 10,000 are exercisable at a price of $7.50 per share and 5,000 are exercisable at $18.00 per share, and Dr. Jacobson has been granted options to purchase an aggregate of 75,000 shares of Common Stock, of which 25,000 are exercisable at a price of $7.50 per share and 50,000 are exercisable at $18.00 per share. COMPENSATION OF EXECUTIVE OFFICERS During 1996 Messrs. Brooks, Hinds, Brukardt and Cashia, and Dr. Hakim (the "Named Executive Officers") will earn annual salaries of $250,000, $200,000, $220,000, $184,000 and $200,000, respectively. See "Management -- Employment Agreements" for more detail regarding these employment arrangements. 43 45 OPTION GRANTS The following table sets forth certain information concerning the grant of options to purchase Common Stock to each of the Company's Named Executive Officers. OPTION GRANTS DURING 1995
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES NUMBER OF % OF TOTAL OF STOCK PRICE SHARES OPTIONS APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1) OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------- NAME GRANTED IN 1995(2) ($/SHARE) DATE 5% 10% - -------------------------- ---------- ----------- ---------- ---------------- ---------- ---------- Sam A. Brooks, Jr......... 250,000(3)(4) 37.1% $ 7.50 November 4, 2005 $1,179,177 $2,988,267 Joseph A. Cashia.......... --(5) -- -- -- -- -- Raymond Hakim, M.D........ 100,000(4)(6) 14.8 7.50 November 4, 2005 471,671 1,195,307 Ronald Hinds.............. 60,000(4)(6) 8.9 7.50 November 4, 2005 283,003 717,184 25,000(4)(6) 3.7 18.00 November 4, 2005 283,003 717,184 ------- ---- Totals........... 435,000 64.5% ======= ====
- --------------- (1) The potential realizable value through the expiration date of the options has been determined on the basis of the market price per share at the time of grant compounded annually over the term of the option, net of the exercise price. These values have been determined based upon assumed rates of appreciation mandated by the Securities and Exchange Commission and are not intended to forecast the possible future appreciation, if any, of the price or value of the Common Stock. (2) The number of options granted to all employees in 1995 includes options to purchase 673,948 shares of Common Stock, but does not include options to purchase 115,500 shares of the Common Stock of Tennessee granted in April 1994 and January 1995 that were assumed by the Company in the Combination in February 1996 on a share-for-share basis. (3) Does not include warrants to purchase 90,000 shares of the common stock of Tennessee granted in February 1994 at a price of $10.00 per share that were assumed by the Company in February 1996 on a share-for-share basis but with an exercise price of $7.50 per share. These warrants were exercisable as of the grant date. (4) In the event of certain changes in control of the Company and the termination of the employment of the optionee, or in the event of certain changes in control of the Company that result in the Common Stock or stock of a successor not being traded on a national securities market, these options may accelerate and be "cashed out" under the circumstances described under "Management -- Stock Option and Stock Purchase Plans -- 1996 Stock Option Plan." (5) Does not include the following options to purchase shares of the common stock of Tennessee granted in April 1994 that were assumed by the Company in February 1996 on a share-for-share basis: 30,000 shares at an exercise price of $7.50 per share; 25,000 shares at an exercise price of $6.00 per share; 20,000 shares at an exercise price of $3.50 per share; and 10,000 shares at an exercise price of $2.00 per share. (6) Options are exercisable as to 20% of these shares as of the grant date, and an additional 20% will vest on each of the first four anniversaries of the grant date. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's Compensation Committee are Joseph C. Hutts, Stephen D. McMurray, M.D., and W. Tom Meredith, M.D. Mr. Brooks, the Chief Executive Officer, President and a Director of the Company, is a member of the board of directors of PhyCor, Inc., of which Mr. Hutts is the Chairman of the Board, President and Chief Executive Officer. See "Certain Transactions." EMPLOYMENT AGREEMENTS The Company has entered into or assumed employment and non-competition agreements with certain of its principal executive officers, including Messrs. Brooks, Hinds, Brukardt and Cashia and Dr. Hakim, and with certain other key personnel, except that Dr. Hakim's agreement does not contain non-competition provisions. The Company has not and does not expect to enter into an employment agreement with 44 46 Dr. Jacobson, the Chairman of the Board, because he does not devote his full time and attention to the affairs of the Company. Other than Dr. Hakim, each Named Executive Officer's employment agreement contains restrictive covenants prohibiting such officer from competing with the Company for a period of one year after the end of the employment term. The terms of the employment agreements commenced on February 12, 1996 and will continue for a term of three years and successive one year renewal terms thereafter, except for Mr. Cashia's which was assumed by the Company on February 12, 1996 and expires March 31, 1997, and Mr. Brukardt's which commenced on July 22, 1996 and will continue for a term of three years and successive one year renewal terms thereafter. The annual salaries of the Named Executive Officers as set forth in the employment agreements are $250,000, $220,000, $200,000, $184,000 and $200,000 for Messrs. Brooks, Brukardt, Hinds and Cashia, and Dr. Hakim, respectively. Each Named Executive Officer is eligible under his employment agreement for bonuses at the sole discretion of the Company (up to a maximum, in Mr. Cashia's agreement, of $50,000). The employment agreements of Messrs. Brooks, Brukardt and Hinds, also provide for severance for each such Named Executive Officer of (i) his salary for 12 months if such officer is terminated without cause, (ii) his salary for one month if such officer is terminated for cause, or (iii) his salary for 36 months if such officer is terminated within 12 months of certain changes in control of the Company either (A) without cause, or (B) by resignation of the officer as a result of declining to accept reassignment to a job that is not the equivalent of his then current position. Dr. Hakim's employment agreement contains similar severance provisions that become operative if he enters into a non-competition agreement. In addition to the above provisions, Mr. Brooks' employment agreement also provides for (i) life insurance coverage of $2.0 million, (ii) long term disability insurance of 60% of Mr. Brooks' annual base salary, (iii) an annual bonus of 75% of his annual base salary to be earned if the Company meets or exceeds its earning per share projections as approved by the Compensation Committee, (iv) a $100,000 payment for efforts related to the initial public offering, paid out of the proceeds of the initial public offering, and (v) severance as provided above but based upon his salary plus his prior year's bonus instead of just his salary. The Company assumed the employment agreement between Tennessee and Mr. Cashia dated April 4, 1994. Mr. Cashia's agreement provides for severance of his salary for 12 months and the amount of any bonus paid to Mr. Cashia in the prior year, and medical coverage during such 12 months for himself and his family if he is terminated without cause (as defined in his agreement). STOCK OPTION AND STOCK PURCHASE PLANS Amended and Restated 1996 Stock Option Plan In January 1996, the Company adopted the Renal Care Group, Inc. 1996 Stock Option Plan (the "Employee Plan"), which was amended and restated effective September 1996. Under the Employee Plan, options to purchase a total of 1,000,000 shares of Common Stock were reserved for grant to eligible employees and consultants of the Company. Options granted under the Employee Plan may qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options. Any key employee or consultant of the Company selected by the Compensation Committee will be eligible for grants under the Employee Plan. The Compensation Committee will determine the number of shares of Common Stock subject to each grant and prescribe the other terms and conditions of each grant. Options will become exercisable and expire at such time and in such installments as the Compensation Committee shall determine. The Board of Directors, in its discretion, may amend, terminate or modify the Employee Plan from time to time without stockholder approval; provided, however, that the Committee may condition any amendment on the approval of stockholders if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations. No termination, amendment or modification of the Employee Plan shall adversely affect any option previously granted under the plan, without the written consent of the option holder. 45 47 In the event of a change of control of the Company (as defined in the Employee Plan), the Employee Plan requires that upon the termination of employment of any employee option holder within 12 months after such change in control (except for terminations for death, certain disabilities, cause, or certain resignations), any vesting of such employee's outstanding options under the Employee Plan will accelerate and the Company or its successor must "cash out" such options by paying such employee an amount for each share subject to such options equal to the difference of (i) the greater of the fair market value of a share of Common Stock on the date of termination or the highest closing price per share of Common Stock during the 90 day period ending on the date of the change in control of the Company, minus (ii) the exercise price. In addition, upon any such change in control of the Company that results in the Common Stock or the stock of any successor to the Company ceasing to be publicly traded in a national securities market, the foregoing acceleration and "cash out" provisions (except that the "cash out" value is measured solely by the difference of (i) the highest closing price per share of Common Stock during the 90 day period ending on the date of the change in control of the Company, minus (ii) the exercise price) will be triggered for all outstanding option holders under the Employee Plan unless otherwise determined by the Board of Directors. 1996 Stock Option Plan For Outside Directors In January 1996, the Company adopted the Director Plan and reserved 100,000 shares of Common Stock for issuance to non-employee directors of the Company thereunder. The Director Plan provides for grants of options to purchase 2,500 shares of Common Stock to "outside directors" who have been directors for at least six months on the day after each annual meeting of stockholders of the Company, and for grants of options to purchase 5,000 shares of Common Stock to "outside directors" on the day such persons first become directors of the Company. For purposes of the Director Plan, "outside director" means any non-employee director who is not the Chairman or Vice Chairman of the Board and who also is not a party to, and whose medical practice is not a party to, a then currently effective Medical Director Agreement with the Company. The option price for each option granted under the Director Plan will be equal to 100% of the fair market value on the date of grant. An option under the Director Plan will be immediately exercisable and will remain exercisable for ten years from the date of grant. In the event of a change of control of the Company (as defined in the Director Plan) that results in the Common Stock or the stock of any successor to the Company ceasing to be publicly traded or quoted in a national securities market, the Director Plan requires that the Company or its successor must "cash out" such options by paying the director an amount for each share subject to such options equal to the difference of the highest closing price per share of Common Stock during the 90 day period ending on the date of the change in control of the Company, minus the exercise price. Amended and Restated Employee Stock Purchase Plan The Renal Care Group, Inc. Amended and Restated Employee Stock Purchase Plan (the "Purchase Plan") was adopted in January 1996 and became effective February 6, 1996. A total of 300,000 shares of Common Stock have been reserved for issuance under the Purchase Plan, which is intended to qualify under Section 423 of the Code. The Purchase Plan allows participants to purchase shares of Common Stock in connection with option periods commencing January 1 and ending the following December 31 (except the first option period which commenced February 6, 1996 and ends December 31, 1996). The Purchase Plan permits eligible employees of the Company and certain of its subsidiaries to purchase Common Stock through payroll deductions, which may not exceed 10% of the employee's base compensation, at a price equal to 85% of the fair market value of the Common Stock at the beginning of the option period or at the end of the option period, which ever is lower (subject to a minimum price specified in the Purchase Plan). Employees are eligible to participate in the Purchase Plan if they are employed by the Company or a participating subsidiary for at least 20 hours per week and more than five months in any calendar year and have been employed for at least six months since their last date of hire, except that credit is given for service with acquired companies. In the event of a change of control of the Company (as defined in the Purchase Plan), each option under the Purchase Plan will (if the Company is the surviving corporation) pertain to and apply to the securities to which a holder of the number of shares of the Company subject to such option would have been entitled in such transaction. If the Company is not the surviving corporation in such change in control, then all options 46 48 under the Purchase Plan will terminate, provided that the Compensation Committee may determine that such options shall be exercisable on the day prior to such change in control transaction. CERTAIN TRANSACTIONS CONSIDERATION FOR FOUNDING COMPANIES In connection with the Combination, and as consideration for their interests in the Founding Companies, certain officers, directors and holders of 5% or more of the Common Stock received cash (excluding $7.0 million of contingent payments), shares of Common Stock (valued at the initial public offering price of $18.00 per share) and notes approximately as follows: Harry R. Jacobson, M.D. (Chairman of the Board) -- $2,674,000; Sam A. Brooks, Jr. (President, Chief Executive Officer and Director) -- $1,337,000 (received in the form of shares of Common Stock, as to which Mr. Brooks disclaims beneficial ownership because the shares are held in a trust of which Mr. Brooks' daughter is the sole beneficiary); Dr. Bower -- $13,436,000; Dr. McMurray -- $3,581,000; Dr. Meredith -- $6,888,000; Dr. Lowery -- $5,281,000; and Kidney Care -- $31,783,000. In addition, the Company assumed indebtedness for which certain officers, directors and holders of 5% or more of the Common Stock or their Founding Companies were obligated approximately as follows: Dr. Bower -- $2,244,000; Dr. McMurray -- $6,618,000; and Dr. Lowery -- $2,300,000, all of which indebtedness was repaid with a portion of the proceeds of the Company's initial public offering. TENNESSEE WARRANTS Various options and warrants of Tennessee outstanding at the time of the Combination were assumed by the Company, on a share-for-share basis unadjusted for the exchange rate in the transactions with Tennessee in the Combination. In addition, the exercise price of the outstanding warrants of Tennessee was reduced from $10.00 to $7.50 per share upon consummation of the Combination. Sam A. Brooks, Jr., and Harry R. Jacobson, M.D., hold warrants for the purchase of 90,000 and 70,000 shares, respectively. ISSUANCE OF CONVERTIBLE NOTES The Company issued $1.38 million of Convertible Notes on December 7, 1995 to provide funds to complete the Combination and its initial public offering. Certain executive officers, directors and holders of 5% or more of the Common Stock purchased (and currently own) Convertible Notes as follows: Dr. Bower -- $100,000 (7.2% of the outstanding); Dr. McMurray -- $20,000 (1.4% of the outstanding); Dr. Meredith -- $120,000 (8.7% of the outstanding); Dr. Lowery -- $100,000 (7.2% of the outstanding); and Kidney Care -- $160,000 (11.6% of the outstanding). The executive officers and directors as a group purchased (and currently own) $340,000 of Convertible Notes (24.6% of the outstanding). The Convertible Notes bear interest at 7.0% and, if not previously converted, mature on December 7, 1996. The holders may convert the principal balance and accrued interest into Common Stock at $7.50 per share and the Company may redeem the Convertible Notes at par plus accrued interest. The shares of Common Stock into which the Convertible Notes may be converted are eligible for the "piggy back" registration rights applicable to the shares acquired by such holders in the Combination. MEDICAL DIRECTOR ARRANGEMENTS Dr. McMurray is a member of Indiana Dialysis Management, P.C., a practice group currently consisting of four nephrologists. The Company entered into a Medical Director agreement dated February 12, 1996 with such practice group that has a term of seven years with successive renewal terms of three years each and provides for medical director fees of $228,000 in year one, $277,000 in year two, and $326,000 in year three and each year thereafter in effect. In addition, pursuant to the terms of such Medical Director agreement, on February 12, 1996, the Company granted to such practice an option to purchase 37,500 shares of Common Stock with an exercise price of $18.00 per share. See "Business -- Operations -- Relationships with Referral Sources, Medical Directors." Dr. Meredith is a member of Kansas Nephrology Physicians, P.A., a practice group currently consisting of four nephrologists. The Company entered into a Medical Director agreement dated February 12, 1996 with 47 49 such practice group that has a term of seven years with successive renewal terms of three years each and provides for medical director fees of $245,000 in year one, $289,000 in year two, and $350,000 in year three and each year thereafter in effect. In addition, pursuant to the terms of such Medical Director agreement, on February 12, 1996 the Company granted to such practice an option to purchase 37,500 shares of Common Stock with an exercise price of $18.00 per share. See "Business -- Operations -- Relationships with Referral Sources, Medical Directors." Dr. Lowery is a member of Tyler Dialysis & Transplant Associates, P.A., a practice group currently consisting of five nephrologists. The Company entered into a Medical Director agreement with such practice group dated February 12, 1996 that has a term of seven years with successive renewal terms of three years each and provides for medical director fees of $274,000 in year one, $333,000 in year two, and $392,000 in year three and each year thereafter in effect. In addition, pursuant to the terms of such Medical Director agreement, on February 12, 1996, the Company granted to such practice an option to purchase 37,500 shares of Common Stock with an exercise price of $18.00 per share. See "Business -- Operations -- Relationships with Referral Sources, Medical Directors." Dr. Bower is a party to an agreement with the Company dated February 12, 1996 to serve as Chief Medical Officer of the Company's centers in Mississippi for which he is compensated $100,000 annually through February 2000. The agreement has a term of four years with successive annual renewals. Dr. Johnson is a party to a Medical Director Services Agreement with several additional nephrologists dated September 30, 1996 that has a term of seven years with successive renewal terms of three years each and provides for medical director fees of $840,000 per year. See "Business -- Operations -- Relationships with Referral Sources, Medical Directors." The Company believes that each of the foregoing Medical Director Agreements were obtained on terms no less favorable to the Company than could be obtained from unaffiliated third parties. The terms of each such Medical Director Agreement were determined by arm's-length negotiations between the Company and the practices, and such terms were subject to scrutiny and negotiations with representatives of the Founding Companies in connection with the Combination. LABORATORY MANAGEMENT AGREEMENT The Company entered into an agreement with Kidney Care dated February 12, 1996, pursuant to which the Company provides certain business, management, administrative and equipment maintenance services to Kidney Care's clinical laboratory located in Jackson, Mississippi. The agreement has a term of one year with a provision for automatic renewal for an additional one year term. In consideration for the management services provided by the Company, Kidney Care has agreed to pay the Company a fixed management fee of $250,000 per year and to reimburse the Company for its expenses in providing services under the agreement, including the cost of certain employees, laboratory supplies and equipment maintenance. DEVELOPMENT SERVICES In connection with development services provided, and to be provided, to the Company, the Company has granted options with an exercise price equal to $18.00 per share to purchase 30,000, 20,000 and 20,000 shares of Common Stock to Drs. Bower, Lowery and McMurray, respectively. PURCHASE OF REAL PROPERTY The Company has purchased certain real property owned by Dr. Bower on which certain of the centers previously operated by Kidney Care are located. The purchase price was paid by the Company by the issuance of 68,000 shares of Common Stock valued at the initial public offering price of $18.00 per share plus the assumption of approximately $1.1 million of indebtedness incurred by Dr. Bower to finance such property. The consideration paid to Dr. Bower for the real estate was determined by arm's-length negotiations between the Company and Dr. Bower, and such consideration was subject to scrutiny by and negotiations with representatives of the Founding Companies. 48 50 LEASES OF REAL PROPERTY Pursuant to a lease agreement dated February 12, 1996, the Company leases from an affiliate of Dr. Bower approximately 20,000 square feet of administrative and other space used by the Company for the operation of the centers acquired from KidneyCare. The lease is a triple net lease at a rate of approximately $6.00 per square foot per year, or a gross payment of approximately $10,000 per month. The lease contains an initial term of ten years and two five-year renewal options. Dr. Lowery owns a 25% interest in certain real property and improvements used in connection with the operation of two of Tyler's centers. Pursuant to a lease agreement dated February 12, 1996, the Company leases those centers which are located in Carthage and Tyler, Texas. Each lease is a triple net lease with rent payable at $12.00 per square foot per year. The Tyler lease requires a gross payment of $20,092 per month, and the Carthage lease requires a gross payment of $2,479 per month. Each lease has an initial term of ten years with two additional five-year renewal options. The amount of rent is subject to a consumer price index adjustment after the initial five-year period. In addition, the Company has subleased back to Tyler Nephrology Associates, Inc. a portion of the Tyler center on terms substantially similar to those contained in the lease of such center to the Company. Dr. Meredith owns a one-third interest in a partnership that subleases to the Company approximately 4,100 square feet for its Dodge City, Kansas center. The sublease, dated February 12, 1996, has a term of five years, with five additional options to renew for periods of five years. The sublease is a double net sublease with a base rent payment of approximately $3,300 per month, adjusted at the commencement of each extended term by a factor based on the consumer price index. EMPLOYMENT AGREEMENT Ann N. Bower, Dr. Bower's daughter, is a party to an employment agreement dated February 12, 1996 with the Company with an annual base salary of $125,000 and having a term of three years, renewable thereafter for successive one-year terms. Ms. Bower serves as the chief operating officer of the Company's Mississippi operations. RELATIONSHIP WITH VANDERBILT UNIVERSITY Dr. Jacobson currently serves as Deputy Vice Chancellor of Health Affairs at Vanderbilt University and as Professor of Medicine and Director of the Division of Nephrology, Department of Medicine, Vanderbilt University. On February 12, 1996, the Company assumed a Dialysis Center Management Agreement with Vanderbilt University Medical Center pursuant to which the Company manages its outpatient dialysis center. The Company received revenues of approximately $132,500 pursuant to this agreement for the six months ended June 30, 1996. Such agreement has a one-year term that is automatically renewed each year unless either party cancels the agreement at least 90 days prior to the end of the current term. Vanderbilt University owns approximately 247,616 of the outstanding shares of the Company. SUPPLY RELATIONSHIP The Company has entered into an agreement dated February 12, 1996, with Healthcare Suppliers, Inc. ("HSI"), a former affiliate of Kidney Care, pursuant to which the Company is obligated, for a period of 18 months, to purchase most of the dialysis and related supplies required for its Kidney Care centers at pre-determined prices no greater than the best prices available to any other Founding Company as of November 1995. The Company believes it will purchase approximately $5.0 million of supplies from HSI during the 18-month term of the agreement. COMPANY POLICY The Company has adopted a policy pursuant to which transactions with affiliates (other than those entered into pursuant to the Combination) must be reviewed by the Audit Committee and approved by a majority of the disinterested members of the Board of Directors and will be made on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 49 51 PRINCIPAL AND SELLING STOCKHOLDERS The table below sets forth certain information regarding the beneficial ownership of the Common Stock (i) as of October 7, 1996, and as adjusted to reflect the sale of Common Stock offered hereby by: (i) each person or entity known by the Company to own beneficially 5% or more of the Common Stock, (ii) each Named Executive Officer and director of the Company, (iii) by each of the Selling Stockholders, and (iv) all directors and executive officers of the Company as a group.
BENEFICIAL BENEFICIAL OWNERSHIP PRIOR OWNERSHIP AFTER TO OFFERING(1) NUMBER OF OFFERING(1) ------------------- SHARES BEING ------------------- NAME NUMBER PERCENT OFFERED NUMBER PERCENT - -------------------------------------------- --------- ------- ------------ --------- ------- Kidney Care, Inc.(2)........................ 891,114 7.1% Harry R. Jacobson, M.D.(3).................. 237,662 1.9 Sam A. Brooks, Jr.(4)....................... 340,000 2.6 Gary Brukardt(5)............................ 20,000 * Joseph A. Cashia(6)......................... 55,000 * Ronald Hinds(7)............................. 29,000 * Raymond Hakim, M.D., Ph.D.(8)............... 49,229 * John D. Bower, M.D.(9)...................... 829,925 6.6 Joseph C. Hutts(10)......................... 9,000 * Kenneth E. Johnson, M.D. ................... 367,180 2.9 Thomas A. Lowery, M.D.(11).................. 283,991 2.3 Stephen D. McMurray, M.D.(12)............... 179,211 1.4 W. Tom Meredith, M.D.(13)................... 263,882 2.1 Directors and Executive Officers as a Group (10 persons)(14).......................... 2,664,090 25.0
- --------------- * Less than 1% of the outstanding Common Stock. (1) Applicable percentage of ownership prior to the Offering is based upon 12,625,954 shares of Common Stock outstanding. Applicable percentage of ownership after the Offering is based upon 14,125,954 shares of Common Stock outstanding. Information relating to the beneficial ownership of Common Stock by the above individuals is based upon information furnished by each such individual using "beneficial ownership" concepts set forth in rules promulgated by the Securities and Exchange Commission under Section 13(d) of the Securities Exchange Act of 1934, as amended. Except as indicated in other footnotes to this table, the above individuals possessed sole voting and investment power with respect to all shares set forth by their names, except to the extent such power is shared by a spouse under applicable law. Any security that any person named above has the right to acquire within 60 days is deemed to be outstanding for purposes of calculating the percentage ownership of such person, but is not deemed to be outstanding for purposes of calculating the ownership percentage of any other person. (2) The address of Kidney Care, Inc. is 3925 West Northside Drive, Jackson, Mississippi 39209. Includes 34,666 shares of Common Stock that could be acquired upon the conversion of Convertible Notes, which are presently convertible. Kidney Care, Inc. is a not-for-profit corporation that has eight members of its Board of Directors, only one of which, Dr. Bower, is affiliated with the Company. See note 8 to this table. (3) Includes 70,000 shares of Common Stock which may be acquired upon exercise of immediately exercisable warrants. Includes 20,000 Shares of Common Stock which may be acquired upon exercise of options exercisable within 60 days. Does not include 55,000 shares of Common Stock which may be acquired upon exercise of options not exercisable within 60 days. (4) Includes 90,000 shares of Common Stock which may be acquired upon exercise of immediately exercisable warrants and 250,000 shares of Common Stock which may be acquired upon exercise of options exercisable within 60 days. 50 52 (5) Includes 20,000 shares of Common Stock which may be acquired upon exercise of options. Does not include 80,000 shares of Common Stock that are not exercisable within 60 days. (6) Includes 55,000 shares of Common Stock which may be acquired upon exercise of options. Does not include 30,000 shares of Common Stock that are not exercisable within 60 days. (7) Includes 29,000 shares of Common Stock which may be acquired upon exercise of options exercisable within 60 days. Does not include 56,000 shares of Common Stock which may be acquired upon exercise of options that will not be exercisable within 60 days. (8) Includes 40,000 shares of Common Stock which may be acquired upon exercise of options that will be exercisable within 60 days. Does not include 60,000 shares of Common Stock which may be acquired upon exercise of options that will not be exercisable within 60 days. (9) Dr. Bower's address is 3925 West Northside Drive, Jackson, Mississippi 39209. Includes 13,333 shares of Common Stock that could be acquired upon the conversion of Convertible Notes, which are presently convertible. Includes 7,500 shares of Common Stock which may be acquired upon exercise of options exercisable within 60 days. Does not include 30,500 shares of Common Stock which may be acquired upon exercise of options that will not be exercisable within 60 days. Dr. Bower is a director of Kidney Care, Inc. Dr. Bower disclaims beneficial ownership of the shares held by Kidney Care, Inc. and such shares are not included in Dr. Bower's holdings. (10) Includes 9,000 shares of Common Stock which may be acquired upon exercise of options that will be exercisable within 60 days. Does not include 6,000 shares of Common Stock which may be acquired upon exercise of options that will not be exercisable within 60 days. (11) Includes 13,333 shares of Common Stock that could be acquired upon the conversion of Convertible Notes, which are presently convertible and 4,000 shares of Common Stock which may be acquired upon exercise of options exercisable within 60 days. Does not include 16,000 shares of Common Stock which may be acquired upon exercise of options that will not be exercisable within 60 days. (12) Includes 2,666 shares of Common Stock that could be acquired upon the conversion of Convertible Notes, which are presently convertible. Includes 4,000 shares of Common Stock which may be acquired upon exercise of options exercisable within 60 days. Does not include 16,000 shares of Common Stock which may be acquired upon exercise of options that will not be exercisable within 60 days. (13) Includes 16,000 shares of Common Stock that could be acquired upon the conversion of Convertible Notes, which are presently convertible. (14) Includes 658,503 shares of Common Stock which may be acquired upon exercise of options and warrants. 51 53 DESCRIPTION OF CAPITAL STOCK The following summary is a description of certain provisions of the Company's Amended and Restated Certificate of Incorporation. Such summary does not purport to be complete and is subject to, and is qualified in its entirety by, all of the provisions of the Company's Amended and Restated Certificate of Incorporation. The Company's authorized capital stock consists of 22,000,000 shares, $.01 par value, of Common Stock and 10,000,000 shares of Preferred Stock, $.01 par value ("Preferred Stock"). Upon completion of the Offering, the Company will have outstanding 14,125,954 shares of Common Stock (14,575,954 if the Underwriters' over-allotment option is exercised in full) and no shares of Preferred Stock. As of October 7, 1996, there are approximately 1,800 record holders of Common Stock. COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders and are not entitled to cumulative voting in the election of directors. The holders of Common Stock are entitled to share ratably in dividends, if any, as may be declared from time to time by the Board of Directors in its discretion out of funds legally available therefor. The Company currently anticipates that all of its earnings will be retained to finance the growth and development of its business and, therefore, does not anticipate that any cash dividends will be declared on the Common Stock in the foreseeable future. The holders of Common Stock are entitled to share ratably in any assets remaining after satisfaction of all prior claims upon liquidation of the Company. The Company's Amended and Restated Certificate of Incorporation gives holders of Common Stock no preemptive or other subscription or conversion rights, and there are no redemption provisions with respect to such shares. All outstanding shares of Common Stock are, and the shares offered hereby will be, when issued and paid for, fully paid and nonassessable. The rights, preferences, and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. See "Dividend Policy." PREFERRED STOCK Subject to conditions specified in the Company's Amended and Restated Certificate of Incorporation, the Delaware General Corporation Law ("DGCL") and other applicable law, the Board of Directors has the authority to issue undesignated Preferred Stock in one or more class or series and to determine the dividend rights, dividend rate, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund provisions, number of shares constituting any class or series, and designations of such class or series without any further vote or action by the stockholders of the Company. The Company has no present intention to issue any shares of Preferred Stock. One of the effects of undesignated Preferred Stock is to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. For example, the Company could issue a series of preferred stock having characteristics that would make a takeover prohibitively expensive. The issuance of shares of the Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank senior to the Common Stock as to dividend rights, liquidation preference or both, may have full or unlimited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. SPECIAL PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW Certain provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws may be deemed to have an anti-takeover effect or may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in such stockholder's best interest, including those attempts that might result in a premium over the market price for the shares held by a stockholder. 52 54 Delaware Anti-Takeover Law. Section 203 of the DGCL ("Section 203") applies to the Company and generally provides that a person who, together with affiliates and associates owns, or within three years did own, 15% or more of the outstanding voting stock of a corporation subject to the statute (an "Interested Stockholder") but less than 85% of such stock may not engage in certain business combinations with the corporation for a period of three years after the date on which the person became an Interested Stockholder unless (i) prior to such date, the corporation's board of directors approved either the business combination or the transaction in which the stockholder became an Interested Stockholder, (ii) the Interested Stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes such person an Interested Stockholder (excluding shares owned by persons who are both officers and directors of the corporation, and shares held by certain employee stock ownership plans), or (iii) subsequent to such date, the business combination is approved by the corporation's board of directors and authorized at a stockholders' meeting by a vote of at least two-thirds of the corporation's outstanding voting stock not owned by the Interested Stockholder. Section 203 defines the term "business combination" to encompass a wide variety of transactions with or caused by an Interested Stockholder, including mergers, asset sales, and other transactions in which the Interested Stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders. The Company's stockholders, by adopting an amendment to the Certificate of Incorporation, may elect not to be governed by Section 203, which election would be effective 12 months after such adoption. Neither the Amended and Restated Certificate of Incorporation nor the Bylaws presently exclude the Company from the restrictions imposed by Section 203, and the restrictions imposed by Section 203 apply to the Company. The provisions of Section 203 could delay or frustrate a change in control of the Company, deny stockholders the receipt of a premium on their Common Stock and have a depressing effect on the market price of the Common Stock. The provisions also could discourage, impede or prevent a merger, tender offer or proxy contest, even if such event would be favorable to the interests of stockholders. Classified Board of Directors. The Amended and Restated Certificate of Incorporation of the Company provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. A director may be removed from office prior to the expiration of his or her term only "for cause," so any person acquiring control of the Company would need three annual meetings to replace all of the members of the Board of Directors. The classified board provision of the Company's Amended and Restated Certificate of Incorporation could have the effect of making the removal of incumbent directors more time-consuming and difficult, and, therefore discouraging a third party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The Company believes that a classified Board of Directors will help to assure the continuity and stability of the Board of Directors and of the business strategies and policies of the Company as determined by the Board of Directors. See "Management -- Board of Directors." Number of Directors; Removal; Filling Vacancies. The Amended and Restated Certificate of Incorporation and Bylaws of the Company provide that the number of directors will be fixed from time to time with the consent of two-thirds of the Board of Directors. Moreover, the Amended and Restated Certificate of Incorporation provides that directors may only be removed with cause by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the Company then entitled to vote at an election of directors. This provision prevents stockholders from removing any incumbent director without cause and allows two-thirds of the incumbent directors to add additional directors without approval of stockholders until the next annual meeting of stockholders at which directors of that class are elected. Advance Notice of Nominations and Stockholder Proposals. The Company's Bylaws contain a provision requiring at least 60 but no more than 90 days' advance notice by a stockholder of a proposal or director nomination that such stockholder desires to present at any annual or special meeting of stockholders, which would prevent a stockholder from making a proposal or a director nomination at a stockholder meeting without the Company having advance notice of the proposal or director nomination. This provision could make a change in control more difficult by providing the directors of the Company with more time to prepare an opposition to a proposed change in control. 53 55 Vote Requirement for Calling Special Meeting. The Company's Bylaws also contain a provision requiring the vote of the holders of two-thirds of the outstanding Common Stock in order to call a special meeting of stockholders. This provision would prevent a stockholder with less than a two-thirds interest from calling a special meeting to consider a merger unless such stockholder had first garnered adequate support from a sufficient number of other stockholders. LIMITATION OF LIABILITY AND INDEMNIFICATION Limitations of Director Liability. Section 102(b)(7) of the DGCL ("Section 102(b)") authorizes corporations to limit or to eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors' fiduciary duty of care. Although Section 102(b) does not change directors' duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. The Company's Amended and Restated Certificate of Incorporation limits the liability of directors to the Company or its stockholders to the full extent permitted by Section 102(b). Specifically, directors of the Company are not be personally liable for monetary damages for breach of a director's fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. Indemnification. To the maximum extent permitted by law, the Amended and Restated Certificate of Incorporation of the Company provides for mandatory indemnification of directors and officers of the Company against an expense, liability and loss to which they may become subject, or which they may incur as a result of being or having been a director or officer of the Company. In addition, the Company must advance or reimburse directors and officers for expenses incurred by them in connection with indemnifiable claims. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is First Union National Bank of North Carolina. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock into the public market after the Offering, or the perception that such sales could occur, could adversely affect the prevailing market price for the Common Stock and the ability of the Company to raise equity capital. The Company can make no prediction as to the effect, if any, that the sale or availability for future sale of shares of additional Common Stock will have on the market price of the Common Stock prevailing from time to time. Upon completion of the Offering, the Company will have 14,125,954 shares of Common Stock outstanding (assuming no exercise of options or warrants and no conversion of any Convertible Notes after the date of this Prospectus). The 3,000,000 shares sold in the Offering (plus any additional shares sold upon exercise of the Underwriters' over-allotment option) and the 4,485,000 shares of Common Stock sold in the initial public offering are freely tradable, except that any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act of 1933, as amended, ("Affiliates"), may generally only be sold in compliance with the limitations of Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the "Securities Act"), as described below. The remaining 6,640,954 shares of Common Stock outstanding are not registered under the Securities Act, and, accordingly, such shares may not be sold except in transactions registered under the Securities Act or pursuant to an exemption from registration. In addition, holders of approximately shares of Common Stock have agreed not to sell any shares of Common Stock or other capital stock or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock or other capital stock for a period of 180 days following the Offering, without the prior written consent of Equitable Securities Corporation. After the expiration of such 180 day period, all of such shares may be sold in accordance with 54 56 Rule 144, subject to the applicable volume, holding period and other limitations of Rule 144 as described below. These same individuals have entered into a similar agreement with the Company covering a period until February 7, 1997. The Company has granted certain registration rights to holders of 8,140,954 shares of restricted stock, of which 1,500,000 shares are being offered hereby. If any such stockholder who has elected to participate in the Offering is not able to dispose of 20% of his Common Stock in the Offering (40% in the case of former stockholders of RenalWest), then such stockholders, upon the request of persons holding at least 20% of the restricted shares of Common Stock, may request, at any time prior to the expiration of the two-year holding period specified in Rule 144 with respect to such shares, that the Company file a registration statement under the Securities Act for an offering of no less than 10% of the restricted shares of Common Stock held by them. The Company is obligated to effect only one such registration pursuant to such a request, subject to certain exceptions. In addition, in the event that the Company proposes to register under the Securities Act any Common Stock for its own account or for the account of others at prior to the expiration of the two-year holding period specified in Rule 144 with respect to such shares, subject to certain exceptions, such stockholders have the right to require the Company to include their shares in such registration, subject to the right of any managing underwriter of the Offering to exclude some or all of the shares for marketing reasons. In general, all fees, costs and expenses of such registrations (other than underwriting commissions, dealer's fees, brokers' fees and concessions applicable to shares of Common Stock registered and any counsel for the selling stockholders) will be borne by the Company. In addition to the shares of Common Stock that will be outstanding, an aggregate of up to 1,831,993 shares of Common Stock may be issued upon exercise of options that the Company has outstanding. These options and warrants will be exercisable as follows: (i) options and warrants to purchase up to shares of Common Stock are exercisable immediately; (ii) options to purchase up to shares of Common Stock will become exercisable on or prior to December 31, 1996; (iii) options to purchase up to shares of Common Stock will become exercisable on or prior to December 31, 1997; (iv) options to purchase up to shares of Common Stock will become exercisable on or prior to December 31, 1998; (v) options to purchase up to shares of Common Stock will become exercisable on or prior to December 31, 1999; and (vi) options to purchase up to shares of Common Stock will become exercisable on or prior to December 31, 2000. The Company has filed a registration statement on Form S-8 under the Securities Act to register all shares of Common Stock subject to these stock options. The shares covered by these registration statements will be eligible for sale in the public markets, subject to the lock-up agreements discussed above, if applicable. The Company has outstanding warrants to purchase an additional 220,000 shares of Common Stock. The outstanding warrants to purchase shares of Common Stock grant certain registration rights to their holders that may be acquired upon exercise of such warrants, which rights under appropriate circumstances would allow holders of warrants to cause the Company to register such shares, even if the Company does not elect to effect the registration that it intends to effect as described above. Upon any such registration, the shares of Common Stock registered will immediately be eligible for resale in the public market, unless such shares are purchased by an Affiliate. Up to 184,000 additional shares may be issued upon conversion of the Convertible Notes. These shares will not be registered under the Securities Act, and, accordingly, such shares may not be sold except in transactions registered under the Securities Act or pursuant to an exemption from registration. In the event that the Company proposes to register under the Securities Act any Common Stock for its own account or for the account of others during the first two years following the completion of the Offering, subject to certain exceptions, the holders of the Convertible Notes have the right to require the Company to include their shares in such registration, subject to the right of any managing underwriter of the offering to exclude some or all of the shares for marketing reasons. Any shares of Common Stock that have not been registered under the Securities Act could be sold under Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years, including a person who may be deemed an 55 57 Affiliate, is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of 1% of the then-outstanding shares of Common Stock or the average weekly reported trading volume of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are subject to certain restrictions relating to manner of sale, notice, and the availability of current public information about the Company. A person who is not an Affiliate at any time during the three months preceding a sale, and who has beneficially owned shares for at least three years, would be entitled to sell such shares immediately following the Offering without regard to the volume limitations, manner of sale provisions, or notice or other requirements of Rule 144. The Securities and Exchange Commission has published a notice of proposed rulemaking that, if adopted as proposed, would shorten the applicable holding periods under Rule 144(d) and Rule 144(k) to one and two years, respectively (from the current two- and three-year periods). The Company cannot predict whether such amendments will be adopted or the effect thereof on the trading market for its Common Stock. 56 58 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom Equitable Securities Corporation, Hambrecht & Quist LLC, Morgan Keegan & Company, Inc. and Needham & Company, Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER UNDERWRITERS OF SHARES --------------------------------------------------------------------------- --------- Equitable Securities Corporation........................................... Hambrecht & Quist LLC...................................................... Morgan Keegan & Company, Inc............................................... Needham & Company, Inc..................................................... Total Underwriters...............................................
