-----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, PSJbiJe+BN8DrGJSPPZ7bq3IDT+A29l150yQg2KINpxCIRmkH3GO9AAZTfMa8jDh I8MwCq+SSMjtBOXnmQ8/Ig== 0000950144-97-003398.txt : 19970401 0000950144-97-003398.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950144-97-003398 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27640 FILM NUMBER: 97569064 BUSINESS ADDRESS: STREET 1: 1801 WEST END AVENUE STREET 2: SUITE 1100 CITY: NASHVILLE STATE: TN ZIP: 37203 BUSINESS PHONE: 6153271513 10-K 1 RENAL CARE GROUP, INC. FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-27640 RENAL CARE GROUP, INC. (EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER) DELAWARE 62-1622383 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 2100 WEST END AVENUE, SUITE 800 NASHVILLE, TENNESSEE 37203 (ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (615) 321-2333 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Company was $404,927,582 as of March 19, 1997, based upon the closing price of such stock as reported on the Nasdaq National Market System ("Nasdaq Stock Market") on that day (assuming for purposes of this calculation, without conceding, that all executive officers and directors are affiliates). There were 14,273,393 shares of common stock, $.01 par value, outstanding at March 19, 1997. DOCUMENTS INCORPORATED BY REFERENCE Parts of the Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report. 2 PART I ITEM 1. BUSINESS GENERAL Renal Care Group is a specialized provider of nephrology services that was founded in June 1995 to focus on the provision of care to patients with kidney disease, including patients suffering from chronic kidney failure also known as end-stage renal disease ("ESRD"). As of December 31, 1996, the Company provided dialysis and ancillary services to approximately 5,200 patients through 81 outpatient dialysis centers in 12 states and managed an additional 10 dialysis centers in 4 states, 7 of which are in affiliation with leading medical centers such as Vanderbilt University Medical Center and The Cleveland Clinic Foundation. In addition to its outpatient dialysis center operations, Renal Care Group provided acute dialysis services through contractual relationships with 45 hospitals, staff-assisted dialysis services to 37 skilled nursing facilities and physician practice management services to 23 of the 64 nephrologists who are affiliated with the Company's outpatient dialysis centers. Renal Care Group was formed by leading nephrologists with the objective of creating an entity with the clinical and financial capability to manage the full range of care for ESRD patients on a cost-effective basis. The Company is working in partnership with its affiliated physicians to develop fully integrated nephrology networks that will implement clinical protocols designed to improve outcomes and reduce costly medical complications associated with ESRD. Nephrology is the specialized practice of medicine dedicated to providing care to patients with ESRD and other kidney-specific ailments. An essential component of the nephrologist's practice is the dialysis facility, where ESRD patients receive their dialysis treatments three times per week in a technologically advanced outpatient setting. Outpatient dialysis facilities generally are owned by nephrology groups and comprise an integral component of the nephrologist's practice due to the critical role that dialysis plays in the treatment of ESRD patients. According to the Health Care Financing Administration ("HCFA"), there were approximately 2,800 dialysis centers in the United States at the end of 1995. The Company believes that approximately 45% were owned by multi-center dialysis companies, 25% were owned by independent physicians and other companies and 30% were hospital-affiliated centers. Although nephrology groups have in the past sold their dialysis centers to entities focused on owning and operating such facilities, the Company believes that many nephrology groups recognize the benefits of affiliation with an entity having broader clinical, financial and business capability to help them manage the increasingly complex and time-consuming aspects of both their dialysis center operations and their nephrology practices. In addition, many hospitals are increasingly motivated to sell or outsource management of their dialysis facilities as they refocus their resources on their core business in response to increasing competitive pressures. ESRD is the state of advanced renal impairment that is irreversible and imminently lethal. Patients with ESRD eventually require dialysis or kidney transplantation to sustain life; transplants constituting approximately 6% of ESRD patients annually. Since 1972, individuals with ESRD 2 3 who are eligible for Social Security have been entitled to Medicare benefits regardless of age or financial circumstances. According to data published by HCFA, the number of patients receiving chronic dialysis services in the United States has grown at a compound annual rate of 8.9%, from 66,000 patients in 1982 to approximately 200,000 in 1995. According to the United States Renal Data System ("USRDS"), the ESRD incidence rate among Medicare-eligible patients increased by 97.3% from 1984 to 1993. The USRDS estimates that the total direct medical payments for ESRD were approximately $11.1 billion in 1994. The Company attributes the growth in the number of ESRD patients principally to the aging of the general population and better treatment and survival of patients with hypertension, diabetes and other illnesses that lead to chronic kidney disease. In addition, improved technology has enabled older patients and those who previously could not tolerate dialysis due to other illnesses to benefit from this life-sustaining treatment. The Company believes these trends will result in continued growth in the number of ESRD patients and increased demand for dialysis and associated nephrology services. INDUSTRY OVERVIEW End-Stage Renal Disease ESRD is the state of advanced renal impairment that is irreversible and lethal unless treated. This condition is most commonly a result of complications associated with diabetes, hypertension, certain renal and hereditary diseases, old age and other factors. In order to sustain life, individuals