The Representatives have advised the Company that the Underwriters propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the Offering, the price and concessions and reallowances to dealers may be changed by the Underwriters. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company has granted a 30-day option to the Underwriters, to purchase up to a maximum of 450,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial 3,000,000 shares to be purchased by the Underwriters. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the sale of the shares of the Common Stock offered hereby. The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company, its directors, executive officers, affiliates and other persons who are holders of outstanding shares of Common Stock as of the consummation of the Offering have agreed not to offer, issue, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock or any rights to acquire Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of Equitable Securities Corporation. These same individuals have entered into a similar agreement with the Company covering a period until February 7, 1997. See "Shares Eligible for Future Sale." The Representatives have advised the Company that the Underwriters do not intend to confirm any sales to accounts over which they exercise discretionary authority. In connection with the Offering, certain Underwriters and selling group members (if any) or their respective affiliates who are qualified registered market makers on the Nasdaq Stock Market may engage in passive market making on the Nasdaq Stock Market in accordance with rule 10b-6A under the Securities and Exchange Act of 1934, as amended, during the two business day period before the commencement of the offers or sales of the Common Stock. The passive market making transactions must comply with the applicable volume and price limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered before the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. 57 59 On December 7, 1995, Equitable Securities Corporation ("Equitable") purchased in a private placement an aggregate principal amount of $50,000 of Convertible Notes from the Company. The Convertible Notes mature on December 7, 1996, bear interest at a rate of 7.0% per annum, and the principal and accrued interest thereof are convertible at a conversion price of $7.50 per share. The Convertible Notes, and the Common Stock into which the Convertible Notes are convertible, will not be sold, transferred, assigned, pledged or hypothecated by Equitable prior to February 6, 1997. The Convertible Notes provide that Equitable has the same "piggyback" registration rights applicable to the former owners of the Founding Companies in connection with the Common Stock received by such persons in the Combination. As a result of the purchase of such Convertible Notes, Equitable will be deemed to have received additional compensation in connection with the Offering. Equitable also acted as financial advisor to Renal Care Group and rendered a fairness opinion in connection with the acquisition of RenalWest in September 1996 and received a fee for such services. LEGAL MATTERS Certain legal matters with respect to the validity of the shares of the Common Stock offered hereby will be passed upon for the Company by Alston & Bird, Atlanta, Georgia. Certain legal matters related to the Offering will be passed upon for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C. EXPERTS The financial statements and schedules appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein which, insofar as their report on Renal Care Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired, is based in part on the reports of Henry & Peters, P.C. and Allen, Gibbs & Houlik, L.C., independent auditors. The financial statements referred to above are included herein in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information contained in the Registration Statement, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document are not necessarily complete; with respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the information requirements of the 1934 Act, and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information, as well as a copy of the Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York, 10048. Copies of such material may be obtained from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the Commission. Such reports, proxy statements and other information, as well as the Registration Statement, including the exhibits and schedules thereto, is also available on the Commission's Web site at http://www.sec.gov. Statements contained in the Prospectus concerning the provisions of certain documents filed as exhibits to the Registration Statement are of necessity brief descriptions thereof, and are not necessarily complete and each such statements is qualified in its entirety by reference to the full text of such document. 58 60 INDEX TO FINANCIAL STATEMENTS
PAGE ---- PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. (OF DELAWARE) (UNAUDITED) Pro Forma Combining Statements of Operations for the six months ended June 30, 1996 and the year ended December 31, 1995................................................ F-2 Notes to Pro Forma Combining Financial Statements..................................... F-5 RENAL CARE GROUP, INC. Report of Independent Auditors'....................................................... F-6 Supplemental Consolidated Balance Sheets as of December 31, 1994 and 1995, and June 30, 1996 (unaudited)....................................................... F-7 Supplemental Consolidated Income Statements for the years ended December 31, 1993, 1994 and 1995, and the six-months ended June 30, 1995 and 1996 (unaudited).......... F-8 Supplemental Consolidated Statements of Changes in Owners' Equity for the years ended December 31, 1993, 1994 and 1995, and the six-month period ended June 30, 1996 (unaudited)......................................................................... F-9 Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995, and the six-months ended June 30, 1995 and 1996 (unaudited).... F-10 Notes to Supplemental Consolidated Financial Statements............................... F-11 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED Report of Independent Auditors........................................................ F-19 Combined Balance Sheets as of December 31, 1994 and 1995.............................. F-22 Combined Statements of Operations for the years ended December 31, 1993, 1994, 1995... F-23 Combined Statements of Changes in Owners' Equity for the years ended December 31, 1993, 1994, 1995.................................................................... F-24 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995................................................................................ F-25 Notes to Combined Financial Statements................................................ F-26 KIDNEY CARE, INC., ET AL. (PREDECESSOR COMPANY) Report of Independent Auditors........................................................ F-36 Combined Balance Sheets as of January 31, 1995 and 1996............................... F-37 Combined Statements of Revenues, Expenses, and Changes in Unrestricted Net Assets for the years ended January 31, 1994, 1995, and 1996 and the six months ended June 30, 1995................................................................................ F-38 Combined Statements of Cash Flows for the years ended January 31, 1994, 1995 and 1996, and the six months ended June 30, 1995.............................................. F-39 Notes to Combined Financial Statements................................................ F-40
F-1 61 PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. (OF DELAWARE) The following unaudited pro forma combining financial statements give effect to the acquisition by Renal Care Group, Inc., a Delaware Corporation ("RCG" or the "Company"), of Kidney Care, Inc. et al. ("KCI") and Renal Care Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired ("Tennessee") which occurred on February 6, 1996 contemporaneously with an initial public offering of RCG's stock (the "Combination"). The Combination was accounted for using historical cost basis, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48. The historical financial statements of RCG also include the results of operations of Main Line Suburban Dialysis Centers, Inc. and RenalWest L.C., et al both accounted for as poolings of interest. The unaudited pro forma combining financial statements have been prepared by the Company based on the historical financial statements of RCG, KCI, and Tennessee included elsewhere in this Prospectus, and certain preliminary estimates and assumptions deemed appropriate by management of the Company. These pro forma combining financial statements may not be indicative of actual results as if the transactions had occurred on the dates indicated or which may be realized in the future. The pro forma combining statements of operations for the six months ended June 30, 1996 and year ended December 31, 1995, assume the Company had completed the Combination on January 1, 1996 and 1995, respectively. The pro forma combining statement of operations for the year ended December 31, 1995 includes the results of operations of KidneyCare for the twelve months ended on January 31, 1996. F-2 62 PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. (OF DELAWARE) UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
RENAL CARE GROUP, INC. (OF TENNESSEE) RENAL CARE AND THREE GROUP, INC. KIDNEY UNRELATED THE PRO FORMA OF DELAWARE CARE, INC. BUSINESSES COMPANY ADJUSTMENTS PRO FORMA ----------- ---------- -------------- ------- ----------- --------- Net revenue................................ $ 55,358 $ 3,440 $ 3,938 $62,736 $ $62,736 Operating costs and expenses: Patient care costs....................... 38,401 2,518 2,904 43,883 43,883 General and administrative expenses...... 5,821 254 341 6,417 6,417 Provision for doubtful accounts.......... 1,071 77 48 1,196 1,196 Depreciation and amortization............ 1,970 70 118 2,158 2,158 Merger expenses.......................... 680 -- -- 680 680 ----------- ---------- ------- ------- ----------- --------- Total operating costs and expenses......................... 48,003 2,919 3,412 54,334 54,334 ----------- ---------- ------- ------- ----------- --------- Income from operations..................... 7,355 521 526 8,402 8,402 Interest expense, net...................... (240) 18 75 (147 ) (147) ----------- ---------- ------- ------- ----------- --------- Income before taxes........................ 7,595 503 451 8,549 8,549 Pro forma provision for income taxes....... 1,980 -- -- 1,980 1,269(a) 3,249 ----------- ---------- ------- ------- ----------- --------- Pro forma net income....................... $ 5,615 $ 503 $ 451 $6,569 (1,269) $ 5,300 =========== ========= ============= ======== =========== ========= Pro forma net income per share............. $ 0.40 Pro forma weighted average shares outstanding.............................. 13,087
See accompanying notes to Unaudited Pro Forma Combining Financial Statements. F-3 63 PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. (OF DELAWARE) UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS -- (CONTINUED) FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
RENAL CARE GROUP, INC. (OF TENNESSEE) RENAL CARE AND THREE GROUP, INC. KIDNEY UNRELATED THE PRO FORMA OF DELAWARE CARE, INC. BUSINESSES COMPANY ADJUSTMENTS PRO FORMA ----------- ---------- -------------- -------- ----------- --------- Net revenue................................ $ 42,971 $ 38,862 $ 33,496 $115,329 $ $115,329 Operating costs and expenses: Patient care costs....................... 26,908 29,890 23,619 80,417 (468)(f) 79,949 General and administrative expenses...... 8,701 927 3,238 12,866 2,600(b) 15,466 Provision for doubtful accounts.......... 2,355 851 789 3,995 3,995 Depreciation and amortization............ 1,580 903 1,178 3,661 253(c) 3,914 ----------- ---------- ------- -------- ----------- --------- Total operating costs and expenses......................... 39,544 32,571 28,824 100,939 (2,385) 103,324 ----------- ---------- ------- -------- ----------- --------- Income from operations..................... 3,427 6,291 4,672 14,390 (2,385) 12,005 Interest expense, net...................... 452 167 394 1,013 507(e) 506 ----------- ---------- ------- -------- ----------- --------- Income before taxes........................ 2,975 6,124 4,278 13,377 1,878 11,499 Pro forma provision for income taxes....... -- -- -- -- 4,370(d) 4,370 ----------- ---------- ------- -------- ----------- --------- Pro forma net income....................... $ 2,975 $ 6,124 $ 4,278 $13,377 $(6,248) $ 7,129 ========== ========= ============= ======== =========== ========= Pro forma net income per share............. .64 ========= Pro forma weighted average shares outstanding.............................. 11,080 =========
See accompanying Notes to Unaudited Pro Forma Combining Financial Statements. F-4 64 PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. (OF DELAWARE) NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS (a) Reflects additional income tax provision of $1,264 for state and federal taxes at a combined effective rate of 38% as the Founding Companies, Main Line, and RenalWest previously were taxed as Subchapter S corporations, partnerships, or organizations exempted from federal income tax under Internal Revenue Code as amended Section 501(c)(3). (b) Reflects additional corporate shared services costs of $2,600 consisting of general and administrative personnel, office facilities and equipment, and other related expenses had the Company maintained a corporate office beginning January 1, 1995. (c) Depreciation and Amortization has been increased by $253 due to additional depreciation on facilities purchased from the owners of Kansas and Kidney Care and increased amortization as a result of DMN's buyout of a 50% interest in a joint venture. (d) Reflects additional income tax provision of $4,370 for state and federal taxes at a combined effective rate of 38% as the Founding Companies, Main Line, and RenalWest previously were taxed as Subchapter S corporations, partnerships, or organizations exempted from federal income tax under Internal Revenue Code as amended Section 501(c)(3). (e) Interest expense has been reduced by $507 to reflect the repayment of both existing and assumed debt from the net proceeds of the offering. (f) Patient care costs have been reduced by $468 due to purchase of facilities from the owners of Kansas and Kidney Care. (g) The computation of pro forma net income per share for the six months ended June 30, 1996 is based upon 13,087 weighted average shares of Common Stock outstanding, which includes (i) 4,834 shares issued to the owners of the Founding Companies, (ii) 4,485 shares being sold in the Offering, (iii) 2,928 shares issued to entities acquired through a pooling-of-interests transaction, and (iv) 840,000 shares outstanding using the treasury stock method on stock options and warrants. (h) The computation of pro forma net income per share for December 31, 1995 is based upon 11,080 weighted average shares of Common Stock outstanding, which includes (i) 4,834 shares issued to the owners of the Founding Companies, (ii) 3,318 shares being sold in the Offering to cover the cash portion of the purchase price to be paid in connection with the Combination, (iii) 2,928 shares issued to entities acquired through an pooling-of-interests transaction. F-5 65 REPORT OF INDEPENDENT AUDITORS The Board of Directors Renal Care Group, Inc. We have audited the accompanying supplemental consolidated balance sheets of Renal Care Group, Inc. (formed as a result of the merger of Renal Care Group, Inc. and RenalWest L.C., et al.) as of December 31, 1994 and 1995, and the related supplemental consolidated income statements, statements of changes in owners' equity, and cash flows for each of the two years in the period ended December 31, 1995. The supplemental consolidated financial statements and schedule give retroactive effect to the merger of Renal Care Group, Inc. and RenalWest L.C., et al. consummated on September 30, 1996, which has been accounted for using the pooling-of-interests method as described in the notes to the supplemental consolidated financial statements. These supplemental financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the supplemental financial statements referred to above present fairly, in all material respects, the consolidated financial position of Renal Care Group, Inc. at December 31, 1994 and 1995 and the consolidated results of operations and cash flows for each of the two years ended December 31, 1995 after giving retroactive effect to the merger of RenalWest L.C., et al., as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Nashville, Tennessee October 8, 1996 F-6 66 RENAL CARE GROUP, INC. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, JUNE 30, ----------------- 1996 1994 1995 ----------- ------- ------- (UNAUDITED -- NOTE 12) ASSETS Current assets: Cash and cash equivalents..................................... $ 298 $ 1,341 $31,292 Accounts receivable, net...................................... 9,338 8,204 24,510 Inventory..................................................... 767 727 2,188 Prepaid expenses and other assets............................. 392 650 826 Related party receivable...................................... 186 196 -- ------- ------- ------- Total current assets.................................. 10,981 11,118 58,816 Property, plant and equipment, net.............................. 6,192 9,225 22,409 Intangible assets, net.......................................... 64 53 3,202 Other assets.................................................... 81 369 1,216 ------- ------- ------- Total assets.......................................... 17,318 20,765 85,643 ======= ======= ======= LIABILITIES AND OWNERS' EQUITY Current liabilities: Accounts payable.............................................. 1,389 2,175 8,536 Accrued wages and benefits.................................... 1,382 1,420 4,296 Due to third parties.......................................... 2,413 4,265 4,323 Due to related parties........................................ 250 270 -- Accrued expenses and other current liabilities................ 545 729 3,301 Income taxes payable.......................................... -- -- 1,980 Line of credit................................................ 44 785 -- Current portion of long-term debt............................. 1,787 2,892 4,361 ------- ------- ------- Total current liabilities............................. 7,810 12,536 26,797 Long-term debt, net of current portion.......................... 3,589 3,663 2,444 Deferred tax liabilities........................................ -- -- 971 ------- ------- ------- Total liabilities..................................... 11,399 16,199 30,212 Total owners' equity.................................. 5,919 4,566 55,431 ------- ------- ------- Total liabilities and owners' equity.................. $17,318 $20,765 $85,643 ======= ======= =======
See accompanying notes. F-7 67 RENAL CARE GROUP, INC. SUPPLEMENTAL CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ----------- ------- ------- ------- ------- (UNAUDITED -- (UNAUDITED -- NOTE NOTE 12) 12) Net revenue................................. $18,126 $41,627 $42,971 $21,242 $55,358 Operating costs and expenses: Patient care costs........................ 13,034 25,003 26,908 13,307 38,461 General and administrative expenses....... 3,649 8,721 8,701 4,384 5,821 Provision for doubtful accounts........... 584 1,418 2,355 1,163 1,071 Depreciation and amortization............. 601 1,484 1,580 666 1,970 Merger expenses........................... -- -- -- -- 680 ------- ------- ------- ------- ------- Total operating costs and expenses........................ 17,868 36,626 39,544 19,520 48,003 ------- ------- ------- ------- ------- Income from operations...................... 258 5,001 3,427 1,722 7,355 Interest expense, net....................... 128 363 452 221 (240) ------- ------- ------- ------- ------- Income before taxes......................... 130 4,638 2,975 1,501 7,595 Provision for income taxes.................. -- -- -- -- 1,980 ------- ------- ------- ------- ------- Net income.................................. $ 130 $ 4,638 $ 2,975 $ 1,501 $ 5,615 ======= ======= ======= ======= ======= Earnings per share.......................... $ .43 ======= Weighted average shares outstanding......... 13,140 =======
See accompanying notes. F-8 68 RENAL CARE GROUP, INC. SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
TOTAL -------- Balance at December 31, 1992 (unaudited -- Note 12)............................... $ 5,435 Capital contributions (unaudited -- Note 12)...................................... 104 Net income (unaudited -- Note 12)................................................. 130 Distributions to owners (unaudited -- Note 12).................................... (768) -------- Balance at December 31, 1993 (unaudited -- Note 12)............................... 4,901 Capital contributions............................................................. 411 Net income........................................................................ 4,638 Distributions to owners........................................................... (4,031) -------- Balance at December 31, 1994...................................................... 5,919 Capital contributions............................................................. 768 Net income........................................................................ 2,975 Distributions to owners........................................................... (5,096) -------- Balance at December 31, 1995...................................................... 4,566 Initial Public Offering ("IPO") Proceeds.......................................... 71,842 Common stock issued to Founders................................................... 16,258 Net income........................................................................ 5,615 Distributions to owners........................................................... (2,601) Dividends (Note 11)............................................................... (40,249) -------- Balance at June 30, 1996 (unaudited -- Note 12)................................... $ 55,431 ========
See accompanying notes. F-9 69 RENAL CARE GROUP, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------- ------------------ 1993 1994 1995 1995 1996 ------------ ------- ------- ------- -------- (UNAUDITED -- (UNAUDITED -- NOTE 12) NOTE 12) OPERATING ACTIVITIES Net income................................... $ 130 $ 4,638 $ 2,975 $ 1,501 $ 5,615 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 601 1,484 1,580 666 1,970 Gain (loss) on sale of property and equipment............................. 72 -- -- (9) (118) Equity in earnings of subsidiary........ -- -- -- (129) Changes in assets and liabilities: Accounts receivable................... (497) (3,284) 1,134 79 (3,042) Inventory............................. (392) (72) 40 19 206 Prepaid expenses and other assets..... (369) 186 (258) (93) 3,085 Related party receivables............. (36) (75) 90 143 (38) Accounts payable...................... (637) 1,646 2,639 1,195 (461) Accrued wages and benefits............ 68 235 38 328 37 Due to related parties................ 1,210 250 20 -- -- Accrued expenses and other liabilities........................ 1,075 2 184 (133) 1,662 Income taxes payable.................. -- -- -- -- 1,980 ---- ------- ------- ------- -------- Net cash provided by operating activities.... 1,225 5,010 8,442 3,696 10,767 INVESTING ACTIVITIES Sale of property and equipment............... 21 -- 171 34 196 Purchases of property and equipment.......... (1,051) (2,428) (4,784) (1,122) (4,972) Change in other assets....................... 105 15 (277) (30) (3) Cash distributions to founders, net of cash contributions.............................. -- -- -- -- (35,961) ---- ------- ------- ------- -------- Net cash used in investing activities........ (925) (2,413) (4,890) (1,118) (40,740) FINANCING ACTIVITIES Payments on line of credit................... (3,253) (9,642) (8,414) (3,097) (10,814) Proceeds from line of credit................. 2,453 9,603 9,155 3,311 10,358 Payments on long-term debt and capital leases..................................... (296) (1,830) (1,765) (908) (9,694) Proceeds from long-term debt and capital leases..................................... 1,272 1,960 2,844 -- 540 Capital contribution......................... 104 411 767 409 (4) Distributions to owners...................... (768) (4,031) (5,096) (2,717) (2,597) IPO proceeds, net of IPO costs............... -- -- -- -- 71,842 ---- ------- ------- ------- -------- Net cash used in financing activities........ 488 (3,529) (2,509) (3,002) 59,631 ---- ------- ------- ------- -------- Increase (decrease) in cash and cash equivalents................................ (188) (932) 1,043 (424) 29,658 Cash and cash equivalents at beginning of year....................................... 1,418 1,230 298 298 1,341 ---- ------- ------- ------- -------- Cash and cash equivalents (bank overdraft) at end of year................................ $ 1,230 $ 298 $ 1,341 $ (126) $ 30,999 ==== ======= ======= ======= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid................................ $ $ 386 $ 469 $ 238 $ 280 ==== ======= ======= ======= ======== SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS: Due from related party for issuance of convertible senior subordinated promissory notes...................................... $ -- $ -- $ 100 $ -- $ -- ==== ======= ======= ======= ========
See accompanying notes. F-10 70 RENAL CARE GROUP, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) DECEMBER 31, 1995 1. ORGANIZATION AND BASIS OF PRESENTATION Renal Care Group, Inc. (of Delaware) (the "Company") was formed in June 1995, primarily for the purpose of acquiring four dialysis businesses and Renal Care Group, Inc. (of Tennessee) ("Tennessee"), in exchange for shares of its Common Stock, cash, notes payable and the assumption of certain debt (the "Combination"). As discussed more fully in Note 12, on February 6, 1996, the Company closed an initial public offering of 3,900 shares of its Common Stock and simultaneously consummated the Combination. The four related businesses acquired in the Combination, which are comprised of numerous legal entities, conduct business as Kidney Care, Inc. and certain operating divisions of Medical Enterprises, Ltd. and Health Care Suppliers, Inc. ("KCI"), DMN Professional Corporation ("DMN"), Tyler Nephrology Associates, P.A. ("Tyler"), and Kansas Nephrology Associates, P.A. ("KNA") and Kansas Dialysis Supply, Inc. ("KDS," combined, "Kansas"). Tennessee and the four unrelated businesses acquired are based in Tennessee, Mississippi, Indiana, Texas, and Kansas. The Combination is being accounted for utilizing the historical cost basis in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48 with the stock being valued at the historical cost of the net assets exchanged. Cash consideration given in the Combination is treated for accounting purposes as a dividend from the Company to Tennessee, KCI, DMN, Tyler, Kansas, and their owners. In April 1996, the Company acquired Main Line Suburban Dialysis Centers, Inc. ("Main Line") in a merger accounted for as a pooling-of-interests through the exchange of 528 shares of the Company's Common Stock. In September 1996, the Company acquired RenalWest, L.C., et al ("RenalWest") in a merger accounted for as a pooling-of-interests through the exchange of 2,400 shares of the Company's common stock. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation of the RenalWest merger; however, they will become the historical consolidated financial statements of the Company after the financial statements including the date of consummation of the RenalWest merger are issued. These financial statements reflect the restated consolidated financial statements of the Company effecting this pooling-of-interest. As mentioned above, on February 6, 1996, the Company completed an initial public offering of 3,900 shares of Common Stock and on February 20, 1996, the underwriters of the offering fully exercised their over allotment option for an additional 585 shares. The 4,485 shares were issued at the initial public offering price of $18 per share. Physician services are provided to the Company by stockholders or legal entities owned by stockholders of the Company. Substantially all of the dialysis treatments performed by the Company are referred by these related physician groups. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company. Significant intercompany transactions and accounts have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. F-11 71 RENAL CARE GROUP, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INVENTORIES Inventories consist of drugs, supplies and parts consumed in dialysis treatments and is stated at the lower of cost (using the average method and the first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided by the straight-line method over the useful lives of the related assets, generally three to five years. Leasehold improvements are amortized using the straight-line method over the related lease terms. Maintenance and repair costs are charged to operations as incurred. OTHER ASSETS Other assets at December 31, 1994 and 1995 consist primarily of costs related to the Company's initial public offering. These costs were capitalized and recorded as a reduction in proceeds from the initial public offering in February 1996. USE OF ESTIMATES The preparation of the Company's combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the combined financial statements and accompanying notes. Actual results could differ from those estimates. During 1995, the Company changed its assumptions in estimating the accounts receivable allowance for doubtful accounts, resulting in a $1,680 increase in the provision for doubtful accounts. NET REVENUE Accounts receivable and net revenue are recorded at the estimated net realizable amount from Medicare, Medicaid, patients, commercial insurers and other third-party payors for services rendered. The Medicare and Medicaid programs reimburse the Company at amounts that are different from the Company's established rates. Contractual adjustments under these programs represent the difference between the amounts billed for these services and the amounts that are reimbursable by third party payors. A summary of the basis for reimbursement with these payors follows: Medicare The Company is paid by the Medicare program on a prospective payment system for dialysis services. Each facility receives a composite rate that is adjusted to account for geographic differences in the cost of labor. The prospectively determined composite rates are subject to retroactive adjustments. Medicaid Medicaid is a state administered program with reimbursements varying by state. The Medicaid programs administered in each state in which the Company operates reimburse the Company for dialysis services rendered. Other Other payments from patients, commercial insurers and other third-party payors are received pursuant to a variety of reimbursement arrangements, which are generally higher than those payments received from the Medicare and Medicaid programs. The allowance for doubtful accounts represent management's estimate of potential credit losses associated with amounts due from patients, commercial insurers and other third-party payors. Management of F-12 72 RENAL CARE GROUP, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Company does not believe that receivables from the Medicare and Medicaid programs represent any credit risk. Reimbursements from Medicare and Medicaid at established rates approximated 83%, 78% and 71% for the years ended December 31, 1993 (unaudited -- Note 12), 1994 and 1995, respectively. INCOME TAXES Prior to the Combination and mergers, KCI, DMN, Tyler, Kansas, Main Line and RenalWest operated as not-for-profits, S Corporations or partnerships; accordingly, income tax liabilities were the responsibility of the respective owners or partners. Under these provisions, the entities did not pay corporate income taxes; rather the income or loss was allocated to each stockholder for inclusion in their respective income tax returns. Because of this practice, provisions for income taxes and deferred tax assets and liabilities of these taxable entities have not been reflected in these supplemental consolidated financial statements. Tennessee and the Company are C Corporations and account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax basis assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse. ESTIMATED MEDICAL PROFESSIONAL LIABILITY CLAIMS The Company is insured for medical professional liability claims through retrospectively rated commercial insurance policies. It is its policy that provision for estimated premium adjustments to medical professional liability costs be made for asserted and unasserted claims based on its experiences. Provision for such professional liability claims included estimates of the ultimate costs of such claims. To date, the Company's experience with such claims has not been significant; accordingly, no such provision has been made. OWNERS' EQUITY Owners' equity includes capital stock, additional paid-in capital and retained earnings of the Company. EARNINGS PER SHARE (UNAUDITED) Earnings per share for the six months ended June 30, 1996 is based on the weighted average number of shares outstanding during the period including the dilutive effect of options and warrants and the 2,928 shares issued in connection with the Main Line and RenalWest mergers. NEWLY ISSUED ACCOUNTING STANDARDS The Company has considered the impact of newly issued accounting pronouncements, principally Statement of Financial Accounting Standards No 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and does not believe that adoptions of this and any other newly issued pronouncements would have a significant impact on the consolidated financial statements. MARKET VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, long-term debt and capital lease obligations. The market values for these financial instruments approximates their carrying value at December 31, 1994 and 1995. F-13 73 RENAL CARE GROUP, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. MERGERS On April 26, 1996, the Company completed a merger with Main Line through the exchange of shares of the Company's Common Stock with an aggregate value of approximately $18,200 at the date of the merger agreement. On August 7, 1996, the Company entered into a definitive agreement to merge with RenalWest, L.C. et al. This transaction was completed on September 30, 1996. Each share of RenalWest common stock then issued and oustanding was canceled and retired then converted into one share of RenalWest common stock. Renal Care Group, Inc. exchanged 2,400 shares of its common stock for the one share of RenalWest common stock. The Main Line and RenalWest mergers have been accounted for as a pooling-of-interests, and accordingly, the supplemental consolidated financial statements give retroactive effect to the combined operations of Renal Care Group, Inc. for all periods presented. The following is a summary of the results of operations of the separate entities for periods prior to the Main Line and RenalWest mergers:
RCG MAIN LINE RENALWEST COMBINED ------- ------------ --------- -------- 1993 (unaudited -- Note 12) Net revenue............................... $ -- $ 10,305 $ 7,821 $18,126 Income from operations.................... -- 831 (573) 258 Net income................................ -- 792 (662) 130 1994 Net revenue............................... -- 10,933 30,694 41,627 Income from operations.................... -- (807) 5,807 5,000 Net income................................ -- (841) 5,478 4,637 1995 Net revenue............................... -- 10,999 32,037 43,036 Income from operations.................... -- 12 3,415 3,427 Net income................................ (6) (25) 3,006 2,975 June 30, 1995 (unaudited -- Note 12) Net revenue............................... -- 5,568 15,674 21,242 Income from operations.................... -- 133 1,589 1,722 Net income................................ -- 116 1,385 1,501 June 30, 1996 (unaudited -- Note 12) Net income................................ 32,004 5,968 17,386 55,358 Income from operations.................... 4,150 635 2,570 7,355 Net income................................ 2,660 647 2,308 5,615
4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
DECEMBER 31, ------------------- 1994 1995 ------- ------- Patient accounts receivable...................................... 11,167 12,185 Allowance for doubtful accounts.................................. 1,829 3,981 ------- ------- Net accounts receivable.......................................... $ 9,338 $ 8,204 ======= ======= Percent of patient accounts receivable related to patients participating in the Medicare and Medicaid programs............ 54% 60%
F-14 74 RENAL CARE GROUP, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------------- 1994 1995 ------- ------- Medical equipment................................................ $ 6,246 $ 8,551 Furniture and nonmedical equipment............................... 1,740 2,591 Leasehold improvements........................................... 1,919 2,836 Buildings........................................................ 841 961 ------- ------- 10,746 14,939 Less accumulated depreciation.................................... 4,554 5,714 ------- ------- Net property and equipment....................................... $ 6,192 $ 9,225 ======= =======
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consists of the following:
DECEMBER 31, --------------- 1994 1995 ------ ------ Term note, bearing interest at the prime rate plus 1/2% (8.88% at December 31, 1995), payable in monthly installments, collateralized by inventory, accounts receivable, property and equipment, due 1997...................... $1,088 $ 502 Nonrevolving line of credit converted to a term note, bearing interest at the prime rate plus 3/8% (8.88% at December 31, 1995), payable in monthly installments, collateralized by inventory, accounts receivable, property and equipment, due 1999.................................................... 1,500 1,200 Equipment line of credit, advances made through December 31, 1995, bearing interest at the variable bank base rate plus 3/8% (8.88% at December 31, 1995), converts May 28, 1996 to a term loan, bearing interest at the variable Bank Base Rate plus 1/2%, due May 31, 2001....................... -- 1,460 Term note, bearing interest at the prime rate plus 1/2% (8.5% at December 31, 1995), payable in monthly installments, collateralized by inventory, accounts receivable, property and equipment, due 1997...................... 1,869 1,263 Notes payable, bearing interest at prime plus 1/2%, (8.50% at December 31, 1995), paid in 1995........................................................ 102 -- Loans from related parties, secured by purchased equipment, monthly payments due through 2001, at interest rates from 11% to 13.5%...................... 250 212 Convertible senior subordinated promissory notes............................. -- 1,380 Capital lease obligations, due through 1999.................................. 505 507 Other........................................................................ 62 31 ------ ------ Total long-term debt......................................................... 5,376 6,555 Less current portion......................................................... 1,787 2,892 ------ ------ Long-term debt, net of current portion....................................... $3,589 $3,663 ====== ======
At December 31, 1995 the Company has a $1,500 revolving line of credit with a bank which expires in June 1996. Interest is payable monthly at the variable Bank Base Rate plus 3/8% (8.88% at December 31, 1995). The Company also has an unsecured line of credit available for $20 from a local bank. At December 31, 1995, no amounts were outstanding relative to this line of credit. F-15 75 RENAL CARE GROUP, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On December 7, 1995, the Company issued an aggregate of principal amount of $1,380 of Convertible Senior Subordinated Promissory Notes to provide funds to complete the initial public offering. Such notes bear interest at a rate of 7% per annum, mature on the first anniversary of their issuance, and the principal and accrued interest thereof is convertible into shares of Common Stock of the Company, beginning 180 days after the closing of the initial public offering, at a conversion price of $7.50 per share. The Company offered such securities solely to "accredited investors" (as defined in Regulation D promulgated under the Securities Act) in a private placement exempt from registration under the Securities Act and state securities laws. Future maturities of long-term debt at December 31, 1995 are as follows:
LONG-TERM CAPITAL DEBT LEASES --------- ------- 1996............................................................. $ 2,749 $ 186 1997............................................................. 1,508 156 1998............................................................. 703 153 1999............................................................. 656 105 2000............................................................. 305 -- Thereafter....................................................... 127 -- ----- ----- 6,048 600 ===== ===== Less amounts representing interest............................... (93) ----- ----- Total minimum principal payments................................. $ $ 507 ===== =====
7. BENEFIT PLANS The Company has qualified defined contribution plans covering substantially all employees which permit participants to make voluntary contributions. The Company pays all general and administrative expenses of the plans and makes matching contributions on behalf of the employees. The Company made contributions relating to these plans totaling $86, $284 and $157 for the years ended December 31, 1993 (unaudited -- Note 12), 1994 and 1995, respectively. 8. RELATED PARTY TRANSACTIONS PHYSICIAN SERVICES, MEDICAL DIRECTOR FEES AND MANAGEMENT FEES Physician and medical director services are provided to the Company by shareholders, partners or legal entities owned by shareholders or partners of the Company. Physician and medical director fees included in patient care costs were $1,327, $2,332 and $787 for the years ended December 31, 1993 (unaudited -- Note 12), 1994 and 1995, respectively. Management fees, which comprise administrative expenses and general overhead expenses were $122, $221 and $243 for the years ended December 31, 1993 (unaudited -- Note 12), 1994 and 1995, respectively. Such fees are included in general and administrative expenses. OTHER RELATED PARTY BALANCES AND TRANSACTIONS Expenses for leases and other services provided through entities owned by shareholders or other related parties aggregated $20, $168 and $116 for the years ended December 31, 1993, (unaudited -- Note 12), 1994 and 1995, respectively. Certain shareholders of the Company established an organization named Main Line Medical Leasing from which the Company has borrowed amounts to purchase equipment. Amounts due to Main Line Medical Leasing were $212 and $177 at December 31, 1994 and 1995, respectively. These balances are included in long-term debt. F-16 76 RENAL CARE GROUP, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Related party receivables consist primarily of amounts paid by the Company on behalf of its owner members which were repaid subsequent to year-end. During 1994 and 1995, related parties loaned the Company $75 and $20, respectively. There are no terms or interest rates associated with these loans. 9. OPERATING LEASES The Company rents office and medical facilities under lease agreements which are classified as operating leases for financial statement purposes. At December 31, 1995, future minimum rental payments under noncancelable operating leases are: 1996........................................................................ $1,389 1997........................................................................ 1,416 1998........................................................................ 1,285 1999........................................................................ 934 2000........................................................................ 436 Thereafter.................................................................. 404 ------ $5,864 ======
Rent expense related to operating leases amounted to $616, $1,428, and $1,648 for the years ending December 31, 1993 (unaudited -- Note 12), 1994 and 1995, respectively. 10. INCOME TAXES The provision for income taxes differs from the amounts computed by applying the statutory federal income tax rate of 34% to income before provision for deferred income taxes. The differences are summarized as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ----------- ------- ------- (UNAUDITED- NOTE 12) Tax provision at statutory rate......................... $ 44 $ 1,576 $ 1,012 State income tax less federal tax benefit............... -- -- -- Adjustment to eliminate S Corporations.................. (44) (1,576) (1,014) Change in valuation allowance........................... -- -- 2 --- ------ ------ $ -- $ -- $ -- === ====== ======
The Company made no payments for federal income taxes in 1993 (unaudited -- Note 12), 1994 or 1995. PRO FORMA INCOME TAX INFORMATION (UNAUDITED) As discussed in Note 2, certain entities comprising the Company operated under 503(c)(1) and Subchapter S of the Internal Revenue Code and were not subject to corporate federal income tax. In connection with the initial public offering, the Subchapter S elections were terminated. As a result, these entities are subject to corporate income taxes subsequent to the termination of their S Corporation status. The Company had operating income for income tax purposes of $131, $4,641, and $2,990 for the years ending December 31, 1993, 1994 and 1995, respectively. Had the Company filed federal and state income tax returns as a regular corporation for these periods, income tax expense under the provisions of Financial Accounting F-17 77 RENAL CARE GROUP, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Standard No. 109 would have been $50, $1,764, and $1,136 for the years ending December 31, 1993, 1994 and 1995, respectively. At the date of termination of S Corporation status, the Company was required to provide for a deferred tax liability for cumulative temporary differences between financial reporting and tax reporting. Such deferred taxes are based on the cumulative temporary difference at the date of termination of S Corporation status. If the termination of S Corporation status had occurred at December 31, 1995, the deferred income tax liability would have been $192. The effect of recognizing the deferred taxes will be included in income from continuing operations in the year of termination of S Corporation status. 11. SUBSEQUENT EVENTS RECAPITALIZATION AND INITIAL PUBLIC OFFERING On February 6, 1996, the Company completed an initial public offering of 3,900 shares of Common Stock and on February 20, 1996, the underwriters of the offering fully exercised their over allotment option for an additional 585 shares, all of which were issued at $18 per share. Simultaneously the Company exchanged 4,834 shares of Common Stock, plus cash, notes payable and the assumption of certain debt for either stock or selected assets and liabilities of KCI, NEI, Tyler, Kansas and Tennessee in accordance with executed combination agreements. The exchange is being accounted for utilizing the historical cost basis in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48 with the stock being valued at the historical cost of the net assets exchanged. Cash consideration given in these acquisitions is treated for accounting purposes as a dividend from the Company to Tennessee and the four unrelated businesses acquired to their owners. STOCK OPTION PLANS In April 1996, the Company registered approximately 1,892 shares of Common Stock with the Securities and Exchange Commission on Form S-8 for the following plans: Renal Care Group, Inc. Employee Stock Purchase Plan (300 shares); Renal Care Group, Inc. 1996 Stock Option Plan (300 shares); Outstanding Options Granted Outside of a Plan for 888 Shares Granted to Employees, Directors, Medical Directors and Consultants (888 shares); Renal Care Group, Inc. 1996 Stock Option Plan for Outside Directors (100 shares); and Renal Care Group, Inc. 1994 Stock Option Plan (approximately 304 shares). Options for the purchase of approximately 1,192 shares (includes options and warrants assumed from Tennessee in connection with the combination agreement) had been granted as of the date of the Company's Registration Statement on Form S-8, at exercise prices ranging from $2 to $18 with varying vesting provisions. 12. UNAUDITED FINANCIAL INFORMATION The unaudited consolidated balance sheet as of June 30, 1996 and the unaudited supplemental consolidated statements of income, changes in owners' equity and cash flows for the six months ended June 30, 1995 and 1996 have been prepared by management and are presented for informational purposes only. The financial statements, presented for informational purposes only, include all adjustments, consisting of only normal recurring adjustments necessary for a fair presentation of the results. F-18 78 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Renal Care Group, Inc. We have audited the accompanying combined balance sheets of Renal Care Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired, as identified in Note 1, as of December 31, 1994 and 1995, and the related combined statements of operations, changes and owners' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1993 and 1994 financial statements of Tyler Nephrology Associates, P.A. and the combined financial statements of Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc., which statements reflect total assets constituting 57% as of December 31, 1994 and total revenues constituting 68% for the two years in the period ended December 31 1994. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Tyler Nephrology Associates, P.A. and the combined financial statements of Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc., is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the combined financial position of Renal Care Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired at December 31, 1994 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. September 30, 1996 Nashville, Tennessee F-19 79 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc. We have audited the accompanying combined balance sheet of Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc. as of December 31, 1994, and the related combined statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1994. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc. as of December 31, 1994, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. /s/ Allen, Gibbs & Houlik, L.C. Wichita, Kansas July 15, 1995 F-20 80 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Tyler Nephrology Associates, P.A. Tyler, Texas We have audited the accompanying balance sheets of The Dialysis Operations of Tyler Nephrology Associates, P.A. as of December 31, 1994 and the related statements of operations and cash flows for the two years then ended. These financial statements are the responsibility of the Association's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, The Dialysis Operations of Tyler Nephrology Associates, P.A., are a part of Tyler Nephrology Associates, P.A. The accompanying financial statements include those assets and liabilities, and revenues and expenses specifically identified with dialysis operations as well as allocations of other items which in the opinion of management are properly allocable to the dialysis operations. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Dialysis Operations of Tyler Nephrology Associates, P.A. as of December 31, 1994, and the results of its operations and its cash flows for the two years then ended in conformity with generally accepted accounting principles. /s/ Henry & Peters, P.C. Tyler, Texas July 24, 1995 F-21 81 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1994 1995 ------- ------- ASSETS Current assets: Cash and cash equivalents.............................................. $ 2,096 $ 2,567 Held to maturity securities............................................ 1,638 111 Accounts receivable, net............................................... 5,344 4,917 Inventories............................................................ 583 592 Due from related parties............................................... 217 125 Prepaid expenses....................................................... 169 227 Other.................................................................. 261 334 ------- ------- Total current assets........................................... 10,308 8,873 Property, plant and equipment, net....................................... 6,328 7,469 Intangible assets, net................................................... 30 2,933 Other assets............................................................. 1,091 2,761 ------- ------- Total assets................................................... $17,757 $22,036 ======= ======= LIABILITIES AND OWNERS' EQUITY Current liabilities: Current portion of long-term debt...................................... $ 303 $ 1,233 Accounts payable....................................................... 1,598 1,750 Accrued wages and benefits............................................. 789 1,090 Due to related parties................................................. -- 372 Other accrued expenses................................................. 182 983 ------- ------- Total current liabilities...................................... 2,872 5,428 Long-term debt, net of current portion................................... 2,152 6,753 Advances received, net................................................... 2,449 -- Redeemable preferred stock............................................... -- 2,449 ------- ------- Total liabilities.............................................. 7,473 14,630 Owners' equity........................................................... 10,285 7,406 ------- ------- Total liabilities and owners' equity........................... $17,757 $22,036 ======= =======
See accompanying notes. F-22 82 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 1993 1994 1995 ------- ------- ------- Total revenue..................................................... $30,950 $32,749 $33,496 Operating costs and expenses: Patient care costs.............................................. 21,025 22,006 23,619 General and administrative expenses............................. 2,021 2,965 3,238 Provision for doubtful accounts................................. 710 726 789 Depreciation and amortization................................... 943 1,011 1,178 ------- ------- ------- Total operating costs and expenses...................... 24,699 26,708 28,824 ------- ------- ------- Income from operations............................................ 6,251 6,041 4,672 Interest expense, net............................................. 147 100 394 ------- ------- ------- Income before taxes............................................... 6,104 5,941 4,278 Provision for income taxes........................................ -- 4 -- ------- ------- ------- Net income........................................................ $ 6,104 $ 5,937 $ 4,278 ======= ======= =======
See accompanying notes. F-23 83 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY (IN THOUSANDS) Balance at December 31, 1992...................................................... $ 9,487 Net income...................................................................... 6,104 Capital distributions........................................................... (5,219) ------- Balance at December 31, 1993...................................................... 10,372 Net income...................................................................... 5,937 Capital distributions........................................................... (6,026) Capital contributions by owners and partners.................................... 2 ------- Balance at December 31, 1994...................................................... 10,285 Net income...................................................................... 4,278 Capital distributions........................................................... (7,325) Capital contributions by owners and partners.................................... 495 Other decreases................................................................. (327) ------- Balance at December 31, 1995...................................................... 7,406
See accompanying notes. F-24 84 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- OPERATING ACTIVITIES Net income.................................................... $ 6,104 $ 5,937 $ 4,278 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................... 943 1,011 1,178 Loss on asset disposals..................................... 14 6 -- Other....................................................... 43 (175) (117) Changes in assets and liabilities: Accounts receivable and due to related parties........... 700 (1,368) 519 Inventories, prepaid expenses and other current assets... (307) 207 (140) Other assets............................................. (100) (174) (1,670) Accounts payable......................................... (388) 959 157 Accrued wages and benefits............................... 102 181 301 Other accrued expenses and other liabilities............. 48 35 1,168 ------- ------- ------- Net cash provided by operating activities........... 7,159 6,619 5,674 INVESTING ACTIVITIES Proceeds from sale of investments............................. -- 24,303 1,527 Purchases of investments...................................... -- (25,941) -- Proceeds from sale of property, plant and equipment........... 19 18 -- Purchases of property, plant and equipment.................... (549) (1,469) (1,701) Intangible assets acquired.................................... -- -- (3,143) Contributions from (to) an equity investment.................. (102) -- 116 ------- ------- ------- Net cash used in investing activities............... (632) (3,089) (3,201) FINANCING ACTIVITIES Proceeds from long-term borrowings............................ 624 745 5,879 Principal payments on long-term debt and capital lease obligations................................................. (1,329) (494) (348) Capital contributions by owners and partners.................. -- 2 495 Advances received, net........................................ -- 2,449 -- Capital distributions......................................... (5,219) (5,623) (8,028) ------- ------- ------- Net cash used in financing activities......................... (5,924) (2,921) (2,002) ------- ------- ------- Net increase in cash and cash equivalents..................... 603 609 471 Cash and cash equivalents at beginning of period.............. 884 1,487 2,096 ------- ------- ------- Cash and cash equivalents at end of period.................... $ 1,487 $ 2,096 $ 2,567 ======= ======= ======= Supplemental disclosures of cash flow information: Interest paid............................................... $ 202 $ 170 $ 315 ======= ======= ======= Noncash capital transactions.................................. $ -- $ 404 $ 607 ======= ======= =======
See accompanying notes. F-25 85 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1995 1. ORGANIZATION AND BASIS OF PRESENTATION Renal Care Group, Inc. (of Delaware) ("the Company") was formed in June 1995, primarily for the purpose of acquiring four dialysis businesses and Renal Care Group, Inc. (of Tennessee) ("Tennessee"), in exchange for shares of its Common Stock, cash, notes payable and the assumption of certain debt (the "Combination"). The Combination was effected in accordance with executed combination agreements with the four dialysis businesses and Tennessee and occurred concurrently with the closing of the initial public offering of the Company (the "Offering") in February 1996. Kidney Care, Inc. and certain operating divisions of Medical Enterprises, Ltd. and Health care Suppliers, Inc. (collectively "KidneyCare") has been designated as the Predecessor and thus KidneyCare's financial statements are not included in these combined financial statements. The Three Unrelated Businesses to be Acquired, which comprise numerous legal entities, conduct business as Northeast Indiana Kidney Center ("NEI"), Tyler Nephrology Associates, P.A. ("Tyler"), and Kansas Nephrology Associates, P.A. ("KNA") and Kansas Dialysis Supply, Inc. ("KDS," and with KNA, "Kansas"). Tennessee and Three Unrelated Businesses to be Acquired are based in Tennessee, Indiana, Texas, and Kansas. Effective July 31, 1995, D.M.N. Professional Corporation, which is owned by the physician owners of NEI, bought the remaining 50% ownership interest in NEI from its former joint venture partner (See Note 3). The joint venture which is NEI is included in these combined financial statements. Physician services are provided to the Three Unrelated Businesses to be Acquired by physician groups, which comprise shareholders, partners or legal entities owned by shareholders or partners of the Three Unrelated Businesses to be Acquired. Substantially all of the dialysis treatments performed by the Three Unrelated Businesses to be Acquired are referred by these related physician groups. Tennessee and the Three Unrelated Businesses to be Acquired previously have operated as separate independent entities. Their historical financial positions, results of operations and cash flows have been combined in the accompanying financial statements and do not reflect any adjustments relating to the Combination or the impacts that may have occurred if the operations of Tennessee and the Three Unrelated Businesses to be Acquired had been combined. All significant intercompany accounts and transactions have been eliminated. Two of the Three Unrelated Businesses to be Acquired maintain their books and records on the cash basis of accounting. The accompanying financial statements have been prepared on the accrual basis of accounting. These combined financial statements have been prepared to show the combined operations and combined financial position of Tennessee and Three Unrelated Businesses to be Acquired. Certain entities are not required to pay federal or state income taxes (due to their status as partnerships, S Corporations and corporations managed to result in taxes being the responsibility of the respective owners), as further described in Note 2. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NET REVENUE Accounts receivable and net revenue are recorded at the estimated net realizable amount from Medicare, Medicaid, patients, commercial insurers, and other third-party payors for services rendered. The Medicare and Medicaid programs reimburse Tennessee and Three Unrelated Businesses to be Acquired at amounts that are different from the Company's established rates. Contractual adjustments under these programs represent the F-26 86 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) difference between the amounts billed for these services and the amounts that are reimbursable by third-party payors. A summary of the basis for reimbursement with these payors follows: Medicare Tennessee and Three Unrelated Businesses to be Acquired are paid by the Medicare program on a prospective payment system for dialysis services. Each facility receives a composite rate that is adjusted to account for geographic differences in the cost of labor. The prospectively determined composite rates are not subject to retroactive adjustments. Medicaid Medicaid is a state administered program with reimbursements varying by state. The Medicaid programs administered by each of Indiana, Ohio, Texas, Kansas and Tennessee, reimburse Tennessee and the respective Three Unrelated Businesses to be Acquired. Other Other payments from patients, commercial insurers, and other third-party payors are received pursuant to a variety of reimbursement arrangements, which are generally higher than those payments received from the Medicare and Medicaid programs. The allowance for doubtful accounts represents management's estimate of potential credit losses associated with amounts due from patients, commercial insurers, and other third-party payors. Management of Tennessee and Three Unrelated Businesses to be Acquired does not believe that receivables from the Medicare and Medicaid programs represent any significant credit risk. Reimbursements from Medicare and Medicaid at established rates approximated 68%, 64%, and 69% of patient service revenue for the years ended December 31, 1993, 1994 and 1995, respectively. CASH AND CASH EQUIVALENTS For the purpose of the combined statements of cash flows, cash and cash equivalents include demand deposits and money market accounts at a financial institution. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. The carrying amount reflected on the balance sheet at December 31, 1994 and 1995 is equal to approximate fair value. HELD-TO-MATURITY SECURITIES Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when there is the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at cost, adjusted for amortization of premium and accretion of discount to maturity. Any such amortization is included in interest income. Any interest received on securities classified as held-to-maturity is included in interest income. All held-to-maturity securities mature within one year of the balance sheet date. INVENTORIES Inventories consist of dialysis supplies and are stated at the lower of cost or market under the first-in, first-out method or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The general range of useful lives is five to 40 years for buildings and leasehold improvements (limited to the terms of the lease including expected renewal periods), and five to F-27 87 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 15 years for furniture, fixtures and equipment. Routine maintenance and repairs are expensed as incurred, while costs of betterments and renewals are capitalized. OTHER ASSETS Included in other assets are escrow deposits related to a performance guarantee agreement between Kansas and a local hospital, which originated in 1986. Such agreement requires Kansas to deposit $8 per month with a designated money manager until 1996, at which time Kansas will have unrestricted use of the amounts deposited and any earnings thereon if it has fulfilled certain obligations thereto. In the opinion of management of Kansas, the assets relating to this guarantee are deemed fully collectible. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INCOME TAXES The Three Unrelated Businesses to be Acquired are S Corporations or partnerships; accordingly, income tax liabilities are the responsibility of the respective owners or partners. Under these provisions, the Three Unrelated Businesses to be Acquired generally do not pay corporate income taxes; rather the income or loss is allocated to each stockholder for inclusion in their respective income tax returns. Because of this practice, provisions for income taxes and deferred tax assets and liabilities of these taxable entities have not been reflected in these combined financial statements. Tennessee is a C Corporation and accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax and laws that will be in effect when the differences are expected to reverse. ESTIMATED MEDICAL PROFESSIONAL LIABILITY CLAIMS Tennessee and each of the Three Unrelated Businesses to be Acquired are insured for medical professional liability claims through retrospectively rated commercial insurance policies. It is their respective policies that provision for estimated premium adjustments to medical professional liability costs be made for asserted and unasserted claims and based upon their experiences. Provision for such professional liability claims includes estimates of the ultimate costs of such claims. To date, their experiences with such claims has not been significant. Accordingly, no such provision has been made. OWNERS' EQUITY Owners' equity includes the respective capital stock, additional paid-in capital, partnership capital, and retained earnings of the various legal entities reflected herein. The Three Unrelated Businesses to be Acquired have multiple owners, various types of agreements exist among the owners which call for the transfer of a physician's ownership interest by the continuing owners in the case of certain events such as the owner's retirement or death. Frequently, the existing owners are required to pay the departed owner for his interest. NEWLY ISSUED ACCOUNTING STANDARDS Tennessee and each of the Three Unrelated Businesses to be Acquired have considered the impact of newly issued financial accounting pronouncements, principally Statement of Financial Accounting Standards F-28 88 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and do not believe that adoption of this and any other newly issued pronouncements would have a significant impact on the combined financial statements. 3. ACQUISITION OF PARTNERSHIP INTEREST Effective July 31, 1995, the 50% physician owners of NEI bought out the remaining 50% ownership interest of its joint venture partner for $4,200, which was paid from the proceeds of new debt. This transaction was accounted for using purchase accounting which resulted in the recognition of approximately $2,900 of goodwill which is being amortized over forty years. 4. CASH, CASH EQUIVALENTS AND HELD-TO-MATURITY SECURITIES In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Tennessee adopted the provisions of the new standard for investments held as of or acquired after January 1, 1994. In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. There was no cumulative effect of adopting Statement 115 as of January 1, 1994. The following is a summary of cash, cash equivalents, and investments in held-to-maturity securities as of:
GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ------ ---------- ---------- ---------- DECEMBER 31, 1994 Cash and cash equivalents: Demand deposits and money market account..... $2,096 $ -- $ -- $2,096 ====== ====== ====== ====== Held-to-maturity securities: Obligations.................................. $1,638 $ 6 $ -- $1,644 ====== ====== ====== ====== DECEMBER 31, 1995 Cash and cash equivalents: Demand deposits and money market account..... $2,567 $ -- $ -- $2,567 ====== ====== ====== ====== Held-to-maturity securities: Obligations.................................. $ 111 $ -- $ -- $ 111 ====== ====== ====== ======
5. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
DECEMBER 31, ------------------- 1994 1995 ------- ------- Patient accounts receivable...................................... $ 6,058 $ 5,484 Other receivables................................................ 408 178 Allowance for doubtful accounts.................................. (1,122) (745) ------- ------- Net accounts receivable.......................................... $ 5,344 $ 4,917 ======= ======= Percent of patient accounts receivable related to patients participating in the Medicare and Medicaid programs............ 76% 69%
F-29 89 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, ------------------- 1994 1995 ------- ------- Buildings........................................................ $ 2,323 $ 3,377 Furniture, fixtures and equipment................................ 5,707 6,552 Leasehold improvements........................................... 1,598 2,002 Other............................................................ 5 -- ------- ------- 9,633 11,931 Less accumulated depreciation.................................... (3,305) (4,462) ------- ------- Net property, plant and equipment................................ $ 6,328 $ 7,469 ======= =======
7. SHORT-TERM AND LONG-TERM OBLIGATIONS Long-term debt consists of the following:
DECEMBER 31, ----------------- 1994 1995 ------ ------ Line of credit with bank, due February 2, 1996, interest of bank's base rate (9.25%), secured by accounts receivable, equipment and inventory, credit available of $1,000 at December 31, 1995....... $ -- $ -- Bank lines of credit, with conversion options to term loan, due from 1995 to 2010, bearing interest ranging from 8.25% to 9.35%, secured by certain equipment, inventory and accounts receivable, credit available under such lines of $3,647 at December 31, 1995............................................................. 600 1,604 Notes payable to banks due through 1998, bearing interest ranging from 8.5% to 9.5%, payable monthly, secured by certain equipment, accounts receivable, and inventory............................... 529 965 Real estate mortgage notes payable, due through 2007, bearing interest ranging from 8.375% to 8.75%, payable monthly, secured by certain real estate and furniture and fixtures................ 1,326 1,217 Business financing note payable monthly beginning March 1, 1996 with interest at the bank's reference rate plus .5% (9.25% at December 31, 1995) through August 31, 2005....................... -- 4,200 ------- ------- Total long-term debt..................................... 2,455 7,986 Less current portion............................................... 303 1,233 ------- ------- Long-term debt, net of current portion............................. $2,152 $6,753 ======= =======
One Unrelated Business to be Acquired has an unsecured line of credit facility with a bank leasing interest at the bank's reference rate (9.35% at December 31, 1995), in the amount of $500. There were no borrowings at December 31, 1994 and 1995. Certain debt obligations contain covenants that require maintenance of certain financial ratios. Default of any covenant could affect the ability of individual entities to borrow under the agreements and, if not waived or corrected, could accelerate the maturity of any borrowings outstanding under the agreements. As of December 31, 1995, Tennessee and each of the Three Unrelated Businesses to be Acquired had complied with F-30 90 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) existing loan covenants. Various of these debt instruments are guaranteed by the respective owners or related entities. As of December 31, 1995, the aggregate amounts of annual principal maturities of long-term debt are as follows: 1996........................................................................ $ 906 1997........................................................................ 1,023 1998........................................................................ 944 1999........................................................................ 846 2000........................................................................ 666 Thereafter.................................................................. 3,601 ------ $7,986 ======
Tennessee and Three Unrelated Businesses to be Acquired lease office space as well as certain equipment under capital leases and noncancelable operating lease agreements which expire at various dates. At December 31, 1995, minimum annual rental commitments under noncancelable operating leases with terms in excess of one year are as follows: 1996........................................................................ $ 629 1997........................................................................ 605 1998........................................................................ 502 1999........................................................................ 448 2000........................................................................ 422 Thereafter.................................................................. 147 ------ Total minimum lease payments...................................... $2,753 ======
Rent expense related to operating leases amounted to $834, $963 and $998 for the years ended December 31, 1993, 1994 and 1995, respectively. 8. BENEFIT PLANS The Three Unrelated Businesses to be Acquired have qualified defined contribution plans which permit participants to make voluntary contributions. The Three Unrelated Businesses to be Acquired pay all general and administrative expenses of the plans and, in some cases, make matching contributions on behalf of the employees. The Three Unrelated Businesses to be Acquired made contributions related to these plans totaling $251, $351 and $414 in 1993, 1994 and 1995, respectively. Tennessee and Three Unrelated Businesses to be Acquired do not typically provide employees any post-retirement benefits other than pensions and, accordingly, the impact of Statement of Financial Accounting Statements No. 106 had no material effect on these combined financial statements. STOCK OPTIONS Effective February 15, 1994, Tennessee adopted the 1994 Stock Option Plan. The plan provided for the grant of options to purchase up to 320 shares of Common Stock to directors, officers and other key persons. Under the plan Tennessee may grant incentive stock options, nonqualified stock options or stock appreciation rights. Options are exercisable as determined by the Board of Directors. F-31 91 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of option transactions during the period from February 11, 1994 (date of inception of Renal Care Group, Inc. (of Tennessee) through December 31, 1995:
EXERCISE OPTIONS PRICE RANGE ------- ----------- Options granted................................................ 85 $2.00 - $7.50 Options exercised.............................................. -- Options forfeited.............................................. -- ------- Balance at December 31, 1994................................... 85 $2.00 - $7.50 Options granted................................................ 31 $7.50 Options exercised.............................................. -- Options forfeited.............................................. -- ------- Balance at December 31, 1995................................... 116 $2.00 - $7.50 ====== Exercisable at December 31, 1995............................... 55 Available for future grant at December 31, 1995................ 204
9. ADVANCES RECEIVED AND PREFERRED STOCK Tennessee is authorized to issue 1,000 shares of Preferred Stock at $.01 par value per share. Tennessee has designated as Series A Preferred Stock, 667 shares, $.01 par value per share. The remaining 333 shares of the Preferred Stock may be issued from time to time in one or more series, each such series to be so designated as to distinguish the shares from the shares of all other series or classes. The Board of Directors has the authority to divide the Preferred Stock into series and determine the preferences, limitations and relative rights. The holders of the Series A Preferred Stock have voting rights and receive dividends, if any, share for share, with Common Stock. The holders of Series A Preferred Stock vote as a class with respect to amending the charter of Tennessee, approving a consolidation or merger of Tennessee, changing the preferences of the Series A Preferred Stock, and effecting an exchange of the Series A Preferred Stock. The holders of Series A Preferred Stock have no preferences with respect to dividends. The Series A Preferred Stock is convertible into Common Stock and will receive a preference distribution equal to its purchase price upon liquidation or sale of Tennessee. The holders shall be entitled to a Preference Amount of $7.50. The number of shares of Common Stock issuable will equal the result obtained by dividing the Preference Amount by the Current Conversion Price. The Initial Conversion Price is set at $7.50 and shall be adjusted to the Current Conversion Price, as defined. In the event of a public offering of Tennessee's Common Stock, the Series A Preferred Stock will have the right to convert to Common Stock at anytime. In the event that prior to May 6, 1999, Tennessee has neither sold shares in an initial public offering nor effected a merger or consolidation, at the option of the holder of Series A Preferred Stock, the shares become redeemable at $10.50 per share plus an amount equal to $.0016438 per day for each day after May 6, 1999. In April and May 1994, Tennessee received $2,449, net of commissions and legal fees of $51, relating to the subscription of Series A Preferred Stock. On June 22, 1995, the stock was issued to the subscribers. Such proceeds are classified as advances received at December 31, 1994 and as redeemable preferred stock at December 31, 1995. 10. WARRANTS Tennessee issued warrants to two of its officers, effective February 14, 1994, to purchase an aggregate of 160 shares of Common Stock of Tennessee at $7.50 per share. Also effective February 14, 1994, Tennessee issued to Equitable Securities Corporation, as compensation for its investment banking services and for F-32 92 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) nominal additional consideration, warrants to purchase 60 shares of Common Stock of Tennessee at $7.50 per share. The warrants have a term of ten years from the date of issuance. 11. INCOME TAXES Income tax expense consists of the following (also see Note 2):
YEAR ENDED DECEMBER 31, ------------------ 1993 1994 1995 ---- ---- ---- Current: Federal........................................................... $-- $ 4 $-- State............................................................. -- -- -- --- --- --- $-- $ 4 $-- === === ===
Significant components of the deferred tax assets and liabilities as of December 31, 1994 and 1995, are as follows:
1994 1995 ------ ------ Deferred tax liabilities: Depreciation and amortization...................................... $ 3 $ 15 Deferred tax liabilities............................................. 3 15 ----- ----- Deferred tax assets: Net operating loss carryforwards................................... 228 620 Other.............................................................. 1 2 ----- ----- Deferred tax assets.................................................. 229 622 Valuation allowance.................................................. (226) (607) ----- ----- Net deferred tax assets.............................................. 3 15 ----- ----- Net deferred tax liabilities (assets)................................ $ -- $ -- ===== =====
The provision for income taxes differs from the amounts computed by applying the statutory federal income tax rate of 34% to income before provision for deferred income taxes. The differences are summarized as follows:
DECEMBER 31, --------------------------- 1993 1994 1995 ------- ------- ------- Tax provision at statutory rate........................... $ 2,075 $ 2,256 $ 1,454 State income tax less applicable federal tax benefit...... 245 (34) 40 Income reported in not-for-profit corporation and adjustment to eliminate S Corporations.................. (2,320) (2,445) (1,875) Change in valuation allowance............................. -- 225 381 Other, net................................................ -- 2 -- ------- ------- ------- $ -- $ 4 $ -- ======= ======= =======
Tennessee and Three Unrelated Businesses to be Acquired made no payments for federal income taxes in 1993, 1994 and 1995. F-33 93 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA INCOME TAX INFORMATION (UNAUDITED) As discussed in Note 2, the Three Unrelated Businesses to be Acquired operate under Subchapter S of the Internal Revenue Code and are not subject to corporate federal income tax. In connection with the Offering (see Note 14), the Subchapter S elections were terminated. As a result, the Three Unrelated Businesses to be Acquired are subject to corporate income taxes subsequent to the termination of their S Corporation status. Tennessee and Three Unrelated Businesses to be Acquired had net operating income for income tax purposes of $5,963, $6,341 and $4,061 for 1993, 1994 and 1995, respectively. Had Tennessee and Three Unrelated Businesses to be Acquired filed federal and state income tax returns as a regular corporation for 1993, 1994 and 1995, income tax expense under the provisions of Financial Accounting Standard No. 109 would have been $2,457, $2,455, and $1,754 respectively. At the date of termination of S Corporation status, Tennessee and Three Unrelated Businesses to be Acquired will be required to provide for a deferred tax liability for cumulative temporary differences between financial reporting and tax reporting. Such deferred taxes are based on the cumulative temporary difference at the date of termination of S Corporation status. 12. COMMITMENTS AND CONTINGENCIES THIRD-PARTY PAYOR SETTLEMENTS Final determination of amounts earned under prospective payment and cost-reimbursement activities is subject to review by appropriate governmental authorities or their agents. In the opinion of management, adequate provision has been made for any adjustments that may result from any such reviews. SELF-INSURED EMPLOYEE HEALTH BENEFIT PLAN One of the Three Unrelated Businesses to be Acquired adopted a self-insurance program for health benefits which comprised a $25 per claim self-insured portion and 20% self-insured portion in excess of $25 up to a maximum specific loss benefit of $1,000. Tennessee and Three Unrelated Businesses to be Acquired obtain medical malpractice insurance and general liability coverage primarily with commercial carriers. They are subject to claims and suits arising in the ordinary course of its business for which they believe are adequately covered by insurance. 13. RELATED PARTY TRANSACTIONS PHYSICIAN SERVICES, MEDICAL DIRECTOR FEES, AND MANAGEMENT FEES Physician and management services are provided to the Three Unrelated Businesses to be Acquired by shareholders, partners or legal entities owned by shareholders or partners of the Three Unrelated Businesses to be Acquired. Physician and Medical Director Fees included in patient care costs were $983, $728 and $663 for the years ended December 31, 1993, 1994 and 1995, respectively. Management fees, which comprise administrative and executive expenses, accounting fees, maintenance fees, and general overhead expenses were $165, $160 and $203 for the years ended December 31, 1993, 1994 and 1995, respectively. Such fees are included in general and administrative expenses. F-34 94 RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) LEASE TRANSACTIONS Certain of the Three Unrelated Businesses to be Acquired lease facility space from various partnerships and corporations which are owned by shareholders or partners of the Unrelated Businesses to be Acquired. Additionally, certain of the Three Unrelated Businesses to be Acquired lease equipment from physician owners. Rent expense on related-party operating leases amounted to $422, $429 and $349 for the years ended December 31, 1993, 1994 and 1995 respectively. OTHER RELATED-PARTY BALANCES AND TRANSACTIONS In various instances, relatives of the owners of the Three Unrelated Businesses to be Acquired are employees of the clinics. In 1995, one of the Three Unrelated Businesses to be Acquired began providing personnel to staff the office of its physician owners. Revenue recognized for the reimbursement of these services was $290 for the year ended December 31, 1995. 14. SUBSEQUENT EVENTS RECAPITALIZATION AND INITIAL PUBLIC OFFERING In February 1996, the Company consummated the Offering and simultaneously consummated the Combination, pursuant to which it exchanged shares of its common stock, cash, notes payable and the assumption of certain debt for selected assets of and liabilities of Tennessee and Three Unrelated Businesses to be Acquired and the Predecessor. The exchange is accounted for utilizing the historical cost basis with the common stock being valued at the historical cost of the net assets exchanged. Cash consideration given in these acquisitions is treated for accounting purposes as a dividend from the Company to Tennessee and Three Unrelated Businesses to be Acquired, the Predecessor and their owners. In December 1995, Renal Care Group, Inc. (of Delaware) sold an aggregate principal amount of $1,380 of Convertible Senior Subordinated Promissory Notes (the "Convertible Notes") to provide funds to complete the Offering. Such Convertible Notes bear interest at a rate of 7.0%, mature in one year, and the principal and accrued interest thereof is convertible, beginning 180 days after the closing of the Offering into shares of common stock of the Company at a conversion price of $7.50 per share. The Company offered such securities solely to "accredited investors" (as defined in Regulation D promulgated under the Securities Act) in a private placement exempt from registration under the Securities Act and state securities laws. Certain owners of Tennessee and Unrelated Businesses to be Acquired purchased an aggregate principal amount of $1,120 of the Convertible Notes. 15. UNAUDITED FINANCIAL INFORMATION The unaudited combined statements of operations, owners' equity and cash flows for the six months ended June 30, 1996 have been prepared by management and are presented for informational purposes only. The financial statements, presented for informational purposes only, include all adjustments, consisting of only normal recurring adjustments necessary for a fair presentation of the results. F-35 95 REPORT OF INDEPENDENT AUDITORS The Board of Directors Kidney Care, Inc. We have audited the accompanying combined balance sheets of Kidney Care, Inc., et al. (see Note 1) as of January 31, 1995 and 1996, and the related combined statements of revenues, expenses and changes in net assets and cash flows for the each of the three years in the period ended January 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Kidney Care, Inc., et al. as of January 31, 1995 and 1996, and the combined results of their operations and cash flows for each of the three years then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Nashville, Tennessee May 15, 1996 F-36 96 KIDNEY CARE, INC., ET AL. COMBINED BALANCE SHEETS (IN THOUSANDS)
JANUARY 31 ----------------- 1995 1996 ------- ------- ASSETS Current assets: Cash and cash equivalents................................................ $ 1,050 $ 3,895 Short-term government securities......................................... 1,000 512 Accounts receivable, net................................................. 7,814 8,348 Inventories.............................................................. 861 1,039 Due from related parties................................................. 771 728 Prepaid expenses......................................................... 135 177 Deferred income taxes.................................................... 65 23 ------- ------- Total current assets............................................. 11,696 14,722 Property, plant and equipment, net......................................... 3,027 2,539 Other assets............................................................... 120 837 ------- ------- Total assets..................................................... $14,843 $18,098 ======= ======= LIABILITIES AND UNRESTRICTED NET ASSETS Current liabilities: Current portion of long-term debt........................................ $ 669 $ 389 Accounts payable......................................................... 1,208 1,838 Due to related parties................................................... 1,236 1,105 Accrued wages and benefits............................................... 928 908 Other accrued expenses................................................... 105 272 ------- ------- Total current liabilities........................................ 4,146 4,512 Long-term debt, net of current portion..................................... 76 200 ------- ------- Total liabilities................................................ 4,222 4,712 Unrestricted net assets.................................................... 10,621 13,386 ------- ------- Total liabilities and unrestricted net assets.................... $14,843 $18,098 ======= =======
See accompanying notes. F-37 97 KIDNEY CARE, INC., ET AL. COMBINED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN UNRESTRICTED NET ASSETS (IN THOUSANDS)
YEAR ENDED JANUARY 31, --------------------------- 1994 1995 1996 ------- ------- ------- Net revenue....................................................... $31,366 $36,294 $38,862 Operating costs and expenses: Patient care costs.............................................. 24,255 28,357 29,890 General and administrative expenses............................. 1,129 930 927 Provision for doubtful accounts................................. 716 770 851 Depreciation and amortization................................... 872 919 903 ------- ------- ------- Total operating costs and expenses...................... 26,972 30,976 32,571 ------- ------- ------- Income from operations............................................ 4,394 5,318 6,291 Interest expense, net............................................. 185 183 167 ------- ------- ------- Income before taxes............................................... 4,209 5,135 6,124 Provision for income taxes........................................ 1,074 944 1,213 ------- ------- ------- Net income........................................................ 3,135 4,191 4,911 Unrestricted net assets not retained by the entity................ (1,447) (2,508) (2,146) Unrestricted net assets at beginning of period.................... 7,250 8,938 10,621 ------- ------- ------- Unrestricted net assets at end of year............................ $ 8,938 $10,621 $13,386 ======= ======= =======
See accompanying notes. F-38 98 KIDNEY CARE, INC., ET AL. COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JANUARY 31, ----------------------------- 1994 1995 1996 ------- ------- ------- OPERATING ACTIVITIES Net income.................................................... $ 3,135 $ 4,191 $ 4,911 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................ 872 919 903 Gain on disposal of equipment............................ -- (6) (25) Deferred income tax credit............................... (23) (28) 42 Changes in assets and liabilities: Accounts receivable................................... (1,416) (1,048) (491) Inventories........................................... (90) (7) (178) Prepaid expenses and other assets..................... (136) 25 (778) Recoverable sales tax................................. (570) 1,727 -- Accounts payable...................................... 662 (534) 630 Other accrued expenses and other liabilities.......... 371 (645) 16 ------- ------- ------- Net cash provided by operating activities....................... 2,805 4,594 5,030 INVESTING ACTIVITIES Maturities of short-term government securities.................. -- -- 3,095 Purchases of short-term government securities................... -- (1,000) (2,608) Proceeds from sales of property, plant and equipment............ 10 19 25 Purchases of property, plant and equipment...................... (810) (761) (395) ------- ------- ------- Net cash provided by (used in) investing activities............. (800) (1,742) 117 FINANCING ACTIVITIES Proceeds from long-term borrowings.............................. 406 428 483 Principal payments on long-term debt and capital lease obligations................................................... (448) (497) (639) Decrease in unrestricted net assets not retained by the entity........................................................ (1,447) (2,508) (2,146) ------- ------- ------- Net cash used in financing activities........................... (1,489) (2,577) (2,302) ------- ------- ------- Net increase in cash and cash equivalents....................... 516 275 2,845 Cash and cash equivalents at beginning of year.................. 259 775 1,050 ------- ------- ------- Cash and cash equivalents at end of year........................ $ 775 $ 1,050 $ 3,895 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid................................................. $ 106 $ 70 $ 50 ======= ======= =======
See accompanying notes. F-39 99 KIDNEY CARE, INC., ET AL. NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS) JANUARY 31, 1996 1. ORGANIZATION AND BASIS OF PRESENTATION Kidney Care, Inc., et al. ("Kidney Care") consists of Kidney Care, Inc. ("KC") and certain operating divisions of its affiliates, Medical Enterprises, Ltd. ("MEL") and Health Care Suppliers, Inc. ("HSI"). Kidney Care operates dialysis treatment centers and provides outpatient and home patient dialysis services in the southern United States. The combined financial statements present the operating results and financial position of the divisions of those entities affiliated with KC that became part of a combination referred to in Note 12. KC, MEL and HSI have common management and members of the Boards of Directors. All significant intercompany transactions between KC and the operating divisions of MEL and HSI have been eliminated in the combination. MEL and HSI provide various administrative services to Kidney Care including data processing, accounting, personnel, purchasing and customer service. It is Kidney Care's policy to charge the expenses of MEL and HSI first on the basis of direct usage when identifiable, with the remainder allocated on the basis of time spent by the service departments on Kidney Care matters. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Net Revenue Net revenue is recorded as services are rendered at established rates net of contractual adjustments. During the years ended January 31, 1994, 1995, and 1996, Kidney Care received approximately 86% of its net revenue from Medicare and Medicaid reimbursement programs which reimburse dialysis services on a prospective payment system. Contractual adjustments arise due to the terms of certain reimbursement and managed care contracts. Such adjustments represent the difference between charges at established rates and estimated amounts to be reimbursed to Kidney Care and are recognized when the services are rendered. Any differences between estimated contractual adjustments and actual final settlements under reimbursement contracts are recognized when the final settlements are made. Kidney Care provides charity care to certain patients who are identified based on financial information provided. Charity care patient service revenue, which is not material, is recorded when payment is received. Cash and Cash Equivalents Cash equivalents are highly liquid investments with original maturity of three months or less. Short-term Government Securities Short-term government securities are stated at cost, which approximates market, and consist of U.S. Government agencies securities with maturities of one year or less. Inventories Inventories are stated at cost (first-in, first-out method) and consist of kidney dialysis supplies, drugs and raw materials and supplies used in the production of dialysis concentrate. Depreciation and Amortization Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the assets which range from five to ten years for furniture, fixtures and equipment and five to thirty-one years for leasehold improvements and buildings. Repairs and maintenance costs are expensed as they are incurred, while costs of betterments and renewals are capitalized. F-40 100 KIDNEY CARE, INC., ET AL. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Estimated Medical Professional Liability Claims Kidney Care is insured for medical professional liability claims through a retrospectively rated commercial insurance policy. It is Kidney Care's policy that provision for estimated premium adjustments to medical professional liability costs be made for asserted and unasserted claims and based upon Kidney Care's experience. Provision for such professional liability claims includes estimates of the ultimate costs of such claims. To date, Kidney Care's experience with such claims has not been significant. Accordingly, no such provision has been made. Income Taxes KC is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code, as amended (the "Code") and is exempt from federal and state income taxes on related income pursuant to Section 501(a) of the Code. Consequently, the accompanying combined statements of revenues, expenses and changes in net assets do not include provisions for income taxes from KC's operations. Income taxes have been provided by the liability method on earnings of the operating divisions of MEL and HSI included therein in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. 3. ACCOUNTS RECEIVABLE Accounts receivable, net at January 31, 1995 and 1996 of $7,814 and $8,348, respectively, includes an allowance for contractual adjustments of $9,284 and $10,724, respectively, and an allowance for doubtful accounts of $2,616 and $1,855, respectively. 4. RECOVERABLE SALES TAX On January 5, 1994, the Mississippi State Tax Commission principally granted Kidney Care an exemption from Mississippi sales taxes. Kidney Care recovered sales tax of $1,727 principally applicable to supply purchases from February 1, 1990 through December 31, 1994. Supplies and drugs expense included in patient care costs in the accompanying combined statements of revenues, expenses and changes in net assets is included net of the sales taxes recovered applicable to the respective fiscal years. F-41 101 KIDNEY CARE, INC., ET AL. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, net consist of the following:
JANUARY 31, ----------------- 1995 1996 ------- ------- Land............................................................... $ 29 $ 29 Building........................................................... 78 78 Furniture, fixtures and equipment.................................. 8,629 8,143 Leasehold improvements............................................. 2,528 2,549 ------- ------- 11,264 10,799 Less accumulated depreciation...................................... (8,237) (8,260) ------- ------- Property, plant and equipment, net................................. $ 3,027 $ 2,539 ======= =======
6. CREDIT FACILITIES, LONG-TERM DEBT AND CAPITAL LEASES
1995 1996 ---- ---- Notes payable to a bank, due in monthly installments, bearing interest at 8.75%, matured in fiscal 1996.................................... $151 $ -- Notes payable to a bank, due in monthly installments, bearing interest at 8.75%, maturing in fiscal 1999................................... 169 152 Equipment notes payable, due in monthly installments, bearing interest at rates from 5.9% to 8.75%, maturing in fiscal 1997 and 2000....... 10 35 Notes payable to insurance companies, due in monthly installments, bearing interest at 6.4% to 7.4%, maturing in fiscal 1997........... -- 330 Notes payable to insurance companies, matured in fiscal 1996.......... 318 -- Capital lease obligation, due in monthly installments, including interest at 10.8%................................................... 97 72 ---- ---- $745 $589 ==== ====
At January 31, 1996, the aggregate maturities of long-term debt and capital leases are as follows:
CAPITAL LONG-TERM LEASE DEBT OBLIGATION --------- ---------- 1997......................................................... $ 360 $ 35 1998......................................................... 29 35 1999......................................................... 122 12 2000......................................................... 6 -- ---- ---- Total aggregate payments........................... $ 517 82 ==== Less amounts representing interest........................... (10) ---- Present value of net minimum lease payments.................. 72 Less amounts due in one year................................. 29 ---- Long-term portion of capital lease obligations............... $ 43 ====
Kidney Care has a $1,200 line of credit with a bank, all of which was available at January 31, 1996, that matures June 30, 1996. Interest on borrowings under the line of credit bear an interest rate of prime plus 1% and borrowings are collateralized by accounts receivable. Accounts receivable, land, building and certain F-42 102 KIDNEY CARE, INC., ET AL. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) furniture, fixtures and equipment and leasehold improvements collateralize the notes payable to a bank. Certain equipment collateralize the equipment notes payable. Kidney Care leases certain computer equipment under a capitalized lease. The cost of such equipment at January 31, 1995 and 1996 was $134. Accumulated amortization was $47 and $74, respectively. 7. BENEFIT PLANS Kidney Care has a 403(b) defined contribution plan for its employees who elect to participate in the plan. Kidney Care matches up to 5% of salaries of participating employees. The retirement plan expense was $256, $316, and $330 for the years ended January 31, 1994, 1995, and 1996, respectively. Kidney Care provides employee health coverage for its employees for claims up to $35 per employee and total aggregate claims of $1,000 per annum. Effective June 1, 1994, Kidney Care provides dental coverage claims up to $1.5 per employee per annum. Kidney Care has reinsurance coverage for amounts in excess of the self-insured amounts. 8. INCOME TAXES Provision for income taxes consists of the following:
YEAR ENDED JANUARY 31, ---------------------- 1994 1995 1996 ------ ---- ------ Current: Federal.................................................... $ 950 $885 $1,067 State...................................................... 147 87 104 ------- ----- ------- 1,097 972 1,171 Deferred (credits): Federal.................................................... (20) (25) 39 State...................................................... (3) (3) 3 ------- ----- ------- (23) (28) 42 ------- ----- ------- $1,074 $944 $1,213 ======= ====== =======
The difference between provision for income taxes at Kidney Care's effective tax rate and income taxes (credits) at the statutory federal tax rate are as follows:
YEAR ENDED JANUARY 31, ------------------------ 1994 1995 1996 ------ ------ ------ Statutory federal income taxes.............................. $1,431 $1,746 $2,082 State income taxes, net..................................... 95 83 107 Income reported in not-for-profit corporation............... (464) (900) (991) Other....................................................... 12 15 15 ------- ------- ------- $1,074 $ 944 $1,213 ======= ======= =======
The components of deferred income tax assets are as follows:
JANUARY 31, ----------- 1995 1996 ---- ---- Accounts receivable...................................................... $64 $23 Accrued expenses......................................................... 1 -- --- --- $65 $23 === ===
F-43 103 KIDNEY CARE, INC., ET AL. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 9. RELATED PARTY TRANSACTIONS Kidney Care rents certain dialysis treatment facilities from one of its directors. Kidney Care also obtained certain water and housekeeping services from MEL and HSI. The following is a summary of these expenses.
YEAR ENDED JANUARY 31, -------------------- 1994 1995 1996 ---- ---- ---- Patient care costs: Water services............................................... $ 70 $ 42 $ 99 Facility rent................................................ 338 338 333 Housekeeping services........................................ 425 551 477 ---- ---- ---- $833 $931 $909 ==== ==== ====
10. PRO FORMA INCOME TAXES (UNAUDITED) The following unaudited pro forma information reflects income tax expense of Kidney Care as if KC had been subject to federal and state income taxes:
YEAR ENDED JANUARY 31, ------------------------ 1994 1995 1996 ------ ------ ------ Current: Federal.................................................... $1,871 $1,840 $1,835 State...................................................... 290 285 176 ------ ------ ------ 2,161 2,125 2,011 Deferred credits............................................. (578) (193) 289 ------ ------ ------ Pro forma income taxes....................................... 1,583 1,932 2,300 Income taxes as reported..................................... 1,074 944 1,213 ------ ------ ------ Pro forma income tax adjustment.............................. $ 509 $ 988 $1,087 ====== ====== ======
The pro forma income tax expense differs from the statutory federal income taxes as follows:
YEAR ENDED JANUARY 31, ------------------------ 1994 1995 1996 ------ ------ ------ Statutory federal income taxes............................... $1,431 $1,746 $2,083 State income taxes, net...................................... 139 169 202 Other........................................................ 13 17 15 ------ ------ ------ $1,583 $1,932 $2,300 ====== ====== ======
11. COMMITMENTS AND CONTINGENCIES Kidney Care leases certain facilities and computer equipment. Rent expense for the years ended January 31, 1994, 1995, and 1996 totaled $893, $948, and $912, respectively. Minimum rental payments under noncancellable operating leases having remaining terms in excess of one year as of January 31, 1996, by fiscal year are as follows: 1997.................................................................. $665 1998.................................................................. 636 1999.................................................................. 624 2000.................................................................. 518 2001.................................................................. 471
F-44 104 KIDNEY CARE, INC., ET AL. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Kidney Care is involved from time to time in claims and routine litigation in the normal course of its business. Management is of the opinion, based on the advice of counsel, that the outcome of any matters presently pending will not have a material adverse effect on the combined financial position or operations of Kidney Care. 12. ASSET TRANSFER AGREEMENTS On July 31, 1995, KC entered into an agreement with Renal Care Group, Inc. ("RCG") whereby RCG agreed to purchase substantially all of KC's assets and assume certain of KC's liabilities. On November 14, 1995, MEL entered into an agreement with RCG whereby MEL agreed to be acquired by RCG in a merger, prior to which MEL's assets that are unrelated to its dialysis business will be spun off into a separate entity. Effective February 6, 1996, RCG completed an initial public offering of 3,900 shares of Common Stock. Simultaneous with the consummation of the offering, a combination was consummated which included provisions for the transfer agreements between RCG, KC and MEL described above. F-45 105 - ------------------------------------------------------ - ------------------------------------------------------ NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OF A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... Risk Factors.......................... The Company........................... Use of Proceeds....................... Price Range of Common Stock........... Dividend Policy....................... Capitalization........................ Dilution.............................. Selected Consolidated Financial Data................................ Pro Forma Financial Data.............. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... Business.............................. Management............................ Principal and Selling Stockholders.... Description of Capital Stock.......... Shares Eligible for Future Sale....... Underwriting.......................... Legal Matters......................... Experts............................... Additional Information................ Index to Financial Statements F-1.....
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 3,000,000 SHARES RENAL CARE GROUP, INC. COMMON STOCK [LOGO] ----------------- PROSPECTUS ----------------- EQUITABLE SECURITIES CORPORATION HAMBRECHT & QUIST MORGAN KEEGAN & COMPANY, INC. NEEDHAM & COMPANY, INC. , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 106 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses to be borne by the Company in connection with the issuance and distribution of the securities being registered hereby, other than underwriting discounts and commissions. The Company is paying all of these expenses in connection with the issuance and distribution of the securities.
PAYABLE BY THE REGISTRANT -------------- SEC registration fee............................................................ $ 37,898 NASD filing fee................................................................. 13,006 Nasdaq Stock Market's National Market listing fee............................... 17,500 Accountants' fees and expenses.................................................. Legal fees and expenses......................................................... Printing and engraving costs.................................................... Blue Sky fees and expenses...................................................... Transfer Agent and Registrar fees............................................... Miscellaneous................................................................... ------- Total................................................................. =======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Amended and Restated Certificate of Incorporation provides that the Company shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time, indemnify its officers and directors. Section 145 of the General Corporation Law of the State of Delaware permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnify for such expenses despite such adjudication of liability. The Company's Amended and Restated Certificate of Incorporation contains a provision which eliminates, to the fullest extent permitted by the General Corporation Law of Delaware, director liability for monetary damages for breaches of the fiduciary duty of care or any other duty as a director. Reference is hereby made to the Underwriting Agreement, the form of which is filed as Exhibit 1.1 hereto, in which the Company agrees to indemnify the Underwriters and certain other persons against certain civil liabilities. II-1 107 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since its incorporation on June 20, 1995, the Company has issued the following securities: (A) On June 22, 1995, Sam A. Brooks purchased one share of Common Stock for $10.00. Such sale was made in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act. (B) At various times between July 19, 1995, and November 4, 1995, the Company granted options to purchase 1,076,448 shares of Common Stock to various consultants, directors and officers of the Company. Such grants were made in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Rule 701 as promulgated thereunder. (C) Between November 16, 1995 and December 8, 1995, the security holders of the Founding Companies made their investment decision to purchase 4,381,000 shares of Common Stock upon the closing of the initial public offering. Obtaining such investment decisions and the ultimate sale of such shares of Common Stock at the closing of the initial public offering were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. Such shares of Common Stock (along with certain cash payments and assumptions of liabilities by the Company) were issued in exchange for the Founding Companies as described in "The Company" and "Certain Transactions." (D) On December 7, 1995, the Company sold an aggregate principal amount of $1,380,000 of Convertible Senior Subordinated Promissory Notes to 17 owners of certain of the Founding Companies in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. Such notes bear interest at a rate of 7.0% per annum, mature on December 7, 1996, and the principal and accrued interest thereon are convertible into shares of Common Stock of the Company at a conversion price of $7.50 per share. (E) On February 12, 1996, the Company issued 4,381,000 shares of Common Stock to the former owners of the Founding Companies in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. (F) On April 26, 1996, the Company issued 528,245 shares of Common Stock to the former owners of Main Line Suburban Dialysis Centers, Inc. in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. (G) On July 1, 1996, the Company issued 298,775 shares of Common Stock to the former owners of The Nephrology Centers, Inc. in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. (H) On September 30, 1996, the Company issued 2,400,000 shares of Common Stock to the former owners of RenalWest, L.C. in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. (I) On September 30, 1996, the Company issued 70,000 shares of Common Stock to the former owner of Northeast Alabama Kidney Center, Inc. in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. No underwriters were engaged in connection with the foregoing sales of securities. II-2 108 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES A. Exhibits (See exhibit index immediately preceding the exhibits for the page number where each exhibit can be found)
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------------------------------------------------------------------- *1.1 -- Form of Underwriting Agreement among the Company and Equitable Securities Corporation, Hambrecht & Quist LLP, Morgan Keegan & Company, Inc. and Needham & Company, Inc., as the Representatives of the several Underwriters 2.1 -- Uniform Terms and Conditions attached to each of the Combination Agreements listed in Exhibits 2.2 through 2.7(1) 2.2 -- Amended and Restated Transfer Agreement, dated November 11, 1995, between the Company and Kansas Nephrology Association and its owners(1) 2.3 -- Amended and Restated Transfer Agreement, dated November 8, 1995, between the Company and Tyler Nephrology Associates, P.A. and its owners(1) 2.4 -- Amended and Restated Transfer Agreement, dated November 8, 1995, between the Company and D.M.N. Professional Corporation and its owners(1) 2.5 -- Agreement and Plan of Merger, dated November 14, 1995, between the Company and Medical Enterprises, Ltd. and John Bower, M.D.(1) 2.6 -- Amended and Restated Transfer Agreement, dated November 14, 1995, between the Company and Kidney Care, Inc.(1) 2.7 -- Agreement and Plan of Merger, dated November 15, 1995, between the Company and Renal Care Group, Inc. (a Tennessee corporation)(1) 2.8 -- Agreement for Purchase and Sale of Real Property, dated July 31, 1995, between Renal Care Group, Inc. and John D. Bower, M.D.(1) 2.9 -- Agreement and Plan of Merger, dated August 7, 1996, by and among the Company, RCG Three Corp., RCG Nine Corp., RCG Four Corp., RenalWest, L.C., 3-CO, Inc., 4-CO, Inc. and 9-CO, Inc. 3.1 -- Amended and Restated Certificate of Incorporation of the Company(1) 3.2 -- Amended and Restated Bylaws of the Company(1) 4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Bylaws of the Company defining rights of holders of Common Stock of the Company(1) 4.2 -- Specimen stock certificate for the Common Stock of the Company(1) 4.3 -- Form of 7.0% Convertible Senior Subordinated Promissory Note(1) *5.1 -- Opinion of Alston & Bird, including consent 10.1 -- Employment Agreement, dated February 6, 1996, between the Company and Sam A. Brooks(2) 10.2 -- Employment Agreement, dated February 6, 1996, between the Company and Ron Hinds 10.3 -- Employment Agreement between the Company and Raymond Hakim, M.D.(1) 10.4 -- Employment Agreement, dated April 1, 1994, between the Company and Joseph A. Cashia(2) 10.5 -- Employment Agreement, dated February 12, 1996, between the Company and Ann N. Bower(2) 10.6 -- Medical Director Services Agreement, dated February 12, 1996, between the Company and Kansas Nephrology Physicians, P.A.(2) 10.7 -- Medical Director Services Agreement, dated February 12, 1996, between the Company and Indiana Dialysis Management, P.C.(2) 10.8 -- Medical Director Services Agreement, dated February 12, 1996, between the Company and Tyler Dialysis & Transplant Associates, P.A.(2) 10.9 -- Lease agreement, dated February 5, 1996, between the Company and MEL, Inc. relating to approximately 20,000 square feet of space.(2) 10.10 -- Lease agreement, dated February 12, 1996, among the Company and Thomas A. Lowery, M.D., James R. Cotton, M.D., Roy D. Gerard, M.D. and Kevin A. Curran, M.D., relating to property in Carthage, Texas.(2)
II-3 109
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------------------------------------------------------------------- 10.11 -- Lease agreement, dated February 12, 1996, among the Company and Thomas A. Lowery, M.D., James R. Cotton, M.D, Roy D. Gerard, M.D. and Kevin A. Curran, M.D., relating to property in Tyler Texas.(2) 10.12 -- Sublease agreement between M-W-R Investment and Kansas Nephrology Associates, P.A. dated February 1, 1990, to be assumed by the Company, and the related Lease agreement between Dodge City Medical Center Building, Inc. and M-W-R Investment.(1) 10.13 -- Sublease Agreement, dated February 12, 1996, with Tyler Nephrology Associates, Inc.(2) 10.14 -- Dialysis Center Management Agreement, dated May 11, 1994 between Renal Care Group, Inc (of Tennessee) and Vanderbilt University(1) 10.15 -- 1996 Stock Option Plan for Outside Directors(1) 10.16 -- Amended and Restated 1996 Stock Option Plan 10.17 -- Employee Stock Purchase Plan(1) 10.18 -- Agreement between the Company and Healthcare Suppliers, Inc. dated December 7, 1995(1) 10.19 -- Amendment No. 1 to the Company's Employee Stock Purchase Plan 10.20 -- Laboratory Management Agreement, dated February 12, 1996, between the Company and Kidney Care, Inc. 10.21 -- Chief Medical Officer Agreement, dated February 12, 1996, between the Company and John D. Bower, M.D. 10.22 -- Medical Director Services Agreement, dated September 30, 1996, between the Company and a group of individual physicians 10.23 -- Employment Agreement, dated June 30, 1996, between the Company and Gary Brukardt 10.24 -- Management Agreement, dated March 1, 1996, between the Company and The Cleveland Clinic Foundation 11.1 -- Statement regarding computation of per share earnings *21.1 -- List of subsidiaries of the Company *23.1 -- Consent of Alston & Bird (Contained in Exhibit 5.1.) 23.2 -- Consent of Ernst & Young LLP 23.3 -- Consent of Henry & Peters, P.C. 23.4 -- Consent of Allen, Gibbs, & Houlik, L.C. 24.1 -- Powers of Attorney with respect to amendments of this Registration Statement (included as part of the signature page to this Registration Statement, page II-7)
- --------------- * To be filed by Amendment (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. No. 333-80221) effective February 6, 1996. (2) Incorporated by reference to the Company's Form 10-Q for the Quarter ended March 31, 1996 (Commission File No. 0-27640). B. Financial Statement Schedules Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the II-4 110 successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The Company hereby undertakes to provide to the Representative of the Underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the Representative of the Underwriters to permit prompt delivery to each purchaser. The Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 111 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on October 9, 1996. RENAL CARE GROUP, INC. By: /s/ SAM A. BROOKS, JR. -------------------------------------- Sam A. Brooks, Jr. President and Chief Executive Officer II-6 112 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Sam A. Brooks, Jr. and Ronald Hinds and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement or a Registration Statement filed pursuant to Rule 462 of the Securities Act of 1933, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on October 9, 1996.
SIGNATURE TITLE - ----------------------------------------------- -------------------------------------------- /s/ SAM A. BROOKS, JR. President, Chief Executive Officer and - ----------------------------------------------- Director (Principal Executive Officer) Sam A. Brooks, Jr. /s/ RONALD HINDS Executive Vice President, Chief Financial - ----------------------------------------------- Officer, Secretary and Treasurer Ronald Hinds (Principal Financial Officer and Principal Accounting Officer) /s/ JOSEPH C. HUTTS Director - ----------------------------------------------- Joseph C. Hutts /s/ HARRY R. JACOBSON, M.D. Director and Chairman of the Board - ----------------------------------------------- Harry R. Jacobson, M.D. Director - ----------------------------------------------- Thomas A. Lowery /s/ JOHN D. BOWER, M.D. Director and Vice Chairman of the Board - ----------------------------------------------- John D. Bower, M.D. /s/ STEPHEN D. MCMURRAY, M.D. Director - ----------------------------------------------- Stephen D. McMurray, M.D. /s/ W. TOM MEREDITH, M.D. Director - ----------------------------------------------- W. Tom Meredith, M.D. Director - ----------------------------------------------- Kenneth Johnson, M.D.
II-7 113 REPORT OF INDEPENDENT AUDITORS The Board of Directors Renal Care Group, Inc. We have audited the supplemental consolidated financial statements of Renal Care Group, Inc., as of December 31, 1994 and 1995, and for each of the two years in the period ended December 31, 1995, and have issued our report thereon dated October 8, 1996 (included elsewhere in this Registration Statement). Our audits also included the supplemental consolidated financial statement schedule listed in Item 16(b) of this Registration Statement. This supplemental consolidated schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the supplemental consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Nashville, Tennessee October 8, 1996 S-1 114 SCHEDULE II RENAL CARE GROUP, INC. SUPPLEMENTAL CONSOLIDATED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT ----------------------- BALANCE AT BEGINNING OF CHARGED TO CHARGED TO END PERIOD EXPENSE REVENUE WRITE-OFFS OF PERIOD ------------ ---------- ---------- ---------- ---------- (IN THOUSANDS) Allowance for doubtful accounts: Year ended December 31, 1994............. $ 954 $1,418 $ 0 $ (543) $1,829 ========= ======== ======== ======= ======== Year ended December 31, 1995............. $1,829 $2,355 $399 $ (204) $3,980 ========= ======== ======== ======= ========
S-2 115 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Renal Care Group, Inc. We have audited the combined financial statements of Renal Care Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated September 30, 1996 (included elsewhere in this Registration Statement). Our audits also included the combined financial statement schedule listed in Item 16(b) of this Registration Statement. This combined schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. We did not audit the financial statements of Tyler Nephrology Associates, P.A. and the combined financial statements of Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc. which statements reflect total assets constituting 57% as of December 31, 1994 and total revenues constituting 68% for the two years in the period ended December 31, 1994. We have been furnished with the report of other auditors with respect to Schedule II of Renal Care Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired. In our opinion, based on our audits and the reports of other auditors, the combined financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Nashville, Tennessee September 30, 1996 S-3 116 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc. We have audited the combined financial statements of Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc. as of December 31, 1994 and for each of the two years in the period ended December 31, 1994, and have issued our report thereon dated July 15, 1995 (included elsewhere in this Registration Statement). Our audits also included a combined financial statement schedule which is included in the schedule listed in Item 16(b) of this Registration Statement. This combined schedule is the responsibility of the Companies' management. Our responsibility is to express an opinion based on our audits. In our opinion, the combined financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Allen, Gibbs & Houlik, L.C. Wichita, Kansas July 15, 1995 S-4 117 INDEPENDENT AUDITORS' REPORT To the Board of Directors Tyler Nephrology Associates, P.A. Tyler, Texas We have audited the financial statements of Tyler Nephrology Associates, P.A. as of December 31, 1994 and for each of the two years in the period ended December 31, 1994, and have issued our report thereon dated July 24, 1995. Our audits also included the combined financial statement schedule listed in Item 16(b) of this Registration Statement. This combined schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Henry & Peters, P.C. Tyler, Texas July 24, 1995 S-5 118 SCHEDULE II RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED COMBINED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE BALANCE AT ----------------------- AT BEGINNING CHARGED TO CHARGED TO END OF PERIOD EXPENSE REVENUE WRITE-OFFS OF PERIOD ---------- ---------- ---------- ---------- --------- (IN THOUSANDS) Allowance for doubtful accounts: December 31, 1993.......................... $ 633 $ 710 $ -- $ (633) $ 710 ======== ======== ======== ======== ======= December 31, 1994.......................... $ 710 $ 726 $ -- $ (314) $ 1,122 ======== ======== ======== ======== ======= December 31, 1995.......................... $1,122 $ 789 $ -- $ (1,166) $ 745 ======== ======== ======== ======== =======
S-6 119 REPORT OF INDEPENDENT AUDITORS The Board of Directors Kidney Care, Inc. We have audited the combined financial statements of Kidney Care, Inc., et al. as of January 31, 1995 and 1996, and for each of the three years in the period ended January 31, 1996, and have issued our report thereon dated May 15, 1996 (included elsewhere in this Registration Statement). Our audits also included the combined financial statement schedule listed in Item 16(b) of this Registration Statement. This combined schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the combined financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Nashville, Tennessee May 15, 1996 S-7 120 SCHEDULE II KIDNEY CARE, INC., ET AL. COMBINED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT ----------------------- BALANCE AT BEGINNING CHARGED TO CHARGED TO END OF PERIOD EXPENSE REVENUE WRITE-OFFS OF PERIOD ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Allowance for doubtful accounts: January 31, 1994........................... $ 482 $716 $ -- $ (847) $ 2,045 ======== ======== ======== ======= ======== January 31, 1995........................... $2,045 $770 $ -- $ 198 $ 2,617 ======== ======== ======== ======= ======== January 31, 1996........................... $2,617 $851 $ -- $ 1,613 $ 1,855 ======== ======== ======== ======= ========