with ESRD require either dialysis for the remainder of their lives or successful kidney transplantation. According to the USRDS, the total estimated direct medical payments for ESRD exceeded $11.1 billion during 1994. Of the total direct medical payments for ESRD, approximately $8.3 billion was paid by the federal government through the Medicare program. As a result of legislation enacted in 1972, the federal government provides Medicare funding for patients who are diagnosed with ESRD regardless of their age or financial circumstances if eligible for Social Security. Based on Medicare ESRD enrollment data published by HCFA, the number of ESRD patients in the United States requiring dialysis treatments has grown from approximately 66,000 at the end of 1982 to approximately 200,000 at the end of 1995. Based on USRDS data, the ESRD incidence rate among Medicare-eligible patients for all age groups was approximately 219 patients per million in 1993 as compared to 111 patients per million in 1984. Furthermore, USRDS data indicates that the incidence rate in patients ages 65 to 74 increased 130% from 1984 to 1993, and in patients ages 75 and older the incidence rate increased 189% over the same period. The Company attributes the growth in the number of ESRD patients principally to the aging of the general population and the improved treatment and increased survival rate of patients with diabetes, hypertension and other illnesses that lead to ESRD. Moreover, improved dialysis technology has enabled older patients and those who previously could not tolerate dialysis due to other illnesses to benefit from this treatment. 3 4 Treatment Options for End-Stage Renal Disease Currently, the three treatment options for ESRD are (i) hemodialysis, which is performed either in a hospital setting, an outpatient facility or a patient's home, (ii) peritoneal dialysis, which is generally performed in the patient's home, and (iii) kidney transplant surgery. According to HCFA data, in 1995 approximately 83% of patients on dialysis in the United States received outpatient hemodialysis treatment and approximately 17% received hemodialysis or peritoneal dialysis in their homes. - Hemodialysis is the most common form of ESRD treatment and is generally performed either in a freestanding center or in a hospital. The process of hemodialysis uses a dialyzer, essentially an artificial kidney, to remove certain toxins, fluid and chemicals from the patient's blood and a device to control external blood flow and to monitor certain vital signs of the patient. The dialysis process occurs across a semi-permeable membrane that divides the dialyzer into two chambers. While the blood is circulated through one chamber, a pre-mixed dialysis fluid is circulated through the adjacent chamber. The toxins and excess fluid contained in the blood cross the membrane into the dialysis fluid. Hemodialysis treatment usually requires approximately four hours and is administered three times per week for the life of the patient pursuant to a nephrologist's plan of care. - Peritoneal dialysis is generally performed by the patient at home and uses the patient's peritoneal, or abdominal, cavity to eliminate fluids and toxins in the patient's blood. Although there are several variations of peritoneal dialysis, continuous ambulatory peritoneal dialysis ("CAPD") and continuous cyclic peritoneal dialysis ("CCPD") are the most common. CAPD uses a sterile dialysis solution which is introduced through a surgically implanted catheter into the patient's peritoneal cavity. Toxins in the blood continuously cross the peritoneal membrane into the dialysis solution. After several hours, the patient drains the used solution and replaces it with fresh solution. CCPD is performed in a manner similar to CAPD, but utilizes a mechanical device to cycle dialysis solution through the peritoneal membrane while the patient is sleeping or at rest. Patients treated at home are monitored monthly either through a visit from a staff person from a designated outpatient center or by the patient visiting the center. - Kidney transplantation, when successful, is the most desirable form of therapeutic intervention. However, the shortage of suitable donors severely limits the availability of this surgical procedure as a treatment option. Approximately 6% of patients with ESRD undergo kidney transplantation annually. Typically, transplant surgery is performed by transplant surgeons and not nephrologists. 4 5 Ancillary Services Nephrologists provide ancillary services to ESRD patients, the most significant of which is the administration of erythropoietin ("EPO"). EPO is a bio-engineered protein that mimics a hormone produced in a normal kidney by stimulating the production of red blood cells. EPO is utilized in connection with all forms of dialysis to treat anemia, a medical complication experienced by almost all ESRD patients. EPO reduces or eliminates the need for blood transfusions in these patients. Other ancillary services provided by nephrologists to or in connection with ESRD patients may include but are not limited to (i) certain laboratory tests required by Medicare to determine the effectiveness of dialysis treatments, (ii) intradialytic parenteral nutrition ("IDPN"), which are nutrients added to a patient's blood during hemodialysis, (iii) studies to test the degree of a patient's bone deterioration, an ESRD complication, (iv) electrocardiograms, (v) nerve conduction studies to test for deterioration of a patient's nerves, another ESRD complication, (vi) Doppler flow testing for the effectiveness of the patient's vascular access for dialysis, and (vii) blood transfusions. Nephrology Practice Caring for ESRD patients is the primary clinical activity of nephrologists. Other clinical activities of a nephrologist include the post-surgical care of kidney transplant patients, the diagnosis and treatment of kidney diseases in patients who are at risk for developing ESRD, and the diagnosis, treatment, and management of clinical disorders including hypertension, kidney stones and autoimmune diseases. Because of the complexity involved in treating patients with chronic kidney disease, the nephrologist typically assumes the role of primary care physician for the ESRD patient. The Company believes