S-8 EX-2.9 2 AGREEMENT AND PLAN OF MERGER 1 Exhibit 2.9 AGREEMENT AND PLAN OF MERGER BY AND AMONG RENAL CARE GROUP, INC., RCG THREE CORP., RCG NINE CORP., RCG FOUR CORP., RENALWEST, L.C., 3-CO., INC., 9-CO., INC. AND 4-CO., INC. DATED AS OF AUGUST 7, 1996 2 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into as of August 7, 1996, by and among RENAL CARE GROUP, INC. ("RCG"), a Delaware corporation; RCG THREE CORP. ("RCG Three"), an Arizona corporation, RCG NINE CORP. ("RCG Nine"), an Arizona corporation, RCG FOUR CORP. ("RCG Four"), an Arizona corporation; RENALWEST, L.C., an Arizona limited liability company ("RenalWest"); 3-CO., Inc., an Arizona corporation ("Three Co"); 9-CO., Inc., an Arizona corporation ("Nine Co"), 4-CO., Inc., an Arizona corporation ("Four Co"), and those parties listed on the signature pages hereto as the shareholders of Three Co, Nine Co and Four Co (the "Owners") (RCG Three, RCG Nine, and RCG Four together the "Merger Corps" and individually a "Merger Corp.;" Three Co., Nine Co. and Four Co together the "Members" and individually a "Member"; the Members and RenalWest together the "Companies" and individually a "Company"). PREAMBLE The Merger Corps are wholly-owned subsidiaries of RCG and the Members are the sole owners of RenalWest. The Boards of Directors of RCG, the Merger Corps, and the Members, and RenalWest and the Owners are of the opinion that the transactions described herein are in the best interests of the parties and their respective shareholders, as applicable. This Agreement provides for the acquisition of the Companies by RCG pursuant to the simultaneous mergers of (i) RCG Three with and into Three Co, (ii) RCG Nine with and into Nine Co and (iii) RCG Four with and into Four Co. At the Effective Time of such mergers, the outstanding shares of the capital stock of each of Three Co, Nine Co and Four Co shall be converted into the right to receive shares of the common stock of RCG (except as provided herein). As a result, the Owners shall become shareholders of RCG and each of Three Co, Nine Co and Four Co shall continue to conduct its business and operations as a wholly owned subsidiary of RCG, and RenalWest shall continue to be owned by Three Co, Nine Co and Four Co. It is the intention of the parties to this Agreement that the mergers qualify (i) as a "reorganization" within the meaning of Section 368(a) of the Code for federal income tax purposes, and (ii) for treatment as a pooling of interests for accounting purposes. Certain terms used in this Agreement are defined in Article 14 of this Agreement. NOW, THEREFORE, in consideration of the above and the mutual warranties, representations, covenants and agreements set forth herein, the parties agree as follows: ARTICLE 1 TRANSACTIONS AND TERMS OF MERGER 1.1 The Mergers. Subject to the terms and conditions of this Agreement, at the Effective Time, (i) RCG Three shall be merged with and into Three Co, (ii) RCG Nine shall be merged with and into Nine Co, and (iii) RCG Four shall be merged with and into Four Co, in each case in accordance with the applicable provisions of ABCA (together the "Mergers" and individually a "Merger"). Each of Three Co, Nine Co and Four Co shall be the Surviving Corporation resulting from the Mergers and shall continue in existence as a wholly owned Subsidiary of RCG and shall continue to be governed by the Laws of the State of Arizona. The Mergers shall be consummated pursuant to the terms of this Agreement, which has been approved and adopted by the respective Boards of Directors of RCG, the Merger Corps and the Members. 1.2 Time and Place of Closing. The closing (the "Closing") will take place as soon as practicable after the satisfaction or waiver of all conditions in Articles 9 and 10 hereof and at such location or on such other date as may be mutually agreed upon by RCG and RenalWest (such actual date of Closing the "Closing Date"). 3 1.3 Effective Time. Subject to the provisions of this Agreement, the parties shall file Articles of Merger executed in accordance with the relevant provisions of the ABCA and shall make all other filings or recordings required under the ABCA as soon as practicable on or after the Closing Date. The Mergers and other transactions contemplated by this Agreement shall become effective on the date and at the time the Articles of Merger reflecting the Mergers become effective with the Secretary of State of the State of Arizona (the "Effective Time"). ARTICLE 2 TERMS OF MERGERS 2.1 Charter. The Articles of Incorporation of the Members in effect immediately prior to the Effective Time shall be amended and restated, effective at the Effective Time, in a manner satisfactory to RCG. The Articles of Incorporation of the Members, as so amended and restated, shall be the Articles of Incorporation of the Surviving Corporations until otherwise amended or repealed. 2.2 Bylaws. The Bylaws of Merger Corps. in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporations until otherwise amended or repealed. 2.3 Tax-Free Reorganization. The parties hereby adopt this Agreement as a tax-free "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations. ARTICLE 3 MANNER OF CONVERTING SHARES 3.1 Conversion of Shares. Subject to the provisions of this Article 3, at the Effective Time, by virtue of the Mergers and without any action on the part of the parties hereto or the shareholders of any of the parties, the shares of the constituent corporations of the Mergers shall be converted as follows: (a) Each share of each Merger Corp. Common Stock issued and outstanding at the Effective Time shall cease to be outstanding and shall (after giving effect to Section 3.1(b) below) be converted into one share of Member Common Stock. (b) All of the shares of Member Common Stock (excluding treasury shares) issued and outstanding at the Effective Time shall cease to be outstanding and shall be converted into and exchanged for the right to receive an aggregate of 2,400,000 shares of RCG Common Stock to be distributed to Owners as set forth on Schedule 3.1(b) hereto (the "Merger Consideration"). 3.2 Anti-Dilution Provisions. In the event RCG changes the number of shares of RCG Common Stock issued and outstanding prior to the Effective Time as a result of a stock split, stock dividend, combination of shares or other similar recapitalization with respect to such stock (an "Anti-Dilution Event") and the record date therefor or, if there is no record date, the effective date thereof, shall be prior to the Effective Time, then the Average Trading Prices and the numbers of shares specified in Section 3.1 shall be adjusted to appropriately and proportionately adjust the number of shares of RCG Common Stock into which the shares of Member Common Stock will be converted pursuant to Section 3.1. 3.3 Shares Held by the Company. Each share of Member Common Stock held in treasury by the Members, shall be canceled and retired at the Effective Time and no consideration shall be issued in exchange therefor. - 2 - 4 3.4 Fractional Shares. No certificates representing fractional shares of RCG Common Stock will be issued as a result of the Mergers. Any fractional share interest to which a Company shareholder would otherwise be entitled to receive shall be rounded up to the nearest whole share if such fraction is .5 or greater and shall be rounded down to the nearest whole share if such fraction is less than .5. ARTICLE 4 EXCHANGE OF SHARES 4.1 Exchange Procedures. Promptly (and in no event more than five (5) calendar days) after the Effective Time, RCG and the Company shall cause the exchange agent selected by RCG (the "Exchange Agent") to mail to the former holders of Member Common Stock appropriate transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the certificates theretofore representing shares of Member Common Stock shall pass, only upon proper delivery of such certificates to the Exchange Agent). After the Effective Time, each holder of shares of Member Common Stock (other than shares to be canceled pursuant to Section 3.3 of this Agreement) issued and outstanding at the Effective Time shall surrender the certificate or certificates representing such shares to the Exchange Agent and shall promptly upon surrender thereof receive in exchange therefor the consideration provided in Section 3.1 of this Agreement. RCG shall not be obligated to deliver the consideration to which any former holder of Member Common Stock is entitled as a result of the Merger until such holder surrenders his certificate or certificates representing the shares of Member Common Stock for exchange as provided in this Section 4.1 or such holder provides an appropriate affidavit regarding loss of such certificate and an indemnification for loss in favor of RCG. The certificate or certificates of Member Common Stock so surrendered shall be duly endorsed as the Exchange Agent may require. Any other provision of this Agreement notwithstanding, neither RCG, the Surviving Corporation nor the Exchange Agent shall be liable to a holder of Member Common Stock for any amounts paid or property delivered in good faith to a public official pursuant to any applicable abandoned property Law. 4.2 Rights of Former Member Shareholders. At the Effective Time, the stock transfer books of the Members shall be closed and no transfer of Member Common Stock by any such holder shall thereafter be made or recognized. Until surrendered in accordance with the provisions of Section 4.1 of this Agreement, each certificate theretofore representing shares of Member Common Stock (other than shares to be canceled pursuant to Section 3.3 of this Agreement) shall from and after the Effective Time represent for all purposes only the right to receive the consideration provided in Section 3.1 of this Agreement in exchange therefor. To the extent permitted by Law, former shareholders of record of the Members shall be entitled to vote after the Effective Time at any meeting of RCG shareholders the number of whole shares of RCG Common Stock into which their respective shares of Member Common Stock are converted. Whenever a dividend or other distribution is declared by RCG on the RCG Common Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares issuable pursuant to this Agreement, but no dividend or other distribution payable to the holders of record of RCG Common Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate representing shares of Member Common Stock issued and outstanding at the Effective Time until such holder surrenders such certificate for exchange as provided in Section 4.1 of this Agreement. However, upon surrender of such certificate, the RCG Common Stock certificate (together with all such undelivered dividends or other distributions without interest) shall be delivered and paid with respect to each share represented by such certificate. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANIES AND THE OWNERS Each Company and the Owners jointly and severally represent and warrant the following to RCG: - 3 - 5 5.1 Organization, Authority and Capacity. Each Member is a corporation and RenalWest is a limited liability company, duly organized, validly existing, and in good standing under the laws of the State of Arizona, and has the full power and authority necessary to (i) execute, deliver and perform its obligations under this Agreement and the other documents and instruments to be delivered by it pursuant to this Agreement (collectively, the "Merger Documents") and (ii) carry on its business as it has been and is now being conducted and to own and lease the properties and assets which it now owns or leases. Each Company is duly qualified to do business and is in good standing in the jurisdictions set forth with respect to that Company in Schedule 5.1, which includes every jurisdiction in which the failure to be so qualified or in good standing would have a material adverse effect on (i) such Company's ability to perform its obligations under the Merger Documents or (ii) the assets, results of operations or prospects of the Companies taken as a whole. 5.2 Authorization and Validity. The execution, delivery and performance of the Merger Documents have been duly authorized by all necessary corporate action on the part of each Company. The Merger Documents to be executed and delivered by the Companies have been or will be, as the case may be, duly executed and delivered by each Company and constitute or will constitute the legal, valid and binding obligations of each Company, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, or other laws affecting creditors' rights generally, or as may be modified by a court of equity. 5.3 Absence of Conflicting Agreements or Required Consents. Except as set forth on Schedule 5.3, the execution, delivery and performance by each Company of the Merger Documents to be executed and delivered by each Company: (i) do not require the consent of or notice to any governmental or regulatory authority or any other third party; (ii) will not conflict with any provision of such Company's organizational documents; (iii) will not conflict with or result in a violation of any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which such Company is subject or by which such Company or any of its properties are bound; (iv) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit to which such Company is a party or by which such Company or any of its properties are bound; and (v) will not create any lien, encumbrance or restriction upon any of the assets or properties of such Company. 5.4 Governing Documents of the Company. True and correct copies of the organizational documents and all amendments thereto of each Company (certified by the Secretary of State of the State of Arizona) have been provided to RCG. RCG has previously been provided with access to each Company's minutes, and such minutes accurately reflect in all material respects the proceedings of the board of directors (or other similar body) of each Company (and all committees thereof). The record books of each Company, which have been made available to RCG for review, contain true, complete and accurate records of the ownership of each Company. 5.5 Outstanding and Authorized Capitalization. All authorized and outstanding Company Equity Securities are accurately described on Schedule 5.5. No shares of capital stock are held in the treasury of any Company except as set forth on Schedule 5.5. All outstanding Company Equity Securities are listed and held of record as indicated on Schedule 5.5 and have been duly and validly issued, are fully paid and nonassessable. None of such Company Equity Securities were issued in violation of preemptive rights of any past or present holder of any Company Equity Security. There are no outstanding warrants, options, rights, calls or other commitments of any nature relating to Company Equity Securities and there are no outstanding securities of any Company convertible into or exchangeable for any Company Equity Securities. Except as set forth on Schedule 5.5, no Company is obligated to issue or repurchase any of its Company Equity Securities for any reason and no person or entity has any right or privilege (whether preemptive or contractual) for the purchase, subscription or issuance of any unissued Company Equity Securities. There are no outstanding rights to demand registration of securities of any Company or to sell securities of any Company in connection with a registration by such Company under the 1933 Act. Except - 4 - 6 as set forth in Schedule 5.5, to the knowledge of each Company and the Owners, there has been no transaction or action taken with respect to any Company Equity Securities in contemplation of the Merger that would prevent RCG from accounting for the Merger on a "pooling of interests" basis. 5.6 Subsidiaries, Investments and Predecessors. Except as set forth on Schedule 5.6, no Company has owned and does not currently own, directly or indirectly, of record, beneficially or equitably, any capital stock or other equity, ownership or proprietary interest in any corporation, partnership, limited liability company, association, trust, joint venture or other entity. Set forth on Schedule 5.6 is a listing of all predecessor companies of each Company, including the names of any entities from whom each Company previously acquired material assets, and any other entity of which such Company has been a subsidiary or division. Except as listed on Schedule 5.6, no Company has sold or disposed of, by way of asset sale, stock sale, spin-off or otherwise, any material assets or business. 5.7 Financial Statements. Attached hereto as Schedule 5.7 are the audited financial statements of the Companies on a combined basis for the years ended December 31, 1994 and 1995 prepared by Ernst & Young, LLP and interim financial statements for the interim period ending June 30, 1996, which reflect the results of operations and financial condition of the Companies on a combined basis for such periods and at such dates (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied, except for (i) the omission of notes to unaudited Financial Statements, (ii) the fact that interim Financial Statement are subject to normal and customary year-end adjustments which will not, in the aggregate, be material and (iii) any exceptions that may be indicated in the notes to such Financial Statements. The Financial Statements present fairly in all material respects the financial position of the Company as of the dates indicated and present fairly in all material respects the results of the Companies' operations on a combined basis for the periods then ended, and are in accordance with the books and records of the Companies, which have been properly maintained and are complete and correct in all material respects. 5.8 Absence of Changes. Except as set forth on Schedule 5.8, and except as contemplated by this Agreement, since December 31, 1995, the Companies have conducted their business only in the ordinary course and have not: (i) suffered any material adverse change in their working capital, condition (financial or otherwise), assets, liabilities, reserves, business or operations; (ii) paid, discharged or satisfied any material liability other than in the ordinary course of business; (iii) written off as uncollectible any account receivable other than in the ordinary course of business; (iv) compromised any debts, claims or rights or disposed of any of its properties or assets other than in the ordinary course of business; (v) entered into any commitments or transactions not in the ordinary course of business involving aggregate value in excess of $250,000 or made aggregate capital expenditures or commitments in excess of $250,000; (vi) made any material change in any method of accounting or accounting practice; (vii) subjected any of their assets, tangible or intangible, to any lien, encumbrance or restriction of any nature whatsoever, except for liens for current property taxes not yet due and payable; - 5 - 7 (viii) increased any salaries, wages or employee benefits for any employee of the Company other than in the ordinary course of business; (ix) hired, committed to hire or terminated any employee or medical director other than in the ordinary course of business; (x) except for payments, dividends or distributions consistent with past practices for prior periods, declared, set aside or made any payment, dividend or other distribution to any holder of a Company Equity Security or purchased, redeemed or otherwise acquired, directly or indirectly, any Company Equity Security; (xi) terminated or amended any material contract, license or other instrument to which any Company is a party or suffered any loss or termination or threatened loss or termination of any existing material business arrangement or supplier, the termination or loss of which, in the aggregate, could materially and adversely affect the Companies; (xii) effected any change in its capital structure; or (xiii) agreed, whether in writing or otherwise, to take any action described in this Section 5.8. 5.9 No Undisclosed Liabilities. Except as listed on Schedule 5.9 hereto, or otherwise disclosed herein or in the Schedules hereto, the Companies have no material Liabilities or obligations, whether accrued, absolute, contingent or otherwise, except for liabilities and obligations reflected in the Financial Statements or incurred in the ordinary course of its business since the date of the Companies' most recent balance sheet included in the Financial Statements. 5.10 Litigation, etc. Except as listed on Schedule 5.10 hereto, there are no claims, lawsuits, actions, arbitrations, administrative or other proceedings pending against any Company. Except as listed on Schedule 5.10, to the knowledge of the Companies and the Owners, (i) no such matter described in the previous sentence is threatened and there is no basis for any such action, and (ii) there are no governmental or administrative investigations or inquiries pending that involve any Company, except in either case for any such matter that could not reasonably be expected to have a material adverse effect on the business of the Companies taken as a whole, financial or otherwise. Except as listed on Schedule 5.10, there are no judgments against or consent decrees binding on any Company or its assets or, to the knowledge of the Companies and its Owners, any licensed professional relating to the business of the Companies. 5.11 No Violation of Law. Except as set forth on Schedule 5.11, to the knowledge of the Companies and the Owners, no Company has been or is currently in violation of any applicable local, state or federal law, ordinance, regulation, order, injunction or decree, or any other requirement of any governmental body, agency or authority or court binding on it, or relating to its property or business or its advertising, sales or pricing practices, except for any such violations as would not individually or in the aggregate have a material adverse effect on the Companies taken as a whole, financial or otherwise. 5.12 Real and Personal Property. (a) Schedule 5.12(a) sets forth a list of all items of personal and mixed, tangible and intangible property, rights and assets of each Company having an original or replacement cost or value greater than $10,000. Except as set forth on Schedule 5.12(a), each Company (i) has good and valid title to all of the personal and mixed, tangible and intangible property, rights and assets which it purports to own, including all the personal property and assets reflected in the Financial Statements; and (ii) owns such rights, assets and personal property free and clear of all liens, encumbrances or restrictions of any nature whatsoever (except for current year ad valorem taxes). (b) The Company does not own any real property. Schedule 5.12(b) contains a true and correct description of all real property leased by each Company, including all improvements located thereon. RCG has been furnished with true, correct and complete copies of all leases, deeds, easements and - 6 - 8 other documents and instruments concerning the matters listed on Schedule 5.12(b). No condemnation or similar actions are currently in effect or, to the knowledge of the Companies and the Owners, pending or threatened against any part of any real property leased by any Company. To the knowledge of the Company and the Owners, there are no encroachments, leases, easements, covenants, restrictions, reservations or other burdens of any nature which might impair in any material respect the use of any leased real property in a manner consistent with past practices nor does any part of any building structure or any other improvement thereon encroach on any other property. (c) The present zoning, subdivision, building and other ordinances and regulations applicable to the leased real property permit the continued operation, use, occupancy and enjoyment of such real property consistent with past practices, and each Company is in compliance with, and has received no notices of violations of, any applicable zoning, subdivision or building regulation, ordinance or other law, regulation, or requirement. Each Company has all rights and easements necessary for public ingress thereto and egress therefrom and for the provision of all utility services thereto, including any required curb cut or street opening permits or licenses for vehicular access over presently existing roads and driveways. (d) Each Company's assets (including all buildings and improvements in connection therewith) are in good operating condition and repair, ordinary wear and tear excepted (and except where the failure to be in such condition and repair, either individually or in the aggregate, would not have a material adverse effect on the Companies taken as a whole, financial or otherwise), and such assets include all rights, properties, interests in properties, and assets necessary to permit the Companies to continue their business after the Closing Date as presently conducted, with the Members becoming wholly owned subsidiaries of RCG. (e) Schedule 5.12(e) contains a complete and correct list of all trademarks, trade names, service marks, service names, brand names, copyrights, technology rights and licenses, know-how, software and patents, registrations thereof and applications therefor, and any other intellectual property used in the business of each Company, together with a complete list of all licenses granted by or to each Company with respect to any of the foregoing. Neither the Company nor any of the Owners is currently in receipt of any notice of any violation of, and each has no reason to believe that the Company's operations are violating, the rights of others with respect to any such matter, and the Company has taken reasonable measures to protect its rights with respect to any such matters as are proprietary to the Company. 5.13 Contracts and Commitments. (a) Schedule 5.13 contains a complete and accurate list of all contracts, agreements, commitments, instruments and obligations (whether written or oral, contingent or otherwise) of each Company of or concerning the following matters (the "Company Agreements"): (i) the lease, as lessee or lessor (except for leases of machines and equipment, the aggregate annual rental payments by the Companies for which do not exceed $25,000), or license, as licensee or licensor, of any real or personal property (tangible or intangible); (ii) the employment or engagement of any officer, director, employee, consultant or agent, other than those terminable at will without material severance obligation; (iii) any relationship that requires financial payments, or performance over a period of more than 90 days, with any Owner, or any person or entity affiliated with or related to any Owner or any officer or director; (iv) any arrangement limiting the freedom of such Company to compete in any manner in any line of business or requiring such Company to share profits; (v) any arrangement that could reasonably be anticipated to have a material adverse effect on such Company, financial or otherwise; - 7 - 9 (vi) any material arrangement not in the ordinary course of business; (vii) any power of attorney, whether limited or general, granted by or to such Company; and (viii) any other arrangement that requires performance for a period of more than 90 days or that requires payments in excess of $50,000. (b) Each Company has delivered to RCG true and complete copies of all of its Company Agreements. Except as indicated on Schedule 5.13, the Company Agreements are valid and effective in accordance with their terms, and there is not under any of such Company Agreements (i) any existing or claimed default by any Company or event which with the notice or lapse of time, or both, would constitute a material default by such Company or (ii) to the knowledge of the Companies and the Owners, any existing or claimed default by any other party or event which with notice or lapse of time, or both, would constitute a material default by any such party. Except as indicated on Schedule 5.13, the continuation, validity and effectiveness of the Company Agreements will not be affected by the Mergers and the Mergers will not result in a breach of or default under, or require the consent of any other party to, any of the Company Agreements. There is no actual or, to the knowledge of the Companies and the Owners, threatened termination, cancellation or limitation of any Company Agreements that would have a material adverse effect on the Companies taken as a whole, financial or otherwise. To the knowledge of the Companies and the Owners, there is no pending or threatened bankruptcy, insolvency or similar proceeding with respect to any other party to the Company Agreements. 5.14 Employment and Labor Matters. (a) Schedule 5.14(a) sets forth (i) the number of full-time and part-time employees of each Company and (ii) the name and compensation (including benefits) paid to each employee of or consultant to each Company who received salary and bonuses for either of such Company's two most recently ended fiscal years in excess of $50,000. (b) Each Company is in compliance in all material respects with all applicable laws respecting employment and employment practices, terms and conditions of employment, wages and hours, occupational safety and health, including laws concerning unfair labor practices within the meaning of Section 8 of the National Labor Relations Act, and the employment of non-residents under the Immigration Reform and Control Act of 1986. (c) Except as disclosed on Schedule 5.14(c), (i) there are no charges, governmental audits, investigations, administrative proceedings or complaints concerning any Company's employment practices pending or, to the knowledge of the Companies and the Owners, threatened before any federal, state or local agency or court that could reasonably be expected to have a material adverse effect on the Companies taken as a whole, financial or otherwise, and, to the knowledge of the Companies and the Owners, no basis for any such matter exists; (ii) to the knowledge of the Companies and the Owners, there are no inquiries, investigations or monitoring of activities of any licensed, registered, or certified professional personnel employed by, credentialed or privileged by, or otherwise affiliated with any Company pending or threatened by any state professional board or agency charged with regulating the professional activities of health care practitioners; (iii) no Company is a party to any union or collective bargaining agreement, and, to the knowledge of the Companies and the Owners, no union attempts to organize the employees of any Company have been made, nor are any such attempts now threatened; and (iv) no Company has experienced any organized slowdown, work interruption, strike, or work stoppage by its employees. - 8 - 10 5.15 Employee Benefit Matters . (a) The Companies currently maintain only the employee pension benefit plans, as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), as are listed on Schedule 5.15(a) (the "Pension Plans"). The Companies have never maintained or contributed to any other employee pension benefit plan, as defined in Section 3(2) of ERISA. (b) The Companies currently maintain only the employee welfare benefit plans, as defined in Section 3(1) of ERISA (including but not limited to, life insurance, medical, hospitalization, holiday, vacation, disability dental and vision plans) as are listed on Schedule 5.15(b) (the "Welfare Plans"). (c) The Companies currently maintain, or have entered into, only the compensation programs and/or employment arrangements, (including but not limited to, any written or unwritten incentive compensation, fringe benefit, payroll or employment practice, bonus, severance, sick pay, salary continuation, deferred compensation, supplemental executive compensation plans, employment agreements and consulting agreements for the benefit of their officers, directors, employees, former employees, or independent contractors) as are listed on Schedule 5.15(c) (the "Compensation Programs"). (d) No Company or an ERISA Affiliate contributes or has contributed within the last five years to any multiemployer plan, as defined by Section 3(37) of ERISA. (e) Each Pension Plan and Welfare Plan has been operated and administered in substantial compliance with ERISA and the Code; each Pension Plan which is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified or a request for such determination has been timely filed with the Internal Revenue Service (and no Company has any knowledge that any event has occurred between the date of the last such determination and the Closing Date that would cause the Internal Revenue Service to revoke such determination). (f) Each Pension Plan and Welfare Plan designed to satisfy the requirements of Section 125, Section 401, Section 401(k), Section 409, Section 501(c)(9), Section 4975(e)(7), and/or Section 4980B of the Code, satisfies such section. (g) No accumulated funding deficiency, as defined in Section 302(a)(2) of ERISA, exists (whether or not waived) with respect to any Pension Plan as of the date hereof. (h) All amounts required to be paid by the Companies with respect to each Pension Plan, Welfare Plan and Compensation Program on or before the Closing Date have been paid. (i) Neither the execution and delivery of this Agreement nor the consummation of any of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due to any current or former employee, (ii) increase any benefits otherwise payable under any Pension Plan, Welfare Plan or Compensation Program, or (iii) result in any acceleration of the time of payment or vesting of any such benefits. (j) Neither the execution and delivery of this Agreement nor the consummation of any of the transactions contemplated hereby will result in a material increase in the premium costs of any Welfare Plan for which benefits are insured or a material increase in benefit costs of any Welfare Plan which provides self-insured benefits. (k) No Pension Plan is subject to a lien (or expected to be subject to a lien) under Code Section 412(n) or ERISA Section 302(f) or to tax under Code Section 4971. No Pension Plan has a "liquidity shortfall" as defined in Code Section 412(m)(5). No event has occurred in connection with a - 9 - 11 Pension Plan that could result in liability under Title IV of ERISA. None of the Companies has incurred any liability to the Pension Benefit Guaranty Corporation in connection with any Pension Plan. (l) The assets of each Pension Plan are sufficient to provide all "benefit liabilities" (as defined in ERISA Section 4001(a)(16)) under such Pension Plan if such Pension Plan is terminated, and are also sufficient to provide all other benefits due under the Pension Plan (including, but not limited to, ancillary, disability, shutdown, early retirement and welfare benefits). (m) None of the Pension Plans or a Company or any party in interest or disqualified person has engaged in any non-exempt "prohibited transactions" as defined in Section 406 of ERISA or Section 4975 of the Code. (n) Except as disclosed in Schedule 5.15(n), no Pension Plan or Welfare Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees beyond their retirement or other termination of service other than (i) coverage mandated by applicable law, (ii) retirement benefits under a Pension Plan, (iii) death benefits under a Welfare Plan, (iv) deferred compensation accrued on the books of the Company or a Subsidiary, or (v) benefits the full cost of which is borne by the current or former employer (or his or her beneficiary). (o) No "leased employee," as that term is defined in Section 414(n) of the Code, performs services for a Company. (p) No liability has been, or is expected by a Company to be, incurred by a Company under Section 4062 of ERISA with respect to any Pension Plan. (q) No reportable event within the meaning of Title IV of ERISA has occurred with respect to any Pension Plan. (r) The Companies have furnished RCG with correct and complete copies of each Pension Plan, Welfare Plan, and Compensation Program, together with any trust agreements, summary plan descriptions, employee informational material, IRS Forms 5500, the most recent actuarial valuation for any Pension Plan, financial statements relating thereto and participant listings. 5.16 Insurance Policies. Except as described on Schedule 5.16, all of the assets and business of each Company are insured in such amounts and against such losses, casualties or risks as are customary for similar properties and businesses, and the Company has maintained such insurance continuously from the earlier of (i) the date of its inception and (ii) the date of inception of any of its predecessors. Schedule 5.16 sets forth a complete and accurate list and description of all insurance policies in force naming each Company, or any employee thereof, as an insured or beneficiary or as a loss payee or for which the Company has paid or is obligated to pay all or part of the premiums, including, without limitation, all liability, malpractice, fire, health and life insurance policies. All such policies are in full force and effect and the premiums due thereon have been timely paid. No Company has received notice of any pending or threatened termination or premium increase (retroactive or otherwise) with respect thereto, and, to the knowledge of the Companies and the Owners, each Company is in compliance with all conditions contained therein. Except as set forth on Schedule 5.16, there are no pending claims against such insurance by any Company as to which insurers are defending under reservation of rights or have denied liability, and except as set forth on Schedule 5.16, there exists no claim under such insurance that has not been properly filed by any Company. To the knowledge of the Companies and the Owners, there are no outstanding or unfulfilled requirements or recommendations of any insurance company insuring any Company regarding any repairs to or work to be performed with respect to the assets of such Company. Each Company has complied with any such requirements and recommendations as to which the Company has received notice. Schedule 5.16 contains a listing of all claims made and loss histories in respect of any insurance maintained by each Company or any predecessor during the past three (3) years. - 10 - 12 5.17 Environmental Matters. Except as set forth in Schedule 5.17, to the knowledge of the Companies and the Owners, there are no present or past Environmental Conditions in any way relating to the business, properties or assets of any Company. For the purposes of this Agreement, "Environmental Condition" means (a) the introduction into the environment of any pollution, including without limitation any contaminant, irritant or pollutant or other toxic or hazardous substance, in violation of any federal, state or local law, ordinance or governmental rule or regulations, as a result of any spill, discharge, leak, emission, escape, injection, dumping or release of any kind whatsoever of any substance or exposure of any type in any work places or to any medium, including without limitation air, land, surface waters or ground waters, or from any generation, transportation, treatment, discharge, storage or disposal of waste materials, raw materials, hazardous materials, toxic materials or products of any kind or from the storage, use or handling of any hazardous or toxic materials or other substances, as a result of which any Company has or may become liable to any person or by any reason of which any of the assets of any Company may suffer or be subjected to any lien, encumbrance or restriction of any nature, or (b) any noncompliance with any federal, state or local environmental law, rule, regulation or order as a result of or in connection with any of the foregoing. 5.18 Accounts Receivable and Payable. To the knowledge of the Companies and the Owners, except as set forth on Schedule 5.18.1, the accounts receivable outstanding as of the Effective Time will be subject to no defenses, counterclaims, or rights of setoff other than those arising in the ordinary course of business and for which adequate reserves have been established. No accounts payable of any Company are, at this date, over 45 days old and no accounts payable of any Company will be over 45 days old at any Closing Date, except as listed on Schedule 5.18.2. 5.19 Taxes. (a) Except as listed in Schedule 5.19 or as reflected in the Financial Statements, there does not exist any material liability for taxes which may be asserted by any taxing authority against, and no lien or other encumbrance for taxes will attach to, any Company or any of its assets other than taxes due in respect of periods for which tax returns are not yet due and for which adequate accruals have been made in the Financial Statements. All federal, state and local tax returns and tax reports required to be filed prior to the date hereof with respect to any Company have been filed (other than returns for which extensions to file have been granted) with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed, all of which are true, correct and complete, and all amounts shown as owing thereon have been paid. (b) Except as listed on Schedule 5.19, no Company has received notice of any tax claims being asserted or any proposed assessment by any taxing authority and no tax returns of any Company have been audited by the Internal Revenue Service (the "IRS") or the appropriate state agencies for any fiscal year or period ended prior to the date hereof, and no Company is presently under, nor has received notice of any, contemplated investigation or audit by the IRS or any state agency concerning any fiscal year or period ended prior to the date hereof. Except as listed on Schedule 5.19, no Company has executed any extension or waivers of any statute of limitations on the assessment or collection of any tax due that is currently in effect. (c) Each Company and any of its predecessors in interest have withheld or collected from each payment made to each of their employees the amount of all taxes required to be withheld or collected therefrom and each Company and any of its predecessors in interest have paid the same to the proper tax depositories or collecting authorities. (d) From its inception, each Member has been a validly electing S corporation as defined in Section 1361 of the Code and corresponding provisions of state and local income tax law in all jurisdictions in which it is required to report its business operations. No Member or Owner has received any notice from the IRS challenging such status and no Member or Owner is aware of any circumstances that would be a basis for challenging such status. - 11 - 13 (e) From its inception, each of RenalWest and its ninety-nine percent owned subsidiary, Renal West Health Supply L.C., has been a limited liability company formed under Arizona law and taxable as a partnership under Section 7701 of the Code and in all states in which it has conducted business. (f) The Owners shall cause to be prepared and filed, at their expense, a short period tax return of each Company ending on the Closing Date. Such returns shall be provided for RCG's prior review and approval, which approval shall not be unreasonably withheld or delayed. The Owners shall file as an "S" corporation for that short period for each Member and as a partnership for RenalWest. RCG shall make available any information in its or the Companies' possession which is reasonably required by the Owners to complete such returns at no cost to the Owners. (g) Except as disclosed on Schedule 5.19, there is no liability for taxes on the part of any Company or any of their subsidiaries (excluding transactions for which the financial reporting gain would exceed applicable income tax liability related to such transaction) (i) that will arise with respect to a current or a future taxable period, (ii) that is wholly or partly a consequence of a transaction or occurrence, or transactions or occurrences, one or more of which occurred before the date hereof, and (iii) that is not fully reserved on the Financial Statements. In addition, except as disclosed on Schedule 5.19, there are no joint venture, partnership or other arrangements or contracts to which any Company or any of their subsidiaries is a party and that could be treated as a partnership for federal income tax purposes. (h) For purposes hereof, "taxes" shall mean any federal, state, county, local, foreign or other tax, charge, imposition or other levy (including interest or penalties thereon) including without limitation, income taxes estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, taxes on earnings and profits, employment and payroll related taxes, property taxes, real property transfer taxes, Federal Insurance Contributions Act taxes, taxes on value added and import duties, whether or not measured in whole or in part by net income, imposed by the United States or any political subdivision thereof or by any jurisdiction other than the United States or any political subdivision thereof. 5.20 Licenses, Authorizations and Provider Programs. (a) Each Company is the holder of all valid licenses and other rights and authorizations required by law, ordinance, regulation or ruling of any governmental regulatory authority necessary to operate its business. RenalWest is certified for participation and reimbursement under Titles XVIII and XIX of the Social Security Act (the "Medicare and Medicaid programs") (Medicare and Medicaid programs and such other similar federal, state or local reimbursement or governmental programs for which the Company is eligible are hereinafter referred to collectively as the "Government Programs") and has current provider agreements for such Government Programs and with such private non-governmental programs, including without limitation any private insurance program, under which the Company directly or indirectly is presently receiving payments (such non-governmental programs herein referred to as "Private Programs"). Set forth on Schedule 5.20.1, as to each facility, is a correct and complete list of such licenses, permits and other authorizations, and provider agreements under all Government and Private Programs, complete and correct copies of which have been provided to RCG. True, complete and correct copies of all surveys of each Company or its facilities conducted in connection with any Government Program, Private Program or licensing or accrediting body during the past two (2) years have been provided to RCG. (b) To the knowledge of the Companies and the Owners, no material violation, default, order or deficiency exists with respect to any of the items listed on Schedule 5.20.1. None of the Companies or the Owners has received any notice of any action pending or recommended by any state or federal agencies having jurisdiction over the items listed on Schedule 5.20.1, either to revoke, withdraw or suspend any license, right or authorization, or to terminate the participation of any Company in any Government or Private Program. To the knowledge of the Companies and the Owners, no event has occurred which, with the giving of notice, the passage of time, or both, would constitute grounds for a material violation, order or deficiency with respect to any of the items listed on Schedule 5.20.1 or to revoke, withdraw or suspend any such license, or to terminate or modify the participation of any Company - 12 - 14 in any Government or Private Program. To the knowledge of the Companies and the Owners, there has been no decision not to renew any provider or third-party payor agreement of any Company. Except as listed on Schedule 5.20.2, no consent or approval of, prior filing with or notice to, or any action by, any governmental body or agency or any other third party is required in connection with any such license, right or authorization, or Government or Private Program, by reason of the consummation of the Mergers, and the continued operation of the business of the Companies thereafter on a basis consistent with past practices. (c) Each Company has timely filed all cost reports and other reports required to be filed by it prior to the date hereof with respect to the Government and Private Programs, all fiscal intermediaries and other insurance carriers and all such reports are complete and accurate in all material respects and have been prepared in material compliance with all applicable laws, regulations, and principles governing reimbursement and payment claims. True and complete copies of such cost reports filed by each Company for the most recent cost-reporting year, if applicable, have heretofore been delivered to RCG. Each Company has paid or caused to be paid or has properly reflected in the Financial Statements all known and undisputed refunds, overpayments, discounts or adjustments which have become due pursuant to such reports and has no liability under any Government or Private Program (known or unknown, contingent or otherwise) for any refund, overpayment, discount or adjustment other than in the ordinary course, and no interest or penalties accruing with respect thereto, except as has been specifically reserved for in the Financial Statements or disclosed herein or in the Schedules hereto. To the knowledge of the Companies and Owners, except as set forth on Schedule 5.20.3, there are no pending appeals, adjustments, challenges, audits, litigation, or notices of intent to reopen any closed cost reports. There are no other reports required to be filed by any Company in order to be paid under any Government or Private Program for services rendered, except for cost reports not yet due. 5.21 Inspections and Investigations. Except as set forth and described in Schedule 5.21, (i) neither any of the Company's right nor, to the knowledge of the Companies and the Owners, the right of any licensed professional or other individual affiliated with any Company to receive reimbursements pursuant to any Government or Private Program has been terminated or otherwise adversely affected as a result of any investigation or action whether by any federal or state governmental regulatory authority or other third party, (ii) no Company, or, to the knowledge of the Companies and the Owners, any licensed professional or other individual affiliated with any Company has, during the past three (3) years, been the subject of any inspection, investigation, survey, audit, monitoring or other form of review by any governmental regulatory entity, trade association, professional review organization, accrediting organization or certifying agency based upon any alleged improper activity on the part of such individual, nor has any Company received any notice of deficiency during the past three years in connection with its operations, (iii) there are not presently, and at the Effective Time there will not be, any outstanding deficiencies or work orders of any governmental authority having jurisdiction over any Company, or other third party, requiring conformity to any applicable agreement, statute, regulation, ordinance or bylaw, including but not limited to, the Government and Private Programs, and (iv) there is not any notice of any claim, requirement or demand of any licensing or certifying agency or other third party supervising or having authority over any Company or their operations to rework or redesign any part thereof or to provide additional furniture, fixtures, equipment, appliances or inventory so as to conform to or comply with any existing law, code, rule, regulation or standard. Attached as part of Schedule 5.21 are copies of all reports, correspondence, notices and other documents relating to any matter described or referenced therein. 5.22 Certain Relationships. (a) Except as set forth on Schedule 5.22(a), no Company has: (i) offered, paid, solicited or received anything of value, paid directly or indirectly, overtly or covertly, in cash or in kind ("Remuneration") to or from any physician, family member of a physician, or an entity in which a physician or physician family member has an ownership or investment interest, including, but not limited to: - 13 - 15 (A) payments for personal or management services pursuant to a medical director agreement, consulting agreement, management contract, personal services agreement, or otherwise; (B) payments for the use of premises leased to or from a physician, a family member of a physician or an entity in which a physician or family member has an ownership or investment interest; (C) payments for the acquisition or lease of equipment, goods or supplies from a physician, a family member of a physician or an entity in which a physician or family member has an ownership or investment interest; or (ii) offered, paid, solicited or received any Remuneration (excluding fair market value payments for equipment or supplies) to or from any healthcare provider, pharmacy, drug or equipment supplier, distributor or manufacturer, including, but not limited to: (A) payments or exchanges of anything of value under a warranty provided by a manufacturer or supplier of an item to the Company; or (B) discounts, rebates, or other reductions in price on a good or service received by the Company; (iii) offered, paid, solicited or received any Remuneration to or from any person or entity in order to induce business, including, but not limited to, payments intended not only to induce referrals of patients, but also to induce the purchasing, leasing, ordering or arrangement for any good, facility, service or item; (iv) entered into any joint venture, partnership, co-ownership or other arrangement involving any ownership or investment interest by any physician, or family member of a physician, or an entity in which physician or physician family member has an ownership or investment interest, directly or indirectly, through equity, debt, or other means, including, but not limited to, an interest in an entity providing goods or services to such Company; (v) entered into any joint venture, partnership, co-ownership or other arrangement involving any ownership or investment interest by any person or entity including, but not limited to, a hospital, pharmacy, drug or equipment supplier, distributor or manufacturer, that is or was in a position to make or influence referrals, furnish items or services to, or otherwise generate business for the Company; or (vi) entered into any agreement providing for the referral of any patient for the provision of goods or services by such Company, or payments by such Company as a result of any referrals of patients to the Company. (b) Set forth on Schedule 5.22(b) is a list of all affiliated practices or physicians who have privileges to use any Company's dialysis facilities or who are otherwise involved with the use or operation of or referral of patients to any Company's dialysis facilities. 5.23 Statements True and Correct. No representation or warranty made herein by the Companies or any of the Owners, nor in any statement, certificate or instrument to be furnished to RCG by the Companies or any of the Owners pursuant to any Merger Document, contains or will contain any untrue statement of material fact or omits or will omit to state a material fact necessary to make these statements contained herein and therein not misleading. - 14 - 16 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE OWNERS Each Owner, severally and not jointly, represents and warrants the following to RCG: 6.1 Ownership Interest Held and Conveyed. Owner is the owner of all right, title and interest (legal, record and beneficial) in and to the Company Equity Securities as set forth on Schedule 6.1, free and clear of any and all liens, encumbrances or restrictions of any nature whatsoever (except for any restrictions on transfer imposed by securities laws), and Owner holds no other interest in any Company. Except as provided in Schedule 6.1 or as specifically contemplated by this Agreement, no person or entity has any right or privilege (whether preemptive or contractual) for the purchase of any Company Equity Securities from Owner. Schedule 6.1 contains a complete list of all agreements or arrangements, whether written or oral, to which Owner is a party that relate in any way to the Company Equity Securities. 6.2 Organization, Authority and Capacity. Owner has the full authority and capacity necessary to execute, deliver and perform his or her obligations under the Merger Documents to be executed and delivered by Owner. 6.3 Authorization and Validity. Owner has the legal capacity required for executing, delivering and performing the Merger Documents to be executed and delivered by Owner. If Owner is married and Owner's interest in the Company constitutes community property, the Merger Documents to be executed and delivered by Owner's spouse have been or will be, as the case may be, duly executed and delivered by Owner's spouse and constitute or will constitute the legal, valid and binding obligations of Owner's spouse, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency or other laws affecting creditors' rights generally, or as may be modified by a court of equity. 6.4 Absence of Conflicting Agreements or Required Consents. Except as set forth on Schedule 6.4, the execution, delivery and performance by Owner of the Merger Documents to be executed and delivered by Owner (i) do not require the consent of or notice to any governmental or regulatory authority or any other third party; (ii) will not conflict with or result in a violation of any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which Owner is subject or by which Owner is bound; (iii) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit material to the Merger and (v) will not create any encumbrance or restriction upon the Company Equity Securities. 6.5 Interested Transactions. Except as set forth on Schedule 6.5, Owner is not a party to any contract, loan or other transaction with any Company and does not have any direct or indirect interest in or affiliation with any party to any such a contract, loan or other transaction. Except as set forth on Schedule 6.5, Owner is not an employee, consultant, partner, principal, director or owner of, and does not have any other direct or indirect interest in or affiliation with, any person or business entity that is engaged in a business that competes with or is similar to the business of any Company. 6.6 Purchase for Investment, Etc. (a) Such Owner is acquiring the RCG Common Stock for such Owner's own account and not with a view to or for sale in connection with any public distribution thereof within the meaning of the 1933 Act; (b) such Owner (i) has sufficient knowledge and experience in financial and business matters to enable him, her or it to evaluate the merits and risks of an investment in the RCG Common Stock, (ii) has the ability to bear the economic risk of acquiring the RCG Common Stock, (iii) has received and reviewed the RCG Documents identified in Section 7.8 below, and (iv) has had an opportunity to ask - 15 - 17 questions of and to receive answers from the officers of RCG and to obtain additional information in writing as requested, which has been made available to and examined by such Owner or such Owner's advisors; (c) such Owner (i) acknowledges that the RCG Common Stock has not been registered under any securities laws and cannot be resold without registration thereunder or exemption therefrom, (ii) agrees not to transfer all or any of the RCG Common Stock received by such Owner unless such transfer has been registered or is exempt from registration under applicable securities laws and (iii) acknowledges that the certificate(s) representing the RCG Common Stock shall bear a prominent legend with respect to the restrictions on transfer under applicable securities laws; and (d) such Owner has accurately completed the Investor Questionnaire required by RCG contemporaneous with the execution of this Agreement and the statements therein are true and correct. 6.7 Pooling and Tax-Free Reorganization Restrictions. (a) Except as disclosed on Schedule 6.7(a) during the 30 days immediately preceding the Effective Time of the Merger, such Owner represents, warrants and covenants that he has not and will not have sold, transferred, or otherwise disposed of his interests in, or reduced his risk relative to, any of the shares of Member Common Stock beneficially owned by the undersigned, except for any pledges of such Member Common Stock existing prior to such 30-day period as disclosed on Schedule 6.7(a) hereto. In the event of any such pledge, each Owner will use his commercially reasonable efforts to obtain an agreement from any such pledgee to abide by the terms of this Agreement. (b) Each Owner is aware that the Merger is intended to qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code ("Code") for federal income tax purposes. Each Owner acknowledges that Section 1.368-1(b) of the Income Tax Regulations requires "continuity of interest" in order for the Merger to be treated as tax-free under Section 368 of the Code. Such Owner represents that he has no pre-arrangement, plan or intention to sell or otherwise dispose of an amount of his RCG Common Stock to be received in the Merger which would cause the foregoing requirement not to be satisfied. Each Owner represents that he has consulted with counsel of his choosing regarding this and other requirements for such a tax-free reorganization and that he understands such requirements and the risk that his receipt of RCG Common Stock could be a taxable event if such requirements are not met. Each Owner further represents that he is not relying on RCG or its advisors concerning the tax treatment or consequences of this Agreement or the transactions contemplated hereby. 6.8 Statements True and Correct. No representation or warranty made herein by Owner, nor in any statement, certificate or instrument furnished or to be furnished to RCG by Owner pursuant to any Merger Document, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein and therein not misleading. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF RCG AND MERGER CORPS. RCG and each Merger Corp. hereby represent and warrant to the Company and the Owners as follows: 7.1 Organization, Authority and Capacity. RCG is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and each Merger Corp. is a corporation duly organized, validly existing and in good standing under the laws of the State of Arizona. RCG and each Merger Corp. have the full power and authority necessary to (i) execute, deliver and perform their obligations under the Merger Documents to be executed and delivered by them, and (ii) carry on their business as they have been and are now being conducted and to own and lease the properties and assets which they now own or lease. RCG and each Merger Corp. are duly qualified to do business and are in - 16 - 18 good standing in each jurisdiction in which a failure to be so qualified or in good standing would have a material adverse effect on (i) their ability to perform their obligations under the Merger Documents to be executed and delivered by them or, (ii) the assets, results of operations or prospects of RCG. 7.2 Authorization and Validity. The execution, delivery and performance of the Merger Documents to be executed and delivered by RCG and each Merger Corp. have been duly authorized by all necessary action by RCG and each Merger Corp. The Merger Documents to be executed and delivered by RCG and each Merger Corp. have been or will be, as the case may be, duly executed and delivered by RCG and each Merger Corp. and constitute or will constitute the legal, valid and binding obligations of RCG and each Merger Corp., enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, or other laws affecting creditors' rights generally, or as may be modified by a court of equity. 7.3 Absence of Conflicting Agreements or Required Consents. The execution, delivery and performance by RCG and each Merger Corp. of the Merger Documents to be executed and delivered by it: (i) do not require the consent of or notice to any governmental or regulatory authority or any other third party; (ii) will not conflict with any provision of RCG's or such Merger Corp.'s articles of incorporation or bylaws; (iii) will not conflict with or result in a violation of any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which RCG or such Merger Corp. is a party or by which RCG or such Merger Corp. or any of their respective properties is bound; (iv) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit to which RCG or such Merger Corp. is a party or by which any of its properties are bound; and (v) will not create any lien, encumbrance or restriction upon any of the assets or properties of RCG or such Merger Corp. 7.4 Governing Documents. True and correct copies of the organizational documents and all amendments thereto of RCG (certified by the Secretary of State of the State of Delaware) and copies of the bylaws of RCG have been provided to the Company and the Owners. The Company and the Owners have previously been provided with access to RCG's minutes, and such minutes accurately reflect all material proceedings of the shareholders and board of directors of RCG (and all committees thereof). True and correct copies of the organizational documents and all amendments thereto of each Merger Corp. (certified by the Secretary of State of the State of Arizona) and copies of the Bylaws of each Merger Corp. have been provided to the Company and the Owners. The Company and the Owners have previously been provided with access to the minutes of each Merger Corp., and such minutes accurately reflect all material proceedings of the shareholder and Board of Directors of each Merger Corp. 7.5 Outstanding and Authorized Capitalization. (a) The authorized capital stock of each Merger Corp. consists of 1,000 shares of common stock, of which 100 shares are issued and outstanding. All of the issued and outstanding shares of capital stock of each Merger Corp. have been duly and validly issued, are fully paid and non-assessable. There are no outstanding warrants, options, rights, calls or other commitments of any nature relating to capital stock of any Merger Corp., and there are no outstanding securities of any Merger Corp. convertible into or exchangeable for any securities of any Merger Corp. or RCG. (b) The authorized capital stock of RCG consists of 22,000,000 shares of RCG Common Stock and 10,000,000 shares of $.01 par value Preferred Stock. As of the date hereof, RCG has 10,146,020 shares of RCG Common Stock and no shares of Preferred Stock issued and outstanding. All issued and outstanding shares of RCG Common Stock have been duly and validly issued, are fully paid and non-assessable. Except for (i) options to purchase 1,433,948 shares of common stock, (ii) warrants to purchase 220,000 shares of common stock and (iii) promissory notes that are convertible into 184,000 shares of common stock, there are no outstanding warrants, options, rights, calls or other commitments of any nature relating to shares of capital stock of RCG, no outstanding securities convertible into or exchangeable for shares of capital stock of RCG, and, RCG is not obligated to issue or repurchase any of its - 17 - 19 shares of capital stock for any reason and no person or entity has any right or privilege (whether preemptive or contractual) for the purchase, subscription or issuance of any unissued shares of capital stock of RCG. Except for rights with respect to 5,661,020 shares outstanding, 220,000 shares under warrants and 184,000 shares under convertible notes, there are no outstanding rights to demand registration of any shares of capital stock of RCG or to sell any securities in connection with a registration by RCG under the 1933 Act. No shares of Common Stock are held in RCG's treasury. All RCG Common Stock to be issued in connection with the Merger will be duly and validly issued, fully paid and nonassessable, and, based on the representations of the Companies and the Owners herein and in documents delivered pursuant hereto, will be issued pursuant to a valid exemption from registration under the 1933 Act and all applicable state securities laws. 7.6 Litigation and Claims. There are no claims, lawsuits, actions, arbitrations, administrative or other proceedings, governmental investigations or inquiries pending or threatened against RCG or the Merger Corps. which could (i) affect the performance by RCG or the Merger Corps. of the Merger Documents, or (ii) adversely affect the condition of RCG or the Merger Corps. (financial or otherwise), and there is no basis for any such action or any state of facts or occurrence of any event which might give rise to the foregoing. 7.7 Statements True and Correct. No representation or warranty made herein by RCG and the Merger Corps., nor in any statement, certificate or instrument to be furnished to the Company or any of the Owners by RCG or the Merger Corps. pursuant to any Merger Document, nor in any RCG Document, contains or will contain any untrue statement of material fact or omits or will omit to state a material fact necessary to make these statements contained and therein not misleading. 7.8 RCG Documents. RCG has heretofore furnished the following documents to the Company: (a) Confidential Private Placement Memorandum, dated November 15, 1995; (b) Final Prospectus, dated February 6, 1996, contained in its Registration Statement on Form S-1 (Registration No. 33-80221); (c) Current Report on Form 8-K, dated March 22, 1996 (Commission File No. 0-2764); (d) Press release, dated April 1, 1996; (e) Registration Statement on Form S-8, dated April 22, 1996; (f) Press release, dated April 29, 1996; (g) current report on Form 8-K/A, dated May 3, 1996; (h) Form 12b-25, dated May 3, 1996; (i) Press release, dated May 6, 1996; (j) Form 12b-25, dated May 13, 1996; (k) Form SR, dated May 17, 1996; (l) Form 10-Q, dated May 20, 1996; (m) Form 10-K, dated May 21, 1996; - 18 - 20 (n) Form 10-K/A, dated June 7, 1996; (o) Press Release, dated July 1, 1996; (p) Press Release, dated July 18, 1996; (q) Agreement and Plan of Merger, dated April 26, 1996, among RCG and Main Line Suburban Dialysis Centers, Inc., et al.; (r) Merger Agreement, dated June 20, 1996, among RCG and The Nephrology Center, Inc., et al.; (s) Loan Agreement, dated May 30, 1996, among RCG, et al. and NationsBank of Tennessee, N.A.; and (t) Press Release, dated August 6, 1996. The foregoing documents together with the exhibits thereto (which will be made available upon written request), are collectively referred to herein as the "RCG Documents." The RCG Documents include accurate and complete copies of each and every (i) report and registration statement filed with the SEC ("SEC Documents") and (ii) publicly disseminated press release of RCG during the past twelve months ("Press Releases"). As of the time each SEC Document was filed with the SEC, such SEC Document did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.9 Absence of Changes. Except as set forth on Schedule 7.9, since March 31, 1996 (the date of last financial statements), RCG has not suffered any material adverse change in its working capital, condition (financial or otherwise), assets, liabilities, reserves, business or operations. 7.10 No Undisclosed Liabilities. Except as listed on Schedule 7.10, and except for liabilities and obligations reflected in the most recent financial statements of RCG contained in the RCG Documents or incurred in the ordinary course of its business since the date of RCG's most recent balance sheet included in the RCG Documents, RCG has no material liabilities or obligations, whether accrued, absolute, contingent or otherwise. 7.11. No Liabilities of Merger Corps. Except for the obligations hereunder, the Merger Corps. are not subject to any liabilities, obligations or claims, whether accrued, absolute, contingent, liquidated or unliquidated, or otherwise. Each Merger Corp. was formed solely for the purpose of consummating the Mergers contemplated by this Agreement and each Merger Corp. has not engaged in any business or other activity for any other purpose. 7.12 Compliance with Legal Requirements. To the knowledge of RCG, RCG and each Merger Corp. are in compliance with all applicable legal requirements, except where the failure to comply with such legal requirements has not had and could not reasonably be expected to have a material adverse effect on RCG or the Company. RCG has not received any notice or any communication from any governmental authority regarding any actual or possible violation of, or failure to comply with, any legal requirement, except where failure to comply with such legal requirement has not had and could not reasonably be expected to have a material adverse effect on RCG. 7.13 Employee Benefits. RCG agrees that after the Mergers it will cause the Members to cause RenalWest to credit RenalWest employees with service for eligibility and vesting purposes, as applicable, - 19 - 21 under the benefit plans in which they participate after the Closing Date and that such employees will receive such RCG benefits as are provided to similarly situated employees of RCG. 7.14 Taxes. (a) Except as reflected in RCG's financial statements included in the RCG Documents (the "RCG Financial Statements"), there does not exist any material liability for taxes that may be asserted by any taxing authority against, and no lien or other encumbrance for any such taxes will attach to, RCG, any subsidiary ("Subsidiary") of RCG, or any assets of RCG or any Subsidiary, other than taxes due in respect of periods for which tax returns are not yet due and for which adequate accruals have been made in the RCG Financial Statements. All federal, foreign, state, county, and local tax returns and tax reports required to be filed prior to the date hereof with respect to RCG or any Subsidiary have been timely filed (other than returns for which extensions to file have been granted) with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed, all of which are true, correct, and complete, and all amounts shown as owing thereon have been timely paid. (b) Neither RCG nor any Subsidiary has received notice of any tax claims being asserted or any proposed assessment by any taxing authority and neither RCG nor any Subsidiary is presently under, nor has received notice of, any contemplated investigation or audit by the IRS or any other taxing authority concerning any fiscal year or period ended prior to the date hereof. Neither RCG nor any Subsidiary has executed any extensions or waivers of any statute of limitations on the assessment or collection of any tax due that is currently in effect. (c) RCG and each Subsidiary, as well as any of their predecessors in interest, have withheld or collected from each payment made to each of their employees the amount of all taxes required to be withheld or collected therefrom and have paid the same to the proper tax depositories or collecting authorities. (d) Neither RCG nor any Subsidiary is or has ever been an includible corporation in an affiliated group of corporations, within the meaning of Section 1504 of the Code, other than in the affiliated group of which RCG is the common parent corporation. (e) Neither RCG nor any Subsidiary is now or has ever been a party to any tax-sharing agreements or similar arrangements, other than with respect to the federal income tax returns for the affiliated group of which RCG is the common parent corporation. (f) For purposes hereof, "tax" or "taxes" shall have the meaning prescribed for "taxes" in section 5.19(g) of this Agreement. (g) RCG has no intention to cause or permit the liquidation or merging out of existence of the Members. (h) RCG has no intention following the Mergers to sell or otherwise dispose of its ownership of the Members, except for transfers of stock to corporations controlled by RCG, as "control" is defined in section 368(c) of the Code, or to cause the Members to sell or otherwise dispose of any of their assets or of any of the assets acquired from any of the Merger Corps, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by RCG, as "control" is defined in section 368(c) of the Code. (i) Except as disclosed on Schedule 7.14, there is no liability for taxes on the part of RCG or any Subsidiary (excluding transactions for which the financial reporting gain would exceed applicable income tax liability related to such transaction) (i) that will arise with respect to a current or a future taxable period, (ii) that is wholly or partly a consequence of a transaction or occurrence, or transactions or occurrences, one or more of which occurred before the date hereof, and (iii) that is not fully reserved on the RCG Financial Statements. In addition, except as disclosed on Schedule 7.14, there are no - 20 - 22 joint venture, partnership or other arrangements or contracts to which RCG or any Subsidiary is a party and that could be treated as a partnership for federal income tax purposes. ARTICLE 8 ADDITIONAL AGREEMENTS 8.1 Access to Company Information. At all times prior to the Closing, the Companies and the Owners will afford the officers and authorized representatives of RCG access upon reasonable notice to all of the Companies' properties, books and records that may relate to or concern the Mergers and will furnish such parties with such additional financial, operating and other information as to the business and properties of the Companies as such parties may from time to time reasonably request. Such parties shall also be allowed access, upon reasonable notice, to consult with the officers, employees, accountants, counsel and agents of the Companies in connection with such investigation of the properties and business of the Companies. In addition, at all times prior to the Closing, RCG will afford to the Companies and the Owners, and their representatives, access, upon reasonable notice, to all of RCG's and its affiliate's properties, books and records as the Companies and the Owners may reasonably request. No such investigation shall diminish or otherwise affect any of the representations, warranties, covenants or agreements of any party under this Agreement. 8.2 No-Shop. Unless and until this Agreement is terminated pursuant to Article 11 hereof, neither any of the Companies nor any Owner shall directly or indirectly, through any officer, director, employee, agent, intermediary or otherwise: (i) solicit, initiate or encourage submission of proposals or offers from any person or other entity relating to any purchase of an equity interest in any of the Companies, or any merger, sale of substantial assets or any similar transaction whether or not resulting in a change of control of any of the Companies; (ii) participate in any discussions or negotiations regarding, or furnish to any other person or other entity, any information with respect to, or otherwise respond to, cooperate or encourage, any effort or attempt by any other person or other entity to purchase any equity interest in the Companies, or engage in a merger, purchase of substantial assets or any similar transaction whether or not such transaction contemplates a change of control of any of the Companies; or (iii) approve or undertake any such transaction. The Companies and the Owners shall promptly communicate to RCG the terms of any such oral or written proposal or offer upon knowledge or receipt of such proposal or offer. 8.3 Affirmative Covenants of the Companies and the Owners. From the date hereof until the earlier of the Effective Time or the termination of this Agreement, the Companies and the Owners covenant and agree that, unless the prior written consent of RCG shall have been obtained, and except as otherwise expressly contemplated herein, each Company shall: (i) operate its business only in the usual, regular, and ordinary course of business, consistent with past practices; (ii) use reasonable commercial efforts to preserve intact its business organization, licenses, permits, government programs, private programs and customers; (iii) use reasonable commercial efforts to retain the services of its employees, agents and consultants on terms and conditions not less favorable than those existing prior to the date hereof and to ensure that there are no material or adverse changes to employee relations; (iv) keep and maintain its assets in their present condition, repair and working order, except for normal depreciation and wear and tear, and maintain its insurance, rights and licenses; - 21 - 23 (v) pay all accounts payable of the Company in accordance with past practice and collect all accounts receivable in accordance with past practice, but not less than in accordance with prudent business practices; (vi) consult with RCG prior to undertaking any new business opportunity outside the ordinary course of business; (vii) confer on a regular and frequent basis with one or more designated representatives of RCG to report material operational matters and to report the general status of ongoing business operations; (viii) make available to RCG true and correct copies of all internal management and control reports (including aging of accounts receivable, listings of accounts payable, and inventory control reports) and financial statements related to the Company and furnished to management of the Company; (ix) cause all tax returns that are due and have not been filed prior to the date hereof or which become due prior to the Effective Time, to be prepared and filed on or before the date such tax return is required to be filed (taking into account any extensions of the filing deadlines granted); provided, however, that any such tax return shall not be filed without a reasonable opportunity for prior review and comment by RCG; (x) as soon as reasonably practicable after they become available, but in no event more than thirty (30) days following the end of each calendar month, deliver to RCG true and complete copies of its monthly financial statements for each calendar month ending subsequent to the date hereof in the format historically utilized by the Company; (xi) perform in all material respects all obligations under agreements relating to or affecting its assets, properties or rights, except for the failure of which performance would not have a material adverse effect on the business of the Companies taken as a whole, financial or otherwise; (xii) keep in full force and effect present insurance policies or other comparable insurance coverage; and (xiii) notify RCG of (i) any event or circumstance which is reasonably likely to have a material adverse effect on the Company or would cause or constitute a breach of any of the Company's representations, warranties or covenants contained herein; or (ii) any unexpected change in the normal course of business or in the operation of the Company's assets, and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), adjudicatory proceedings, budget meetings or submissions involving any material property. Each Company agrees to keep RCG fully informed of such events and to permit RCG's representatives prompt access to all materials prepared in connection therewith. 8.4 Negative Covenants of the Company and the Owners. From the date hereof until the earlier of the Effective Time or the termination of this Agreement, the Companies and the Owners covenant and agree that no Company will do any of the following without the prior written consent of the RCG: (i) take any action which would (a) adversely affect the ability of any party to the Merger Documents to obtain any consents required for the transactions contemplated thereby, or (b) adversely affect the ability of any party hereto to perform its covenants and agreements under the Merger Documents; (ii) amend any of its organizational or governing documents, except as provided herein or for the purpose of accomplishing the transactions contemplated by this Agreement; - 22 - 24 (iii) incur any additional debt obligation or other obligation for borrowed money in excess of an aggregate of $100,000 except in the ordinary course of the business of the Company consistent with past practices, or impose, or suffer the imposition, on any material asset of the Company of any lien or permit any such lien to exist; (iv) repurchase, redeem, or otherwise acquire or exchange, directly or indirectly, any Company Equity Securities, or any securities convertible into any Company Equity Securities, or declare or pay any dividend or make any other distribution in respect of Company Equity Securities, other than such dividends or distributions as are described in Section 8.19 below. (v) other than pursuant to the Merger Documents, issue, sell, pledge, encumber, authorize the issuance of, enter into any contract to issue, sell, pledge, encumber, or authorize the issuance of, or otherwise permit to become outstanding, any additional Company Equity Securities or any rights with respect to any Company Equity Securities; (vi) purchase or acquire any assets or properties, whether real or personal, tangible or intangible, or sell or dispose of any assets or properties, whether real or personal, tangible or intangible, except in the ordinary course of business and consistent with past practices; (vii) adjust, split, combine or reclassify any Company Equity Securities or issue or authorize the issuance of any other securities in respect of or in substitution for Company Equity Securities, or sell, lease, mortgage or otherwise dispose of or otherwise encumber any asset having a book value in excess of $50,000 other than in the ordinary course of business for reasonable and adequate consideration; (viii) purchase any securities or make any material investment, either by purchase of stock or other securities, contributions to capital, asset transfers, or purchase of any assets, in any entity, or otherwise acquire direct or indirect control over any other entity; (ix) grant any increase in compensation or benefits to the employees or officers of the Company, except in accordance with past practice; pay any severance or termination pay or any bonus other than pursuant to written policies or written contracts in effect as of the date hereof and disclosed on the Schedules hereto; enter into or amend any severance agreements with officers of the Company; or grant any material increase in fees or other increases in compensation or other benefits to directors of the Company except in accordance with past practice; (x) enter into or amend any employment contract between the Company and any person or entity (unless such amendment is required by law) that the Company does not have the unconditional right to terminate without liability (other than liability for services already rendered), at any time on or after the Effective Time; (xi) adopt any new employee benefit plan or make any material change in or to any existing employee benefit plans other than any such change that is required by law or that, in the opinion of counsel, is necessary or advisable to maintain the tax qualified status of any such plan; (xii) make any significant change in any tax or accounting methods or systems of internal accounting controls, except as may be appropriate to conform to changes in tax laws or regulatory accounting requirements or GAAP; (xiii) commence any litigation other than in accordance with past practice, settle any litigation involving any liability of the Company for material money damages or restrictions upon the operations of the Company; - 23 - 25 (xiv) except in the ordinary course of business and which is not material, modify, amend or terminate any material contract or waive, release, compromise or assign any material rights or claims; (xv) except in the ordinary course of business and, even if in the ordinary course of business, then not in an amount to exceed $300,000 in the aggregate, make or commit to make any capital expenditure, or enter into any lease of capital equipment as lessee or lessor; (xvi) take any action, or omit to take any action, which would cause any of the representations and warranties contained in Article 5 to be untrue or incorrect; or (xvii) make any loan to any person or increase the aggregate amount of any loan currently outstanding to any person. 8.5 Affirmative Covenants of RCG. From the date hereof until the earlier of the Effective Time or the termination of this Agreement, RCG covenants and agrees that, unless the prior written consent of RenalWest shall have been obtained, and except as expressly contemplated herein, RCG shall (i) consult with RenalWest prior to making a new material business opportunity outside the ordinary course of business; (ii) as soon as reasonably practicable after they become available, deliver to RenalWest true and complete copies of its monthly financial statements for each calendar month ending subsequent to the date hereof, in the format historically utilized by RCG; (iii) perform in all material respects all obligations under agreements relating to or affecting its assets, property or rights, except for the failure of which performance would not have a material adverse effect on the business of RCG, financial or otherwise; and (iv) notify RenalWest of (i) any event or circumstance which is reasonably likely to have a material adverse effect on RCG or would cause or constitute a breach of any of RCG's representations, warranties or covenants contained herein; or (ii) any unexpected change in the normal course of business or in the operation of RCG's assets, and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), adjudicatory proceedings, budget meetings or submissions involving any material property. RCG agrees to keep RenalWest fully informed of such events and to permit RenalWest's representatives prompt access to all materials prepared in connection therewith. 8.6 Negative Covenants of RCG. (a) From the date hereof until the earlier of the Effective Time or the termination of this Agreement, RCG covenants and agrees that it will not do any of the following without the prior written consent of RenalWest: (i) take any action that would (a) adverse affect the ability of any party to the Merger Documents to obtain any consents required for the transactions contemplated thereby, or (b) adversely affect the ability of any party hereto to perform its covenants and agreements under the Merger Documents; or (ii) amend any of its organizational or governing documents, except for the purpose of accomplishing the transactions contemplated by this Agreement. (b) From the date hereof until the earlier of the Effective Time or the termination of this Agreement, RCG covenants and agrees that it will not do any of the following without first notifying RenalWest of its intent: - 24 - 26 (i) other than pursuant to the Merger Documents, issue, sell, pledge, encumber or enter into any contract to issue, sell, pledge, encumber, or authorize the issuance of, or otherwise permit to become outstanding, any additional capital stock of RCG, except for the granting of stock options to employees and consultants in the ordinary course; (ii) adjust, split or reclassify any outstanding capital stock of RCG or authorize the issuance of any other securities in respect of, or in substitution for, or in addition to, any outstanding capital stock of RCG, or sell, lease, mortgage or otherwise dispose of or otherwise encumber any asset having a book value in excess of $100,000 other than in the ordinary course of business for reasonable and adequate consideration; (iii) except for normal and customary cash management activities, purchase any securities or make any material investment, either by purchase of stock or other securities, contributions to capital, asset transfers, or purchase of any assets, in any entity, or otherwise acquire direct or indirect control over any other entity; or (iv) take any action, or omit to take any action, which would cause any of the representations and warranties contained in Article 7 to be untrue or incorrect. 8.7 Confidentiality, Public Announcements. The parties hereby affirm and ratify the terms of that certain letter agreement, dated June 27, 1996, among them concerning confidentiality, public announcements and related matters, which agreement remains valid and binding among the parties notwithstanding Section 15.9 hereof. 8.8 Confidentiality, Noncompetition and Nonsolicitation. (a) Each Owner agrees that, for a period of ten (10) years after the Effective Time, Owner will not in any manner, directly or indirectly, by himself or herself or in conjunction with any other person, conduct activities that are competitive with the business of the Companies or acquire, establish or own any financial, beneficial or other interest in (other than an interest consisting of less than one percent (1%) of a class of publicly traded security), make any loan to or for the benefit of, or render any managerial, marketing or other business advice, to any entity that is then conducting activities that are competitive with the business of the Companies, in either case within a geographic territory defined as the seventy-five (75) mile radius of the Companies' current locations (the "Territory"). For purposes of this Section the "business of the Companies" shall mean owning or operating a renal dialysis center, unit or facility or providing renal dialysis supplies or services to any other center, unit or facility or any acute care facility or any home renal dialysis patient, including the provision of pharmaceuticals or laboratory services. (b) Each Owner further agrees that, for a period of ten (10) years after the Effective Time, Owner will keep confidential and not directly or indirectly divulge to anyone or use or otherwise appropriate for Owner's own benefit or for the benefit of others, any knowledge or information of a confidential nature with respect to the business of the Companies, RCG, or any of their affiliates, including all trade secrets, pricing information, marketing information or technical information (hereinafter referred to as the "Confidential Data"), except for (i) a disclosure that is required by law; or (ii) information that has been made generally available to the public by the act of one who has the right to disclose such information. Each Owner hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies which RCG may have available pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of confidential information, and the enforcement by RCG of its rights and remedies pursuant hereto shall not be construed as a waiver of any other rights or available remedies which RCG may possess in law or equity. Each Owner acknowledges that RCG has taken reasonable and appropriate steps to ensure the confidentiality and non-disclosure of all such Confidential Data. (c) Each Owner also agrees that, for a period of ten (10) years after the Effective Time, Owner will not, for his or her own benefit or the benefit of others, solicit any person or entity that has - 25 - 27 had, or disrupt or attempt to disrupt, any relationship, contractual or otherwise (including with any patient, payor, physician, provider, managed care organization or supplier), with RCG or any of its affiliates (including the Companies), for the purpose of assisting, or creating such a relationship for, any business entity that is conducting activities competitive with the business of the Companies within the Territory. (d) Each Owner further agrees that, for a period of ten (10) years after the Effective Time, Owner shall not induce, nor attempt to induce, any employee of RCG, or any of its affiliates (including the Companies), to terminate his or her association with any such party. (e) The covenants contained in this Section 8.8 are considered by the parties hereto to be fair, reasonable and necessary for the protection of RCG and the Companies. The parties mutually agree that if a violation of any covenant contained in this Section 8.8 occurs, such violation or threatened violation will cause irreparable injury to RCG and the Companies and the remedy at law for any such violation or threatened violation will be inadequate. Each Owner therefore agrees that RCG shall be entitled to appropriate equitable relief, including but not limited to a temporary restraining order or a preliminary injunction, in addition to any other remedy that might be available at law or in equity. (f) Nothing in this Section 8.8 shall be deemed to prohibit any Owner who is a physician from exercising his or her medical judgment concerning the treatment of his or her patient in any manner whatsoever in any location whatsoever, and shall not be deemed to require the referral of any such patient to any facility of RCG or any of its affiliates. (g) The foregoing ten (10) year periods in this Section 8.8 are subject to RCG obtaining from its physician stockholders owning at least sixty percent (60%) of the RCG Common Stock issued to its physician stockholders in connection with the acquisition by RCG of their dialysis centers (the "Required Physicians"), revisions where needed to similar agreements with such Required Physician extending their corresponding periods of coverage to ten (10) years from their original starting date. In the event that the Required Physicians are not subject to such ten year periods prior to or at the Closing, then the foregoing ten (10) year periods in this Section 8.8 shall be reduced to the longest corresponding period of time to which the Required Physicians are or become subject. 8.9 Medical Director Agreements. The parties hereto agree that the Company and each affiliated physician practice that has a physician member or employee involved with the use, operation of or referral of patients to the Company's dialysis facilities (the "Practices"), shall enter into a Medical Director Agreement at Closing under which the Practices shall provide medical director services to the Company for the dialysis facilities operated by the Company. Such Medical Director Agreement shall have an initial term of seven (7) years with renewal terms for additional three year periods and shall provide for (i) an aggregate annual fee to be paid by RCG to the Practices of $840,000 (subject to agreed upon modifications) to be divided among the Practices at the Practices' discretion, (ii) certain restrictive covenants, including but not limited to a covenant not to compete with a duration of the term of the Medical Director Agreement and three (3) years after termination of the Medical Director Agreement, and (iii) other customary terms and conditions. The Owners agree that a Medical Director Agreement substantially in the form of Exhibit 8.9 attached hereto will be entered into at the Closing by them and their practices. 8.10 Right of First Refusal. The Owners recognize the opportunities to provide care for End Stage Renal Disease in an integrated manner and agree to work in good faith with RCG to pursue opportunities for RCG and its affiliates to offer the full range of dialysis services, including physician and transplant services, to payors, health maintenance and other managed care organizations. Furthermore, the Owners agree to work in good faith with RCG or any of its affiliates for the provision of medical director services for dialysis treatment and for the provision of nephrology physician services at the facilities of RCG acquired from or operated through the Company after the Closing, and agree that for a period of three years from the Closing Date, the Owners will allow RCG to have a right of first refusal with respect to any proposed contract or other arrangement with a third party for the sale or management of the Owner's medical practice on the same terms and conditions as proposed by such third party, provided that such offer - 26 - 28 shall not apply to any a transaction in which the Owner's medical practice would join the multispecialty physician group from which the Owner's practice has received substantially all of its patient referrals. RCG or any of its affiliates may accept the offer by giving written notice of such acceptance at any time within 20 days following receipt of written notice of the offer. No activities of any Owner under this Section 8.10 shall be deemed a violation of Section 8.8 hereof. 8.11 Delivery of Schedules. As soon as reasonably practical following the execution hereof, the Companies and the Owners shall deliver all Schedules to be delivered by them to RCG and its counsel accompanied by a certificate, executed by the Companies and the Owners stating that all Schedules required to be delivered by them hereunder have been delivered. The Companies and the Owners understand and acknowledge that RCG's obligation to consummate the Closing is subject to its satisfactory review of said Schedules as contemplated by Section 9.6 hereof. After receipt of all such Schedules and the certificate, RCG shall complete its review of said Schedules and notify the Company of its satisfaction with said Schedules at least ten (10) days prior to Closing. 8.12 Availability of Rule 144 Information. For so long as RCG is subject to the 1934 Act, RCG shall take all actions necessary to enable the Owners to sell any shares of RCG Stock received by them without registration under the 1933 Act within the limitations of the exemption provided by Rule 144 under the 1933 Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission, including filing on a timely basis all reports required to be filed by the 1934 Act. Upon the request of an Owner, RCG shall deliver to such Owner a written statement as to whether it has complied with such requirements. 8.13 Approval of Transactions. Subject to Article 11 hereof, each Owner, through the execution and delivery of this Agreement, irrevocably votes for and approves the Merger in its capacity as a holder of Company Equity Securities and each such Owner does hereby waive any required notice for any meeting concerning such matters. Subject to Article 11 hereof, at any further meeting of the Owners of the Company called to vote on the Mergers or in any other circumstances upon which a vote, consent or other approval with respect to the Mergers is sought, such Owner shall vote (or cause to be voted), such Owner's Company Equity Securities in favor of the Mergers and the execution, delivery and performance by the Companies of the Merger Documents. Each Owner acknowledges and agrees that he, she or it has had adequate opportunity to review the terms and conditions of the Mergers and to seek independent legal, tax and financial advice. 8.14 Accounting and Tax Treatment. Each of the parties undertakes and agrees to use its reasonable efforts to cause the Mergers, and to take no action which would cause the Mergers not, to qualify for pooling-of-interests accounting treatment and treatment as a "reorganization" within the meaning of Section 368(a) of the Code for federal income tax purposes. Each Owner agrees that he will not sell, transfer, or otherwise dispose of his interests in, or reduce his risk relative to, any of the shares of RCG Common Stock into which his shares of Company Common Stock are converted upon consummation of the Merger until such time as the requirements of SEC Accounting Series Release Nos. 130 and 135 ("ASR 130 and 135") have been met. Each Owner understands that ASR 130 and 135 relate to publication of financial results of post-Merger combined operations of RCG and the Companies. RCG agrees to promptly notify the Owners following satisfaction of the requirements of ASR 130 and 135. 8.15 Resignation and Releases. Simultaneously with the execution and delivery of this Agreement, each officer, director and Owner of the Companies shall deliver a Resignation and Release, to be effective as of the Closing, in the form of Exhibit 8.15 to this Agreement. 8.16 Representations on RCG Board of Directors and Medical Advisory Board. RCG agrees that it shall at the Closing increase the number of members to its Board of Directors by one and add an individual specified by the Companies as a new member, with such member subject to the reasonable approval of RCG, to serve an initial term ending on the date of RCG's 1999 Annual Meeting of its stockholders. Further, RCG shall recommend to its stockholders at such 1999 Annual Meeting that such - 27 - 29 designee, or such other designee reasonably approved by RCG, serve for an additional three (3) year term as a member of the Board of Directors of RCG. Furthermore, RCG agrees to name a physician specified by the Companies, who shall be subject to the reasonable approval of RCG, as a member of RCG's Medical Advisory Board. 8.17 Grant of Options. At Closing, RCG shall grant options to purchase an aggregate of 270,000 shares of RCG Common Stock to employees of the Companies. Such options shall (i) to the extent possible be granted under RCG's 1996 Stock Option Plan, (ii) be non-qualified stock options for tax purposes, (iii) be allocated among the employees or consultants of the Companies in a manner mutually agreed with RCG prior to the Closing, (iv) vest over a five-year period, and (v) have exercise prices equal to the closing price of the RCG Common Stock on the Nasdaq National Market on the Closing Date. The additional terms of said options shall be commensurate with similar stock options granted generally by RCG to similarly situated employees and affiliates of RCG. 8.18 Arizona Operations. RCG agrees that the main office of RenalWest in Mesa, Arizona, will serve as the executive headquarters of RCG's southwest region, which will include the existing operations of the Companies in Mesa plus all centers newly developed or acquired in the states of Arizona, New Mexico, Colorado, Utah, Nevada and California (the "Southwest Region"), and that John Greksa, the current Chief Executive Officer of RenalWest, will serve as the Chief Operating Officer of the Southwest Region while he is employed with RCG. The foregoing covenant shall expire upon the later to occur of the fifth anniversary of the Closing Date or the date on which Sam A. Brooks, Jr. ceases to serve as the Chief Executive Officer of RCG. 8.19 Pre-Closing Distributions to Members. The parties intend and agree that, solely in a manner consistent with prior practices, the income of RenalWest earned prior to the Closing shall be distributed to the Members and that the Members shall distribute such income to the Owners. Such distributions by RenalWest shall be made in accordance with the respective ownership interests therein of the Members and such distributions to the Owners shall be made in accordance with their respective ownership of the Members, all of which shall be consistent with past practices. The Owners agree that they shall be responsible for their personal income tax liability resulting from such distributions. RCG agrees to provide reasonable cooperation to assist with the accounting and completion of such distributions. 8.20 Filings with State Offices. Upon the terms and subject to the conditions of this Agreement, the Members and the Merger Corps. shall execute and file Articles of Merger with the Secretary of State of Arizona in connection with the Closing. 8.21 Availability of Books and Records. RCG agrees to cause the Companies to make available in a reasonable manner the books and records of the Companies to enable the Owners to complete the tax returns and other matters described in Section 5.19 and for general review by the Owners for a period of three (3) years following the Closing. 8.22 Conditions to Closing. The Owners, the Companies and RCG agree to use their commercially reasonable efforts to satisfy the closing conditions set forth in Articles 9 and 10 of this Agreement by September 30, 1996, and if not by such time, as soon thereafter as possible. ARTICLE 9 CONDITIONS TO OBLIGATIONS OF RCG AND MERGER CORP. The obligation of RCG and the Merger Corps. to consummate the Mergers is subject to the satisfaction or waiver, at or prior to Closing, of each of the following conditions: 9.1 Representations and Warranties. The representations and warranties of the Companies and the Owners set forth in this Agreement, or any document or instrument delivered to RCG hereunder, - 28 - 30 shall be true and correct as of the Effective Time with the same force and effect as if such representations and warranties had been made at and as of the Effective Time, except with respect to any of such representations and warranties referring to a state of facts existing on a specified date prior to the Closing Date, it shall be sufficient if at the Effective Time such representation and warranty continues to describe accurately the state of facts existing on the date so specified. 9.2 Performance; Covenants. All of the terms, covenants and conditions of the Merger Documents to be complied with or performed by the Companies or the Owners at or prior to Closing shall have been complied with and performed in all material respects including, but not limited to, the delivery of the following documents: (a) A good standing certificate regarding the Companies, certified by the Secretary of State of Arizona dated within fifteen (15) business days of the Closing; (b) A certificate dated as of the Closing Date signed by the duly authorized officers of the Companies and by the Owners certifying the satisfaction of the condition in Section 9.1 and that the Companies and each of the Owners have fulfilled all of the conditions of this Article 9; (c) Written consents of all third parties necessary for the consummation of the transactions contemplated by the Merger Documents; (d) Resolutions of the Companies (Board and shareholder) in form and substance reasonably satisfactory to RCG approving the execution, delivery and performance of this Agreement and the consummation of the Mergers, certified by an appropriate officer of the Companies; (e) An incumbency certificate certifying the identity of the officers of the Companies; and (f) Resignations and Release of each of the officers, directors and Owners of the Companies (as applicable) effective as of the Effective Time; (g) The Medical Director Agreements entered into by the Practices as described in Section 8.9; (h) All books and records of the Companies, including all corporate and other records, minute books, stock record books, stock registers, books of accounts, contracts, agreements and such other documents or certificates as shall be reasonably requested by RCG; and (i) All agreements or arrangements, whether written or oral, among the Owners and/or the Companies that relate in any manner to the Company Equity Securities shall have been terminated. 9.3 Necessary Consents and Approvals. RCG, the Companies and the Owners shall have obtained all licenses, consents and permits, provided all notices, and all waiting periods required by Law shall have expired, necessary in order for RCG, the Merger Corps. and the Companies to consummate the Mergers and for the continued operation of the business of the Company after the Effective Time consistent with their operation prior to the Effective Time, including all consents and approvals listed on the Schedules hereto. 9.4 No Material Adverse Change. There shall not have occurred any material adverse change in the business, assets, liabilities or condition, financial or otherwise, of the Companies, taken a whole, between the date hereof and the Effective Time, and a certificate shall have been delivered to RCG to such effect signed by each of the Owners and such executive officers of the Companies as RCG may request. - 29 - 31 9.5 No Injunction, Etc. No action, proceeding, investigation or legislation shall have been instituted, threatened or proposed before any court, governmental agency, or legislative body to enjoin, restrain, prohibit or obtain substantial damages in respect of, or which is related to, arises out of, this Agreement or the consummation of the Mergers, or which is related to or arises out of the business or operations of the Companies, if such action, proceeding, investigation or legislation, in the reasonable judgment of RCG or its counsel, would make it inadvisable to consummate such transactions. 9.6 Satisfactory Due Diligence. RCG shall in all respects be reasonably satisfied with the results of its due diligence investigation of the Company, including its continuing review of matters contained or not contained in the Schedules. 9.7 Legal Opinion. RCG shall have received an opinion of counsel to the Company and Owners in form and substance reasonably satisfactory to RCG . 9.8 Pooling Letter. RCG shall have received, from Ernst & Young LLP, assurances in form and substance reasonably acceptable to RCG to the effect that the Mergers will qualify for pooling-of-interests accounting treatment. 9.9 Stockholder Approval. The Mergers shall have been approved by the stockholders of RCG. 9.10 Employment Agreements. Each of John Greksa, Jeff Weintraub and Ron Fuller shall have entered into an Employment Agreement in form and substance reasonably satisfactory to RCG. 9.11 Dissenter's Rights. No Owner shall have exercised dissenter's or appraisal rights under any applicable law in respect of the Mergers. ARTICLE 10 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE OWNERS The obligations of the Companies and the Owners to close the Mergers are subject to the satisfaction or waiver, at or prior to Closing, of each of the following conditions: 10.1 Representations and Warranties. The representations and warranties of RCG and the Merger Corp. set forth in this Agreement, or any document or instrument delivered to any party hereunder, shall be true and correct as of the Effective Time with the same force and effect as if such representations and warranties had been made at and as of the Effective Time, except with respect to any of such representations and warranties referring to a state of facts existing at a specified date prior to the Closing Date, it shall be sufficient if at the Effective Time such representation and warranty continues to describe accurately the state of facts existing on the date so specified. 10.2 Performance; Covenants. All of the terms, covenants and conditions of this Agreement to be complied with or performed by RCG at or prior to the Closing shall have been complied with and performed in all material respects, including, but not limited to delivery of the following documents: (a) A good standing certificate regarding the Merger Corps. certified by the Secretary of State of Arizona, each dated within 15 days prior to Closing; (b) A certificate dated as of the Closing Date signed by a duly authorized officer of RCG and the Merger Corps. certifying the satisfaction of the condition in Section 10.1 and that RCG and the Merger Corps. have fulfilled all of the conditions of this Article 10; - 30 - 32 (c) Resolutions adopted by the Board of Directors of RCG and the Board of Directors and shareholder of the Merger Corps. in form and substance satisfactory to the Companies and the Owners approving the execution, delivery and performance of this Agreement and the consummation of the Mergers, certified by the Secretary of RCG and the Merger Corps., respectively; (d) The Medical Director Agreement entered into by RCG as described in Section 8.9; and (e) An incumbency certificate certifying the identity of the officers of RCG. 10.3 Necessary Consents and Approvals. RCG, the Companies and the Owners shall have obtained all licenses, consents and permits, provided all notices, and all waiting periods required by Law shall have expired, necessary in order for RCG, the Merger Corps. and the Companies to consummate the Mergers and for the continued operation of the business of the Company after the Effective Time consistent with their operation prior to the Effective Time, including all consents and approvals listed on the Schedules hereto. 10.4 No Material Adverse Change. There shall not have occurred any material adverse change in the business, assets, liabilities or condition, financial or otherwise, of RCG between the date hereof and the Effective Time, and a certificate shall have been delivered to the Companies and the Owners to such effect signed by an authorized officer of RCG. 10.5 No Injunction, Etc. No action, proceeding, investigation or legislation shall have been instituted, threatened or proposed before any court, governmental agency, or legislative body to enjoin, restrain, prohibit or obtain substantial damages in respect of, or which is related to, arises out of, this Agreement or the consummation of the Mergers, or which is related to or arises out of the business or operations of RCG, if such action, proceeding, investigation or legislation, in the reasonable judgment of the Companies or their counsel, would make it inadvisable to consummate such transactions. 10.6 Legal Opinion. The Owners shall have received an opinion of counsel to RCG in form and substance reasonably satisfactory to the Owners. 10.7 SEC and Exchange Approval. RCG shall have taken all actions and complied in all material respects with requirements necessary to notify and obtain any consents from the SEC, Nasdaq and any state securities law regulatory agency of all actions contemplated by this Agreement. 10.8 Approval of Registration Rights. RCG shall have obtained the requisite approval of its stockholders currently holding registration rights for the grant of the registration rights provided to the Owners in Article 13 hereof. 10.9 Satisfactory Due Diligence. The Owners shall in all respects be reasonably satisfied with the results of the due diligence investigation of RCG. 10.10 Pooling Letter. RCG shall not have waived the condition in Section 9.8. 10.11 Employment Agreements. RCG shall have caused RenalWest to enter into an employment agreement with each of John Greksa, Jeff Weintraub and Ron Fuller on terms and conditions reasonably satisfactory to and approved by RenalWest prior to the Closing. - 31 - 33 ARTICLE 11 TERMINATION 11.1 Right of Termination. This Agreement and the Mergers may be terminated at any time prior to the Closing Date: (a) By the mutual written consent of RCG and each Company. (b) By RCG or the Companies as contemplated in Section 3.1(b)(iii) and (v). (c) By RCG in the event that the conditions set forth in Article 9 of this Agreement shall not have been satisfied or waived by October 31, 1996, unless such satisfaction shall have been frustrated or made impossible by any act or failure to act of RCG. (d) By the Companies in the event that the conditions set forth in Article 10 of this Agreement shall not have been satisfied or waived by October 31, 1996, unless such satisfaction shall have been frustrated or made impossible by any act or failure to act of any Company or one or more of the Owners. (e) By the Companies or RCG if the Closing shall not have occurred by November 30, 1996. 11.2 Effect of Termination. In the event of termination in accordance with Section 11.1, this Agreement shall become void and of no further force or effect, without any liability on the part of any of the parties hereto or their respective owners, directors, officers or employees, except the obligations of each party to preserve the confidentiality of documents, certificates and information furnished to such party pursuant thereto and for any obligation or liability of any party based on or arising from any breach or default by such party with respect to its representations, warranties, covenants or agreements contained in the Merger Documents. ARTICLE 12 INDEMNIFICATION 12.1 Indemnification by Owners. (a) Subject to Sections 12.3 through 12.6, each Owner shall, severally and not jointly, indemnify and hold harmless RCG, the Surviving Corporations and their respective officers, directors, agents or affiliates, from and against any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), liabilities, costs and expenses, including but not limited to reasonable attorneys' fees ("Losses"), suffered or incurred by any such party by reason of or arising out of any of the following: (i) the breach of any representation or warranty contained in Article 6 hereof or in any document or instrument delivered by such Owner in connection with the Merger Documents; and (ii) the non-fulfillment of any covenant or agreement of such Owner contained in the Merger Documents. (b) Subject to Sections 12.3 through 12.6, the Owners shall jointly and severally indemnify and hold harmless RCG, the Surviving Corporations and their respective officers, directors, agents or affiliates, from and against any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), liabilities, costs and - 32 - 34 expenses, including but not limited to reasonable attorneys' fees ("Losses"), suffered or incurred by any such party by reason of or arising out of any of the following: (i) the breach of any representation or warranty contained in Article 5 hereof or in any document or instrument delivered by the Companies in connection with the Merger Documents; and (ii) the non-fulfillment of any covenant or agreement of the Companies contained in the Merger Documents. (c) No claim for indemnification with respect to any alleged misrepresentation or breach of warranty may be made (i) thirty days after the first publication by RCG of audited consolidated financial statements covering an accounting period after the Closing Date for those items that would be expected to be encountered in the audit process or (ii) one (1) year after the Closing Date for all other items; provided, however, that the right to indemnification shall extend beyond such period with respect to any specific claim for indemnification for which written notice was given to the Owners during such period but shall expire on the expiration of the applicable statutes of limitations unless an action has been brought with respect thereto. 12.2 Indemnification by RCG. (a) Subject to Sections 12.3 through 12.6, RCG shall indemnify and hold harmless the Owners, and any of their officers, directors, agents and affiliates, at all times after the date hereof from and against any and all Losses suffered or incurred by any such party by reason of, or arising out of any of the following: (i) any misrepresentation, breach of warranty or breach or non-fulfillment of any agreement of RCG contained in any Merger Document or any document or instrument delivered by RCG in connection therewith; and (ii) the non-fulfillment of any covenant or agreement of RCG contained in the Merger Documents hereof. (b) No claim for indemnification with respect to any alleged misrepresentation or breach of warranty may be made (i) thirty days after first publication by RCG of audited consolidated financial statements covering an accounting period after the Closing Date for those items that would be expected to be encountered in the audit process or (ii) one (1) year after the Closing Date for all other items; provided, however, that the right to indemnification shall extend beyond such period with respect to any specific claim for indemnification for which written notice was given to RCG during such period but shall expire on the expiration of the applicable statutes of limitations unless an action has been brought with respect thereto. 12.3 Notice and Opportunity to Defend. The party indemnified under this Article 12 (the "Indemnified Party") shall promptly notify in writing the indemnifying party (the "Indemnifying Party") of any matter giving rise to an obligation to indemnify and the Indemnifying Party shall defend such claim at its expense with counsel reasonably acceptable to the Indemnified Party, provided that the Indemnifying Party may not settle any such claim without the consent of the Indemnified Party. The Indemnified Party agrees to cooperate with the Indemnifying Party and to make reasonably available to the Indemnifying Party any necessary records or documents in the possession of the Indemnified Party which are necessary to defend such claim. If the Indemnifying Party does not defend or settle such claim, the Indemnified Party may do so without the Indemnifying Party's participation, in which case the Indemnifying Party shall pay the expenses of such defense, and the Indemnified Party may settle or compromise such claim without the Indemnifying Party's consent. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder except to the extent that the Indemnifying Party is actually prejudiced by such failure to give notice. - 33 - 35 12.4 Indemnification Deductible. Except with respect to any indemnification claim under Sections 12.1(a)(ii), 12.1(b)(ii) or 12.2(a)(ii), no Indemnifying Party (with the Owners as a group deemed as a single Indemnifying Party for this purpose) shall be required to indemnify the Indemnified Party (with the Owners as a group deemed as a single Indemnifying Party for this purpose) unless the amount of the loss or claim for which indemnification is sought, when aggregated with all other losses and claims for which indemnification is sought by the Indemnified Party (with the Owners as a group deemed as a single Indemnifying Party for this purpose), exceeds $200,000, at which time rights to indemnification for losses and claims may be asserted for any amounts in excess of $200,000. 12.5 Indemnification Limit. (a) In no event shall any Owner be required to satisfy an indemnification obligation in excess of one hundred percent (100%) of the aggregate value of the shares of RCG Common Stock (valued at the Average Trading Price) to be received by such Owner and in no event shall RCG be required to satisfy an indemnification obligation in excess of one hundred percent (100%) of the aggregate value of all of the shares of RCG Common Stock (valued at the Average Trading Price) issued as consideration hereunder. (b) The obligations to indemnify under this Article 12 shall be satisfied solely and exclusively by means of delivery by the Indemnifying Party to the Indemnified Party of shares of RCG Common Stock whose Average Trading Price equals the amount for which the Indemnified Party is entitled to be indemnified, provided that the Owners shall be obligated to satisfy their indemnification obligation in cash to the extent that they no longer hold a sufficient number of shares of RCG Common Stock to satisfy their obligation. 12.6 Survival, Exclusivity and Insurance. The representations and warranties of the parties contained in the Merger Documents or in any document or instrument delivered in connection therewith shall survive the Closing and shall not be extinguished thereby notwithstanding any investigation or other examination by any party, provided that from and after the Closing the remedies set forth in this Article 12 shall constitute the sole and exclusive remedy for any inaccuracy or breach of any such representation or warranty. The limitations contained in this Article 12 shall not apply to fraud or intentional misrepresentation. ARTICLE 13 REGISTRATION RIGHTS 13.1 General. (a) For purposes of this Article 13, (i) the term "Registrable Securities" means (1) the RCG Common Stock issued to the Owners pursuant to this Agreement and (2) any security issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of (pursuant to any reorganization, recapitalization, business combination or otherwise), such RCG Common Stock and (ii) the term "Holder" means the Owners or a transferee of Registrable Securities to which the Owners may transfer their registration rights pursuant hereto, but not a transferee of any such transferee. (b) RCG hereby grants to the Holders the right to include their Registrable Securities in a registration for resale upon the same terms and conditions as granted by RCG to its existing stockholders (the "Founding Stockholders"), a copy of which registration rights is attached hereto as Appendix A and which are hereby granted and made applicable to the Owners with the following modifications: - 34 - 36 (i) RCG will undertake reasonable commercial efforts to file a registration statement for the Secondary Offering described in Section 1.2(a) of Appendix A with the SEC by November 30, 1996 and thereafter to take reasonable commercial efforts to have said registration statement declared effective by the SEC as soon as practicable. (ii) To the extent permissible under the "pooling of interests" rules described in Section 8.14 of this Agreement, the Owners shall have the right to include up to forty percent (40%) of their aggregate Registrable Securities in any such Secondary Offering, provided that said Registrable Securities are allocated among the Owners in a manner reasonably acceptable to RCG. (iii) The Owners, acting by a majority in interest, shall have the right independently to elect the demand registration rights described in Section 1.2(a) of Appendix A and shall have the right to include up to twenty percent (20%) of their Registrable Securities in any such demand registration. (iv) Notwithstanding Section 1.11 of Appendix A, the rights granted in this Article 13 shall not expire until the expiration of the holding period specified in paragraph (d) of Rule 144 under the 1933 Act with respect to the Registrable Securities, as said Rule may be amended after the date hereof. (v) Notwithstanding Section 1.2(c) of Appendix A, if Holders (i.e., Owners and their transferees as defined in this Agreement) proposing to distribute their Registrable Securities shall be prevented from including at least eighty percent (80%) of the Registrable Securities proposed to be distributed by them, then RCG shall be obligated to effect one (1) additional demand registration pursuant to Section 1.2 upon the request of Holders. (vi) Notwithstanding Section 1.3 of Appendix A, the Holders shall have the right to include up to forty percent (40%) of their aggregate Registrable Securities in any such Piggy-Back Registration. (vii) Notwithstanding Section 1.9 of Appendix A, any Holder's registration rights hereunder may be assigned to a permitted transferee or assignee of Registrable Securities, provided that RCG is given written notice by such Holder at the time of or within a reasonable time of after such transfer, stating the name and address of said transferee or assignee and identifying the Registrable Securities with respect to which such registration rights are being assigned. Any transferee shall, as a condition of such transfer, agree that all transferred Registrable Securities are subject to the terms, conditions, provisions and agreement of this Agreement. (c) The foregoing rights in Section 13.1(b) are subject to RCG obtaining the written consent of the Founding Stockholders as required by Section 1.10 of Appendix A. (d) RCG agrees to undertake reasonable commercial efforts to satisfy the reporting requirements described in Section 8.14 in a manner to enable the Owners to participate in the Secondary Offering described above and to take other reasonable and appropriate actions to enable the owners to participate in such Secondary Offering. In the event that such Secondary Offering occurs and the Owners are not able to participate through no fault of them or the Companies, then RCG agrees to provide reasonable assistance to the Owners to aid them in obtaining a loan or loans from a third party (such loan secured by an adequate amount of their shares of Common Stock) until June 30, 1997 (the "Maturity Date"), including, if necessary, a guaranty by RCG to such third party lender of up to an aggregate of $1,500,000 of such loan or loans (such guaranty by RCG to be secured by an adequate number of the Owners' shares of RCG Common Stock and allocated among such Owner loans at their discretion). If such loan or loans are not available on terms and conditions otherwise reasonably acceptable to the Owners, RCG agrees to provide a loan or loans directly to the Owners of up to an aggregate amount of $1,500,000 (to be allocated among the Owners at their discretion) which (i) mature on the Maturity Date (ii) contain terms and - 35 - 37 conditions to the Owners no less favorable than are available to RCG from its third party lenders, and (iii) are secured by an adequate number of shares of RCG Common Stock. Either of the loan or loans described in this Section 13.1(d) shall be paid prior to the Maturity Date to the extent of the first available proceeds from any resale of the Owner's shares of RCG Common Stock under the registration rights provided herein. ARTICLE 14 CERTAIN DEFINITIONS Except as otherwise provided herein, the capitalized terms set forth below shall have the following meanings: "ABCA" shall mean the Arizona Business Corporation Act. "Agreement" shall mean this Agreement and Plan of Merger, including the Exhibits and Schedules delivered pursuant hereto and incorporated herein by reference. "Articles of Merger" shall mean the Articles of Merger to be executed by the Merger Corps. and the Members and filed with the Secretary of State of Arizona relating to the Mergers as contemplated by Section 1.1 of this Agreement. "Closing Date" shall mean the date on which the Closing occurs. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Company Equity Securities" shall mean the equity securities of each Company of any type, including but not limited to common stock, preferred stock, options to purchase the foregoing and securities convertible into any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean, with respect to any entity, any other entity, which, together with such entity, would be treated as a single employer (i) under Section 414(b) or (c) of the Code or (ii) for purposes of any Benefit Plan subject to Title IV of ERISA, under Section 414(b), (c), (m) or (o) of the Code. "Exhibits" shall mean the Exhibits so marked, copies of which are attached to this Agreement. Such Exhibits are hereby incorporated by reference herein and made a part hereof, and may be referred to in this Agreement and any other related instrument or document without being attached hereto. "HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Law" shall mean any code, law, ordinance, regulation, reporting or licensing requirement, rule, or statute applicable to a person or its assets, Liabilities or business, including those promulgated, interpreted or enforced by any Regulatory Authority. "Liability" shall mean any direct or indirect, primary or secondary, liability, indebtedness, obligation, penalty, cost or expense (including costs of investigation, collection and defense), claim, deficiency, guaranty or endorsement of or by any Person (other than endorsements of notes, bills, checks, and drafts presented for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute or contingent, liquidated or unliquidated, matured or unmatured, or otherwise. "Member Common Stock" shall mean the common stock of the Members. - 36 - 38 "Merger Corp. Common Stock" shall mean the $0.01 par value common stock of each Merger Corp. "Merger Documents" shall mean the Merger Agreement, including these terms and conditions, and all other agreements, instruments and documents to be executed and delivered in connection with the Merger Agreement and the transactions contemplated hereby. "NASD" shall mean the National Association of Securities Dealers, Inc. "1933 Act" shall mean the Securities Act of 1933, as amended. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. "Person" shall mean a natural person or any legal, commercial or governmental entity, such as, but not limited to, a corporation, general partnership, joint venture, limited partnership, limited liability company, trust, business association, group acting in concert, or any person acting in a representative capacity. "RCG Common Stock" shall mean the $0.01 par value common stock of RCG. "Regulatory Authorities" shall mean, collectively, all federal and state regulatory agencies having jurisdiction over the Parties and their respective Subsidiaries, including the NASD, and the SEC. "SEC" shall mean the Securities and Exchange Commission. "Surviving Corporations" shall mean the Members as the surviving corporations resulting from the Mergers. (b) In addition to the terms defined in Section 14.1 (a) above, the terms set forth below shall have the meanings ascribed thereto in the referenced sections: Anti-Dilution Event - Section 3.2 Indemnified Party - Section 12.3 Benefit Plans - Section 5.15 Indemnifying Party - Section 12.3 Closing - Section 1.2 IRS - Section 5.19 Closing Date - Section 1.2 Losses - Section 12.1 Company Agreements - Section 5.13 Medicare and Medicaid programs - Section 5.20 Confidential Data - Section 8.7(b) Merger - Section 1.1 Effective Time - Section 1.3 Merger Consideration - Section 3.1(b) Environmental Condition - Section 5.17 Merger Documents - Section 5.1 Exchange Agent - Section 4.1 Private Programs - Section 5.20 Financial Statements - Section 5.7 RCG Documents - Section 7.8 Government Programs - Section 5.20 Remuneration - Section 5.22
(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." - 37 - 39 ARTICLE 15 MISCELLANEOUS PROVISIONS 15.1 Notices. (a) Any notice sent in accordance with the provisions of this Section 15.1 shall be deemed to have been received (even if delivery is refused or unclaimed) on the date which is: (i) the date of proper posting, if sent by certified U.S. mail or by Express U.S. mail or private overnight courier; or (ii) the date on which sent, if sent by facsimile transmission, with confirmation and with the original to be sent by certified U.S. mail, addressed as follows: If to the Owners: c/o Jeff Weintraub ------------------------------ ------------------------------ ------------------------------ Telecopy Number: -------------- Copy to Counsel: Squire, Sanders & Dempsey Two Renaissance Square 40 North Central Avenue, Suite 2700 Phoenix, Arizona 85004 Telecopy Number: 602-253-8129 Attention: Christopher D. Johnson, Esq. If to RCG: Renal Care Group, Inc. 2100 West End Avenue, Suite 800 Nashville, Tennessee 37203 Telecopy Number: (615) 321-5419 Attention: Mr. Sam A. Brooks Copy to Counsel: Alston & Bird One Atlantic Center 1201 W. Peachtree Street Atlanta, Georgia 30309 Telecopy Number: (404) 881-7777 Attention: Steven L. Pottle, Esq.
(b) Any party hereto may change its address specified for notices herein by designating a new address by notice in accordance with this Section 15.1. 15.2 Owner's Representative. (a) The Owners have and do hereby irrevocably make, constitute and appoint Jeff Weintraub as their agent (the "Owner's Representative") and authorize and empower him to fulfill the role of Owner's Representative hereunder. In the event of the resignation of the Owner's Representative, the resigning Owner's Representative shall appoint a successor from among the Owners and who shall agree in writing to accept such appointment. If the Owner's Representative should die or become incapacitated, his successor shall be appointed within 15 days of his death or incapacity by a majority of the Owners, and such successor shall be a Owner. The choice of a successor Owner's Representative appointed in any manner permitted above shall be final and binding upon all of the Owners. The decisions and actions of any successor Owner's Representative shall be, for all purposes, those of a Owner's Representative as if originally named herein. (b) Each Owner has made, constituted and appointed and by the execution of this Agreement hereby irrevocably makes, constitutes and appoints the Owner's Representative as such person's true and lawful attorney in fact and agent, for such person and in such person's name, place and stead for all purposes necessary or desirable in order for the Owner's Representative to take the actions contemplated by - 38 - 40 the Merger Documents on behalf of the Owners, with the ability to execute and deliver all instruments, certificates and other documents of every kind incident to the foregoing to all intents and purposes and with the same effect as such Owner could do personally, and each such Owner hereby ratifies and confirms as his, her, or its own act, all that the Owner's Representative shall do or cause to be done pursuant to the provisions hereof. All Claim Notices and all other notices and communications directed to Owners under this Agreement shall be given to the Owner's Representative. (c) The death or incapacity of any Owner shall not terminate the authority and agency of the Owner's Representative. (d) The Owners hereby agree to indemnify the Owner's Representative and to hold him or her harmless against any and all loss, liability or expense incurred without bad faith on the part of the Owner's Representative and arising out of or in connection with his or her duties as Owner's Representative, including the reasonable costs and expenses incurred by the Owner's Representative in defending against any claim or liability in connection herewith. 15.3 Expenses. Each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, provided, however, all legal, accounting and other fees and expenses incurred by the Companies and the Owners concerning the transactions contemplated hereby in excess of $150,000 shall be paid by the Owners at the Closing or thereafter when due. 15.4 Further Assurances. Each party covenants that at any time, and from time to time, after the Closing, it will execute such additional instruments and take such actions as may be reasonably requested by the other parties to confirm or perfect or otherwise to carry out the intent and purposes of this Agreement. 15.5 Waiver. Any failure on the part of any party to comply with any of its obligations, agreements or conditions hereunder may be waived by any other party to whom such compliance is owed. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. 15.6 Assignment. This Agreement shall not be assignable by any of the parties hereto without the written consent of all other parties. 15.7 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and assigns. This Agreement shall survive the Closing and not be merged therein. 15.8 Headings. The section and other headings in this Agreement are inserted solely as a matter of convenience and for reference, and are not a part of this Agreement. 15.9 Entire Agreement. This Agreement and the Exhibits, Schedules, certificates and other documents delivered pursuant hereto or incorporated herein by reference, contain and constitute the entire agreement among the parties and supersede and cancel any prior agreements, representations, warranties, or communications, whether oral or written, among the parties relating to the transactions contemplated by this Agreement. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an agreement in writing signed by the party against whom or which the enforcement of such change, waiver, discharge or termination is sought. 15.10 Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware, without regard to any applicable conflicts of Laws; provided, however, that the effectiveness and validity of the Mergers and Section 8.7 hereof shall be governed by the Laws of the State of Arizona. The provisions of this Agreement are severable and the - 39 - 41 invalidity of one or more of the provisions herein shall not have any effect upon the validity or enforceability of any other provision. 15.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15.12 No Brokers. The Owners, the Companies and RCG each represent to the others that no broker or finder has been employed in connection with the transactions hereunder. 15.13 Schedules and Exhibits. All Schedules and Exhibits attached to this Agreement are by reference made a part hereof. [Signatures appear on next page] - 40 - 42 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf and its corporate seal to be hereunto affixed and attested by officers thereunto as of the day and year first above written. ATTEST: RENAL CARE GROUP, INC. By: - ----------------------- ---------------------------- Secretary Title: -------------------------- [CORPORATE SEAL] ATTEST: RENAL THREE CORP. By: - ----------------------- ---------------------------- Secretary Title: -------------------------- [CORPORATE SEAL] ATTEST: RCG NINE CORP. By: - ----------------------- ---------------------------- Secretary Title: -------------------------- [CORPORATE SEAL] ATTEST: RCG FOUR CORP. By: - ----------------------- ---------------------------- Secretary Title: -------------------------- [CORPORATE SEAL] ATTEST: RENALWEST, L.C. By: - ----------------------- ---------------------------- Secretary Title: -------------------------- [CORPORATE SEAL] - 41 - 43 ATTEST: 3-CO.,INC. By: - ----------------------- ---------------------------- Secretary Title: -------------------------- [CORPORATE SEAL] ATTEST: 9-CO.,INC. By: - ----------------------- ---------------------------- Secretary Title: -------------------------- [CORPORATE SEAL] ATTEST: 4-CO.,INC. By: - ----------------------- ---------------------------- Secretary Title: -------------------------- [CORPORATE SEAL] OWNERS: -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- - 42 - 44 -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- - 43 - EX-10.2 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of February 6, 1996, by and between RENAL CARE GROUP, INC., a Delaware corporation (the "Company"), and RON HINDS (hereinafter "Employee"). WITNESSETH: WHEREAS, the Company desires to employ Employee, and Employee desires to be employed by the Company, on the terms and conditions contained herein; and WHEREAS, in serving as an employee of the Company, Employee has and will participate in the use and development of confidential proprietary information about the Company, its customers and suppliers, and the methods used by the Company and its employees in competition with other companies, as to which the Company desires to protect fully its rights; and WHEREAS, the Company wishes to enter into an agreement with Employee whereby Employee shall agree not to compete with the Company in any current or future business activity conducted or entered into by the Company and to hold certain information obtained by and through Employee's employment in confidence. NOW, THEREFORE, in consideration of the compensation payable to Employee by the Company pursuant to this Agreement, and the mutual promises, covenants, representations and warranties contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do agree as follows: 1. Employment. Effective on February 6, 1996, the Company hereby employs Employee, and Employee hereby agrees to accept employment with the Company, upon the terms and conditions hereinafter set forth. 2. Term. This Agreement shall begin on February 6, 1996 (the "Effective Date"), and shall continue for an initial period of thirty-six (36) months (the "Initial Period"), subject to earlier termination by employee or the Company as hereinafter provided. This Agreement shall renew for additional terms of twelve (12) months each, subject to earlier termination hereinafter provided, on the same terms and conditions (subject to mutually agreeable modifications, if any). 2 3. Compensation and Benefits (a) Base Compensation: The Company shall pay Employee an annual salary of One Hundred Seventy-Five Thousand Dollars ($175,000), as may be adjusted as provided herein (the "Base Compensation"), payable according to the pay periods of the Company as may be in effect from time to time. Such payment shall be prorated for periods less than a full pay period. The Base Compensation shall be subject to withholding for federal, state and local payroll and all other taxes or withholdings applicable to Employee. Any increase of the Base Compensation shall be at the discretion of the Company, provided that any decreases to the then current Base Compensation shall require the consent of the Employee. (b) Benefits: During the term of this Agreement, Employee shall also be entitled to participate in the insurance and other fringe benefits made available generally to similar employees of the Company, as such benefits may be determined from time to time by the Company, provided that Employee shall have at least four (4) weeks of paid vacation time. (c) Bonuses: In addition to the Base Compensation payable to the Employee pursuant to the Section 3(a) above, from time to time Employees may be entitled to an annual bonus as determined in the sole discretion of the Company. (d) Expenses: The Company shall reimburse Employee for any and all expenses reasonably incurred by employee incident to the performance of the duties imposed upon Employee hereunder. 4. Duties, Extent of Services. Employee is engaged as Executive Vice President and Chief Financial Officer and shall perform such duties and responsibilities as are typically incident thereto, and shall perform in a faithful and competent manner such additional duties as may be reasonably assigned from time to time by the Company. Such duties shall be performed on a full-time basis for the Company at the Company's offices in Nashville, Tennessee. Employee may be required, from time to time, to perform his duties temporarily hereunder at such other place or places as the Company shall reasonably require, provided that such period does not exceed thirty (30) consecutive days without Employee's consent and that during any such period Employee is able to return to Nashville, Tennessee at the Company's expense for weekends. Employee shall devote all of Employee's business time, attention, knowledge, and skill solely to the business and interest of the Company, and the Company shall be entitled to all the benefits, profits, and other issues arising from, or incident to, all work, services, and advice of Employee. 