that while some nephrologists practice independently or are members of multi-specialty groups, most nephrologists practice in small single-specialty groups. Nephrology groups typically provide services in relatively large geographic areas, and it is common for a large geographic area to be served by a single nephrology group. Most nephrologists also have a significant office practice and consult on numerous hospitalized patients who are not on dialysis. A nephrologist typically derives income from services rendered (i) during office visits, (ii) for the treatment of patients in acute care hospitals and (iii) for the treatment of patients receiving dialysis services. Medicare reimburses nephrologists based on a fixed fee per month for outpatient services rendered in treating ESRD patients and based on designated rate schedules for services to ESRD patients who are hospitalized. BUSINESS STRATEGY Renal Care Group's objective is to develop fully integrated nephrology provider networks to assume and manage the clinical and financial risk associated with providing renal disease management services on a capitated basis. The Company seeks to achieve this objective by (i) acquiring, developing and managing outpatient and medical center-based dialysis centers, (ii) integrating its dialysis centers with affiliated nephrology practices, (iii) developing a protocol-driven ESRD management model to enhance clinical outcomes and (iv) providing appropriate ancillary services to ESRD patients. The Company believes an integrated network of nephrologists and dialysis centers, combined with the Company's clinical expertise, management experience and access to capital, will provide significant advantages to patients and third-party 5 6 payors by improving the quality of care while reducing the overall costs associated with treating patients with all forms of kidney disease, including those with ESRD. Following is a discussion of the key components of the Company's growth strategy. ACQUISITION AND DEVELOPMENT ACTIVITIES In February 1996, the Company commenced its business with the simultaneous acquisition of the five Founding Companies: Kidney Care, Inc. and Medical Enterprises Ltd. ("MEL" and collectively "Kidney Care"); D.M.N. Professional Corporation ("DMN"); Tyler Nephrology Associates ("Tyler"); Kansas Nephrology Association ("Kansas"); and Renal Care Group, Inc., a Tennessee corporation ("Tennessee") (the "Combination"). At the time of the Combination, the Founding Companies had an aggregate of 41 dialysis centers serving approximately 2,663 patients in eight states. The aggregate consideration paid by the Company in the Combination was approximately 4,834,000 shares of Common Stock with an aggregate value at the time of the Combination of approximately $87.0 million, $32.8 million in cash, $7.3 million in notes payable and $13.8 million of assumed debt. In April 1996, the Company entered into an agreement to operate and manage the outpatient dialysis activities of The Cleveland Clinic Foundation located in Cleveland, Ohio. The Cleveland Clinic Foundation operates two dialysis facilities staffed by 11 nephrologists serving approximately 370 patients. In April 1996, the Company completed a merger with Main Line Suburban Dialysis Centers, Inc. ("Main Line") based in Wynnewood, Pennsylvania, which currently operates five dialysis centers serving approximately 350 patients in the suburban Philadelphia area. The Company acquired Main Line in exchange for shares of Common Stock with an aggregate value of approximately $18.2 million at the time the Company and Main Line entered into the merger agreement. The merger was accounted for as a pooling of interests. In September 1996, the Company completed a merger with RenalWest, L.C. ("RenalWest") which has 18 affiliated nephrologists and operates 19 freestanding hemodialysis centers and three home peritoneal dialysis centers serving approximately 1,260 patients in the state of Arizona. RenalWest also provides inpatient dialysis services to 16 acute care hospitals and staff-assisted dialysis services to 37 skilled nursing facilities. The Company acquired RenalWest in exchange for shares of Common Stock with an aggregate value of approximately $72.0 million at the time the Company and RenalWest entered into the merger agreement. The merger was accounted for as a pooling of interests. In October 1996, the Company acquired a dialysis company in Anniston, Alabama consisting of two facilities, and began managing, with the right to develop and own, a dialysis facility in Bay City, Texas, which together serve an aggregate of approximately 200 patients. In November 1996, the Company acquired substantially all of the assets of the Watson Wise Dialysis Center of St. Joseph's Hospital and Health Center of Paris, Texas, which serves 6 7 approximately 100 patients. In addition, acute in-patient dialysis services will be provided to St. Joseph's Hospital by the Company. In December 1996, the Company formed a joint venture with The Cleveland Foundation and MetroHealth Systems, Cleveland Ohio to operate four outpatient facilities which expects to serve approximately 450 patients in the Cleveland metropolitan area. In January 1997, the Company exercised an option to acquire the assets of a laboratory from Kidney Care, Inc. In March 1997, the Company announced that it had acquired substantially all of the assets of seven federated dialysis facilities in Central Indiana: Eastern Indiana Kidney Center, Richmond Indiana; Southeastern Indiana Kidney Center, Greensburg, Indiana; Saint Joseph Dialysis Center, Kokomo, Indiana; and Indiana Kidney Center, Indiana Kidney Center South, St. Vincent Dialysis Center and St. Vincent Dialysis Center West, all in Indianapolis, Indiana. The facilities combined currently provide treatment to approximately 600 patients as well as acute, inpatient dialysis treatment services to four local hospitals. The consideration for the purchase transaction; excluding working capital acquired consisted of cash of approximately $24,800,000 and $7,200,000 of restricted common stock. OPERATIONS Location, Capacity and Use of Facilities Renal Care Group operates 81 outpatient dialysis centers in 12 states with 64 affiliated nephrologists and 1,294 certified dialysis stations, excluding 