2 3 5. Termination. This Agreement may be terminated by the parties in the manners specified below: (a) Termination without Cause. Either the Company or the employee may terminate Employee's employment under this Agreement at any time for any reason upon thirty (30) day's prior written notice to the other party. (b) Termination for Cause. The Company may terminate this Agreement on written notice at any time for "cause". For purposes of this Agreement, "cause" shall mean: (i) Employee is convicted of, pleads guilty to, or confesses to a felony or any crime involving any act of dishonesty, fraud, misappropriation, embezzlement or moral turpitude, in which event the Company may terminate this Agreement immediately, (ii) the misconduct or gross negligence by Employee in connection with the performance of Employee's duties hereunder, (iii) the engaging by Employee in any fraudulent, disloyal or unprofessional conduct which results in an injury to the Company, its affiliates or any of its or their centers, monetarily or otherwise, (iv) Employee breaches any provision of Section 6 of this Agreement, or (v) the failure by Employee to otherwise substantially perform his duties with the Company (other than any such failure resulting from the disability of Employee under Section 5(c)(i)) or the breach of any provision of this Agreement other than Section 6. In the event of any termination for cause pursuant to the provisions of (ii), (iii), (iv) or (v) of this subsection, the Company shall give Employee written notice prior to such termination detailing the specific acts, actions, failures, or events upon which the forecast termination is based, and Employee shall have fifteen (15) days after such written notice to cease such actions or otherwise correct any such failure or breach. If Employee does not cease such action or otherwise correct such failure or breach within such fifteen day time period, or having once received such written notice and ceased such actions or corrected such failure or breach, Employee at any time thereafter again so acts, fails or breaches, the Company may terminate this Agreement immediately. (c) Involuntary Termination. The employment of Employee hereunder shall be automatically terminated by the death or disability of Employee as outlined below. (i) Disability. The Company may terminate this Agreement at the time Employee shall have been Disabled for a continuous period of six (6) months during any continuous twelve month period. For purposes of this Paragraph 5(c)(i), the term "Disabled" shall mean Employee's inability to perform the essential functions of his duties, with or without reasonable accommodation. During Employee's six month period of Disability or such longer wait period as may be provided for in any policy of disability that may be maintained by the Company for the benefit of Employee, the Company agrees to continue to pay Employee's Base 3 4 Compensation (less regular withholdings for payroll or other taxes and other required or proper items, and less any payments from all disability plans provided by the Company). In the event of a termination of Employee on account of Disability, however, the Company shall be obligated to pay only Employee's Base Compensation that has been earned through the effective date of termination (less regular withholdings for payroll or other taxes and other required or proper times, and less any payments from all disability plans provided by the Company). (ii) Death. In the event Employee shall die during the term of this Agreement, this Agreement shall terminate and Employee's estate shall receive the remainder of the Base Compensation set forth in Section 3(a) hereof accrued to the last day of the month in which death occurs. (d) Post-Termination Compensation. Except as provided in Section 5(c) above, upon termination of this Agreement, the Company shall be relieved of all of its obligations hereunder notwithstanding any period of time remaining under the initial or any renewal term, subject to the following: (i) Termination without Cause. In the event that the Company terminates Employee's employment hereunder without Cause under Section 5(a) above, then Employee shall, after the effective date of such termination, as Employee's sole and exclusive remedy, receive the Base Compensation (as then in effect) for a period of twelve (12) months after the termination date. If the Employee's employment is terminated by the Company without Cause, the Employee shall be under no duty to seek or accept other employment; but if he shall do so, any compensation he shall receive therefrom shall not diminish the Company's obligation to make payments required to the Employee hereunder. In the event that Employee terminates his or her employment under Section 5(a) above, the Company's obligation to pay Employee's Base Compensation shall terminate as of the date of termination. (ii) Termination for Cause. In the event that the Company terminates Employee's employment hereunder with Cause under Section 5(b) above, then Employee shall, after the effective date of such termination, as Employee's sole and exclusive remedy, receive the Base Compensation (as then in effect) for a period of one (1) month after the termination date. (iii) Termination following Change in Control. If within twelve (12) months following a Change in Control (as defined below), either (A) the Company terminates the employment of Employee hereunder without Cause under Section 5(a) above or (B) Employee resigns from a declined reassignment of a job that is not reasonably equivalent in responsibility or compensation or that is not in the same geographical area, then, in lieu of any other compensation that may be specified herein, Employee shall continue to receive the Base Compensation (as then in effect) for a period of thirty-six (36) months from the date of termination payable in the same manner as it was being paid as of the date of termination, provided, however, that the salary payment provided for hereunder may at the option of the Company be paid in a single lump-sum payment, to be paid not later than thirty (30) days after termination. In the event such payment obligation arises, no compensation received from other 4 5 employment (or otherwise) shall reduce the obligation to make the payment(s) described in this paragraph. (e) Change in Control. "Change in Control" means a change in control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of a Current Report on Form 8-K pursuant to Section 13 of 15(d) of the Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, a Change in Control shall also be deemed to have occurred at such time as: (i) any "person" within the meaning of Section 14(d) of the Exchange Act, other than the Company; a subsidiary, or any employee benefit plan(s) sponsored by the Company or any Subsidiary, is or has become the "beneficial owner," as defined in rule 13d-3 under the Exchange Act, directly or indirectly, of 25% or more of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at the election of directors, or (ii) individuals who constitute the Board immediately prior to any meeting of stockholders (the "Incumbent Board") have ceased for any reason to constitute at least a majority thereof, provided that any person becoming a director whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (iii) upon approval by the Company's stockholders of a reorganization, merger, share exchange or consolidation, other than one with respect to which those persons who were the beneficial owners, immediately prior to such reorganization, merger, share exchange or consolidation, or outstanding securities of the Company ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than 75% of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors; or (iv) upon approval by the Company's stockholders of a complete liquidation and dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company other than to a Subsidiary. Notwithstanding the occurrence of any of the foregoing, the Board may determine, if it deems it to be in the best interest of the Company and consistent with a good faith interpretation of this Agreement, that an event or events otherwise constituting a Change in Control shall not be so considered. Such determination shall only be effective (A) if it is made by the Board prior to the occurrence of an event that otherwise would be or probably will lead to a Change in Control or after such event if made by the Board a majority of which is composed of directors who were 5 6 members of the Board immediately prior to the event that otherwise would be or probably will lead to a Change in Control and 75% or more of such directors vote in favor of such determination, and (B) if it is made with respect to all executive officers of the Company. Upon such determination, such event or events shall not be deemed to be in Change in Control for any purposes hereunder. 6. Nondisclosure, Confidentiality; Competition. (a) Employee agrees that, during the term of this Agreement and of Employee's employment by the Company, and for a period twelve (12) months after the termination of Employee's employment with the Company, Employee will not in any manner, directly or indirectly, by himself or in conjunction with any other person, (i) conduct any of the activities or perform any of the responsibilities or duties that Employee provided the Company during his employment by the Company for any business entity that is competitive with the business of the Company or its affiliates or (ii) establish or own any financial, beneficial or other interest in (other than an interest consisting of less than one percent (1%) of a class of publicly traded security), make any loan to or for the benefit of, or render any managerial, marketing or other business advice, to any entity that is then conducting activities that are competitive with those of the business of the Company or its affiliates, in either case with a geographic territory defined as the greater of (i) a seventy-five (75) miles radius of any renal dialysis center, unit or facility owned or operated by the Company or an affiliate of the Company (an "RCG Center"), or (ii) the geographic area, as narrowly construed as is practicable, from which the Company received patients at each of the RCG Centers. For purposes of this Section, the "business of the Company or its affiliates" shall mean owning or operating a renal dialysis center, unit or facility, and providing practice management services to nephrologists. (b) Employee further agrees that, for a period of three (3) years after the termination of Employee's employment with the Company, Employee will keep confidential and not directly divulge, or allow through a lack of reasonable care to be divulged to anyone, or use or otherwise appropriate for Employee's own benefit or for the benefit of others, any knowledge or information of a confidential nature with respect to the Company's and its affiliates' current business, the Company itself, or any of its affiliates, including all trade secrets, pricing information, marketing information or technical information (hereinafter referred to as the "Confidential Data"), except for (i) a disclosure that is required by law; or (ii) information that has been made generally available to the public by the act of one who has the right to disclose such information; or (iii) information that has become part of the public domain through no fault of the Employee; and (iv) was known to the Employee prior to June 1995. Employee hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies which the Company may have available pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of confidential information, and the enforcement by the Company of its rights and remedies pursuant hereto shall not be construed as a waiver of any other rights or available remedies which the Company may possess in law or equity. Employee acknowledges that the Company has 6 7 taken reasonable and appropriate steps to ensure the confidentiality and non-disclosure of all such Confidential Data. For purposes of this Section the Company's and its affiliates' "current business" shall mean owning or opening a renal dialysis center, unit or facility. (c) Employee further agrees that, for a period of three (3) years after the termination of Employee's employment with the Company, Employee will not, for his own benefit or the benefit of others, solicit any person or entity that has or has had, or disrupt or attempt to disrupt, any relationship, contractual or otherwise, with the Company or an affiliate of the Company (including any patient, payor, physician, provider, managed care organization or supplier) or any time during Employee's employment with the Company, for the purpose of assisting, or creating such a relationship for, any business entity that is competitive with the Company or an affiliate of the Company. For purposes of this Section, a business entity is competitive with the Company or an affiliate of the Company if it provides or offers any renal dialysis service that is provided by the Company or an affiliate of the Company. (d) Employee further agrees that, for a period of three (3) years after the termination of Employee's employment with the Company, Employee shall not induce, nor attempt to induce, any employee of the Company, or any of its affiliates, to terminate such employee's association with the Company or any of its affiliates. (e) These post-employment covenants are considered by the parties hereto to be fair, reasonable and integral for the protection of the Company. The parties mutually agree that if a violation of any of these covenants occurs, such violation or any threatened violation will cause irreparable injury to the Company and the remedy at law for any such violation will cause irreparable injury to the Company and the remedy at law for any such violation or threatened violation will be inadequate. The parties acknowledge that these covenants will survive, and remain in effect and enforceable after, termination of this Agreement. (f) Employee agrees to indemnify and hold harmless the Company from and against any and all claims, causes of action, damages and/or any other losses suffered or incurred by the Company as a result of any breach or purported breach by Employee of any agreement applicable to Employee which existed prior to the time of the entering into of this Agreement. Such obligations of Employee to indemnify and hold the Company harmless shall include any and all costs of defense of any such claim or threatened claim, including reasonable attorneys' fees. 7. Severability. The parties hereto hereby expressly agree and contract that it is not the intention of either party to violate any public policy, or any statutory or common law, and that if any paragraph, sentence, clause or combination of the same of this Agreement shall be in violation of the laws of any state where applicable, such paragraph, sentence, clause or the combination of the same shall be void in the jurisdictions where it is unlawful, and the remainder thereof shall remain binding on the parties hereto. It is the intention of the parties to make the covenants of 7 8 this Agreement binding only to the extent that they may be lawfully done under existing applicable laws. In the event that any part of any term or covenant of this Agreement is determined by a court of law or equity to be overly broad or otherwise unenforceable, the parties hereto agree that such court shall be empowered to substitute, and it is the intent of the parties hereto that such court substitute, a reasonably judicially enforceable term or limitation in the place of such unenforceable term or covenant, and that as so modified this Agreement shall be fully enforceable. 8. Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties and supersedes any and all prior understandings or agreements, and any changes or additions hereto must be in writing and signed by both parties. 9. Assignment. (a) The rights and benefits of Employee under this Agreement, other than accrued and unpaid amounts due under Section 3(a) hereof, are personal to Employee and shall not be assignable. (b) This Agreement may not be assigned by the Company except to an affiliate of the Company, provided that such affiliate assumes the Company's obligations under this Agreement; provided, further, that if the Company shall merge or effect a consolidation or share exchange with or into, or sell or otherwise transfer substantially all its assets to, another business entity, the Company may assign its rights hereunder to that business entity without the consent of the Employee provided that it causes such business entity to assume the Company's obligations under this Agreement. 10. Notice. The references to the notice periods of certain "days" contained in this Agreement shall mean calendar days. Any notice provided for in this Agreement shall be delivered to Employee at the most recent address of employee listed in the Company's then current employment records. Notice to the Company shall be delivered to the following address: c/o Renal Care Group, Inc., 2100 West End Avenue, Suite 800, Nashville, Tennessee 37203, Attention: President. 11. Waiver. The waiver by any party to this Agreement of a breach of any of the provisions contained herein shall not operate or be construed as a waiver of any subsequent breach. 8 9 12. Disputes and Governing Law. The Company and employee agree that any dispute arising in connection with, or relating to, this Agreement or the termination of this Agreement, to the maximum extent allowed by applicable law, shall be subject to resolution through informal methods and, failing such efforts, through arbitration. Either party may notify the other party of the existence of a dispute by written notice to the address indicated above in Section 10. The parties shall thereafter attempt in good faith to resolve their differences within thirty (30) days after the receipt of such notice. If the dispute cannot be resolved within such 30-day period, either party may file a written demand for arbitration with the other party. The arbitration shall proceed in accordance with the terms of the Federal Arbitration Act and the rules and procedures of the American Arbitration Association. A single arbitrator shall be appointed through the American Arbitration Association's procedures to resolve the dispute. The parties agree that in the event arbitration is necessary, the laws of the State of Tennessee and any applicable federal law shall apply. The place of the arbitration shall be Nashville, Tennessee. The award of the arbitrator shall be binding and conclusive upon the parties. Either party shall have the right to have the award made the judgement of a court of competent jurisdiction in the State of Tennessee. In the event of a dispute arising under this Agreement, the prevailing party shall be entitled to all reasonable attorneys' fees incurred in connection with such dispute. The Company agrees, to the maximum extent permitted by law and the By-laws of the Company, to defend and indemnify the Employee against and to hold the Employee harmless from any and all claims, suits, losses, liabilities, and expenses (including disputes arising under this Agreement and including reasonable attorney's fees and payment of reasonable expenses incurred in defending against such claim or suite as such expenses are incurred) asserted against the Employee for actions taken or omitted to be taken by the Employee in good faith and within the scope of his responsibilities as an officer or employee of the Company. If requested by the Employee, the Company shall advance to the Employee, promptly following the Company's receipt of any such request, any and all expenses for which indemnification is available hereunder. 9 10 IN WITNESS WHEREOF, the Company and Employee have executed this Agreement on the day and year first above written. COMPANY: RENAL CARE GROUP, INC. By: /s/ Sam A. Brooks ------------------------------------- Sam A. Brooks President [Corporate Seal] EMPLOYEE: /s/ Ronald Hinds (Seal) ---------------------------------- Ron Hinds 10 EX-10.16 4 AMENDED AND RESTATED 1996 STOCK OPTION PLAN 1 EXHIBIT 10.16 RENAL CARE GROUP, INC. AMENDED AND RESTATED 1996 STOCK OPTION PLAN ARTICLE I PURPOSE 1.1 GENERAL. The purpose of the Renal Care Group, Inc. Amended and Restated 1996 Stock Option Plan (the "Plan") is to promote the success, and enhance the value, of Renal Care Group, Inc. (the "Company"), by linking the personal interests of its key employees and consultants to those of Company stockholders and by providing its key employees and consultants with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees and consultants upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent. Accordingly, the Plan permits the grant of stock option awards from time to time to selected officers and key employees and consultants. ARTICLE 2 EFFECTIVE DATE 2.1 EFFECTIVE DATE. The Plan first became effective upon approval of the same by the Board of Directors of the Company (January 15, 1996) (the "Effective Date"), as approved by the sole stockholder of the Company. The first amendments to the Plan were approved by the Board of Directors of the Company on August , 1996, subject to approval thereof by the stockholders of the Company at the special meeting of stockholders held on September 27, 1996. ARTICLE 3 DEFINITIONS 3.1 DEFINITIONS. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings: (a) "Board" means the Board of Directors of the Company. (b) "Cause" means the continued failure by a Participant to substantially perform such Participant's duties of employment after written warnings identifying the lack of substantial performance are communicated to the Participant by the employer that identify the manner in which the employer believes that the Participant has not substantially performed such duties, or the engaging by an Participant in illegal conduct that is materially and demonstrably injurious to the Company, unless otherwise defined in an employment agreement between the Participant and the Company or a Subsidiary in effect on the date of termination in which case "Cause" shall be defined as set forth therein. (c) "Change in Control" means a change in control of the Company after the closing of an initial public offering of Stock registered under the Securities Act on a Registration Statement on Form S-1 of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of a Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without limitation, a Change in Control shall also be deemed to have occurred at such time as: (i) any "person" within the meaning of Section 14(d) of the Exchange Act, other than the Company, a Subsidiary, or any employee benefit plan(s) sponsored by the Company or any 2 Subsidiary, is or has become the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of 25% or more of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at the election of directors; (ii) individuals who constitute the Board immediately prior to any meeting of stockholders (the "Incumbent Board") have ceased for any reason to constitute at least a majority thereof, provided that any person becoming a director whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters ( 3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; (iii) upon approval by the Company's stockholders of a reorganization, merger, share exchange or consolidation, other than one with respect to which those persons who were the beneficial owners, immediately prior to such reorganization, merger, share exchange or consolidation, of outstanding securities of the Company ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than 75% of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors; or (iv) upon approval by the Company's stockholders of a complete liquidation and dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company other than to a Subsidiary. Notwithstanding the occurrence of any of the foregoing, the Board may determine, if it deems it to be in the best interest of the Company, that an event or events otherwise constituting a Change in Control shall not be so considered. Such determination shall be effective if it is made by the Board prior to the occurrence of an event that otherwise would be or probably will lead to a Change in Control or after such event if made by the Board a majority of which is composed of directors who were members of the Board immediately prior to the event that otherwise would be or probably will lead to a Change in Control. Upon such determination, such event or events shall not be deemed to be a Change in Control for any purposes hereunder, including but not limited to, Section 8.6. (d) "Change in Control Price" means the highest closing price per share paid for the purchase of Stock in a national securities market during the ninety (90) day period ending on the date the Change in Control occurs. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the committee of the Board described in Article 4. (g) "Company" means Renal Care Group, Inc., a Delaware corporation. (h) "Disability" shall mean any permanent disability as defined by Section 22(e)(3) of the Code. The Committee may require such medical or other evidence as it deems necessary to judge the nature and permanency of a Participant's Disability. (i) "Effective Date" has the meaning assigned such term in Section 2.1. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (k) "Fair Market Value" means the closing price of the shares of Stock on the New York Stock Exchange or other national securities exchange on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by the National Quotation Bureau, Inc. or other national quotation service. If the shares are not traded on an exchange but are traded in the over-the-counter market, Fair Market Value means the closing "asked" price of the shares in the over-the-counter market on the day on which such value is to be determined or, if such "asked" price is not available, the last sales price on such day or, if no shares were traded on such 2 3 day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. (l) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (m) "Non-Qualified Stock Option" means an Option that is not an Incentive Stock Option. (n) "Option" means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option. (o) "Option Agreement" means any written agreement, contract, or other instrument or document evidencing an Option. (p) "Participant" means a person who, as an officer or key employee or consultant of the Company or any Subsidiary, has been granted an Option under the Plan. (q) "Plan" means the Renal Care Group, Inc. 1996 Stock Option Plan, as amended from time to time. (r) "Securities Act" means the Securities Act of 1933, as amended from time to time. (s) "Stock" means the $0.01 par value common stock of the Company and such other securities of the Company as may be substituted for Stock pursuant to the terms of the Plan including but not limited to Article 9 hereof. (t) "Subsidiary" means any corporation that qualifies as a subsidiary of a corporation under the definition of "subsidiary corporation" contained in Section 424(f) of the Code. ARTICLE 4 ADMINISTRATION 4.1 The Plan shall be administered by a committee of directors of the Company (the "Committee") appointed by the Board from time to time and consisting of at least two members of the Board, each of whom shall be both (i) a "non-employee director" as such term is defined in Rule 16b-3 promulgated under Section 16 of the Exchange Act or any successor provision, and (ii) an "outside director" as that term is used in Section 162 of the Code and the regulations promulgated thereunder. In the absence of an appointment of a Committee, the Board shall serve as the Committee. 4.2 AUTHORITY OF COMMITTEE. The Committee has the exclusive power, authority and discretion to: (a) Designate Participants; (b) Determine the type or types of Options to be granted to each Participant; (c) Determine the number of Options to be granted and the number of shares of Stock to which an Option will relate; (d) Determine the terms and conditions of any Option granted under the Plan, including but not limited to, the exercise price, any restrictions or limitations on the Option, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Option, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines; (e) Determine whether, to what extent, and under what circumstances an Option may be settled in, or the exercise price of an Option may be paid in, cash, Stock, or other property, or an Option may be canceled, forfeited, or surrendered; (f) Prescribe the form of each Option Agreement, which need not be identical for each Participant; (g) Decide all other matters that must be determined in connection with an Option; 3 4 (h) Establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; and (i) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan. 4.3. DECISIONS BINDING. The Committee's interpretation of the Plan, any Options granted under the Plan, any Option Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. ARTICLE 5 SHARES SUBJECT TO THE PLAN 5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section 9.1, the aggregate number of shares of Stock reserved and available for Options shall be . 5.2. LAPSED AWARDS. To the extent that an Option is canceled, terminates, expires or lapses for any reason, any shares of Stock subject to the Option will again be available for the grant of an Option under the Plan. 5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Option may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market. 5.4. LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. Notwithstanding any provision in the Plan to the contrary, the maximum number of shares of Stock with respect to one or more Options that may be granted to any one Participant in any one taxable year shall be 100,000, subject to adjustment as set forth in Article 9 hereto. ARTICLE 6 ELIGIBILITY 6.1. GENERAL. Options may be granted only to individuals who are (i) officers or other key employees (including employees who also are directors or officers) of the Company or a Subsidiary, or (ii) bona fide consultants to the Company or a Subsidiary, as determined by the Committee. ARTICLE 7 STOCK OPTIONS 7.1. GENERAL. The Committee is authorized to grant Options to Participants on the following terms and conditions: (a) Exercise Price. The exercise price per share of Stock under an Option shall be determined by the Committee. The Committee may elect to grant Non-Qualified Stock Options with an exercise price per share of Stock less than the Fair Market Value of a share of Stock on the date any such Non-Qualified Stock Option is granted. (b) Time and Conditions of Exercise. (i) The Committee shall determine the time or times at which an Option may be exercised in whole or in part. The Committee also shall determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. (ii) In connection with the grant of any Options, the Committee may provide in the Option Agreement for the termination of all or any portion of the Options under certain circumstances, including, without limitation, termination of a Participant's employment, provided that the Committee may distinguish among various causes of termination as the Committee deems appropriate. In 4 5 addition, the Committee may provide, through the Option Agreement or otherwise, that if a Participant's employment is terminated: (i) such Participant's Option(s) may be exercised for specified periods thereafter but no later than the expiration date of such Option; (ii) to the extent not fully exercisable on the date of termination of employment, such Option may continue to become exercisable within the term of the Option; or (iii) some or all of the Options not fully exercisable on the date of termination of employment may be deemed fully exercisable. A Participant's employment shall be deemed to terminate on the last date for which he or she receives a regular wage or salary payment (excluding severance payments unless otherwise provided in the Option Agreement). Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur where the Participant transfers from the Company to one of its Subsidiaries, transfers from a Subsidiary to the Company or transfers from one Subsidiary to another Subsidiary. (c) Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of Stock, or other property (including "cashless exercise" arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants. Without limiting the power and discretion conferred on the Committee pursuant to the preceding sentence, the Committee may, in the exercise of its discretion, but need not, allow a Participant to pay the exercise price of an Option by directing the Company to withhold from the shares of Stock that would otherwise be issued upon exercise of the Option that number of shares having a Fair Market Value on the exercise date equal to the exercise price, all as determined pursuant to rules and procedures established by the Committee. (d) Evidence of Grant. All Options shall be evidenced by a written Option Agreement between the Company and the Participant. The Option Agreement shall include such provisions as may be specified by the Committee. 7.2. INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules: (a) Exercise Price. The exercise price per share of Stock shall be set by the Committee, provided that the exercise price for any Incentive Stock Option shall not be less than the Fair Market Value as of the date of the grant. (b) Exercise. In no event may any Incentive Stock Option be exercisable for more than ten years from the date of its grant. (c) Individual Dollar Limitation. The aggregate Fair Market Value (determined as of the time an Option is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000. (d) Ten Percent Owners. No Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any Subsidiary unless the exercise price per share of such Option is at least 110% of the Fair Market Value per share of Stock at the date of grant and the Option expires no later than five years after the date of grant. (e) Expiration of Incentive Stock Options. No award of an Incentive Stock Option may be made pursuant to the Plan on or after the tenth anniversary of the Effective Date. (f) Right To Exercise. During a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant. (g) Interpretation of Incentive Stock Options. In interpreting this Section 7.2 of the Plan and the provisions of individual Option Agreements granting Incentive Stock Options, the Committee shall be 5 6 governed by the principles and requirements of Sections 421, 422 and 424 of the Code, and applicable Treasury Regulations. ARTICLE 8 GENERAL PROVISIONS APPLICABLE TO OPTIONS 8.1. STAND-ALONE, TANDEM, AND SUBSTITUTE OPTIONS. Options granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for, any other Option granted under the Plan. If an Option is granted in substitution for another Option, the Committee may require the surrender of such other Option in consideration of the grant of the new Option. Options granted in addition to or in tandem with other Options may be granted either at the same time as or at a different time from the grant of such other Options. 8.2. EXCHANGE PROVISIONS. The Committee may at any time offer to exchange or buy out any previously granted Option for a payment in cash, Stock, or another Option (subject to Section 8.1), based on the terms and conditions the Committee determines and communicates to the Participant at the time the offer is made. 8.3. TERM OF OPTION. The term of each Option shall be for the period as determined by the Committee, provided that in no event shall the term of any Incentive Stock Option exceed a period of ten years from the date of grant. 8.4. LIMITS ON TRANSFER. No right or interest of a Participant in any Option may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary. No Option shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution or, except in the case of an Incentive Stock Option, pursuant to a domestic relations order as defined in Section 414(p)(1)(B) of the Code, if the order satisfies Section 414(p)(1)(A) of the Code. 8.5. STOCK CERTIFICATES. All Stock certificates delivered under the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate to reference restrictions applicable to the Stock. 8.6. CHANGES IN CONTROL. (a) Change in Control Followed by Employment Termination. In the event that a Change in Control shall occur and an employee Participant's employment shall terminate, except as provided in the next sentence, within twelve (12) months after the Change in Control, then (i) all unexercised Options (whether vested or not vested) shall automatically become one hundred percent (100%) vested immediately, (ii) no other terms, conditions, restrictions or limitations shall be imposed upon any such Options after such date, and in no circumstance shall an Option be forfeited on or after such date, and (iii) all such Options shall be valued on the basis of the greater of the Change in Control Price or the Fair Market Value on the date of such termination, and such value shall promptly be paid to the Participant in cash by the Company or its successor. The foregoing shall not apply if employment termination is due to (i) death, (ii) disability entitling the Participant to benefits under the Company's or its successor's long-term disability plan, (iii) Cause, or (iv) resignation (other than (A) resignation from a declined reassignment to a job that is not reasonably equivalent in responsibility or compensation or that is not in the same geographic area, or (B) resignation within 30 days following a reduction in base pay). (b) Automatic Acceleration and Cash-Out. Upon a Change in Control that results directly or indirectly in the Stock (or the stock of any successor to the Company received in exchange for Stock) ceasing to be publicly traded in a national securities market, (i) all unexercised Options (whether vested or not vested) shall automatically become one hundred percent (100%) vested immediately, (ii) no other 6 7 terms, conditions, restrictions or limitations shall be imposed upon any such Options after such date, and in no circumstance shall an Option be forfeited on or after such date, and (iii) all such Options shall be valued on the basis of the Change in Control Price, and such value shall promptly be paid to the Participant in cash by the Company or its successor. (c) Miscellaneous. Upon a Change in Control, no action, including, without limitation, the amendment, suspension or termination of the Plan, shall be taken that would adversely affect the rights of any Participant or the operation of the Plan with respect to any Option to which a Participant may have become entitled hereunder on or prior to the date of the Change in Control or to which such Participant may become entitled as a result of such Change in Control. 8.7. MODIFICATION, EXTENSION AND RENEWAL. The Committee may modify, renew or accept the surrender of outstanding Options issued under the Plan (or the surrender of similar grants issued under any other plan of the Company or a Subsidiary), including the acceleration or waiver of any vesting or other restrictions or limitations, or the conversion of such Options (with appropriate adjustments) to be applicable to the securities of any successor corporation to the Company, and the Committee may authorize new Options pursuant to the Plan in substitution for any outstanding Options. Any substituted, modified or converted Options may bear such different or additional terms and conditions as the Committee shall deem appropriate within the limitations of the Plan. The determination of the Committee as to the terms of any of the foregoing may be made without regard to whether a Change in Control has or has not occurred (or whether the Committee has determined that any event shall not be considered to be a Change in Control) and shall be conclusive and binding notwithstanding the provisions of the respective agreements regarding exercisability. Any fractional shares resulting from any of the foregoing adjustments under this Section shall be disregarded and eliminated. However, no modification of an Option shall, without the consent of the Participant holding the Option, adversely affect the rights or obligations of such Participant with respect to such Option. ARTICLE 9 CHANGES IN CAPITAL STRUCTURE 9.1. GENERAL. If the Company's outstanding shares of Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split, combination of shares, stock dividend, or transaction having similar effect, the Board shall proportionately and appropriately adjust (i) the number of shares of Stock authorized and reserved for grants under the Plan as set forth in Section 5.1, (ii) the number of shares of Stock that may be subject to one or more Options granted to any one Participant in any one taxable year as set forth in Section 5.4, and (iii) the number and kind of shares that are subject to each Option and the exercise price per share, without any change in the aggregate price to be paid therefor upon exercise of each Option. ARTICLE 10 AMENDMENT, MODIFICATION AND TERMINATION 10.1. AMENDMENT, MODIFICATION AND TERMINATION. With the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan without stockholder approval; provided, however, that the Committee may condition any amendment on the approval of stockholders of the Company if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations. 10.2 OPTIONS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect any Option previously granted under the Plan, without the written consent of the Participant. 7 8 ARTICLE 11 GENERAL PROVISIONS 11.1. NO RIGHTS TO OPTIONS. No Participant or employee shall have any claim to be granted any Option under the Plan, and neither the Company nor the Committee is obligated to treat Participants and employees uniformly. 11.2. NO STOCKHOLDER RIGHTS. No Option gives the Participant any of the rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Option. 11.3. WITHHOLDING. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the Plan. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Option is granted or thereafter, require that any such withholding requirement be satisfied, in whole or in part, by withholding shares of Stock having a Fair Market Value on the date of withholding equal to the amount to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. 11.4. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Option Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary. 11.5. UNFUNDED STATUS. The Plan is intended to be an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to the Plan, nothing contained in the Plan or any Option Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary. 11.6. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or benefit plan of the Company or any Subsidiary. 11.7. EXPENSES. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries. 11.8. TITLES AND HEADINGS. The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 11.9. GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 11.10. FRACTIONAL SHARES. No fractional shares of Stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up. 11.11. SECURITIES LAW COMPLIANCE. It is intended that the provisions of the Plan and any grant of Options hereunder shall comply in all respects with the terms and conditions of Rule 16b-3 under the Exchange Act, or any successor provisions, as it relates to persons subject to the reporting requirements of Section 16(a) of the Exchange Act. Any agreement granting any Options shall contain such provisions as are necessary or appropriate to assure such compliance. To the extent that any provision hereof is found not to be in compliance with such Rule as it relates to such Act, such provision shall be deemed to be modified so as to be in compliance with such Rule, or if such modification is not possible, shall be deemed to be null and void, as it relates to such Participant. 8 9 11.12. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register under the Securities Act any of the shares of Stock paid under the Plan. If the shares paid under the Plan may in certain circumstances be exempt from registration under the Securities Act, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. 11.13. GOVERNING LAW. To the extent not governed by federal law, the Plan and all Option Agreements shall be construed in accordance with and governed by the laws of the State of Delaware. IN WITNESS WHEREOF, Renal Care Group, Inc., acting by and through its duly authorized officers, has executed this instrument as of the day of , 1996. ATTEST: RENAL CARE GROUP, INC. By: By: ------------------------------------- ----------------------------------- Ronald Hinds Sam A. Brooks, Jr. Secretary President and Chief Executive Officer
9 EX-10.19 5 AMENDMENT #1 TO EMPLOYEE STOCK OPTION PLAN 1 Exhibit 10.19 AMENDMENT NO. 1 TO THE RENAL CARE GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN The Renal Care Group, Inc. Employee Stock Purchase Plan (the "Plan") be and hereby is amended as follows: 1. Section 1.1 of the Plan is hereby deleted in its entirety and the following is hereby inserted in lieu thereof: 1.1. "Anniversary Date" shall mean January 1 of each year. 2. Section 1.14 of the Plan is hereby deleted in its entirety and the following is hereby inserted in lieu thereof: 1.14. "Normal Monthly Pay" for purposes of determining the amount of a Participant's contributions for any Plan Year shall be (i) for hourly paid Employees an amount computed by annualizing the Participant's hourly base pay and his regular scheduled hours of work as of December 1 of the preceding Plan Year and dividing by twelve (12), and (ii) for salaried employees, their regular monthly base pay as of December 1 of the preceding Plan Year. For purposes of computing a Participant's "Normal Monthly Pay" for contributions during the first Plan Year, a Participant's hourly base pay and regular scheduled hours of regular monthly base pay as applicable shall be determined as of the later of (i) February 6, 1996, or (ii) his date of employment. 3. Section 1.19 of the Plan is hereby deleted in its entirety and the following is hereby inserted in lieu thereof: 1.19. "Plan Year" shall mean a twelve (12) month period beginning on the first day of January and ending on the last day of December of each year; provided, however, that in the year of adoption, Plan Year shall mean the period commencing on the Effective Date and ending on the last day of December, 1996. 4. Section 3.1 of the Plan is hereby deleted in its entirety and the following is hereby inserted in lieu thereof: 3.1. Every Employee who becomes an Employee during the first Plan Year (i.e., the Plan Year beginning on the Effective Date) and whose customary employment is at least twenty (20) hours per week and more than five (5) months in a calendar year shall be eligible to participate as of the date he or she first becomes an Employee. Every other Employee whose customary employment is at least twenty (20) hours per week and more than five (5) months in a calendar year shall be eligible to participate as of any Anniversary 2 Date coincident with or immediately following his completion of at least six (6) months of Continuous Service. An Employee shall not be eligible to participate, however, if immediately after the Options are granted such Employee would own stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the Sponsoring Employer or a subsidiary corporation or parent corporation (as those terms are defined in Section 424(e) and (f) of the Code). For purposes of this paragraph, the ownership attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of an Employee and stock which the Employee may purchase under outstanding options (under this or any other plan or agreement) shall be treated as stock owned by the Employee. 5. Section 4.2 of the Plan is hereby deleted in its entirety and the following is hereby inserted in lieu thereof: 4.2. With respect to the first Plan Year only, in addition to or in lieu of payroll contributions, a Participant may make cash contributions to his or her Contribution Account, which, together with any payroll contributions during the first Plan Year, do not exceed the product of (i) 10% of the Participant's Normal Monthly Pay, and (ii) the number of partial or full months in the first Plan Year (i.e., eleven). An election to make a cash contribution shall be in writing on such form as provided by the Committee, and must be received by the Employer no later than December 31, 1996. For all purposes of this Plan, a Participant's cash contributions shall be allocated to and deemed a part of the Participant's Contribution Account. No interest shall accrue or be paid on any cash contributions under the Plan. 6. Section 5.2 of the Plan is hereby deleted in its entirety and the following is hereby inserted in lieu thereof: 5.2. The Issue Price of the Sponsoring Employer Stock under this Plan shall be equal to the lesser of: (i) eighty-five percent (85%) of the Market Price on the Exercise Date of each Plan Year; or (ii) eighty-five percent (85%) of the Market Price on the Grant Date of each Plan Year. The Issue Price is subject, however, to a "Minimum Issue Price" for each Plan Year. The "Minimum Issue Price" for any Plan Year shall be the book value of the Sponsoring Employer Stock as of the December 31 for the calendar year preceding the calendar year during which the Grant Date for the Plan Year occurs. Notwithstanding any provision to the contrary, if the Issue Price for any Plan Year is less than the Minimum Issue Price, the Options granted for that Plan Year shall be considered null and void and the payroll deductions credited to the Participant's Contribution Account shall be returned to the Participant. - 3 - 3 7. Except as amended hereby, the Plan shall be and remain in full force and effect. Executed this 15th day of August, 1996. RENAL CARE GROUP, INC. By: /s/ Ronald Hinds --------------------------- - 4 - EX-10.20 6 LABORATORY MANAGEMENT AGREEMENT 1 Exhibit 10.20 LABORATORY MANAGEMENT AGREEMENT by and between KIDNEY CARE, INC. and RENAL CARE GROUP, INC. Effective Date: February 12, 1996 2 LABORATORY MANAGEMENT AGREEMENT by and between KIDNEY CARE, INC., AND RENAL CARE GROUP, INC. TABLE OF CONTENTS ARTICLE 1. DEFINITIONS........................................................ 1 1.2 KCI.......................................................... 1 1.3 Laboratory................................................... 1 1.4 Professional Services........................................ 2 1.5 Pathologists................................................. 2 1.6 Laboratory Services.......................................... 2 1.7 Term......................................................... 2 ARTICLE 2. RCG'S DUTIES....................................................... 2 2.1 Management Services.......................................... 2 2.2 Professional Services........................................ 2 2.3 Personnel.................................................... 2 2.3-1 Management and Clerical Personnel..................... 2 2.3-2 Technical Health Care Personnel....................... 3 2.4 Equipment Maintenance........................................ 3 2.5 Supplies..................................................... 3 2.6 Quality Assurance and Utilization Review..................... 3 2.7 Financial Services........................................... 3 2.7-1 Billing and Collection....................................... 3 2.7-2 Financial Matters..................................... 4 (a) Annual Budget..................................... 4 (b) Accounting and Financial Records.................. 4 (c) Access............................................ 4 2.8 Compliance With Laws, Rules, and Regulations.................. 4 2.9 Records and Reports Produced by RCG........................... 5 2.10 Insurance..................................................... 5 2.11 Indemnity..................................................... 5 2.11-1 RCG Indemnity......................................... 5 2.11-2 KCI Indemnity......................................... 6 ARTICLE 3. KCI'S DUTIES....................................................... 6 3.1 Space and Facilities.......................................... 6 3.2 Equipment..................................................... 6 3.3 Insurance..................................................... 6
-i- 3 3.4 Licensure and Certification............................................... 6 ARTICLE 4. MANAGEMENT FEE................................................................. 6 4.1 Amount of Management Fee.................................................. 6 4.2 Payment of Management Fee................................................. 7 ARTICLE 5. TERM AND TERMINATION........................................................... 7 5.1 Term...................................................................... 7 5.2 Termination............................................................... 7 5.2-1 Termination by Agreement........................................... 7 5.2-2 Damage or Condemnation of Laboratory............................... 7 5.2-3 Bankruptcy......................................................... 7 5.2-5 Default............................................................ 8 5.2-6 Termination Due to Legislative or Administrative Changes........... 8 5.2-7 Termination Due to Exercise of Purchase Option..................... 8 5.3 Effect of Termination in General.......................................... 8 5.4 Effect of Termination Pursuant to Purchase Option......................... 8 ARTICLE 6. GENERAL PROVISIONS.............................................................. 9 6.1 Relationship of Parties.................................................... 9 6.2 Delegation and Assignment.................................................. 9 6.3 Notices.................................................................... 9 6.4 Amendments................................................................. 10 6.5 Governing Law.............................................................. 10 6.6 Severability............................................................... 10 6.7 Legal Costs................................................................ 10 6.8 Force Majeure.............................................................. 10 6.9 Nonwaiver.................................................................. 11 6.10 Interpretation............................................................. 11 6.11 Documents.................................................................. 11 6.12 Warranty of Authority...................................................... 11 6.13 Cooperation and Fair Dealing............................................... 11 6.14 Ambiguities................................................................ 11 6.15 Representations............................................................ 11
-ii- 4 LABORATORY MANAGEMENT AGREEMENT THIS LABORATORY MANAGEMENT AGREEMENT is entered into this _____ day of April, 1996, effective as of February 12, 1996 ("Effective Date"), by and between KIDNEY CARE, INC., a Mississippi not-for-profit corporation ("KCI"), and RENAL CARE GROUP, INC., a Delaware corporation ("RCG"). RECITALS WHEREAS, KCI owns a clinical laboratory facility ("Laboratory") located in Jackson, Mississippi and desires to arrange for the timely and cost-effective operation and management of its Laboratory; and WHEREAS, as part of the arrangements, KCI desires that a pathologist serve as Medical Director of its Laboratory who is properly qualified to assume professional and clinical responsibility for the services furnished through the Laboratory; and WHEREAS, RCG has available expertise in the management, administration, and supervision of clinical reference laboratory businesses and is ready, willing and able to manage and operate the Laboratory; and WHEREAS, KCI and RCG desire to have a clear written understanding of their responsibilities and expectations, and therefore enter into this Agreement. NOW, THEREFORE, for and in consideration of the mutual promises, covenants, terms and conditions contained herein, the parties agree as follows: ARTICLE 1. DEFINITIONS For purposes of this Agreement, the following terms shall have the meanings ascribed thereto unless otherwise clearly required by the context in which such term is used. 1.1 AGREEMENT. The term "Agreement" shall mean this Laboratory Management Agreement and any amendments thereto as may be from time to time adopted as hereinafter provided. 1.2 KCI. The term "KCI" shall mean Kidney Care, Inc., a Mississippi not-for-profit corporation. 1.3 LABORATORY. The term "Laboratory" shall mean the laboratory facility owned by KCI, which is located at 644E Lakeland East Drive in Jackson, Mississippi. 5 1.4 PROFESSIONAL SERVICES. The term "Professional Services" shall mean services furnished by pathologists, which shall include both medical direction and professional medical services. 1.5 PATHOLOGISTS. The term "Pathologists" shall mean the physicians rendering Professional Services as herein provided for or contemplated, each of which shall: (1) be licensed to practice medicine; and (2) maintain board certification or eligibility for certification by the American Board of Pathology. 1.6 LABORATORY SERVICES. The term "Laboratory Services" shall mean anatomic and clinical pathology services and other laboratory services relevant to the provision of care for patients with End Stage Renal Disease, such as water/dialysate testing. 1.7 TERM. The term "Term" shall mean the contract period provided for under Section 5.1 of this Agreement. ARTICLE 2. RCG'S DUTIES 2.1 MANAGEMENT SERVICES. RCG shall provide business, administrative, and full management services for KCI related to the operation of the Laboratory, including, without limitation, day-to-day management services, billing and collection services, financial record keeping and reporting services, scheduling services, supervision of personnel, and other business office services. 2.2 PROFESSIONAL SERVICES. RCG shall arrange for the provision of clinical oversight services required in connection with the Laboratory Services furnished through the Laboratory, which services will include the provision of a Pathologist to serve as Medical Director of the Laboratory in compliance with all licensure and certification requirements. RCG shall also arrange for the provision of professional medical services by a Pathologist that are required for Laboratory Services furnished through the Laboratory. 2.3 PERSONNEL. 2.3-1 Management and Clerical Personnel. RCG shall employ or otherwise retain, and shall be responsible for selecting, training, supervising, scheduling and terminating, all management and clerical personnel as RCG deems reasonably necessary and appropriate for RCG's performance of its duties under this Agreement. RCG shall have sole responsibility for determining the salaries, wages, and fringe benefits of all such management and clerical personnel, for paying such salaries and wages and providing such fringe benefits, for reimbursing travel, lodging, and ancillary expenses incurred by such personnel in the course of fulfilling RCG's duties under this Agreement, and for establishing and implementing human resource policies for all such personnel. RCG shall also have sole responsibility for withholding, as required by law, any sums for income tax, -2- 6 unemployment insurance, social security, or any other withholding required by applicable federal or state law. RCG shall appoint an Administrative Director who shall be responsible for administering the day-to-day operations of the Laboratory, and whose duties shall include supervision of nonphysician personnel, administrative and fiscal management, planning, scheduling and budgeting. 2.3-2 Technical Health Care Personnel. RCG shall employ or otherwise retain, and shall be responsible for selecting, training, supervising, scheduling, and terminating all technical health care personnel as RCG deems reasonably necessary and appropriate to provide Laboratory Services pursuant to this Agreement. RCG shall have sole responsibility for determining the salaries, wages, and fringe benefits of all such technical health care personnel, for paying such salaries and wages and providing such fringe benefits, and for establishing and implementing human resource policies for all such technical health care personnel. RCG shall also have sole responsibility for withholding, as required by law, any sums for income tax, unemployment insurance, social security, or any other withholding required by applicable federal or state law. Technical health care personnel retained by RCG shall have applicable licensure, experience, and training necessary to provide the Laboratory Services. RCG shall appoint a Laboratory Supervisor who shall be responsible for the provision of clinical supervision (in conjunction with the Medical Director) in compliance with all licensure and certification requirements. 2.4 EQUIPMENT MAINTENANCE. RCG shall maintain all equipment located in the Laboratory, which is provided by KCI in accordance with Section 3.2 hereof. The equipment shall be maintained by RCG in good and operable condition, ordinary wear excepted. 2.5 SUPPLIES. RCG shall furnish all laboratory, office, and other supplies necessary for the operation of the Laboratory and the provision of services by personnel employed or otherwise retained by RCG pursuant to this Agreement. 2.6 QUALITY ASSURANCE AND UTILIZATION REVIEW. RCG shall participate in the development, implementation, and periodic review of quality assurance, risk management, and utilization review programs to assure the consistency and quality of all Laboratory Services provided through the Laboratory. RCG shall also develop and periodically review a manual for the Laboratory setting forth general policies, procedures, and protocols applicable to the provision of Laboratory Services. RCG will participate with KCI in the formation and maintenance of a laboratory service committee ("Committee"). The Committee will oversee the operations of the Laboratory, including the quality assurance and utilization review programs. 2.7 FINANCIAL SERVICES. 2.7-1 Billing and Collection. On behalf of and for the account of KCI, RCG shall establish and maintain credit and billing and collection policies and procedures, and shall be responsible for the billing and collection of fees for Laboratory Services. RCG shall advise and consult with KCI regarding the fees established by KCI for Laboratory -3- 7 Services. In connection with the billing and collection services to be provided hereunder, RCG shall bill patients, third-party payors, and contact purchasers, in KCI's name and on KCI's behalf, for all Laboratory Services provided through the Laboratory. RCG shall also collect and receive, in KCI's name and on KCI's behalf, all accounts receivable generated by such billings and deposit all amounts collected into the KCI Account, which account shall be established and maintained by KCI. 2.7-2 Financial Matters. (a) Annual Budget. Within thirty (30) days of execution of this Agreement, RCG shall prepare, in consultation with KCI, and deliver to KCI an operational budget for the Laboratory setting forth an estimate of the KCI revenues and expenses (including, without limitation, all costs associated with the services provided by RCG hereunder). RCG shall use its best efforts to perform its duties and obligations under this Agreement such that the actual revenues, costs, and expenses are consistent with the budget. (b) Accounting and Financial Records. RCG shall establish and administer accounting procedures, controls, and systems for the development, preparation, and safekeeping of records and books of accounts relating to the business and financial affairs of KCI, all of which shall be prepared and maintained on an accrual basis according to generally accepted accounting principles. RCG shall prepare and deliver to KCI monthly financial statements reflecting the financial status of KCI in respect of the provision of Laboratory Services, which shall include a balance sheet, a statement of income and expenses, and a statement of cash flow. Additionally, RCG shall prepare and deliver to KCI such other financial statements or records as RCG may from time to time deem appropriate or as KCI may from time to time reasonably request. (c) Access. KCI shall have the right, at KCI's Expense, at all reasonable times during normal business hours to audit, examine, and make copies of books of account maintained by RCG concerning the operation of the Laboratory. 2.8 COMPLIANCE WITH LAWS, RULES, AND REGULATIONS. All services provided hereunder by RCG shall be performed in compliance with the certification standards required by federal law under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"), the State of Mississippi's licensure requirements, the applicable standards for laboratories participating in the Medicare and Medicaid programs, all other applicable laws and regulations, ethical and professional standards, and the reasonable policies of KCI. RCG and KCI shall use their best efforts to ensure that the Laboratory continuously maintains status as a Medicare and Medicaid provider, CLIA certification, and satisfactory performance on other appropriate laboratory surveys -4- 8 and testing programs. 2.9 RECORDS AND REPORTS PRODUCED BY RCG. RCG shall maintain a record of specimens received by the Laboratory and an appropriate system for identification of each specimen. Reports of all Laboratory Services performed on such specimens shall be furnished to KCI and the requesting parties on a timely basis taking into consideration the specific needs and circumstances of each occasion and the requirements of any contractual agreements. RCG shall retain or cause to be retained in a readily retrievable manner duplicate copies of the reports of all Laboratory Services performed. All records, reports, slides, tissue blocks, samples, and specimens shall be and remain joint property of KCI, RCG, and of the Pathologists providing Professional Services with respect thereto. All such property shall be created, maintained, and disposed of by RCG in accordance with KCI policies, the requirements of CLIA, the Medicare and Medicaid programs, and all applicable laws (including laws governing confidentiality of patient information). 2.10 INSURANCE. During the Term or any extended Term of this Agreement, and for the period of the applicable statute of limitations thereafter (for which statute of limitations RCG's liability may be satisfied by purchasing appropriate "tail" coverage), RCG shall continuously provide and maintain for itself and all employees or agents providing Laboratory Services under this Agreement, professional malpractice insurance and broad form comprehensive public liability insurance with a responsible company authorized to do business in the State of Mississippi, with policy limits which shall be continuously sufficient to protect against the probable amounts of potential judgments, and which shall initially with respect to malpractice insurance be in an amount not less than $1,000,000 per occurrence and $3,000,000 in the aggregate. RCG shall provide to KCI, initially after signing this Agreement and thereafter periodically upon KCI's request, reasonable evidence of such insurance and shall inform KCI of any proposed materially adverse changes in such coverage at least thirty days prior to such proposed changes becoming effective. 2.11 INDEMNITY. 2.11-1 RCG Indemnity. RCG shall indemnify, defend, protect, and hold harmless KCI, its officers, trustees, agents, employees, and independent contractors, upon written demand from and against all claims, losses, liabilities, damages, awards, judgments, assessments, costs, and expenses of any kind or nature, including reasonable attorneys' fees, arising out of or in any manner related to (i) RCG's failure to satisfy or perform its obligations and duties arising under this Agreement, (ii) RCG's negligence, illegal or wrongful misconduct, or intentional acts or omissions in connection with the performance of its obligations and duties pursuant to this Agreement, or (iii) the compensation, employment, retention or termination of the persons furnishing services on behalf of RCG pursuant to this Agreement, including, without limitation, all compensation or salaries, employee benefits, federal and state withholding taxes, compliance with federal and state wage-hour obligations, and other applicable taxes and contributions to government mandated employment related insurance and similar programs. -5- 9 2.11-2 KCI Indemnity. KCI shall indemnify, defend, protect, and hold harmless RCG, its officers, trustees, agents, employees, and independent contractors, upon written demand from and against all claims, losses, liabilities, damages, awards, judgments, assessments, costs, and expenses of any kind or nature, including reasonable attorneys' fees, arising out of or in any manner related to (i) KCI's failure to satisfy or perform its obligations and duties arising under this Agreement, (ii) KCI's negligence, illegal or wrongful misconduct, or intentional acts or omissions in connection with the performance of its obligations and duties pursuant to this Agreement, or (iii) the compensation, employment, retention or termination of the persons furnishing services on behalf of KCI pursuant to this Agreement, including, without limitation, all compensation or salaries, employee benefits, federal and state withholding taxes, compliance with federal and state wage hour obligations, and other applicable taxes and contributions to government mandated employment related insurance and similar programs. ARTICLE 3. KCI'S DUTIES 3.1 SPACE AND FACILITIES. KCI shall provide the current Laboratory space for RCG's use in providing services under this Agreement. KCI shall provide such space with heat, cooling, light, water, security, physical plant requirements, special utility lines as reasonably required, reasonably necessary fixtures, and reasonable housekeeping, laundry, maintenance, and garbage services. 3.2 EQUIPMENT. KCI shall provide the equipment listed in Exhibit 1, which is currently located in the Laboratory. KCI shall consider and evaluate all reasonable requests by RCG for the purchase of new equipment or the update of the equipment listed on Exhibit 1, deemed necessary and appropriate for the provision of Laboratory Services in the Laboratory. Upon its sole discretion, KCI shall purchase or lease such additional equipment. 3.3 INSURANCE. KCI shall continuously maintain insurance, in such amounts as KCI in its sole discretion shall determine, to cover losses arising from all reasonably insurable risks, including damage to property, plant and equipment, general liability and malpractice risks. 3.4 LICENSURE AND CERTIFICATION. KCI shall apply for and maintain all licensures and certifications relating to operation of the Laboratory, including, but not limited to, CLIA certification, and certification as a provider under the Medicare and Medicaid programs. ARTICLE 4. MANAGEMENT FEE 4.1 AMOUNT OF MANAGEMENT FEE. KCI agrees to pay RCG a fixed annual fee of $250,000 for services furnished under this Agreement. KCI shall also reimburse RCG for Direct Expenses incurred by RCG in providing services under this Agreement. The term "Direct Expenses" shall mean: (1) payroll expenses associated with the technical health care, management -6- 10 and clerical personnel provided by RCG in accordance with Section 2.3-2 hereunder; (2) expenses incurred in providing laboratory supplies; and (3) costs incurred in maintaining the equipment listed on Exhibit 1, as may be added to from time to time pursuant to Section 3.2 hereof. 