10 centers managed by the Company. The Company leases 61 centers and owns 20 centers. The Company also provides inpatient dialysis services to 45 acute care hospitals and 37 skilled nursing facilities. Excluding managed centers, 703,549 hemodialysis treatments were provided at the Company's facilities during the year ended December 31, 1996. The Company estimates that on average its centers were operating at approximately 60% of capacity as of December 31, 1996, based on the assumption that a dialysis center is able to provide up to three treatments a day per station, six days a week. The Company believes it may increase the number of dialysis treatments at its centers without making additional capital expenditures. Operation of Facilities Renal Care Group's dialysis centers provide outpatient hemodialysis and related services to ESRD patients in a convenient setting. A majority of the Company's centers utilize volumetric dialysis equipment that accommodates high flux and high efficiency dialysis treatments. In addition to dialysis stations, the Company's centers generally contain a nurses' station, a patient waiting area, examination rooms, a supply room, a water treatment space to purify water used in hemodialysis treatments, a dialyzer reprocessing room, staff work areas, offices, and a staff lounge. 7 8 Many of the Company's centers also have a designated area for training patients in home dialysis and also offer certain amenities for the patients. In accordance with conditions for participation in the Medicare ESRD program, each of the Company's centers is supervised by a qualified Medical Director. Each center is managed by an administrator, typically a registered nurse, who is responsible for the day-to-day operations of the center and its staff. The staff of each center typically includes registered nurses, licensed practical or vocational nurses, patient care technicians, social workers, registered dietitians, a unit clerk, and biomedical equipment technicians. Each center is staffed in a manner that allows the number of personnel to be adjusted according to the number of patients receiving treatments. Home Dialysis All of Renal Care Group's centers offer various forms of peritoneal dialysis, primarily CAPD or CCPD, and home hemodialysis. As of December 31, 1996, approximately 11% of the patients treated by the Company received home dialysis. The Company's home dialysis services consist of providing equipment and supplies, training, patient monitoring and follow-up assistance to patients who prefer and are able to receive dialysis treatments in their homes. The Company intends to expand its home dialysis program, which the Company believes is important to the development of a fully integrated nephrology services company. Hospital and Skilled Nursing Facility Care Certain of Renal Care Group's centers provide in-patient dialysis services through contracts with 45 hospitals located within their respective service areas. Under these contracts, the Company's centers typically provide equipment, supplies and personnel required to perform hemodialysis and peritoneal dialysis in connection with the hospital's inpatient services. Such inpatient dialysis services are required for patients with acute renal failure resulting from accidents, medical and surgical complications, patients in the early stage of renal failure and ESRD patients who require hospitalization for other reasons. The terms of these contracts are individually negotiated and vary by contract. Most of the Company's hospital contracts specify predetermined fees per dialysis treatment, although the Company believes that such fees may be subject to negotiation in the future as the provision of health care services becomes increasingly influenced by managed care and subject to capitated arrangements. The Company also provides staff-assisted dialysis services to 37 skilled nursing facilities in the Phoenix, Arizona metropolitan area. A central office dispatches equipment, supplies and personnel required to perform dialysis treatments in connection with the extended care services of skilled nursing facilities. University Division Renal Care Group currently manages the dialysis programs at Vanderbilt University Medical Center, The Cleveland Clinic Foundation and Case Western Reserve University, provides home dialysis services to a group of patients at the University of Arkansas, provides consulting 8 9 services to the University of Michigan Medical Center regarding its dialysis program and is developing a dialysis center for the University of Louisville. The Company entered in a partnership agreement with Saint Louis University effective in October 1996, to operate outpatient dialysis facilities in the Saint Louis area. The Company intends to expand its university and medical center management program and is currently in various stages of discussions concerning a number of such programs. In addition, the Company also intends to acquire or develop university and medical center dialysis centers. The Company believes that its affiliation with leading nephrology groups will enhance its ability to attract and maintain agreements to manage the dialysis programs of universities and medical centers. Furthermore, the Company expects these affiliations will expand the Company's patient base, provide opportunities for the development of new centers and access to highly qualified physicians to act as Medical Directors. Furthermore, as a result of these affiliations, the Company will have access to outcomes research which, will support the Company's quality initiative. Relationships with Nephrologists; Medical Directors A key factor in the success of a dialysis center is its relationship with local nephrologists. An ESRD patient generally seeks treatment at a center where the patient's nephrologist has practice privileges. Consequently, Renal Care Group relies on its ability to attract and to meet the needs of referring nephrologists in order to receive and gain new patients. The Company has engaged practicing, board-eligible or board-certified nephrologists to serve as Medical Directors for each of its centers. Each of the Company's Medical Directors provides services pursuant to an independent contractor agreement between the Company and the physician or his or her professional practice group. Medical Directors' responsibilities primarily consist of the administration and monitoring of the Company's patient care policies, including patient education, administration of dialysis treatment, development and training programs and assessment of all patients. Coordination of the delivery of care is important in maintaining ESRD patients' general level of health and in avoiding medical complications that might necessitate hospitalization. The Company typically enters into Medical Director agreements with nephrologists at each of its centers containing terms of seven years with three-year renewal options. The Company's Medical Director agreements typically provide for its Medical Directors to be paid fees for their supervisory services and include non-competition clauses with specific limitations on their ability to compete with the Company for certain periods of time and in certain geographic areas. In certain instances, in consideration for such non-competition agreements, the Company has granted options to purchase shares of Common Stock to the physicians serving as Medical Directors or their professional practice groups. Nephrology Practice Management Renal Care Group currently provides certain practice management services to the practices of 23 of the Company's nephrologists. Under these arrangements, the Company typically provides to the physicians, in exchange for a management fee, certain equipment, supplies and 9 10 administrative services, including billing, collection, accounting, human resources and information systems. Each physician retains exclusive control of the provision of medical services to his or her patients. QUALITY ASSURANCE In order to optimize therapy and improve outcomes, Renal Care Group established a Medical Advisory Board to maintain quality criteria for its clinical operations, monitor patient outcomes in all of its centers, and to develop a protocol-driven clinical management model and involves its patients in their own care. Medical Advisory Board The Company's Medical Advisory Board meets quarterly to monitor the development and implementation of clinical protocols and to review patient outcomes. The Medical Advisory Board is chaired by Raymond Hakim, M.D., Ph.D., the Company's Chief Medical Officer, and is composed of affiliated nephrologists. In addition, the Medical Advisory Board is responsible for establishing, implementing and monitoring the Company's quality assurance policies and procedures, identifying therapy deficiencies, and evaluating technological changes. The Medical Advisory Board's principal task is the development of a protocol-driven clinical management model that will enable the Company to manage effectively the financial risk associated with ESRD capitation. Quality Criteria The Company actively involves its Medical Advisory Board in the oversight of quality criteria for both owned centers and its acquisition candidates. Regular evaluation of the prescribed dialysis treatments and the key physiological parameters of patients constitutes part of the continuous quality improvement that is the Company's primary clinical objective. The Company employs a registered nurse as a corporate Quality Assurance Coordinator to oversee the Company's continuous quality assurance program. In addition, each center has a quality assurance committee that typically includes the Medical Director, the center administrator and nurses, as well as other technical personnel. This committee meets regularly to monitor the quality of care in the center and to assure compliance with applicable regulations. Outcomes Data The Company believes that an important factor in the successful management of ESRD is access to a broad database of treatment-specific outcomes information from which clinical pathways may be defined. The Quality Assurance Coordinator oversees the collection of patient outcomes and cost data in the Company's centers to assist in implementing clinical pathways to enhance patient outcomes while reducing the cost of care. The Company believes that the implementation of such clinical pathways is necessary to improve the overall quality and operating efficiencies of its dialysis centers and to contract more effectively with payors in a health care environment increasingly influenced by managed care. 10 11 Patient Involvement The Company also attempts to ensure quality care by instructing all ESRD patients before and after the initiation of dialytic therapy on methods for participating in their own care to the fullest extent possible. In addition, in some of the Company's centers, "self-care" units are formed in which self-reliance is fostered through instruction and support. REIMBURSEMENT Sources of Net Patient Revenue The following table sets forth information regarding the percentages of Company net patient revenues:
YEAR ENDED DECEMBER 31, ----------------------- 1994 1995 1996 ---- ---- ---- Medicare 68% 68% 68% Medicaid 8 7 6 Private and other payors 18 20 21 Hospital inpatient dialysis services 6 5 5 --- --- --- Total 100% 100% 100% === === ===
The Social Security Act provides for Medicare coverage for certain individuals who are medically determined to have ESRD. Once an individual is medically determined to have ESRD, the Social Security Act specifies that one of two conditions must be met before entitlement begins: (i) a regular course of dialysis must begin, or (ii) a kidney transplant must be performed. The Social Security Act provides that entitlement begins the third month after the month in which a regular course of renal dialysis is initiated. ESRD is currently defined in federal regulations as that stage of kidney impairment that appears irreversible and permanent and requires a regular course of dialysis or kidney transplantation to maintain life. Under the Medicare ESRD program, the reimbursement rates per treatment are fixed but have been adjusted from time to time by legislation. Although this form of reimbursement limits the allowable charge per treatment, it provides the Company with predictable and recurring per treatment revenue. The Medicare composite rate, set by HCFA, governs the Medicare reimbursement available for a designated group of dialysis services, including the dialysis treatment, supplies used for such treatment, certain laboratory tests and medications. The Medicare composite rate is subject to regional differences based on certain factors, including labor costs. Certain other services and drugs are eligible for separate reimbursement under Medicare and are not part of the composite rate, including specific drugs such as EPO and some physician ordered tests provided to dialysis patients. The Company generally submits Medicare claims monthly and is usually paid within 30 days of the submission. 