4.2 PAYMENT OF MANAGEMENT FEE. KCI shall pay RCG the monthly pro rata amount of the fixed annual fee specified in Section 4.1 above by the 10th day of the month for services furnished during the month then ended. RCG shall invoice KCI on a monthly basis for all Direct Expenses incurred in the month then ended, which invoices shall separately state the amount of Direct Expenses that are payroll expenses associated with technical health care, management and clerical personnel provided by RCG in accordance with Section 2.3-2 hereunder. KCI shall pay the portion of such invoices relating to Direct Expenses that are payroll costs within five (5) business days of receipt and the balance of such invoices within ten (10) business days of receipt. ARTICLE 5. TERM AND TERMINATION 5.1 TERM. This Agreement shall be effective as of the Effective Date and shall continue for an initial Term of one (1) year, unless sooner terminated pursuant to Section 5.2 hereof. At the expiration of the initial Term, and at the expiration of each renewal Term (if any) of this Agreement, this Agreement shall be automatically renewed for a further Term of one (1) year, unless at least ninety (90) days prior to the date of such expiration either party has provided written notice to the other party stating an intent not to renew. 5.2 TERMINATION. 5.2-1 Termination by Agreement. In the event KCI and RCG shall mutually agree in writing, this Agreement may be terminated on the date specified in such written agreement. 5.2-2 Damage or Condemnation of Laboratory. In the event that the Laboratory is totally or substantially destroyed by fire, explosion, flood, windstorm, hail, earthquake, hurricane, tornado, or other casualty or act of God, or in the event all or a substantial portion of the Laboratory and the premises on which it is situated are taken or to be taken by condemnation or eminent domain proceeding, then either KCI or RCG may by written notice to the other immediately terminate this Agreement. 5.2-3 Bankruptcy. In the event that either KCI or RCG becomes insolvent, or if any petition under federal or state law pertaining to bankruptcy or insolvency or for a reorganization or arrangement or other relief from creditors shall be filed by or against either such party, or if any assignment, trust, mortgage, or other transfer shall be made of all or a substantial part of the property of either such party, or if either such party shall make or offer a composition in its debts with its creditors, or if a receiver, trustee, or similar officer or creditor's committee shall be appointed to take charge of any property of or to operate or wind up the affairs of either such party, then the other party may, by -7- 11 written notice, immediately terminate this Agreement. 5.2-4 Nonpayment. In the event that KCI fails to make and continues to fail to make for thirty (30) or more business days, payment in accordance with Section 4.2 above, RCG shall have the option and right to terminate this Agreement upon thirty (30) calendar days' notice to KCI without waiving any other rights or remedies RCG may have. 5.2-5 Default. In the event any party shall give written notice to the other that such other party has substantially defaulted in the performance of any material duty or material obligation (which obligation must be for the benefit of the party giving notice) imposed upon it by this Agreement, and such default shall not have been cured within thirty (30) days following the giving of such written notice, the party giving such written notice shall have the right to immediately terminate this Agreement unless the defaulting party, within said thirty (30) day period, shall have made a good faith effort to initiate corrective action, and it is contemplated that such corrective action will be completed within the following thirty (30) day period. 5.2-6 Termination Due to Legislative or Administrative Changes. In the event that there shall be a change in federal or state law, the Medicare or Medicaid statutes, regulations, or general instructions (or in the application thereof), the adoption of new legislation or regulations applicable to this Agreement, or the initiation of an enforcement action with respect to legislation, regulations, or instructions applicable to this Agreement, any of which affects the continuing viability or legality of this Agreement or the ability of either party to obtain reimbursement for services provided by that party, then either party may by notice propose an amendment to conform this Agreement to existing laws. If notice of such a change or an amendment is given and if RCG and KCI are unable within thirty (30) days thereafter to agree upon the amendment, then either party may terminate this Agreement by giving thirty (30) days written notice to the other, unless a sooner termination is required by law or circumstances. 5.2-7 Termination Due to Exercise of Purchase Option. In the event RCG exercises its option to purchase the Laboratory, set forth in Section 3.7 of that certain Amended and Restated Transfer Agreement, dated November 14, 1995, between RCG and KCI, this Agreement shall terminate upon the transfer of the Laboratory to RCG. 5.3 EFFECT OF TERMINATION IN GENERAL. Unless otherwise provided in this Agreement, upon termination neither party shall have any further obligations hereunder, except for (i) obligations arising prior to the date of termination which remain unsatisfied as of the date of termination and (ii) obligations or covenants which expressly or necessarily extend beyond the Term of this Agreement, including the obligations for the payment of the fees to RCG through the date of termination in the manner described in Section 4 above. -8- 12 5.4 EFFECT OF TERMINATION PURSUANT TO PURCHASE OPTION. In the event this Agreement is terminated pursuant to Section 5.2-7 hereof, RCG agrees to acquire or assume responsibility for any item of equipment purchased or leased by KCI pursuant to Section 3.2 hereof in accordance with the following: (i) with respect to all equipment purchased by KCI pursuant to Section 3.2 hereof, RCG agrees to pay KCI the cost incurred by KCI in acquiring such equipment, less accumulated depreciation determined in accordance with generally accepted accounting principles; and (ii) with respect to all equipment leased by KCI pursuant to Section 3.2 hereof, RCG agrees to assume all remaining lease payments, including reimbursing KCI for the pro rata portion of any lease payments covering periods exceeding the termination date of this Agreement, and KCI agrees to assign all such leases to RCG. ARTICLE 6. GENERAL PROVISIONS 6.1 RELATIONSHIP OF PARTIES. RCG is and shall continue to be an independent contractor for all services furnished pursuant to this Agreement by RCG and its employees. RCG and its employees shall provide services hereunder free of any direction or control by KCI, in a manner consistent with current standards of practice. This agreement shall not expressly or by implication create any employer/employee, joint venture or partnership relationship between KCI and RCG or its employees. This Agreement shall not directly or by implication obligate KCI to withhold income taxes for RCG or any of its employees, or to provide employee benefits or coverage of any type for RCG or its employees. 6.2 DELEGATION AND ASSIGNMENT. Except as expressly provided herein, neither party shall delegate its duties or assign its rights under this Agreement, in whole or in part, without the prior written consent of the other party. Any attempt to do so without such consent shall be void and without effect. Subject to the foregoing, the provisions of this Agreement and the obligations arising hereunder shall extend to, be binding upon, and inure to the benefit of the parties hereto and their respective heirs, successors, assigns and legal representatives. 6.3 NOTICES. All notices, requests, demands or other communications required or permitted to be given under this Agreement shall be in writing and shall be given to the party for whom the notice is intended either (i) by personal delivery to the address for that party to which notices are to be addressed (in which case such notice shall be deemed given on the date of delivery), (ii) by consigning the same for prepaid delivery with a responsible national courier service (e.g., Federal Express or other similar service) (in which case such notice shall be deemed given on the business day next following the date of consignment with the courier service), or (iii) by telefax followed by a copy sent in either other manner specified in this Section (in which case such notice shall be deemed given on the date on which such telefax is sent), and properly sent to the following addresses and/or telefax numbers: -9- 13 If to RCG: 1801 West End Avenue, Suite 1100 Nashville, Tennessee 37203 Facsimile: (615) 321-5491 Attn: Joseph A. Cashia If to KCI: 3925 West Northside Drive Jackson, Mississippi 39209 Facsimile: (601) 923-3642 Attn: James F. Dorris, Chief Executive Officer A party to this Agreement may change its address for purposes of this Section 6.3 by giving written notice to the other party in the manner specified in this Section 6.3. 6.4 AMENDMENTS. Any amendment hereto must be in writing and signed by both parties hereto in order to be effective. 6.5 GOVERNING LAW. This Agreement and all rights, duties, and obligations hereunder shall be construed and interpreted in accordance with the internal laws, and not the law of conflicts, of the State of Mississippi applicable to agreements made and to be wholly performed within the State. Each party hereby agrees to submit to the jurisdiction and venue of any state or federal court in Hinds County, Mississippi. 6.6 SEVERABILITY. Nothing contained in this Agreement shall be construed so as to require the commission of an act contrary to law and whenever there is any conflict between any provision of this Agreement and any present statute, law, ordinance, or regulation contrary to which the parties have no legal right to contract, the latter shall prevail, but in such event, the provisions of this Agreement affected shall be curtailed and limited only to the extent necessary to bring it within the requirements of the law and to carry out the purposes of this Agreement. 6.7 LEGAL COSTS. In any dispute arising out of an alleged breach of this Agreement, the prevailing party shall be awarded reasonable costs and attorneys fees, in addition to its judgment or award. 6.8 FORCE MAJEURE. Neither party shall be liable nor deemed to be in default for any delay or failure in performance under this Agreement or other interruption of service or employment deemed resulting, directly or indirectly, from acts of God, civil or military authority, riots or civil disobedience, acts of public enemy, war, accidents, fires, explosions, earthquakes, floods, failure of transportation, machinery, supplies or utilities, vandalism, strikes or other work interruptions beyond the reasonable control of any party. However, the parties shall make good faith efforts to perform under this Agreement in the event of any such circumstances. -10- 14 6.9 NONWAIVER. Any waiver of any term and condition hereof must be in writing and signed by the party giving the waiver. A waiver of any of the terms and conditions hereof shall not be construed as a waiver of any other terms and conditions hereof. Failure or delay of any party to insist upon strict performance of any of the provisions if this Agreement, or to exercise any right or action herein conferred, shall not be construed to be a waiver or relinquishment of any such right and the same shall be and remain in full force and effect. 6.10 INTERPRETATION. Titles in this Agreement are not part of this Agreement and shall have no effect upon the interpretation of any part hereof. As used in this Agreement the words "herein," "hereof," "hereunder," and similar expressions refer to this Agreement as a whole and not to any particular portion hereof, unless the context otherwise clearly requires. As used herein the masculine gender includes the feminine and neuter genders, and vice versa, and the singular the plural, and vice versa, where the context reasonably permits. None of the provisions of the Agreement are for the benefit of nor shall be enforceable by any third party, including clients, employees, patients or creditors. 6.11 DOCUMENTS. Each of the parties hereto shall execute and deliver all documents, papers, and instruments necessary or convenient to carry out the terms of this Agreement. 6.12 WARRANTY OF AUTHORITY. Each person signing this Agreement represents and warrants that he is duly authorized and executes this Agreement on behalf of and as the free and voluntary act and deed of the organization he purports to represent. 6.13 COOPERATION AND FAIR DEALING. Each party agrees to deal fairly with the other in good faith in all matters concerning this Agreement, and without limiting the generality of the foregoing agrees to cooperate in good faith with the other party so that the purposes of this Agreement may be served. 6.14 AMBIGUITIES. The general rule that ambiguities are to be construed against the drafter shall not apply to this Agreement. In the event that any provision of this Agreement is found to be ambiguous, each party shall have an opportunity to present evidence as to the actual intent of the parties with respect to such ambiguous provision. 6.15 REPRESENTATIONS. This Agreement contains the entire understandings of the parties with respect to the subject-matters of this Agreement and there are no other written or oral understandings or agreements between the parties with respect to the subject matters of this Agreement other than those contained herein. Each party acknowledges (i) that no representation or promise not expressly contained in this Agreement has been made by any other party hereto or by any of its agents, employees, representatives or attorneys; (ii) that this Agreement is not being entered into on the basis of, or in reliance on, any promise or representation, expressed or implied, other than such as are set forth expressly in this Agreement; and (iii) that such party has been represented by legal counsel of its own choice in the preparation and negotiation of this Agreement, or has affirmatively elected not to be represented by legal counsel. -11- 15 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on this 8th day of April, 1996. KCI RCG By: /s/ Jimmy Dorris By: /s/ Joseph Cashia ------------------------- ---------------------- Name: Jimmy Dorris Name: Joseph Cashia ------------------------ ------------------- Title: CEO Title: COO ----------------------- ------------------- -12- 16 EXHIBIT 1 EQUIPMENT LIST FEBRUARY 12, 1996 EQUIPMENT LIST FOR KCI LABORATORY 1. Two Abbott Call-Dyn 3000 Hematology Analyzers 2. Sysmex R-3000 Reticulocyte Analyzer 3. Hitachi 717 Chemistry Analyzer 4. Hitachi 747 Chemistry Analyzer 5. Varifuge Floor Model Centrifuge 6. Ultra Low Temperature Freezer 7. Microbiology Incubator 8. Nikon Labophot Microscope 9. Two Victory Double Door Refrigerators 10. Office Furniture 11. Hemstek 2000 Slide Stainer 12. Kenmore Kitchen Refrigerator 13. G.E. Turntable Microwave Oven 14. Handtruck 15. Sharp Fax Machine Model FO-1700 16. Lanier Model 6514 Copier 17. Dell Dimension 433SV PC and Monitor 18. Dell Dimension XPS 466V PC and Monitor 19. Okidata Microline 320 Printer 20. Uninterruptible Power Supplies (5) 21. Modulus Laboratory Information System EX-10.21 7 CHIEF MEDICAL OFFICER SERVICES AGREEMENT 1 Exhibit 10.21 RENAL CARE GROUP, INC. CHIEF MEDICAL OFFICER SERVICES AGREEMENT FEBRUARY 12, 1996 2 CHIEF MEDICAL OFFICER SERVICES AGREEMENT THIS CHIEF MEDICAL OFFICER SERVICES AGREEMENT (the "Agreement") is made and entered into this 12th day of February, 1996, to be effective as provided for herein below, by and between RCG MISSISSIPPI, INC., a Delaware corporation (the "COMPANY"), and John D. Bower, M.D., an individual resident of the State of Mississippi (the "PHYSICIAN"). WITNESSETH WHEREAS, the COMPANY owns and operates various renal dialysis facilities located throughout the Southeastern United States which provide outpatient and home dialysis services, WHEREAS, the COMPANY desires to engage a physician who is skilled in the care of patients at End Stage Renal Disease ("ESRD) facilities and is willing to act as the COMPANY's Chief Medical Officer; WHEREAS, the PHYSICIAN is licensed to practice medicine and prescribe drugs without restriction in the States of Mississippi, Arkansas and Louisianna specializes in dialysis services, is experienced in the care of patients at ESRD facilities and is willing to act as the COMPANY's Chief Medical Officer. NOW THEREFORE, in consideration of the mutual covenants and agreements of the parties as herein set forth, the receipt and sufficiency of such consideration being hereby acknowledged, the parties agree as follows: ARTICLE I SERVICES 1.1 ENGAGEMENT. The COMPANY shall engage the services of the PHYSICIAN and the PHYSICIAN shall perform services for the COMPANY as the Chief Medical Officer. In such capacity, the PHYSICIAN shall (i) serve as the chairman of the COMPANY's Medical Advisory Board, (ii) oversee the activities of the Physicians retained by the COMPANY as medical directors of the COMPANY's various ESRD Facilities located in the Southeastern United States and the physicians admitting patients to the COMPANY's facilities, (iii) assist the COMPANY in formulating and implementing policies and procedures for the operation of the COMPANY's ESRD facilities which shall be in accordance with the requirements of Medicare and Medicaid and other applicable state and federal laws, rules and regulations; (iv) make recommendations to the COMPANY in keeping controllable costs of the COMPANY's facilities to a minumum; (v) maintain the COMPANY's overall quality management program, and procedures to promote the consistency and quality of all dialysis services provided by the COMPANY so that the COMPANY is in compliance with all applicable governmental requirements; and (vii) perform the services customarily performed by medical directors of dialysis facilities and such additional or other tasks related to the oversight of dialysis treatments being administered at any COMPANY ESRD facility located in Mississippi, Arkansas, and Louisianna which is temporarily without a medical director. 3 1.2 RESPONSIBILITIES. Without limiting the generality of the foregoing, when acting as a medical director of an ESRD facility, the PHYSICIAN shall perform the following services: (a) Ensure proper administration and execution of the facility's patient care policies through the facility's Administrative Nurse; (b) Provide medical expertise to the facility's nursing staff through the facility's Administrative Nurse; (c) Oversee the facility's physical facilities and assets and the daily operation and maintenance of dialysis equipment; (d) Monitor the selection of the appropriate dialysis treatment modality and treatment setting for facility patients in conjunction with the patients attending physician, if necessary; (e) Ensure policies are in place for assuring the availability of personnel capable of handling emergency situations should they arise; (f) Develop needs analyses, implement and monitor facility training programs, including in-service training to patients; (g) Review and approve water analysis results and monthly culture reports, direct and monitor appropriate remedial steps as needed; (h) Participate in on-site governmental and managed care organization surveys upon request of the COMPANY; review federal, state and local survey reports and, as needed, participate in the development and implementation of appropriate plans of correction; (i) Review all facility incident reports, patient complaints and quality management reviews and implement corresponding actions, if necessary; (j) Be available to the members of the facility's physicians in a counseling capacity and serve as the facility's governing body representative to such physicians; (k) Attend periodic conferences upon request of the COMPANY's Medical Advisory Board; (l) Perform those other functions required of the facility's medical director; 2 4 ARTICLE II TERM AND TERMINATION 2.1 TERM. This Agreement shall become effective as of 12:01 a.m. on February 12, 1996 (the "Effective Date") and shall remain in full force and effect until 12:00 p.m. midnight on February 11, 2000, unless otherwise earlier terminated as provided in this Article II (the "Initial Term"). Unless the PHYSICIAN or the COMPANY provides notice in writing to the other of such party's intention to terminate at least 30 days prior to the expiration date of the initial term or the then existing term, this Agreement shall automatically renew for an additional one (1) year term on the same terms and conditions of this Agreement. 2.2 TERMINATION BY AGREEMENT. If the COMPANY and the PHYSICIAN shall mutually agree in writing, this Agreement shall be terminated on the time and date stipulated therein. 2.3 TERMINATION WITHOUT CAUSE. Either the COMPANY or the PHYSICIAN may terminate this Agreement at the end of the Initial Term or any Renewal Term by giving thirty (30) days prior written notice to the PHYSICIAN of such intention to terminate. 2.4 TERMINATION FOR CAUSE. The COMPANY may terminate this Agreement and all rights and liabilities created by this Agreement immediately, at any time for cause including, but not limited to the PHYSICIAN's dishonesty; misappropriation of funds; suspension or revocation of any of the PHYSICIAN's medical licenses or authorizations or ability to prescribe drugs; loss or suspension of the PHYSICIAN's board certification; commission or conviction, including a plea of nolo contendre, of any felony or of any crime involving moral turpitude. 2.5 EFFECT OF TERMINATION OR EXPIRATION. Following the expiration of this Agreement or its termination for any reason, the PHYSICIAN shall not interfere with any intent by the COMPANY to contract with any other individual or entity for the provision of chief medical officer services. ARTICLE III ILLNESS, INCAPACITY OR DEATH 3.1 INCAPACITY. If, at any time during the term of this Agreement, the PHYSICIAN becomes disabled or unable to perform for any reason all of the duties described herein, such disability or inability to perform his duties shall not then be in breach of this Agreement. The disability or inability to perform his duties shall be determined by a qualified physician selected by the COMPANY. The PHYSICIAN shall continue to receive all of the compensation provided in Article IV of this Agreement during any disability. 3.2 DEATH. In the event of PHYSICIAN's death during the term of this Agreement, PHYSICIAN's estate shall continue to receive all of the compensation provided in Article IV of this Agreement. 3 5 ARTICLE IV COMPENSATION 4.1 COMPENSATION. In consideration of the services, covenants, and agreements agreed to be performed by the PHYSICIAN during the Term of this Agreement, the COMPANY shall pay the PHYSICIAN a Chief Medical Officer Fee of One Hundred Thousand Dollars ($100,000) during each year of this Agreement. The Chief Medical Officer Fee shall be payable in equal monthly installments on the tenth (10th) day of the month following the month in which services are rendered. The PHYSICIAN agrees to accept the Chief Medical Officer Fee as determined above as the total compensation for all services, covenants and agreements pursuant to this Agreement. 4.2 ADDITIONAL EFFECT OF TERMINATION. If either the COMPANY or the PHYSICIAN terminates this Agreement or it expires before the end of a pay period, the compensation shall be pro-rated on a daily basis for purposes of calculating the amount of compensation due PHYSICIAN through the date of termination or expiration. ARTICLE V STATUS OF PARTIES 5.1 INDEPENDENT CONTRACTOR STATUS. It is mutually understood and agreed that the PHYSICIAN is an independent contractor in his performance of the professional services, duties and obligations contemplated by this Agreement. The COMPANY shall neither have nor exercise any control or direction over the methods or manner by which the PHYSICIAN performs his professional services and functions. Except for requiring the coverage of services called for in the Agreement, the COMPANY shall not set nor shall it have the right to set, the specific working hours of the PHYSICIAN. The PHYSICIAN shall not be subject to any policies or procedures applicable to the COMPANY except those required of the COMPANY for it to be in compliance with governmental laws and regulations; nor shall he be entitled to employee benefits including vacation pay, sick leave, retirement benefits, Social Security, Workers' Compensation, disability or unemployment insurance benefits that may be provided to the COMPANY's employees. The terms of this Agreement shall take precedence over any inconsistent terms which may be found in the policies, PHYSICIAN applications, or otherwise of the COMPANY as presently existing or as amended. 5.2 PAYMENT OF TAXES. The PHYSICIAN acknowledges that he will have sole responsibility for the payment of all federal, state and local estimated, withholding and employment taxes arising out of its relationship with and the performance of the professional services for the COMPANY. The PHYSICIAN acknowledges and agrees that the COMPANY will not withhold on his behalf any sums for income tax, unemployment insurance, social security or any other withholding pursuant to any law or requirement of any governmental body, nor will the COMPANY make available to the PHYSICIAN any of the benefits afforded to employees of the COMPANY. Each and every one of such payments, withholding and benefits, if any, is the sole responsibility of the PHYSICIAN. The PHYSICIAN agrees to indemnify and hold the COMPANY harmless from any and all loss or liability arising with respect to such payments, withholdings and benefits, if any. In the event the United States Internal Revenue Service ("IRS") should question or challenge the 4 6 worker status of the PHYSICIAN, the parties hereto mutually agree that both the PHYSICIAN and the COMPANY shall have the right to participate in any discussion or negotiation occurring with the IRS, irrespective of or by whom such discussions or negotiations are initiated; and, each party shall notify the other in advance of any planned meeting or discussion. 5.3 NO AGENCY. The PHYSICIAN shall not have the right or authority and hereby expressly covenants not to enter into a contract in the name of the COMPANY or otherwise bind the COMPANY, in any way, without the express written consent of the COMPANY. The PHYSICIAN shall hold the COMPANY harmless from any loss attributable to a violation of this covenant. However, PHYSICIAN shall advise and assist the COMPANY in securing and retaining contracts in the name and for the account of the COMPANY with such individuals or entities necessary for the proper and efficient functioning of the COMPANY. 5.4 ACCESS TO RECORDS. If it is ultimately determined that Section 952 of the Omnibus Reconciliation Act of 1980 applies to this Agreement, the PHYSICIAN will make available to the Secretary of the United States Department of Health and Human Services, the United States Comptroller General, and their representatives, this Agreement and all books, documents and records necessary to certify the nature and extent of the costs of those services. If the PHYSICIAN carries out the duties of this Agreement through a subcontract worth $10,000 or more over a twelve-month period with a related organization, the subcontract will also contain an access clause to permit access by the Secretary, Comptroller General, and their representatives to the related organizations's books, documents and records. ARTICLE VI INSURANCE 6.1 MINIMUM INSURANCE COVERAGE. The PHYSICIAN shall purchase and maintain at his expense professional and general liability insurance coverage from a commercial insurance company licensed to transact insurance in the State of Mississippi and acceptable to the COMPANY in an amount equal to the higher of One Million Dollars ($1,000,000) per claim and Three Million Dollars ($3,000,000) in the aggregate per year, (the "Minimum Coverage"). 6.2 CONTINUING COVERAGE. If the PHYSICIAN either changes insurance carriers for any reason or switches from "claims made" to "occurrence" coverage, or has the Minimum Coverage terminated for any reason, then the PHYSICIAN shall obtain the requisite Minimum Coverage with prior acts coverage containing a retroactive date sufficient to cover any claims arising out of acts which occurred from the Effective Date of this Agreement through and including the expiration date of the current coverage. 6.3 EVIDENCE OF COVERAGE. On execution of this Agreement and annually thereafter or on reasonable request, the PHYSICIAN shall provide the COMPANY with a certificate of insurance or other written instrument acceptable to the COMPANY evidencing purchase of the requisite Minimum Coverage. The PHYSICIAN shall notify the COMPANY at least thirty (30) days prior 5 7 to the voluntary cancellation or termination of the Minimum Coverage and immediately upon receipt of any notice of involuntary cancellation or termination of the Minimum Coverage. ARTICLE VII REPRESENTATIONS 7.1 Representations and Warranties. In performing services under this Agreement, the PHYSICIAN covenants and warrants that he: (a) Is licensed without restriction to practice medicine in the States of Mississippi, Arkansas and Louisiana, and has never had any such license in this or any other state limited, withdrawn, suspended, subject to reprimand, curtailed, placed on probation or revoked; (b) Is a member of the active medical staff of a hospital and has at least one (1) year experience or training in the care of patients at an end stage renal disease treatment facility; (c) Has never been denied membership or reappointment to membership on the medical staff of any health care facility, and no health care facility medical staff membership or clinical privileges of the PHYSICIAN have ever been limited, suspended, curtailed, revoked, placed on probation or withdrawn, subject to reprimand whether voluntarily or as a result of action (either formal or informal) initiated by any health care facility or its medical staff; (d) Shall use his best and most diligent efforts and professional skills and judgment in rendering services under this Agreement; (e) Shall perform professional services and shall render care to patients in accordance with and in a manner consistent with appropriate standards and the ethics of the medical profession and as necessary for the COMPANY to maintain compliance with applicable governmental laws and regulations; (f) Shall immediately notify the COMPANY of any denial, suspension, revocation or curtailment of licensure or certification status, medical staff membership or clinical privileges held by the PHYSICIAN with any state, company, payor or health care facility; (g) Has notified the COMPANY of each action or claim alleging professional negligence filed or asserted against him within the previous five (5) years and a current status and/or ultimate resolution of such claim and will immediately notify the COMPANY in writing of his receipt of any action, claim or lawsuit alleging professional negligence lodged against him individually or against any partnership, professional corporation or association with which he is affiliated; and (h) Shall immediately notify the COMPANY of any sanction, threatened sanction, investigation or proceeding by any governmental agency or any entity regarding his participation in the Medicare, Medicaid program or any third party payor program. 6 8 ARTICLE VIII MISCELLANEOUS 8.1 NOTICES. Any notices to be given under this Agreement shall be deemed given if sent U.S. certified mail, return receipt requested, to the parties at the following addresses: PHYSICIAN: John D. Bower, M.D. 3220 North State Street Jackson, Mississippi 39216 COMPANY: RCG MISSISSIPPI, INC. 1801 West End Avenue, Suite 1100 Nashville, Tennessee 37203 Attn: Sam A. Brooks, President If either party desires to change either the address or the person to whom notice is to be given, such change must be done in writing delivered to the parties. 8.2 AMENDMENTS. This Agreement may be amended at any time by mutual agreement of the parties hereto, but any such amendment shall not be operative or valid unless the same is reduced to writing and approved by the parties hereto. 8.3 ASSIGNABILITY. This Agreement is personal to the PHYSICIAN and the PHYSICIAN shall not assign any of his rights or obligations under this Agreement without consent of the COMPANY. The COMPANY may not assign its rights and obligations under this Agreement without the consent of the PHYSICIAN. 8.4 SEVERABILITY AND TERMINATION PROVISIONS. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws in effect during the term of this Agreement, the legality, validity or enforceability of the remaining provisions of this Agreement shall not be effected thereby, and in lieu of such illegal, invalid or unenforceable provisions, there shall be added automatically as part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be legal, valid and enforceable. 8.5 HEADINGS. The headings of this Agreement are inserted for convenience only and are not to be considered in constructing of the provisions hereof. 8.6 ENTIRE AGREEMENT. This Agreement constitutes the full contract and agreement of the parties, superseding all prior or contemporaneous agreements, either oral or written. 8.7 CONSTRUCTION OF THE AGREEMENT AND BINDING EFFECT. This Agreement shall be construed and interpreted according to the laws of the State of Mississippi. 7 9 8.8 NON-WAIVER. The failure of either part to exercise any of its rights under this Agreement for a breach thereof shall not be deemed to be a waiver of such rights or a waiver of any subsequent breach. 8.9 DISPUTES AND GOVERNING LAW. The COMPANY and the PHYSICIAN agree that any dispute arising in connection with, or relating to, this Agreement or the termination of this Agreement, to the maximum extent allowed by applicable law, shall be subject to resolution through informal methods and, failing such efforts, through arbitration. Either party may notify the other party of the existence of a dispute by written notice to the address indicated hereinabove. The parties shall thereafter attempt in good faith to resolve their differences within thirty (30) days after the receipt of such notice. If the dispute cannot be resolved within such 30-day period, either party may file a written demand for arbitration with the other party. The arbitration shall proceed in accordance with the terms of the Federal Arbitration Act and the rules and procedures of the American Arbitration Association. A single arbitrator shall be appointed through the American Arbitration Association's procedures to resolve the dispute. The parties agree that in the event arbitration is necessary, the laws of the State of Mississippi and any applicable federal law shall apply. The place of the arbitration shall be Jackson, Mississippi. The award of the arbitrator shall be binding and conclusive upon the parties. Either party shall have the right to have the award made the judgment of a court of competent jurisdiction in the State of Mississippi. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written to be effective as provided hereinabove. COMPANY: RCG MISSISSIPPI, INC. BY: /s/ Sam A. Brooks, President ----------------------------- Sam A. Brooks, President PHYSICIAN: /s/ John D. Bower, M.D. ----------------------------- John D. Bower, M.D. 8 EX-10.22 8 MEDICAL DIRECTOR SERVICES AGREEMENT 1 Exhibit 10.22 RENAL CARE GROUP, INC. MEDICAL DIRECTOR SERVICES AGREEMENT (GROUP PRACTICE) 2 CONTENTS ARTICLE I SERVICES ............................................. 1 1.1 Engagement ........................................... 1 1.2 Responsibilities ..................................... 1 1.3 Patient Care Manual .................................. 3 1.4 Records .............................................. 3 1.5 Medical Staff ........................................ 3 1.6 Coverage ............................................. 3 ARTICLE II TERM AND TERMINATION ................................ 4 2.1 Term ................................................. 4 2.2 Termination By Agreement ............................. 4 2.3 Termination Without Cause ............................ 4 2.4 Termination for Cause by the Company ................. 4 2.5 Termination for Cause by the Group ................... 4 2.6 Effect of Termination or Expiration .................. 5 ARTICLE III COMPENSATION ....................................... 5 3.1 Compensation ......................................... 5 3.2 Intentionally Omitted ................................ 5 3.3 Additional Effect of Termination ..................... 5 ARTICLE IV STATUS OF PARTIES ................................... 6 4.1 Tax Status ........................................... 6 4.2 No Agency ............................................ 6 4.3 Access to Records .................................... 6 ARTICLE V INSURANCE ............................................ 6 5.1 Minimum Insurance Coverage ........................... 6 5.2 Continuing Coverage .................................. 6 5.3 Evidence of Coverage ................................. 7 ARTICLE VI REPRESENTATIONS ..................................... 7 6.1 Representations and Warranties ....................... 7 ARTICLE VII POST-EMPLOYMENT, CONFIDENTIALITY, NONCOMPETITION AND NONSOLICITATION COVENANT ......................................... 8 7.1 Additional Covenants ................................. 8 ARTICLE VIII MISCELLANEOUS ..................................... 10 8.1 Notices .............................................. 10 8.2 Amendments ........................................... 10 8.3 Assignability ........................................ 10 8.4 Severability and Termination Provisions .............. 10 8.5 Headings ............................................. 10 8.6 Entire Agreement ..................................... 10 8.7 Construction of the Agreement and Binding Effect ..... 10 8.8 Non-Waiver ........................................... 10 8.9 Disputes and Governing Law ........................... 11
-i- 3 MEDICAL DIRECTOR SERVICES AGREEMENT (GROUP PRACTICE/FREESTANDING FACILITIES) THIS MEDICAL DIRECTOR SERVICES AGREEMENT (the "Agreement") is made and entered into this day of __ day of September, 1996, to be effective as provided for hereinbelow, by and between RENAL CARE GROUP, INC., a Delaware corporation (the "COMPANY"), and those individual physicians who are signatories hereto (the "GROUP"). W I T N E S S E T H: WHEREAS, the COMPANY owns and operates twenty-two renal dialysis facilities known as "RenalWest" (such facilities collectively referred to as "Facility") which provide outpatient and home dialysis services; WHEREAS, the COMPANY desires to engage a single group of nephrologists skilled in dialysis center administration to provide medical director services at the Facility; WHEREAS, the GROUP desires to provide medical director services to the COMPANY at the Facility, and is willing to engage for this purpose a physician or physicians licensed to practice medicine and prescribe drugs without restriction in the State of Arizona, who specialize in nephrology and dialysis services, and are experienced in dialysis center administration. NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties as herein set forth, the receipt and sufficiency of such consideration being hereby acknowledged, the parties agree as follows: ARTICLE I SERVICES 1.1 ENGAGEMENT. The COMPANY shall engage the services of the GROUP and the GROUP shall provide services for the COMPANY as medical director of the Facility. In such capacity, the GROUP shall perform the services customarily performed by medical directors of dialysis facilities and such additional or other tasks related to the oversight of dialysis treatments being administered at the Facility as designated by the COMPANY. The GROUP shall devote its ability and effort to provide for the proper medical quality and conduct of the Facility and its operations; provided, however, operational decisions regarding the Facility shall be made solely by the COMPANY. 1.2 RESPONSIBILITIES. Without limiting the generality of the foregoing, the GROUP shall provide the following services: (a) Ensure proper administration and execution of the Facility's patient care policies through the Facility's Head Nurse; (b) Provide medical expertise to the Facility's nursing staff through the Facility's Head Nurse; (c) Oversee the Facility's physical facilities and assets and the daily operation and maintenance of dialysis equipment; 4 (d) Monitor the selection of the appropriate dialysis treatment modality and treatment setting for Facility patients in conjunction with patients' attending physician(s), if necessary; (e) Ensure policies are in place for assuring the availability of personnel capable of handling emergency situations should they arise; (f) Develop needs analyses and implement and monitor Facility training programs, including in-service training to patients; (g) Review and approve water analysis results and monthly culture reports; direct and monitor appropriate remedial steps as needed; (h) Participate in on-site governmental and managed care organization surveys upon request of the COMPANY; review federal, state and local survey reports and, as needed, participate in the development and implementation of appropriate plans of correction; (i) Require a physician to review all Facility incident reports, patient complaints and quality management reviews and implement corresponding actions, if necessary; (j) Make available to the members of the Facility's physicians an appropriate physician to serve in a counseling capacity and serve as the Facility's governing body representative to such physicians; (k) Make available an appropriate physician to attend periodic conferences upon request of the COMPANY's Medical Advisory Board; (l) Provide those other functions required of the Facility's medical director as generally required of medical directors in similar facilities; (m) Make recommendations to the COMPANY in keeping controllable costs of the Facility to a minimum; (n) Present recommendations to the Regional Chief Executive Officer, Regional Chief Operating Officer or the Executive Vice President, Chief Operating Officer of the COMPANY, Head Nurse of the Facility, or other persons designated by the COMPANY respectively, concerning policies and procedures for the Facility to be submitted for the COMPANY's Medical Advisory Board approval, which polices and procedures shall be in accordance with the requirements of Medicare and Medicaid and as well as with applicable state and federal laws, rules and regulations; (o) Make available an appropriate physician to act as liaison with the Facility's affiliated medical institutions and renal transplant centers; (p) Oversee the Facility's overall quality management program, procedures to promote the consistency and quality of all dialysis services provided at the Facility by physician and non-physician personnel and, subject to the direction or guidelines of the COMPANY, at all times operate the Facility so it is in compliance with all applicable governmental requirements; - 2 - 5 (q) Cooperate with the COMPANY's insurance carriers and/or its designees regarding any claims, investigations or lawsuits involving the services provided hereunder and immediately notify the COMPANY upon receipt of notification of any such claim, investigation or lawsuit; and (r) Require its physicians to obtain and maintain from the Facility privileges sufficient to perform the obligations hereunder and meet COMPANY's quality standards as set by the Medical Advisory Board. 1.3 PATIENT CARE MANUAL. The COMPANY shall advise the GROUP on federal regulatory compliance and modifications to such regulations. The GROUP shall advise the COMPANY on the Facility's compliance with governmental regulations including, but not limited to, those which require renal care facilities to maintain and implement a patient care policy and procedures manual describing: (a) The types of dialysis used in the Facility and the procedures followed in performance of each type of dialysis; (b) Procedures for implementing universal precautions for the prevention of disease transmission; (c) Procedures for properly handling blood-borne and infectious pathogens; and (d) A disaster readiness plan. 1.4 RECORDS. The GROUP shall assure the current status of all medical and business records relating to the care and treatment of patients in the Facility in accordance with COMPANY policies and applicable regulations of governmental agencies. While the Head Nurse has day-to-day responsibility in this regard and the attending physician has the medical responsibility for the content of the medical record, the GROUP is ultimately responsible for the integrity and completeness of such records, including: (a) Patient long-term care plans, patient short-term care plans and medical histories; (b) Results of physical examinations and laboratory tests; and (c) Progress notes by all patient care staff, complete and legibly signed orders and discharge summaries. 1.5 MEDICAL STAFF. The GROUP shall review the applications of physicians requesting to attend to patients at the Facility and forward a recommendation concerning such applications to the COMPANY's Medical Advisory Board. The GROUP shall maintain oversight of all disciplinary actions with regard to any matter of such physicians or patient care personnel as needed to assure the quality of services and conformity to COMPANY and Facility rules and policies. 1.6 COVERAGE. The GROUP shall make available one or more physicians, at a minimum, to provide services at each site for their respective hours of operation. Should the Facility's patient case load increase, the COMPANY may increase the GROUP's on-site obligation coverage accordingly and the GROUP shall provide such coverage. - 3 - 6 ARTICLE II TERM AND TERMINATION 2.1 TERM. This Agreement shall become effective as of 12:01 a.m. on September__, 1996 (the "Effective Date") and shall remain in full force and effect until 12:00 p.m. midnight on the Seventh (7th) anniversary of the Effective Date, unless otherwise earlier terminated as provided in this Article II (the "Initial Term"). This Agreement shall automatically renew for successive terms of three (3) year(s) duration each (the "Renewal Terms"), unless either party provides written notice of its election not to renew at least ninety (90) days prior to the expiration of a term or unless otherwise earlier terminated as provided in this Article II. 2.2 TERMINATION BY AGREEMENT. If the COMPANY and the GROUP shall mutually agree in writing, this Agreement shall be terminated on the time and date stipulated therein. 2.3 TERMINATION WITHOUT CAUSE. Either party may terminate this Agreement at the end of the Initial Term or any Renewal Term by giving ninety (90) days prior written notice to the other party of such intention to terminate. 2.4 TERMINATION FOR CAUSE by the Company. The COMPANY may terminate this Agreement and all rights and liabilities created by this Agreement immediately, except for those relating to Article VII, at any time for cause including, but not limited to the GROUP's (or any one of its physician's(s')) dishonesty, misconduct, misappropriation of funds, disparagement of the COMPANY, the Facility or any of their representatives or employees, refusal to perform properly designated tasks, negligence in the performance of medical or other functions, suspension or revocation of the GROUP's license(s) to conduct business or any licenses or authorizations of its physician(s), including medical license(s), board certifications or board eligibility, medical staff membership(s), clinical privilege(s) or authorization(s) or ability to prescribe drugs, commission or conviction, including a plea of nolo contendere, of any felony or of any crime involving moral turpitude, act or omission that could be detrimental to the reputation of the Facility or the COMPANY, failure to perform or observe any of the terms or provisions of this Agreement, breach of any terms or provisions of this Agreement, reprimand by a federal or state regulatory or professional oversight board, any expulsion or other discipline by the medical staff or management of any health care facility where one of the physicians of the GROUP enjoys membership or clinical privileges, or failure of any of the GROUP's representations in this Agreement. The GROUP shall notify the COMPANY immediately upon learning of any event described in the foregoing sentence. Upon the occurrence of any event described herein this Section 2.4, the COMPANY agrees not to terminate this Agreement if: (A) with respect to an action or omission by an individual physician within ten (10) days of the COMPANY's request (i) the GROUP agrees that any GROUP physician who is the subject of such cause will not provide services under this Agreement, and (ii) such physician agrees to be placed on leave and not to practice at the Facility until a final determination is made that such actions or omissions constituting such cause did not occur or that such actions or omissions will not result in any disciplinary action against such physician, and if such a final determination is not reached, the physician agrees, at the request of the COMPANY, to tender immediately in writing a voluntary resignation of such physician's privileges to attend patients at the Facility or (B) with respect to any breach of any material term or provision of this Agreement by GROUP, within (30) days of the COMPANY's notice to the GROUP of its intent to terminate, the GROUP is able to remedy such occurrence. 2.5 TERMINATION FOR CAUSE BY THE GROUP. The Group may terminate this Agreement for cause in the event that (a) the Company fails to perform or observe any material term or provision of this Agreement, (b) the Company breaches any material term or provision of this Agreement, or (c) the Company is reprimanded or disciplined by a federal or state regulatory or professional agency in a manner that adversely affects the public image of the Group. Upon the occurrence of any event described above in this Section 2.5, - 4 - 7 the Group agrees that it will not to terminate this Agreement if, within thirty (30) days of the Group's notice to the Company of its intent to terminate, the Company is able to remedy such occurrence. 2.6 EFFECT OF TERMINATION OR EXPIRATION. (a) Following the expiration of this Agreement or its termination for any reason, the GROUP shall not interfere with any action by the COMPANY to contract with any other individual or entity for the provision of medical director services. (b) Following the expiration or termination of this Agreement and the termination or resignation of a physician from the GROUP, the GROUP shall maintain for itself and each of the physicians provided hereunder, with an insurer licensed to transact insurance in the State of Arizona, prior acts coverage with policy limits and with a retroactive date sufficient to cover any claims arising out of acts which occurred from the Effective Date of this Agreement through and including the date of such termination or obtain an extended reporting endorsement for two (2) years, all as acceptable to the COMPANY. The GROUP shall provide evidence of such coverage to COMPANY upon request. ARTICLE III COMPENSATION 3.1 COMPENSATION. In consideration of the services, covenants, and agreements agreed to be performed by the GROUP during the Initial or any Renewal Term of this Agreement, the COMPANY shall pay the GROUP an amount equal to the sum of Eight Hundred Forty Thousand Dollars ($840,000) per year, payable monthly in advance. The GROUP agrees to accept this payment by the COMPANY as the total compensation for all services, covenants and agreements pursuant to this Agreement; provided however, ninety (90) days prior to each annual anniversary of the Effective Date of the Initial Term and any Renewal Term, the parties shall discuss in good faith whether any adjustment to the compensation described in Article III herein would be appropriate to reflect the value of the services provided hereunder by the GROUP and the medical director services required by the Facility for each year of this Agreement and to reflect any changes in reimbursement levels for services provided by the Facilities or the economics of owning and operating the facilities in each case with a view to determining the fair market value of the services provided herein. No change to the compensation shall be made unless both the parties agree in writing and any such change shall be effective for at least twelve (12) months from the effective date of such change. 3.2 INTENTIONALLY OMITTED. 3.3 ADDITIONAL EFFECT OF TERMINATION. If either the COMPANY or the GROUP terminates this Agreement or it expires before the end of a Facility pay period, the compensation shall be pro-rated on a daily basis for purposes of calculating the amount of compensation due GROUP through the date of termination or expiration. The COMPANY may offset any sums owing it due from GROUP from such owed sums. ARTICLE IV STATUS OF PARTIES 4.1 TAX STATUS. It is mutually understood that the physician(s) to be engaged to perform the services required hereunder are to be engaged by the GROUP, and shall under no circumstances be considered the employee(s) of the COMPANY or the Facility. The GROUP shall be responsible for any payroll and similar taxes related to its engagement of the physician(s), and neither the GROUP nor its physician(s) shall be entitled to any benefits afforded to the employees of the COMPANY. The GROUP agrees to indemnify and - 5 - 8 hold the COMPANY harmless from any and all loss or liability arising with respect to such payments, withholdings and benefits, if any. In the event the United States Internal Revenue Service ("IRS") should question or challenge the worker status of the GROUP or its physicians, the parties hereto mutually agree that both the GROUP and the COMPANY shall have the right to participate in any discussion or negotiation occurring with the IRS, irrespective of or by whom such discussions or negotiations are initiated; and, each party shall notify the other in advance of any planned meeting or discussion. 4.2 NO AGENCY. Except as required in the ordinary and customary conduct of its responsibilities as set forth in Section 1.2, the GROUP shall not have the right or authority and hereby expressly covenants not to enter into a contract in the name of the COMPANY or otherwise bind the COMPANY, in any way, without the express written consent of the COMPANY. The GROUP shall hold the COMPANY harmless from any loss attributable to a violation of this covenant. However, GROUP shall advise and assist the COMPANY in securing and retaining contracts in the name and for the account of the COMPANY with such individuals or entities necessary for the proper and efficient functioning of the Facilities. 4.3 ACCESS TO RECORDS. If it is ultimately determined that ss. 952 of the Omnibus Reconciliation Act of 1980 applies to this Agreement, then until the expiration of four (4) years after the furnishing of services provided under this Agreement, the GROUP will make available to the Secretary of the United States Department of Health and Human Services, the United States Comptroller General, and their representatives, this Agreement and all books, documents and records necessary to certify the nature and extent of the costs of those services. If the GROUP carries out the duties of this Agreement through a subcontract worth $10,000 or more over a twelve-month period with a related organization, the subcontract will also contain an access clause to permit access by the Secretary, Comptroller General, and their representatives to the related organization's books, documents and records. ARTICLE V INSURANCE 5.1 MINIMUM INSURANCE COVERAGE. The GROUP shall purchase and maintain at its expense for itself and each of the physicians professional and general liability insurance coverage from a commercial insurance company licensed to transact insurance in the State of Arizona and acceptable to the COMPANY in an amount equal to the higher of One Million Dollars ($1,000,000.00) per claim and Three Million Dollars ($3,000,000) in the aggregate per year, (the "Minimum Coverage") or such greater amount required by a governmental entity. 5.2 CONTINUING COVERAGE. In the event that the GROUP switches from its present "occurrence" coverage to "claims made" coverage and then if the GROUP thereafter either changes insurance carriers for any reason or switches from "claims made" to "occurrence" coverage, or has the Minimum Coverage terminated for any reason, then the GROUP shall obtain the requisite Minimum Coverage with prior acts coverage containing a retroactive date sufficient to cover any claims arising out of acts which occurred from the Effective Date of this Agreement through and including the expiration date of the current coverage. 5.3 EVIDENCE OF COVERAGE. On execution of this Agreement and annually thereafter or on reasonable request, the GROUP shall provide the COMPANY with certificates of insurance or other written instruments acceptable to the COMPANY evidencing purchase of the requisite Minimum Coverage for itself and each of the GROUP's physicians. The GROUP shall notify the COMPANY at least sixty (60) days prior to the voluntary cancellation or termination of any Minimum Coverages and immediately upon receipt of any notice of involuntary cancellation or termination of any Minimum Coverages. - 6 - 9 ARTICLE VI REPRESENTATIONS 6.1 REPRESENTATIONS AND WARRANTIES. In performing services under this Agreement, the GROUP covenants and warrants that it: (a) Is licensed to conduct its business in the State of Arizona, and shall engage only physician(s) who are licensed without restriction to practice medicine in such state and who never have had any such license in this or any other state limited, withdrawn, suspended, subject to reprimand, curtailed, placed on probation or revoked; (b) Shall engage only physician(s) who is(are) board eligible or board certified in the specialty of nephrology as recognized by the American Board of Medical Specialists; (c) Shall engage only physician(s) who is(are) a member(s) of the active medical staff of a local hospital and has(have) adequate experience or training in the care of patients at an end stage renal disease treatment facility; (d) Shall engage only physician(s) who has(have) never been denied membership or reappointment to membership on the medical staff of any health care facility, and no health care facility medical staff membership or clinical privileges of a physician have ever been limited, suspended, curtailed, revoked, placed on probation or withdrawn, subject to reprimand whether voluntarily or as a result of action (either formal or informal) initiated by any health care facility or its medical staff; (e) Shall require its physician(s) to use their best and most diligent efforts and professional skills and judgment in rendering services under this Agreement; (f) Shall require its physician(s) to perform professional services and shall render care to patients in accordance with and in a manner consistent with appropriate standards and the ethics of the medical profession and as necessary for the Facility to maintain compliance with applicable governmental laws and regulations; (g) Shall require its physician(s) to immediately notify the COMPANY of any denial, suspension, revocation or curtailment of licensure or certification status, medical staff membership or clinical privileges held by such physician(s) with any state, company, payor or health care facility; (h) Has notified the COMPANY of each action or claim alleging professional negligence filed or asserted against any engaged physician within the previous two (2) years and a current status and/or ultimate resolution of such claim and will immediately notify the COMPANY in writing of its receipt of any action, claim or lawsuit alleging professional negligence lodged against any engaged physician individually or against any partnership, professional corporation or association with which any engaged physician is affiliated; (i) Shall, for itself, and for each physician provided hereunder, immediately notify the COMPANY of any sanction, threatened sanction, investigation or proceeding by any governmental agency or any entity regarding its or such physician's(s') participation in the Medicare, Medicaid program or any third party payor program in which the CENTER participates; and - 7 - 10 (j) Shall cause each physician within the GROUP or other physicians performing services on behalf of the GROUP hereunder (as may be approved by the COMPANY), to execute this Agreement (i) demonstrating each physician's understanding of this Agreement and its provisions, including the understanding that he or she will not retain privileges at the Facility if this Agreement is terminated or if their employment or contractual relationship with the GROUP is terminated for any reason, and (ii) agreeing to be bound by Article VII as provided therein. The COMPANY may in its sole discretion make exceptions to the foregoing representations and warranties on a case by case basis based upon the facts provided to the COMPANY by the GROUP. ARTICLE VII CONFIDENTIALITY, NONCOMPETITION AND NONSOLICITATION COVENANT 7.1 ADDITIONAL COVENANTS. (a) The GROUP agrees that, during the term of this Agreement and for a period of three (3) years after the termination of this Agreement, the GROUP will not in any manner, directly or indirectly, by itself or in conjunction with any other person, (i) conduct any of the activities or perform any of the responsibilities delineated in Article I ("Services") of this Agreement for any business entity that is competitive with the business of the COMPANY or (ii) establish or own any financial, beneficial or other interest in (other than an interest consisting of less than one percent (1%) of a class of publicly traded security), make any loan to or for the benefit of, or render any managerial, marketing or other business advice, to any entity that is then conducting activities that are competitive with those of the business of the COMPANY, in either case within a seventy-five (75) mile radius of the Facility. For purposes of this Article, the "business of the COMPANY" shall mean owning or operating a renal dialysis center, unit or facility or providing renal dialysis supplies or services to any other center, unit or facility or any acute care facility or any home renal dialysis patient, including the provision of pharmaceuticals or laboratory services. The terms and provisions of this Article VII shall also apply to each physician of the GROUP or other physician performing services on behalf of the GROUP hereunder (as may be approved by the COMPANY), any member or shareholder of any professional corporation or association of which a GROUP is a shareholder or any person with whom the GROUP is associated in partnership and in or with respect to which by virtue of said professional corporation or partnership the GROUP receives an indirect financial benefit. With respect to the persons identified in this paragraph, the time periods applicable to this Article VII shall begin on the earlier of (i) the termination or expiration of this Agreement or (ii) a physician's departure from the GROUP or a physician cessation of services hereunder on behalf of the GROUP. (b) The GROUP further agrees that during the term of this Agreement and for a period of three (3) years after the termination of this Agreement, the GROUP will keep confidential and not directly divulge, or allow through reasonable care to be divulged to anyone, or use or otherwise appropriate for the GROUP's own benefit or for the benefit of others, any knowledge or information of a confidential nature with respect to the business of the COMPANY, COMPANY itself, or any of its affiliates, including all trade secrets, pricing information, marketing information or technical information (hereinafter referred to as the "Confidential Data"), except for (i) a disclosure that is required by law; or (ii) information that has been made generally available to the public by the act of one who has the right to disclose such information. The GROUP hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies which the COMPANY may have available pursuant to - 8 - 11 the laws of any jurisdiction or at common law to prevent the disclosure of confidential information, and the enforcement by the COMPANY of its rights and remedies pursuant hereto shall not be construed as a waiver of any other rights or available remedies which the COMPANY may possess in law or equity. The GROUP acknowledges that the COMPANY has taken reasonable and appropriate steps to ensure the confidentiality and non-disclosure of all such Confidential Data. (c) The GROUP also agrees that during the term of this Agreement and for a period of three (3) years after the termination of this Agreement, the GROUP will not, for its own benefit or the benefit of others, solicit any person or entity that has or has had, or disrupt or attempt to disrupt, any relationship, contractual or otherwise, with the COMPANY (including any patient, payor, physician, provider, managed care organization or supplier) at any time during the GROUP's Agreement with the COMPANY, for the purpose of assisting, or creating such a relationship for, any business entity that is competitive with the business of the COMPANY. (d) The GROUP further agrees that during the term of this Agreement and for a period of three (3) years after the termination of this Agreement, the GROUP shall not induce, nor attempt to induce, any employee of the COMPANY, or any of its affiliates, to terminate his or her association with the COMPANY or any of its affiliates. (e) These covenants are considered by the parties hereto to be fair, reasonable and integral for the protection of the COMPANY. The parties mutually agree that if a violation of any of these covenants occurs, such violation or any threatened violation will cause irreparable injury to the COMPANY and the remedy at law for any such violation or threatened violation will be inadequate. The parties acknowledge that these covenants will survive, and remain in effect and enforceable after, termination of this Agreement. (f) Nothing in these covenants shall be deemed to prohibit the physicians of the GROUP from exercising their medical judgment concerning the medical treatment of a patient in any manner whatsoever in any location whatsoever, and shall not be deemed to require the referral of any such patient to any facility of the COMPANY or any of its affiliates. The GROUP acknowledges that enforcement of this covenant will not prevent a physician of the GROUP from earning a living by practicing medicine or nephrology. (g) The GROUP hereby further agrees that prior to the engagement of any physician as an independent contractor or the employment of a physician to perform services for the patients or medical practice of the GROUP, the GROUP will require as a condition of said physician's engagement or employment that the physician enter into a supplemental non-compete agreement with the COMPANY like the one contained within. It is expressly understood and agreed by the GROUP that its promises in this subparagraph (g) have served as a material inducement to the COMPANY to enter into this Agreement. ARTICLE VIII MISCELLANEOUS 8.1 NOTICES. Any notices to be given under this Agreement shall be deemed given if sent U.S. certified mail, return receipt requested, to the parties at the following addresses: GROUP: c/o _______________, M.D. ------------------------ ------------------------ ------------------------ ------------------------ - 9 - 12 COMPANY: Renal Care Group, Inc. 2100 West End, Suite 800 Nashville, Tennessee 37202 Attn: Chief Financial Officer and Chief Operating Officer If either party desires to change either the address or the person to whom notice is to be given, such change must be done in writing delivered to the parties. 8.2 AMENDMENTS. This Agreement may be amended at any time by mutual agreement of the parties hereto, but any such amendment shall not be operative or valid unless the same is reduced to writing and approved by the parties hereto. 8.3 ASSIGNABILITY. This Agreement shall not be assignable by either party and neither party shall assign any of its rights or obligations under this Agreement without consent of the other party; provided that the GROUP may assign this agreement to an entity owned by the GROUP. 8.4 SEVERABILITY AND TERMINATION PROVISIONS. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws in effect during the term of this Agreement, the legality, validity or enforceability of the remaining provisions of this Agreement shall not be affected thereby, and in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be legal, valid and enforceable. 8.5 HEADINGS. The headings of this Agreement are inserted for convenience only and are not to be considered in construction of the provisions hereof. 8.6 ENTIRE AGREEMENT. This Agreement constitutes the full contract and agreement of the parties, superseding all prior or contemporaneous agreements, either oral or written. 8.7 CONSTRUCTION OF THE AGREEMENT AND BINDING EFFECT. This Agreement shall be construed and interpreted according to the laws of the State of Tennessee. 8.8 NON-WAIVER. The failure of either party to exercise any of its rights under this Agreement for a breach thereof shall not be deemed to be a waiver of such rights or a waiver of any subsequent breach. 