11 12 Medicare Reimbursement Rates The Medicare composite rate for outpatient dialysis services currently averages $126 per treatment in free standing facilities and may vary depending on regional wage differences. Medicare reimbursement rates are adjusted periodically based on certain factors, including legislation, executive and congressional budget reduction and control processes, inflation and costs incurred in rendering the services. In the past, adjustments in the composite rate have had little relationship to the cost of conducting business. The Medicare ESRD composite reimbursement rate was unchanged from commencement of the program in 1972 until 1983. From 1983 through December 1990, numerous congressional actions resulted in net reductions of the average composite reimbursement rate from a fixed fee of $138 per treatment in 1983 to approximately $125 per treatment in 1986. Congress increased the ESRD composite reimbursement rate, effective January 1991, resulting in an average rate of $126 per treatment. The Medicare ESRD composite reimbursement rate has been the subject of a number of reports and studies. In April 1991, the Institute of Medicine, an organization chartered by the National Academy of Sciences and an advisor to the federal government, released a report recommending that the composite rate be adjusted for the effects of inflation. In March 1996, the Prospective Payment Assessment Commission ("PROPAC") recommended that the ESRD composite reimbursement rate be increased by 2.0% for freestanding facilities for fiscal year 1997. In August 1996, and in response to the March 1996 report of PROPAC, HCFA announced that an increase in the composite rate may be appropriate within the next few years. In making this announcement HCFA also stated that any rate increase must be considered in the context of Medicare budgetary concerns. Nevertheless, HCFA stated that it may recommend an update to the composite rate for fiscal year 1998. In January 1996, HCFA announced a three-year demonstration project involving the enrollment of ESRD patients in managed care organizations. The demonstration project would adjust payment rates based upon treatment status, age groups, and the cause of renal failure. Based upon the results of the demonstration project, HCFA has stated it would make recommendations to Congress concerning the appropriateness of paying for ESRD services on a capitated basis. Congress is not required to implement these recommendations and could either raise or lower the reimbursement rate. During the last congressional session, there were various proposals for the reform of numerous aspects of Medicare. The Company is unable to predict what, if any, future changes may occur in the Medicare composite reimbursement rate. Any reductions in the Medicare composite reimbursement rate could have a material adverse effect on the Company's results of operations, financial condition and business. From June 1989 through December 1990, the Medicare ESRD program added $40 per administration of EPO to the dialysis center's allowable composite rate for dosages of up to 9,999 units per administration. For higher dosages, an additional $30 per treatment was allowed. Effective January 1991, the Medicare allowable prescribed rate for EPO was changed to $11 per 1,000 units, rounded to the nearest 100 units. Subsequently, legislation was enacted to reduce the Medicare prescribed rate for EPO by $1 to $10 per 1,000 units for administration of EPO in 1994. 12 13 For subsequent periods, the Secretary of the Department of Health and Human Services ("HHS") is authorized to determine an appropriate rate, which currently is $10 per 1,000 units administered. Medicaid Reimbursement Medicaid programs are state administered programs partially funded by the federal government. These programs are intended to provide coverage for patients whose income and assets fall below state defined levels and who are otherwise uninsured. The programs also serve as supplemental insurance programs for the Medicare co-insurance portion and provide certain coverages (e.g., oral medications) that are not covered by Medicare. State regulations generally follow Medicare reimbursement levels and coverages without any coinsurance amounts. Certain states, however, require beneficiaries to pay a monthly share of the cost based upon levels of income or assets. The Company is a licensed ESRD Medicaid provider in all states in which it does business. Private Reimbursement/Acute Care Contracts The Company receives reimbursement from private payors for ESRD treatments prior to Medicare becoming a patient's primary payor at rates significantly higher than the per treatment rate set by Medicare. After Medicare becomes a patient's primary payor, private secondary payors generally reimburse the Company for 20% of the Medicare per treatment rate. The Company has negotiated managed care contracts with certain payors at rates that are higher than the Medicare rate. The Company also receives payments from hospitals under 45 acute care contracts at rates significantly higher than the Medicare composite rate. GOVERNMENT REGULATION General The Company's dialysis center operations are subject to extensive governmental regulation at the federal, state and local levels. These regulations require the Company to meet various standards relating to, among other things, the management of centers, personnel, maintenance of proper records, equipment and quality assurance programs. The dialysis centers are subject to periodic inspection by state agencies and other governmental authorities to determine if the premises, equipment, personnel and patient care meet applicable standards. To receive Medicare reimbursement, the Company's dialysis centers must be certified by HCFA as meeting certain Medicare conditions of coverage. All of the Company's dialysis centers are so certified. HCFA has announced that it is in the process of revising the current Medicare Conditions of Coverage for ESRD services. The Company is unable to predict what, if any, future changes may occur in the Medicare Conditions of Coverage for ESRD facilities. Any changes to the Medicare Conditions of Coverage, or any loss by the Company of its federal certifications, its authorization to participate in the Medicare or Medicaid programs or its licenses under the laws of any state or other governmental authority from which a substantial portion of its revenues is derived or a change resulting from health care reform reducing dialysis 13 14 reimbursement or reducing or eliminating coverage for dialysis services would have a material adverse effect on the Company's operations, revenues and net earnings. To date, the Company and its subsidiaries have maintained their licenses and their Medicare and Medicaid authorizations. The Company believes that the health care services industry will continue to be subject to intense regulation at the federal, state and local levels, the scope and effect of which cannot be predicted. No assurance can be given that the activities of the Company will not be reviewed and challenged by government regulators or that health care reform will not result in a material adverse change to the Company. Furthermore, the Company potentially could be held responsible for actions previously taken by entities it has acquired. As part of its announced regulatory agenda for 1996, HHS intends to issue a proposed rule that would automatically assign to the new owner of a Medicare provider or supplier liability for any Medicare overpayments, violations, or sanctions incurred by or imposed on, the previous owner. There can be no assurance that previous operating practices of the Company's acquisitions will not be reviewed and challenged by government regulators or that the Company will not be liable for such practices. Fraud and Abuse The Company's operations are subject to the illegal remuneration provisions of the Social Security Act (sometimes referred to as the "anti-kickback" statute) and similar state laws that impose criminal and civil sanctions on persons who knowingly and willfully solicit, offer, receive or pay any remuneration, whether directly or indirectly, in return for, or to induce, the referral of a patient for treatment, or, among other things, the ordering, purchasing, or leasing, of items or services that may be paid for in whole or in part by Medicare, Medicaid or similar state programs. Federal enforcement officials may attempt to impose civil false claims liability with respect to claims resulting from an anti-kickback violation. Violations of the federal anti-kickback statute are punishable by criminal penalties, including imprisonment, civil penalties, fines and exclusion of the provider from future participation in the Medicare or Medicaid programs. Civil suspension from participation in Medicare or Medicaid for anti-kickback violations also can be imposed through an administrative process, without the imposition of civil monetary penalties. Some state statutes also include criminal penalties. While the federal anti-kickback statute expressly prohibits transactions that have traditionally had criminal implications, such as kickbacks, rebates or bribes for patient referrals, its language has been construed broadly and has not been limited to such obviously wrongful transactions. Court decisions state that, under certain circumstances, the statute is also violated when one purpose (as opposed to the "primary" or a "material" purpose) of a payment is to induce referrals. Congress has frequently considered federal legislation that would expand the federal anti-kickback statute to include the same broad prohibitions regardless of payer source. In fact, effective January 1, 1997, the Health Insurance Portability and Accountability Act of 1996 expands the anti-kickback statute to certain other "Federal Health Care Programs," such as CHAMPUS. 14 15 In July 1991 and in November 1992, the Secretary of HHS published regulations that create exceptions or "safe harbors" for certain business transactions. Transactions that satisfy the criteria under applicable safe harbors will be deemed not to violate the federal anti-kickback statute. Transactions that do not satisfy all elements of a relevant safe harbor do not necessarily violate the statute, although such transactions may be subject to scrutiny by enforcement agencies. The Company seeks to structure its various business arrangements to satisfy as many safe harbor elements as possible under the circumstances, although not all of the Company's arrangements satisfy all of the elements of a safe harbor. Although the Company has never been challenged under any anti-kickback statute and the Company believes it has a reasonable basis for concluding that it complies in all material respects with the federal anti-kickback statute and all other applicable related laws and regulations, there can be no assurance that the Office of the Inspector General (the "OIG") within HHS or other governmental agency will not take a contrary position or that the Company will not be required to change its practices in a manner which will cause, or will not otherwise experience, a material adverse effect as a result of any such challenge or any sanction which might be imposed. In July 1994, the Secretary of HHS proposed a rule that would modify the original set of safe harbor provisions to give greater clarity to the rule making's original intent. The proposed rule would make changes to the safe harbors on personal services and management contracts, small entity investment interests and space rentals, among others. The Company does not believe that its current operations, as set forth above, would change if the proposed rule were adopted in the form proposed. However, the Company cannot predict the outcome of the rule making process or whether changes in the safe harbors rule will affect the Company's position with respect to the federal anti-kickback statute. The Company believes that the current arrangements of the