8.9 DISPUTES AND GOVERNING LAW. The parties agree that any dispute arising in connection with, or relating to, this Agreement or the termination of this Agreement, to the maximum extent allowed by applicable law, shall be subject to resolution through informal methods and, failing such efforts, through arbitration. Either party may notify the other party of the existence of a dispute by written notice to the address indicated hereinabove. The parties shall thereafter attempt in good faith to resolve their differences within thirty (30) days after the receipt of such notice. If the dispute cannot be resolved within such 30-day period, either party may file a written demand for arbitration with the other party. The arbitration shall proceed in accordance with the terms of the Federal Arbitration Act and the rules and procedures of the American Arbitration Association. A single arbitrator shall be appointed through the American Arbitration Association's procedures to resolve the dispute. - 10 - 13 The parties agree that in the event arbitration is necessary, the laws of the State of Arizona and any applicable federal law shall apply. The place of the arbitration shall be Phoenix, Arizona. The award of the arbitrator shall be binding and conclusive upon the parties. Either party shall have the right to have the award made the judgment of a court of competent jurisdiction in the State of Arizona or Tennessee. [Signatures on Next Page] - 11 - 14 IN WITNESS WHEREOF, the parties have executed this Medical Director Services Agreement on the day and year first above written to be effective as provided hereinabove. COMPANY: RENAL CARE GROUP, INC. By: /s/ ---------------------------------- Title: ------------------------------- GROUP: Each physician executing below acknowledges that he or she has read and understood the terms of this Agreement and hereby makes the acknowledgment set forth in Section 6(j) and agrees that he or she is bound by Article VII as provided therein. (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- - 12 - 15 Each physician executing below acknowledges that he or she has read and understood the terms of this Agreement and hereby makes the acknowledgment set forth in Section 6(j) and agrees that he or she is bound by Article VII as provided therein. /s/ Dr. Sean O'Regan (Seal) -------------------------------------- Sean O'Regan , M.D. -------------------------- /s/ Richard (Seal) -------------------------------------- Richard , M.D. -------------------------- /s/ (Seal) -------------------------------------- , M.D. -------------------------- /s/ Ronald Hyde (Seal) -------------------------------------- Ronald Hyde , M.D. -------------------------- /s/ (Seal) -------------------------------------- , M.D. -------------------------- /s/ Berne Yee (Seal) -------------------------------------- Berne Yee , M.D. -------------------------- /s/ William E. Smith (Seal) -------------------------------------- William E. Smith , M.D. -------------------------- /s/ David Reichert (Seal) -------------------------------------- David Reichert , M.D. -------------------------- /s/ Gary Birnbaum (Seal) -------------------------------------- Gary Birnbaum , M.D. -------------------------- /s/ (Seal) -------------------------------------- , M.D. ------------------------- /s/ Kenneth (Seal) -------------------------------------- Kenneth , M.D. ------------------------ /s/ Kenneth Johnson (Seal) ------------------------------------- Kenneth Johnson , M.D. ------------------------ - 13 - 16 /s/ Jeffrey (Seal) -------------------------------------- Jeffrey , M.D. -------------------------- /s/ (Seal) -------------------------------------- , M.D. -------------------------- /s/ (Seal) -------------------------------------- , M.D. -------------------------- /s/ (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- (Seal) -------------------------------------- , M.D. -------------------------- - 14 - EX-10.23 9 EMPLOYMENT AGREEMENT 1 Exhibit 10.23 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of June 30, 1996, by and between RENAL CARE GROUP, INC., a Delaware corporation (the "Company"), and GARY BRUKARDT (hereinafter "Employee"). WITNESSETH: WHEREAS, the Company desires to employ Employee, and Employee desires to be employed by the Company, on the terms and conditions contained herein; and WHEREAS, in serving as an employee of the Company, Employee has and will participate in the use and development of confidential proprietary information about the Company, its customers and suppliers, and the methods used by the Company and its employees in competition with other companies, as to which the Company desires to protect fully its rights; and WHEREAS, the Company wishes to enter into an agreement with Employee whereby Employee shall agree not to compete with the Company in any current or future business activity conducted or entered into by the Company and to hold certain information obtained by and through Employee's employment in confidence. NOW, THEREFORE, in consideration of the compensation payable to Employee by the Company pursuant to this Agreement, and the mutual promises, covenants, representations and warranties contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do agree as follows: 1. Employment. Effective on August 5, 1996, the Company hereby employs Employee, and Employee hereby agrees to accept employment with the Company, upon the terms and conditions hereinafter set forth. 2. Term. This Agreement shall begin on July 22, 1996 (the "Effective Date"), and shall continue for an initial period of thirty-six (36) months (the "Initial Period"), subject to earlier termination by employee or the Company as hereinafter provided. This Agreement shall renew automatically for additional terms of twelve (12) months each, subject to earlier termination as hereinafter provided, on the same terms and conditions (subject to mutually agreeable modifications, if any). 2 3. Compensation and Benefits. (a) Base Compensation: The Company shall pay Employee an annual salary of Two Hundred Twenty Thousand Dollars ($220,000), as may be adjusted as provided herein (the "Base Compensation"), payable according to the pay periods of the Company as may be in effect from time to time. Such payments shall be prorated for periods less than a full pay period. The Base Compensation shall be subject to withholding for federal, state and local payroll and all other taxes or withholdings applicable to Employee. Any increase of the Base Compensation shall be at the discretion of the Company, provided that any decreases to the then current Base Compensation shall require the consent of Employee. (b) Benefits: During the term of this Agreement, Employee shall also be entitled to participate in the insurance and other fringe benefits made available generally to similar employees of the Company, as such benefits may be determined from time to time by the Company, provided that Employee shall have at least four (4) weeks of paid vacation time. In addition, Employee shall be entitled to those other benefits described on the exhibit attached hereto and incorporated herein by reference. (c) Bonuses: In addition to the Base Compensation payable to Employee, pursuant to Section 3(a) above, Employee shall also be entitled to an annual incentive bonus as described in the exhibit attached hereto and incorporated herein by reference. (d) Expenses: The Company shall reimburse Employee for any and all expenses reasonably incurred by employee incident to the performance of the duties imposed upon Employee hereunder. 4. Duties, Extent of Services: Employee is engaged as Executive Vice President and Chief Operating Officer and shall perform such duties and responsibilities as are typically incident thereto, and shall perform in a faithful and competent manner such additional duties as may be reasonably assigned from time to time by the Company. Such duties shall be performed on a full-time basis for the Company at the Company's offices in Nashville, Tennessee. Employee may be required, from time to time, to perform his duties temporarily hereunder at such other place or places as the Company shall reasonably require, provided that such period does not exceed thirty (30) consecutive days without Employee's consent and that during any such period Employee is able to return to Nashville, Tennessee at the Company's expense for weekends. Employee shall devote all of Employee's business time, attention, knowledge, and skill solely to the business and interest of the Company, and the Company shall be entitled to all the benefits, profits, and other issues arising from, or incident to, all work, services, and advice of Employee. 2 3 5. Termination. This Agreement may be terminated by the parties in the manners specified below: (a) Termination without Cause. Either the Company or the employee may terminate Employee's employment under this Agreement at any time for any reason upon thirty (30) day's prior written notice to the other party. (b) Termination for Cause. The Company may terminate this Agreement on written notice at any time for "cause". For purposes of this Agreement, "cause" shall mean: (i) Employee is convicted of, pleads guilty to, or confesses to a felony or any crime involving any act of dishonesty, fraud, misappropriation, embezzlement or moral turpitude, in which event the Company may terminate this Agreement immediately, (ii) the gross misconduct or gross negligence by Employee in connection with the performance of Employee's duties hereunder, (iii) the engaging by Employee in any fraudulent, disloyal or unprofessional conduct which results in a material injury to the Company, its affiliates or any of its or their centers, monetarily or otherwise, (iv) Employee breaches any provision of Section 6 of this Agreement, or (v) the failure by Employee to otherwise substantially perform his duties with the Company (other than any such failure resulting from the disability of Employee under Section 5(c)(i)) or the breach of any provision of this Agreement other than Section 6. In the event of any termination for cause pursuant to the provisions of (ii), (iii), (iv) or (v) of this subsection, the Company shall give Employee written notice prior to such termination detailing the specific acts, actions, failures, or events upon which the forecast termination is based, and Employee shall have fifteen (15) days after such written notice to cease such actions or otherwise correct any such failure or breach. If Employee does not cease such action or otherwise correct such failure or breach within such fifteen day time period, or having once received such written notice and ceased such actions or corrected such failure or breach, Employee at any time thereafter again so acts, fails or breaches, the Company may terminate this Agreement immediately. (c) Involuntary Termination. The employment of Employee hereunder shall be automatically terminated by the death or disability of Employee as outlined below. (i) Disability. The Company may terminate this Agreement at the time Employee shall have been Disabled for a continuous period of six (6) months during any continuous twelve month period. For purposes of this Paragraph 5(c)(i), the term "Disabled" shall mean Employee's inability to perform the essential functions of his duties, with or without reasonable accommodation. During Employee's six month period of Disability or such longer 3 4 wait period as may be provided for in any policy of disability that may be maintained by the Company for the benefit of Employee, the Company agrees to continue to pay Employee's Base Compensation (less regular withholdings for payroll or other taxes and other required or proper items, and less any payments from all disability plans provided by the Company). In the event of a termination of Employee on account of Disability, however, the Company shall be obligated to pay only Employee's Base Compensation that has been earned through the effective date of termination (less regular withholdings for payroll or other taxes and other required or proper times, and less any payments from all disability plans provided by the Company). (ii) Death. In the event Employee shall die during the term of this Agreement, this Agreement shall terminate and Employee's estate shall receive the remainder of the Base Compensation set forth in Section 3(a) hereof accrued to the last day of the month in which death occurs. (d) Post-Termination Compensation. Except as provided in Section 5(c) above, upon termination of this Agreement, the Company shall be relieved of all of its obligations hereunder notwithstanding any period of time remaining under the initial or any renewal term, subject to the following: (i) Termination without Cause. In the event that the Company terminates Employee's employment hereunder without Cause under Section 5(a) above, then Employee shall, after the effective date of such termination, as Employee's sole and exclusive remedy, receive the Base Compensation (as then in effect) for a period of twelve (12) months after the termination date. If the Employee's employment is terminated by the Company without Cause, the Employee shall be under no duty to seek or accept other employment; but if he shall do so, any compensation he shall receive therefrom shall not diminish the Company's obligation to make payments required to the Employee hereunder. In the event that Employee terminates his or her employment under Section 5(a) above, the Company's obligation to pay Employee's Base Compensation shall terminate as of the date of termination. (ii) Termination for Cause. In the event that the Company terminates Employee's employment hereunder with Cause under Section 5(b) above, then Employee shall, after the effective date of such termination, as Employee's sole and exclusive remedy, receive the Base Compensation (as then in effect) for a period of one (1) month after the termination date. (iii) Termination following Change in Control. If within twelve (12) months following a Change in Control (as defined below), either (A) the Company terminates the employment of Employee hereunder without Cause under Section 5(a) above or (B) Employee resigns from a declined reassignment of a job that is not reasonably equivalent in responsibility or compensation that is not in the same geographic area, then, in lieu of any other compensation that may be specified herein, Employee shall continue to receive the Base Compensation (as then in effect) for a period of thirty-six (36) months from the date of termination payable in the same manner as it was being paid as of the date of termination, provided, however, that the salary payment provided for hereunder may at the option of the 4 5 Company be paid in a single lump-sum payment, to be paid not later than thirty (30) days after termination. In the event such obligation arises, no compensation received from other employment (or otherwise) shall reduce the obligation to make the payment(s) described in this paragraph. (e) Change in Control. "Change in Control" means a change in control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of a Current Report on Form 8-K pursuant to Section 13 of 15(d) of the Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, a Change in Control shall also be deemed to have occurred at such time as: (i) any "person" within the meaning of Section 14(d) of the Exchange Act, other than the Company; a subsidiary, or any employee benefit plan(s) sponsored by the Company or any Subsidiary, is or has become the "beneficial owner," as defined in rule 13d-3 under the Exchange Act, directly or indirectly, of 25% or more of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at the election of directors, or (ii) individuals who constitute the Board immediately prior to any meeting of stockholders (the "Incumbent Board") have ceased for any reason to constitute at least a majority thereof, provided that any person becoming a director whose election, or nomination for election by the Company's stockholders, was approved by a vote of a least three-quarters (3/4 )of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (iii) upon approval by the Company's stockholders of a reorganization, merger, share exchange or consolidation, other than one with respect to which those persons who were the beneficial owners, immediately prior to such reorganization, merger, share exchange or consolidation, or outstanding securities of the Company ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than 75% of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors; or (iv) upon approval by the Company's stockholders of a complete liquidation and dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company other than to a Subsidiary. Notwithstanding the occurrence of any of the foregoing, the Board may determine, if it deems it to be in the best interest of the Company and consistent with a good faith interpretation of this Agreement, that an event otherwise constituting a Change in Control shall not be so considered. Such determination shall only be effective (A) if it is made by the Board prior to 5 6 the occurrence of an event that otherwise would be or probably will lead to a Change in Control or after such event if made by the Board a majority of which is composed of directors who were members of the Board immediately prior to the event that otherwise would be or probably will lead to a Change in Control and 75% or more of such directors vote in favor of such determination, and (B) if it is made with respect to all executive officers of the Company. Upon such determination, such event or events shall not be deemed to be a Change in Control for any purposes hereunder. 6. Nondisclosure, Confidentiality; Competition. (a) Employee agrees that, during the term of this Agreement and of Employee's employment by the Company, and for a period twelve (12) months after the termination of Employee's employment with the Company, Employee will not in any manner, directly or indirectly, by himself or in conjunction with any other person, (i) conduct any of the activities or perform any of the responsibilities or duties that Employee provided the Company during his employment by the Company for any business entity that is competitive with the business of the Company or its affiliates or (ii) establish or own any financial, beneficial or other interest in (other than an interest consisting of less than one percent (1%) of a class of publicly traded security), make any loan to or for the benefit of, or render any managerial, marketing or other business advice, to any entity that is then conducting activities that are competitive with those of the business of the Company or its affiliates, in either case within a geographic territory defined as the greater of (i) a seventy-five (75) mile radius of any renal dialysis center, unit or facility owned or operated by the Company or an affiliate of the Company (an "RCG Center"), or (ii) the geographic area, as narrowly construed as is practicable, from which the Company received patients at each of the RCG Centers. For purposes of this Section, the "business of the Company or its affiliates" shall mean owning or operating a renal dialysis center, unit or facility, and providing practice management services to nephrologists. (b) Employee further agrees that, for a period of three (3) years after the termination of Employee's employment with the Company, Employee will keep confidential and not directly divulge, or allow through a lack of reasonable care to be divulged to anyone, or use or otherwise appropriate for Employee's own benefit or for the benefit of others, any knowledge or information of a confidential nature with respect to the Company's and its affiliates' current business, the Company itself, or any of its affiliates, including all trade secrets, pricing information, marketing information or technical information (hereinafter referred to as the "Confidential Data"), except for (i) a disclosure that is required by law; or (ii) information that has been made generally available to the public by the act of one who has the right to disclose such information; or (iii) information that has become part of the public domain through no fault of the Employee; and (iv) was known to the Employee prior to June 1996. Employee hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies which the Company may have available pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of confidential information, and the enforcement by the Company of its rights and remedies 6 7 pursuant hereto shall not be construed as a waiver of any other rights or available remedies which the Company may possess in law or equity. Employee acknowledges that the Company has taken reasonable and appropriate steps to ensure the confidentiality and non-disclosure of all such Confidential Data. For purposes of this Section the Company's and its affiliates' "current business" shall mean owning or opening a renal dialysis center, unit or facility. (c) Employee further agrees that, for a period of three (3) years after the termination of Employee's employment with the Company, Employee will not, for his own benefit or the benefit of others, solicit any person or entity that has or has had, or disrupt or attempt to disrupt, any relationship, contractual or otherwise, with the Company or an affiliate of the Company (including any patient, payor, physician, provider, managed care organization or supplier) at any time during Employee's employment with the Company, for the purpose of assisting, or creating such a relationship for, any business entity that is competitive with the Company or an affiliate of the Company. For purposes of this Section, a business entity is competitive with the Company or an affiliate of the Company if it provides or offers any renal dialysis service that is provided by the Company or an affiliate of the Company. (d) Employee further agrees that, for a period of three (3) years after the termination of Employee's employment with the Company, Employee shall not induce, nor attempt to induce, any employee of the Company, or any of its affiliates, to terminate such employee's association with the Company or any of its affiliates. (e) These post-employment covenants are considered by the parties hereto to be fair, reasonable and integral for the protection of the Company. The parties mutually agree that if a violation of any of these covenants occurs, such violation or any threatened violation will cause irreparable injury to the Company and the remedy at law for any such violation or threatened violation will be inadequate. The parties acknowledge that these covenants will survive, and remain in effect and enforceable after, termination of this Agreement. (f) Employee agrees to indemnify and hold harmless the Company from and against any and all claims, causes of action, damages and/or any other losses suffered or incurred by the Company as a result of any breach or purported breach by Employee of any agreement applicable to Employee which existed prior to the time of the entering into of this Agreement. Such obligations of Employee to indemnify and hold the Company harmless shall include any and all costs of defense of any such claim or threatened claim, including reasonable attorneys' fees. 7. Severability. The parties hereto hereby expressly agree and contract that it is not the intention of either party to violate any public policy, or any statutory or common law, and that if any paragraph, sentence, clause or combination of the same of this Agreement shall be in violation of the laws of any state where applicable, such paragraph, sentence, clause or the combination of 7 8 the same shall be void in the jurisdictions where it is unlawful, and the remainder thereof shall remain binding on the parties hereto. It is the intention of the parties to make the covenants of this Agreement binding only to the extent that they may be lawfully done under existing applicable laws. In the event that any part of any term or covenant of this Agreement is determined by a court of law or equity to be overly broad or otherwise unenforceable, the parties hereto agree that such court shall be empowered to substitute, and it is the intent of the parties hereto that such court substitute, a reasonably judicially enforceable term or limitation in the place of such unenforceable term or covenant, and that as so modified this Agreement shall be fully enforceable. 8. Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties and supersedes any and all prior understandings or agreements, and any changes or additions hereto must be in writing and signed by both parties. 9. Assignment. (a) The rights and benefits of Employee under this Agreement, other than accrued and unpaid amounts due under Section 3(a) hereof, are personal to Employee and shall not be assignable. (b) This Agreement may not be assigned by the Company except to an affiliate of the Company, provided that such affiliate assumes the Company's obligations under this Agreement; provided, further, that if the Company shall merge or effect a consolidation or share exchange with or into, or sell or otherwise transfer substantially all its assets to, another business entity, the Company may assign its rights hereunder to that business entity without the consent of the Employee provided that it causes such business entity to assume the Company's obligations under this Agreement. 10. Notice. The references to the notice periods of certain "days" contained in this Agreement shall mean calendar days. Any notice provided for in this Agreement shall be delivered to Employee at the most recent address of employee listed in the Company's then current employment records. Notice to the Company shall be delivered to the following address: c/o Renal Care Group, Inc., 2100 West End Avenue, Suite 800, Nashville, Tennessee 37203, Attention: President. 11. Waiver. The waiver by any party to this Agreement of a breach of any of the provisions contained herein shall not operate or be construed as a waiver of any subsequent breach. 8 9 12. Disputes and Governing Law. The Company and employee agree that any dispute arising in connection with, or relating to, this Agreement or the termination of this Agreement, to the maximum extent allowed by applicable law, shall be subject to resolution through informal methods and, failing such efforts, through arbitration. Either party may notify the other party of the existence of a dispute by written notice to the address indicated above in Section 10. The parties shall thereafter attempt in good faith to resolve their differences within thirty (30) days after the receipt of such notice. If the dispute cannot be resolved within such 30-day period, then the parties will submit the dispute for mediation. If mediation efforts are not successful, then either party may file a written demand for arbitration with the other party. The arbitration shall proceed in accordance with the terms of the Federal Arbitration Act and the rules and procedures of the American Arbitration Association. A single arbitrator shall be appointed through the American Arbitration Association's procedures to resolve the dispute. The parties agree that in the event arbitration is necessary, the laws of the State of Tennessee and any applicable federal law shall apply. The place of the arbitration shall be Nashville, Tennessee. The award of the arbitrator shall be binding and conclusive upon the parties. Either party shall have the right to have the award made the judgment of a court of competent jurisdiction in the State of Tennessee. In the event of a dispute arising under this Agreement, the prevailing party shall be entitled to all reasonable attorney's fees incurred in connection with such dispute. The Company agrees, to the maximum extent permitted by law and the By-laws of the Company, to defend and indemnify the Employee against and to hold the Employee harmless from any and all claims, suits, losses, liabilities, and expenses (including disputes arising under this Agreement and including reasonable attorneys' fees and payment of reasonable expenses incurred in defending against such claim or suite as such expenses are incurred) asserted against the Employee for actions taken or omitted to be taken by the Employee in good faith and within the scope of his responsibilities as an officer or employee of the Company. If requested by the Employee, the Company shall advance to the Employee, promptly following the Company's receipt of any such request, any and all expenses for which indemnification is available hereunder. 9 10 IN WITNESS WHEREOF, the Company and Employee have executed this Agreement on the day and year first above written. COMPANY: RENAL CARE GROUP, INC. By: /s/ Sam A. Brooks ----------------------------------------- Sam A. Brooks President [Corporate Seal] EMPLOYEE: /s/ Gary Brukardt (Seal) ----------------------------------------- Gary Brukardt 10 EX-10.24 10 DIALYSIS PROGRAM MANAGEMENT AGREEMENT 1 Exhibit 10.24 DIALYSIS PROGRAM MANAGEMENT AGREEMENT THIS AGREEMENT is made effective this 1st day of March, 1996 ("Effective Date") by and between The Cleveland Clinic Foundation, an Ohio non-profit corporation, and Renal Care Group, Inc., a Tennessee corporation ("Management Company"). WITNESSETH: WHEREAS, Management Company is engaged in the business of managing dialysis units; and WHEREAS, The Cleveland Clinic Foundation desires that Management Company manage its current outpatient dialysis services program ("UNIT") pursuant to this Agreement; and WHEREAS, Management Company agrees to manage the UNIT under the name, The Cleveland Clinic Foundation; NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained in this Agreement, The Cleveland Clinic Foundation and Management Company agree as follows: I. AUTHORITY OF THE PARTIES 1.1 Ultimate Control. The Cleveland Clinic Foundation shall at all times exercise ultimate authority and control over the policies and assets of the UNIT, and shall retain the ultimate authority and responsibility regarding the powers, duties, and responsibilities vested in The Cleveland Clinic Foundation with respect to the UNIT by applicable law and regulations. In accordance with the intent of the parties, Management Company shall, subject to the approval of The Cleveland Clinic Foundation, establish general administrative policies which shall be carried out by Management Company as specified under this Agreement. 1.2 Grant of Day-to-Day Management Authority. Subject to the foregoing, and to supervision of all professional medical care by the Medical Director as provided below, The Cleveland Clinic Foundation hereby grants and delegates to Management Company the authority to supervise and manage the day-to-day operations of the UNIT and to perform the specific functions set out in this Agreement. The Cleveland Clinic Foundation shall cooperate with Management Company in order to facilitate Management Company's efficient performance of its management responsibilities under this Agreement. 2 1.3 Relationship of the Parties. The parties hereto intend by this Agreement solely to effect the appointment of Management Company for administrative management of UNIT as described herein, and does not extend to or involve any other activities of either The Cleveland Clinic Foundation or Management Company, except as set forth in Section 1.4 herein. No other relationship is intended to be created between the parties hereto and nothing in this Agreement shall be construed as to make either party hereto the employer or employee of the other, agent or principal of the other, the joint venturer or partner of the other, or have the right to, or control of, or in any manner conduct the other's business; other than as is herein explicitly provided. 1.4 Exclusivity. Without the prior consent of The Cleveland Clinic Foundation, Management Company shall not provide outpatient dialysis management services other than to The Cleveland Clinic Foundation during the term of this Agreement within the area outlined on Exhibit A attached hereto and made a part hereof; provided, however, that this shall not prohibit the Management Company from providing such services to MetroHealth System (which shall include its affiliated entities) in Cleveland, Ohio. II. MANAGEMENT PERSONNEL 2.1 Administrator. 2.1.1 Management Company shall hire and appoint an administrator for the UNIT ("Administrator"), who shall be an employee of Management Company. Notwithstanding the above, the appointment of the Administrator shall be subject to the approval of The Cleveland Clinic Foundation. 2.1.2 The Administrator shall have general day-to-day responsibility for the management of the UNIT, other than those duties specifically delegated to the Medical Director pursuant to this Agreement. 2.2 Medical Director. 2.2.1 The Cleveland Clinic Foundation, on the recommendation of the Director of the Division of Nephrology at The Cleveland Clinic Foundation, shall hire or retain and appoint, and may remove, the Medical Director of the UNIT, who shall be and remain an employee of The Cleveland Clinic Foundation. 2.2.2 The Medical Director shall supervise all professional medical services performed in the UNIT and shall undertake overall coordination of utilization review, quality assurance, and related functions as directed by The Cleveland Clinic Foundation. The Medical Director may perform other duties as The Cleveland Clinic Foundation may deem appropriate, and which do not interfere with the performance of the Medical Director's duties under this agreement. The Cleveland Clinic Foundation shall be responsible for the 2 3 compensation, including fringe benefits, expenses, including professional liability insurance, and other support and operating costs of the Medical Director. 2.3 Other Personnel. The Cleveland Clinic Foundation and Management Company each shall, at its sole expense, employ, pay, and supervise some other personnel reasonably necessary to perform each party's duties under this Agreement, and in such party's discretion may remove and/or reassign such other personnel, and locate such personnel at such places as are appropriate. Subject to the prior approval of the Medical Director and in accordance with the terms of the Annual Operating Plan, as further described in Section 3.2, the Management Company shall provide certain personnel, such as registered nurses, for patient care purposes (hereinafter "Management Company Patient Care Personnel"). The Cleveland Clinic Foundation and Management Company shall each be responsible for the compensation, including fringe benefits, expenses, and other support and operating costs of the personnel it employs; provided, however, that Management Company shall be reimbursed by The Cleveland Clinic Foundation, as set forth in the Annual Operating Plan, approved by The Cleveland Clinic pursuant to Section 3.2 hereon, for the cost of the Management Company Health Care Personnel assigned to and performing services at the Unit. 2.4 In the event either party reasonably determines that any personnel provided by the other party should be terminated or re-assigned as a result of lack of competence, conduct or behavior detrimental to patient care, the party employing such individual shall promptly review such determination and make reasonable best efforts to take appropriate personnel action, in accordance with its customary personnel policies and procedures. III. ADMINISTRATIVE SERVICES 3.1 General Responsibilities and Services. Management Company shall perform those services as set forth in this Article III, and all related functions as are reasonably necessary for the effective management of the operations of the UNIT. Management Company shall establish operational policies for the UNIT, subject to The Cleveland Clinic Foundation's approval, and shall implement those policies. Management Company shall perform its services diligently in accordance with generally recognized standards of good management in the health care industry relating to dialysis centers, in the reasonable exercise of Management Company's judgment, and in accordance with performance standards to be developed by Management Company and updated annually, which standards will be subject to the review and approval of The Cleveland Clinic Foundation. Nothing in this Agreement shall be construed to require or permit the practice of medicine by Management Company or any employee thereof. 3.2 Preparation and Adoption of Annual Operating Plan. Management Company shall prepare, for The Cleveland Clinic Foundation's approval, an annual operating plan ("Annual Operating Plan") for each fiscal year or part thereof during which this Agreement is in effect. The Annual Operating Plan shall set out major operating objectives and anticipated revenues and expenses of the UNIT and will be presented to The Cleveland Clinic 3 4 Foundation for its acceptance, rejection, or modification not later than three (3) months prior to the beginning of each fiscal year, except that the first Annual Operating Plan shall be presented to The Cleveland Clinic Foundation prior to the execution of this Agreement. After the Annual Operating Plan has been modified to incorporate any changes made by The Cleveland Clinic Foundation, and subject to the provisions of this Agreement, it shall serve as a guide for the operation of the UNIT. The Annual Operating Plan will include information with respect to the UNIT's major business objectives, anticipated revenues and expenses, capital expenditures, cash flow, enrollment and staffing projections, and a discussion of anticipated changes, if any, in utilization, patient charges, and other significant criteria identified by The Cleveland Clinic Foundation. Management Company may, from time to time, propose modifications to the Annual Operating Plan which it deems necessary or advisable, which modifications shall be incorporated into the Annual Operating Plan upon approval by The Cleveland Clinic Foundation. The Cleveland Clinic Foundation may also, from time to time, propose modifications to the Annual Operating Plan which it deems necessary and advisable, which modifications shall, after consultation with Management Company, be incorporated into the Annual Operating Plan. 3.3 Billing and Collection of Accounts. Management Company shall, at its expense, design, implement and maintain a billing and collection system and procedures appropriate to the UNIT's operations using the UNIT's End State Renal Dialysis ("ESRD") Number. These procedures shall be in accordance with billing and collection policies approved by The Cleveland Clinic Foundation. Management Company shall supply directly to The Cleveland Clinic Foundation all patient billing and collection data produced or administered by Management Company. The Cleveland Clinic Foundation shall retain sole authority to bill and to take prompt action to collect accounts owed to the UNIT in The Cleveland Clinic Foundation's or the UNIT's name and on The Cleveland Clinic Foundations' behalf, and to take possession of and endorse in The Cleveland Clinic Foundation's name any cash, notes, checks, money orders, insurance payments, and other instruments received in payment for services rendered by the UNIT. 3.4 Deposit and Disbursement of Funds. 3.4.1 Management Company shall promptly deposit all funds it receives on behalf of The Cleveland Clinic Foundation in federally-insured accounts established by The Cleveland Clinic Foundation in The Cleveland Clinic Foundations's name with banks or other appropriate depository institutions. Management Company shall pay for all operating expenses of the UNIT as set forth in the Annual Operating Plan approved by The Cleveland Clinic Foundation, and shall be reimbursed by The Cleveland Clinic Foundation on an actual cost basis for all approved expenditures. Management Company shall request reimbursement from The Cleveland Clinic Foundation on a fortnightly or less frequent basis and shall accompany each request for reimbursement with an itemized statement of the actual expenditures to be reimbursed. Disbursements for approved expenses must be supported by vouchers, receipts, or other reasonable records duly approved by the Administrator or his/her 4 5 delegate, and Management Company shall provide copies of these to The Cleveland Clinic Foundation upon request. 3.5 Accounting Records and Reports. Management Company shall implement and maintain an appropriate accounting system adequate for the UNIT's needs and shall cause to be delivered to The Cleveland Clinic Foundation monthly unaudited financial statements for the UNIT. These statements shall be prepared on an accrual basis in accordance with generally accepted accounting principles. These financial statements shall be delivered to The Cleveland Clinic Foundation on or before the tenth (10) business day of the following month, commencing March, 1996. Management Company will also prepare and deliver to The Cleveland Clinic Foundation such other reports as are necessary to manage the UNIT including, but not limited to, quarterly service reports (analyzing the utilization and cost of dialysis services and supplies provided, and quarterly billing reports. Within twelve (12) days after the end of each Cleveland Clinic Foundation's fiscal year, Management Company shall prepare and deliver to The Cleveland Clinic Foundation unaudited financial statements. Any financial books and records of the Management Company that relate to its operation of the UNIT shall be available for inspection by The Cleveland Clinic Foundation or its delegates during normal business hours or otherwise upon reasonable notice. With respect to all such reports and financial statements, Management Company shall be entitled to supplement such reports and financial statements from time to time as deemed necessary by Management Company. 3.6 Ancillary and Other Agreements. On behalf of The Cleveland Clinic Foundation, Management Company shall negotiate and enter into such administrative agreements, with terms not exceeding one (1) year (unless a longer term is approved in writing by The Cleveland Clinic Foundation prior to execution), as Management Company reasonably deems necessary or advisable for the furnishing of utilities, services, concessions, and non-physician services and supplies for the maintenance and operation of the UNIT, other than those directly provided by Management Company hereunder. 3.7 Other Agreements. Except as provided in the approved Annual Operating Plan or as otherwise specifically provided herein, Management Company shall not enter into any contracts, agreements, leases, debts, obligations, or legal commitments on behalf of The Cleveland Clinic Foundation or make any capital expenditure involving an expense in excess of $10,000 on behalf of the UNIT, or dispose of any asset of the UNIT having a value of more than $10,000, except as approved in writing prior to execution by The Cleveland Clinic Foundation. 3.8 Limitation of Contractual Liability. In the event this Management Agreement is terminated by either party as set forth in Section VIII, The Cleveland Clinic Foundation's sole liability under agreements entered into by Management Company pursuant to Sections 3.6 and 3.7 shall be limited to payment for all supplies and services received and accepted by The Cleveland Clinic Foundation. In addition, the Management Company shall, upon request from The Cleveland Clinic Foundation, use its best efforts to promptly terminate such 5 6 agreements. Upon receipt of payment for such supplies and services, Management Company shall hold The Cleveland Clinic Foundation harmless for any other claims or liabilities alleged or brought by third parties related to such agreements. 3.9 Regulatory Requirements. Management Company shall prepare and submit on behalf of the UNIT all necessary reports and filings, including cost and utilization reports, supporting data and other material required in connection with reimbursement under Medicare, Medicaid, Nationwide Insurance Company, and other third-party payment contracts and programs in which the UNIT may from time to time participate. In addition, Management Company shall take all other appropriate actions necessary for regulatory compliance or otherwise advisable in order that The Cleveland Clinic Foundation be in compliance with any requirements of local, state, or federal agencies having jurisdiction over the UNIT's operations, or in order to comply with requirements of payors, provided that Management Company shall consult with The Cleveland Clinic Foundation on an ongoing basis concerning these functions and compliance. IV. DUTIES OF THE CLEVELAND CLINIC FOUNDATION AND MANAGEMENT COMPANY 4.1 Data and Information. The Cleveland Clinic Foundation shall provide to Management Company without charge all necessary and relevant data and information in the possession of The Cleveland Clinic Foundation as shall be reasonably required or requested by Management Company in order to enable it to perform its duties hereunder. 5.1 Amount of Compensation. In consideration of the services to The Cleveland Clinic Foundation to be provided by Management Company pursuant to this Agreement, Management Company will receive a monthly management fee of Seventy-Six Thousand, Seven Hundred and Thirty-Nine Dollars ($76,739.00) for each contract month of this Agreement. Such fee represents payment to Management Company for the general and administrative overhead and executive management of Management Company. In addition, The Cleveland Clinic Foundation shall reimburse Management Company for the approved actual operating expenses of the UNIT as set forth in the Annual Operating Plan approved by The Cleveland Clinic Foundation pursuant to Section 3.2 hereof. The management fee shall be paid in monthly installments, payable on or before the tenth (10th) business day of the following month, commencing as of the Effective Date. 6 7 VI. OWNERSHIP OF WORK PRODUCT 6.1 Work Product 6.1.1 All operating procedures, protocols, information systems, operating data, patient lists, computer data base, reports, and other non-public proprietary business systems or information pertaining to or owned by The Cleveland Clinic Foundation used or obtained by Management Company in performing its management activities under this Agreement, with respect to the UNIT, shall be and remain the exclusive property of The Cleveland Clinic Foundation. All operating procedures, protocols, information systems, computer data base programs, and other non-public proprietary business systems or information not uniquely pertaining to The Cleveland Clinic Foundation, that are or were created, developed, or obtained by Management Company from sources other than The Cleveland Clinic Foundation shall be the exclusive property of Management Company. Management Company acknowledges that any and all Cleveland Clinic Foundation business, patient or financial data residing in any Management Company database or information system is, and shall remain, the exclusive property of The Cleveland Clinic Foundation. 6.1.2 Management Company shall not disclose or use for any other purpose other than for the performance of its obligations hereunder any confidential or proprietary data, reports, or other information or materials concerning The Cleveland Clinic Foundation, the UNIT, or its products or services without the prior written consent of The Cleveland Clinic Foundation, except as otherwise required by law or regulation applicable to The Cleveland Clinic Foundation or Management Company. 6.2. Licensure of Service Mark. 6.2.1 Management Company acknowledges The Cleveland Clinic Foundation's exclusive right, title, and interest in and to the trade names and service marks related to The Cleveland Clinic Foundation, and all related names, symbols, trade names, and service marks now owned by The Cleveland Clinic Foundation (the "Marks"). The Marks will not be altered or changed by Management Company without the prior written approval of The Cleveland Clinic Foundation. Management Company shall use the Marks only on connection with the operation and management of the UNIT, and in a manner which shall be subject to the prior approval of The Cleveland Clinic Foundation. The parties agree that violations of this Section will result in irreparable harm and that, in addition to any other rights and remedies provided by law, The Cleveland Clinic Foundation shall be entitled to injunctive relief to enforce Management Company's obligations under this Section. 6.2.2 With The Cleveland Clinic Foundation's prior written approval, the Management Company may, on a non-exclusive basis, use the Marks in Management Company's service area in connection with the operation of the UNIT while this Agreement remains in effect. The Cleveland Clinic Foundation shall have the right to use the marks on its own behalf as well. 7 8 6.2.3 The Cleveland Clinic Foundation shall defend or settle at its expense any litigation or claim which may be instituted against The Cleveland Clinic Foundation insofar as such litigation or claim solely contests the ownership of the Marks. VII. INSURANCE AND INDEMNIFICATION 7.1 Each party (the"Indemnitor") shall indemnify, save and hold harmless the other party (the "Indemnitee") from and against any and all judgments, damages, costs and expenses, including reasonable attorney's fees, paid or incurred by the Indemnitee in any claim, action or proceeding for damage to property, injury or death to person, or otherwise, arising solely out of the proven negligent acts or omissions of Indemnitor in Indemnitor's performance under this Agreement. Indemnitee obligations as set forth in the preceding sentence are conditioned upon (i) Indemnitee promptly notifying Indemnitor of any claim, demand or action, or any incident of which Indemnitee has actual and constructive knowledge, which may reasonably result in a claim, demand or action, and for which Imdemnite will look to Indemnitor for indemnification under this Section, (ii) Indemnitee, its directors, officers, employees and servants, shall reasonably and in good-faith cooperate with Indemnitor in Indemnitor's investigation and review of any such claim, demand, action or incident, and (iii) Indemnitee not entering into any admissions, agreements or settlements which may affect the rights of Indemnitee or Indemnitor without the prior written consent and approval of Indemnitor. Indemnitor reserves the right, in its sole discretion, to assume the defense of Indemnitee in any such claim, action or proceeding. 7.2 The Indemnitee shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnitee unless (a) employment of such counsel and payment of the fees and expenses thereof by the Indemnitor has been specifically authorized by the Indemnitor, or (b) in the reasonable judgment of such Indemnitee, employment of such counsel is necessary because the claim or defense for which such counsel is employed is inconsistent or in conflict with the claims or defenses of the Indemnitor, or (c) the Indemnitee shall have reasonably concluded that there may be claims or defenses available to it that are different from or in addition to those available to the Indemnitor, in any of which events such fees and expenses shall be borne by the Indemnitor, but in any such event, the Indemnitor shall not have the right to direct the defense of such action on behalf of the Indemnitee. The Indemnitor shall not be liable for any settlement of any such action effected without the Indemnitor's consent by the Indemnitee, but if settled with consent of the Indemnitor or if there shall be a final judgment for the plaintiff in such action against the Indemnitee or the Indemnitor with or without the consent of Indemnitor, the Indemnitor agrees to indemnity and hold harmless the Indemnitee to the extent provided herein. 7.3 Each party shall procure and maintain for the term of this Agreement professional liability insurance in a minimum amount of $3,000,000 per incident/$3,000,000 annual aggregate. Each party shall also provide the other with certificate or affidavit of said coverage. Each party will notify the other of any cancellation or significant change thirty 8 9 (30) days prior to such cancellation or change. If such coverage is written on a claims-made form following termination of this Agreement, coverage shall survive for a period of no less than five (5) years. Coverage shall provide for a retroactive date of placement coinciding with the Effective Date of this Agreement. The Cleveland Clinic Foundation shall reimburse Management Company for that portion of the reasonable cost of such insurance attributable to Management Company's Health Care Personnel assigned to or performing services on a full-time basis at the UNIT, provided such costs are set forth in the Annual Operating Plan, approved by The Cleveland Clinic Foundation, pursuant to Section 3.2 hereof. The Cleveland Clinic Foundation, at its expense, will provide professional liability insurance coverage for the Medical Director of the UNIT and for its other employees providing services to the UNIT hereunder. 7.4 The Cleveland Clinic Foundation, at its expense, shall provide fire and extended coverage insurance with respect to the UNIT and its contents. Management Company shall be named as an additional insured under such policy. The Cleveland Clinic Foundation also shall obtain general liability insurance coverage in a minimum amount of $1,000,000 per incident/$3,000,000 annual aggregate with respect to its ownership of the UNIT. Management Company shall obtain, at its expense, general liability insurance coverage in a minimum amount of $1,000,000 per incident /$3,000,000 annual aggregate with respect to its actions as manager of the UNIT. Management Company shall procure and maintain workers' compensation insurance meeting statutory requirements and employer liability insurance coverage in commercially reasonable amounts with respect to the Management Company's employees. The Cleveland Clinic Foundation shall reimburse Management Company for that portion of the reasonable cost of such insurance attributable to Management Company's Health Care Personnel assigned to or performing services on a full-time basis at the UNIT, provided such costs are set forth in the Annual Operating Plan, approved by The Cleveland Clinic Foundation, pursuant to Section 3.2 hereof. 7.5 Management Company shall be solely responsible for the hiring, compensation, termination and all matters relating to any persons, companies or corporations employed by Management Company, for any reason whatsoever in regard hereto, arising herefrom or otherwise, and shall indemnify and hold The Cleveland Clinic Foundation harmless from any liability arising from the employment by Management Company of any such persons or companies, including any liability arising under the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act, and any other relevant federal, state, and local laws or regulations. 7.6 No individual whose compensation for services is paid by Management Company shall be in any way, directly or indirectly, expressly or by implication, deemed an employee of The Cleveland Clinic Foundation or any related entity, nor shall any such individual, be deemed to be employed by The Cleveland Clinic Foundation or any related 9 10 entity for the purpose of any payroll taxes, income tax withholding, or contributions imposed by any federal, state, or local law or regulations, with respect to employment, workers' compensation, or otherwise. Management Company accepts exclusive liability for any and all payroll taxes, income tax withholding or contributions, in any form whatsoever, imposed by federal, state or local law or regulations, not only with respect to itself, but also with respect to any and all of its agents or employees. VIII. TERM AND TERMINATION 8.1 Term. The term of this Agreement shall be one (1) year, unless earlier terminated as hereinafter set forth. This Agreement may be terminated at any time without cause by either: i) mutual written consent of the parties; or ii) The Cleveland Clinic Foundation providing sixty (60) days prior written notice to the Management Company. 8.2 Termination for Cause. 8.2.1 Bankruptcy Termination. Management Company may terminate this Agreement upon the "bankruptcy" of The Cleveland Clinic Foundation and The Cleveland Clinic Foundation may terminate this Agreement upon the "bankruptcy" of Management Company, in each case upon written notice thereof to the other party. As used in this Section, "bankruptcy" of a party means: the filing of a petition commencing a voluntary case against it under the Bankruptcy Code; a general assignment by it for the benefit of creditors; its insolvency; its inability to pay its debts as they become due; the filing by it of any petition or answer in any proceeding seeking for itself or consenting to, or acquiescing in, any insolvency, receivership, composition, readjustment, liquidation, dissolution, or similar relief under any present or future statute, law, or regulation, or the filing by it of an answer or other pleading admitting or failing to deny or to contest the material allegations of the petition filed against it in any such proceeding; its seeking or consent to, or acquiescence in the appointment of, any trustee, receiver, or liquidator of it or any material part of its property; or the commencement against it of any involuntary case under the Bankruptcy Code, or a proceeding under any receivership, composition, readjustment, liquidation, insolvency, dissolution, or like law or statute, which case or proceeding is not dismissed or vacated within sixty (60) days from commencement. 8.2.2 Termination for Breach or Default. If either party ("Defaulting Party") fails substantially to perform any of its material obligations under this Agreement, the other party ("Non-Defaulting Party") shall have the right to give the Defaulting Party a "Notice of Default." The Notice of Default shall set forth the nature of the obligation that the Defaulting Party has not performed. If, within ten (10) business days following the giving of the Notice of Default, the Defaulting Party in good faith commences to cure the default, and thereafter diligently and continuously pursues the curing to completion within thirty (30) days of such notice, unless the default is impossible to cure within thirty (30) days, in which event the defaulting party must continuously and diligently pursue a cure to completion within a reasonable time, it shall be deemed that the Notice of Default has not been given and the 10 11 Defaulting Party shall not lose any of its rights under this Agreement by reason thereof, although such Defaulting Party may be required to pay interest relating to such default if so required by the terms of this Agreement. If, within the ten (10) day notice period, the Defaulting Party does not commence in good faith the curing to the default or does not thereafter diligently and continuously prosecute and achieve the curing to completion within the applicable cure period, the Non-Defaulting Party shall have the right to terminate this Agreement upon ten (10) days' written notice to the Defaulting Party. 8.3 Rights Upon Termination. 8.3.1 The right to terminate this Agreement shall be in addition to any other remedy available on account of any breach or default. 8.3.2 Upon termination of this Agreement for any reason, and notwithstanding Section 8.2 hereof, Management Company shall, for a period not to exceed ninety (90) days, assist The Cleveland Clinic Foundation in effecting an orderly transfer of all of its management functions, including, without limitation, billing, collections, and maintenance of data, so as to prevent or minimize disruption of the UNIT's operations. In addition, upon prior consultation with Management Company, The Cleveland Clinic Foundation shall have the right to solicit all non-officer Management Company employees in the event of a termination by Management Company hereunder. Such assistance shall be rendered in a manner consistent with usual and customary practice and The Cleveland Clinic Foundation's needs. IX. MISCELLANEOUS 9.1 Assignment. This Agreement shall not be assigned by either party without the prior written consent of the other party. 9.2 Further Documents. The parties do hereby covenant and agree that they and their successors and assigns will execute any and all instruments, releases, assignments, and consents which may reasonably be required of them in order to carry out the provisions of this Agreement. Notwithstanding expiration or termination of this Agreement, each party hereto shall take such further actions as are necessary to fulfill its existing obligations, including those in Section 3.2, Section 6.1, and Article X. 9.3 Effect on Successors. Without in any way limiting the provisions of Section 9.1, this Agreement shall be binding upon, enforceable by, and inure to the benefit of the parties and their permitted successors and assigns. 9.4 Entire Agreement. This Agreement contains the entire agreement between the parties relating to the subject matter of this Agreement. The terms of this Agreement may be modified or amended only by a writing signed by all parties. 11 12 9.5 Governing Law. This Agreement shall be governed by and construed, interpreted, and enforced pursuant to the laws of the State of Ohio. 9.6 Notices. All notices under this Agreement by any party to the other shall be in writing. All notices, demands, and requests shall be deemed given when mailed, postage prepaid, registered or certified mail, return receipt requested, or sent by prepaid express delivery service: (a) TO: The Cleveland Clinic Foundation 9500 Euclid Avenue; Desk A-101 Cleveland, Ohio 44195 Attention: Dr. Vincent Dennis With copies to: General Counsel; Desk H-18 (b) TO: Renal Care Group, Inc. University Division 1801 West End Avenue, Suite 1100 Nashville, TN 37203 Attention: Virginia Long, Vice President With copies to Stuart Campbell, Esq. Fares, Warfield & Kanaday 17th Floor Third National Bank Building 201 Fourth Avenue, North Nashville, TN 37219 9.7 No Waiver. The future of any party to insist at any time upon the strict observance or performance of any of the provisions of this Agreement shall not impair any such right or remedy or be construed to be a waiver or relinquishment. Every right and remedy given by this Agreement to the parties may be exercised from time to time and as often as may be deemed expedient by the parties. 9.8 Enforceability, Severability. The invalidity or unenforceability of any term or provision of this Agreement shall not, unless otherwise specified, affect the validity or enforceability of any other term or provision, unless the term or provision is material and its invalidity or unenforceability results in a substantial economic detriment to The Cleveland Clinic Foundation or Management Company, in which event the parties hereto shall negotiate in good faith a resolution which to the maximum extent feasible preserves to each party the right and benefits contemplated hereunder. 12 13 9.9 Confidentiality. Each party hereto covenants and agrees that it shall not disclose the terms of this Agreement or any agreement supplementing this Agreement to third parties, except as and to the extent disclosure is required by law, or required for the performance of its obligations hereunder or under related agreements, or as necessary or appropriate in dealing with the accountants, attorneys, and other representatives of the respective parties. 9.10 Medicare Access to Books and Records. In the event, and only in the event, that Section 952 of P.L. 96-499 [(42 U.S.C. Section 1395 x (v)(1)(1)] is applicable to this Agreement, each party agrees as follows: a. Until the expiration of four (4) years after the furnishing of such services pursuant to this Agreement, each party shall make available, upon written request, to the Secretary of the Federal Department of Health and Human Services or, upon request to the Comptroller General of the United States, or any of its duly authorized representatives, this Agreement, and books, documents and records of each party that are necessary to certify the nature and extent of the cost of services provided pursuant to this Agreement; and b. If any party carries out any of the duties of this Agreement through a subcontract, with a value or cost of Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, with a related organization, such subcontract shall contain a clause to the effect that until the expiration of four (4) years after the furnishing of such services pursuant to such subcontract, the related organization shall make available, upon written request, to the Secretary of the Federal Department of Health and Human Services or, upon request, to the Comptroller General of the United States, or any of its duly authorized representatives, the subcontract, and books, documents and records of such organization that are necessary to verify the nature and extent of the cost of services provided pursuant to such subcontract; c. Each party shall notify the other parties immediately of any request for access to books and records described above. In addition, each party shall indemnify, defend and hold the other party harmless from any liability arising out of any refusal by the refusing party or its subcontractors to grant access to books and records as required above. 9.11 Resolution of Disputes/Binding Arbitration. In the event that a dispute, the resolution of which is not already provided herein, arises between the Management Company and The Cleveland Clinic Foundation, the parties agree that such dispute shall first be submitted to the Chief Executive Officers of both parties. If such dispute is not resolved to the parties' satisfaction, said dispute shall be submitted to a panel of arbitrators in Cleveland, Ohio, who shall be governed the rules of the American Arbitration Association and whose decision shall be binding and conclusive on the parties. Costs associated with such arbitration shall be borne proportionate to the arbitrators' finding of fault. 13 14 X. GOVERNMENTAL APPROVALS The Management Group and The Cleveland Clinic Foundation acknowledge that they have, in good faith, made reasonable efforts to comply with any applicable restrictions under the laws of the United States of America or the State of Ohio with respect to the practice of medicine and relationships between physicians and management companies. In the event that: (a) any applicable licensing, administrative or governmental agency, authority or office, or any court of competent jurisdiction finds, pursuant to a final nonappealable determination or order, that any aspect of this Agreement or any transaction contemplated by this Agreement does or may violate applicable prohibitions or restrictions with respect to the practice of medicine by unlicensed persons or relationships between management corporations and physicians; or (b) any party to this Agreement has reasonable belief that such findings may be made, then the Management Company and The Cleveland Clinic Foundation shall use their best efforts to reform or reorganize the structure of their relationship described in this Agreement so that such violation or alleged violation no longer exists; provided, however, that notwithstanding such efforts and reformation or reorganization, in the event of (a) above, either party may elect to terminate this Agreement by proving sixty (60) days prior written notice, and upon such termination, neither party shall have any liability to the other party with respect to this Agreement except incurred prior to termination or with respect to such violation or alleged violation to the extent that Hospital and Foundation restructure or reorganize their relationship, they shall do so to preserve to the greatest extent possible the economic relationship between them. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE CLEVELAND CLINIC FOUNDATION RENAL CARE GROUP, INC. By: /s/ Frank L. Lordeman By: /s/ ---------------------------- -------------------------------- FRANK L. LORDEMAN Title: CHIEF OPERATING OFFICER Title: Chief Medical Officer ------------------------ Director, University Division Renal Care Group -------------------------------- APPROVED AS TO FORM COF - Office of General Counsel By /s/ Donald W. Rowan --------------------------- Date 3/17/96 ------------------------- -------------------------------- 14 15 EXHIBIT A EXCLUSIVE SERVICE AREA CUYAHOGA, LAKE, SUMMIT, GEAUGA, LORAIN, HURON AND ERIE COUNTIES 15 EX-11.1 11 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 RENAL CARE GROUP, INC. (OF DELAWARE) STATEMENT RE PRO FORMA COMPUTATION OF PER SHARE EARNINGS (UNAUDITED PRO FORMA)
DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ------------------ PRIMARY EARNINGS PER SHARE Common Stock issued to Founders............................ 4,834,000 4,834,000 Common Stock issued to Public.............................. 3,318,000(1) 4,485,000 Common Stock issued to acquired entities................... 2,928,000 2,928,000 ---------- ---------- Common Stock outstanding..................................... 11,080,000 12,247,000 Treasury Stock Method of Options and Warrants................ -- 840,000 ---------- ---------- Average weighted shares outstanding.......................... 11,080,000 13,087,000 ========== ========== ProForma Net Income.......................................... $ 7,129,000 $5,300,000 ========== ========== ProForma Earnings per Share.................................. $ 0.64 $ 0.40 ========== ==========
- --------------- (1) Excludes 1,167,000 shares the proceeds of which will be used for general corporate purposes. EX-23.2 12 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated October 8, 1996 with respect to the supplemental consolidated financial statements of Renal Care Group, Inc., the use of our reports dated September 30, 1996 with respect to the combined financial statements of Renal Care Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired and the use of our reports dated May 15, 1996 with respect to the combined financial statements of Kidney Care, Inc. et al. in the Registration Statement (Form S-1) and the related Prospectus of Renal Care Group, Inc. for the Registration of 3,000,000 shares of its common stock. /s/ Ernst & Young LLP Nashville, Tennessee October 8, 1996 EX-23.3 13 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Tyler Nephrology Associates, P.A. We consent to the reference to our firm under the caption "Experts", and to the use of our reports on the financial statements of Tyler Nephrology Associates, P.A. to be included in the Form S-1 Registration Statement of Renal Care Group, Inc. /s/ Henry & Peters, P.C. Tyler, Texas October 7, 1996 EX-23.4 14 CONSENT OF ALLEN, GIBBS & HOULIK, L.C., 1 EXHIBIT 23.4 CONSENT OF ALLEN, GIBBS & HOULIK, L.C., INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and "Selected Combined Financial Data" and to the use of our report dated July 15, 1995, relating to the combined financial statements of Kansas Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc. and to the inclusion of those financial statements audited by our firm in the combined financial statements referred to in the audit report of Ernst & Young LLP, dated September 30, 1996 in the Registration Statement (Form S-1) and the related Prospectus of Renal Care Group, Inc. /s/ Allen, Gibbs & Houlik, L.C. Wichita, Kansas October 7, 1996 -----END PRIVACY-ENHANCED MESSAGE-----