Company with nephrologist owners, Medical Directors, laboratories, IDPN suppliers, hospitals, and other persons or entities who either refer patients to the Company's dialysis centers or from whom the Company purchases items or services generally are in material compliance with the federal anti-kickback statute. Specifically, the Company believes that such arrangements now generally provide, and will provide for reasonable compensation to or by the Company for the items and services it buys from or furnishes to such persons or entities. Moreover, the Company intends that IDPN therapy will be furnished in accordance with specified utilization protocols consistent with Medicare coverage guidelines, and only to patients for whom it is deemed medically necessary, as demonstrated by physician-authorized Certificates of Medical Necessity. However, there can be no assurance that the Company's future arrangements will not be challenged or subject to sanctions for any of the Founding Companies' past arrangements. Any such challenge or change, including any related sanctions which might be assessed, could have a material adverse effect on the Company's operations, net revenue and earnings. Stark II Provisions enacted as part of the Omnibus Reconciliation Act of 1989 and the Omnibus Reconciliation Act of 1993 ("Stark I" and "Stark II," respectively) restrict physician referrals for certain designated health services to entities with which a physician or an immediate family 15 16 member has a "financial relationship." The entity is prohibited from claiming payment under the Medicare or Medicaid programs for services rendered pursuant to a prohibited referral and is liable for the refund of amounts received pursuant to prohibited claims. The entity also can incur civil penalties of up to $15,000 per improper claim and can be excluded from participation in the Medicare or Medicaid programs. Provisions enacted as part of Stark I imposing restrictions to clinical laboratory services became effective in 1992. Stark II provisions applicable to "designated health services" that may be relevant to the Company became effective in January 1995. A "financial relationship" under Stark II is defined as an ownership or investment interest in, or a compensation arrangement between, the physician (or an immediate family member) and the entity. The Company has entered into compensation agreements with its Medical Directors or their respective professional practices. The Medical Directors or their professional practices also will own shares, and options to purchase shares, of Common Stock. Accordingly, the Medical Directors will have a "financial relationship" with the Company for purposes of Stark II. For purposes of Stark II, "designated health services" include, among other things: clinical laboratory services; parenteral and enteral nutrients, equipment and supplies, including IDPN; prosthetics; orthotics; prosthetic devices; physical and occupational therapy services; outpatient prescription drugs; durable medical equipment; and inpatient and outpatient hospital services. Dialysis is not a designated health service under Stark II. However, the Stark II definition of "designated health services" includes items and services that are components of dialysis or that may be provided to a patient in connection with dialysis, if such items and services are considered separately rather than collectively as dialysis. Under the final Stark I regulations published in August 1995, HCFA provided an exception from Stark I for clinical laboratory services reimbursed under the Medicare "composite rate" for dialysis. The Company believes it likely that, when final Stark II regulations are published, they will contain a similar exception for "designated health services" reimbursed under the composite rate. However, there can be no assurance that HCFA will adopt such a position. Even if the final Stark II regulations contain such an exception, the Company's provision of, or arrangement and assumption of financial responsibility for, services and items including, but not limited to, outpatient prescription drugs, including EPO, enteral and parenteral nutrients, such as IDPN, clinical laboratory services,in-center dialysis services and supplies, home dialysis supplies and equipment, and services to hospital inpatients and outpatients, are reimbursed separate from the Medicare composite rate and therefore may be construed as "designated health services" within the meaning of Stark II. Although the Company has learned that HCFA officials responsible for drafting implementing regulations for Stark II have tentatively taken the informal position that administration of certain prescription drugs that would not be needed but for a patient's need for dialysis (e.g., EPO) will not be treated as outpatient prescription drugs subject to the Stark II prohibition on self-referral, this informal position is not binding on HCFA, and there can be no assurance that final Stark II regulations will adopt such a position. With respect to the other items and services provided by the Company that are likely to be deemed to be "designated health services" subject to the Stark II prohibition, the language of Stark II and of the Stark I final regulation suggest that the Company will not be permitted to offer such services in the absence of a Stark II exception. 16 17 Stark II contains exceptions for ownership or compensation arrangements that meet certain specific criteria set forth in the statute or in forthcoming regulations. With respect to ownership, certain qualifying in-office physician or ancillary services provided by or under the supervision of physicians in a single group practice are exempt from both ownership and compensation arrangement restrictions. With respect to compensation arrangements, exceptions are available for certain qualifying arrangements in the following areas: (i) bona fide employment relationships; (ii) personal services contracts; (iii) space and equipment leasing arrangements; (iv) certain group practice arrangements with a hospital that were in existence prior to December 1989; and (v) purchases by physicians of laboratory services, or of other items and services at fair market value. In order to be exempt from the Stark II self-referral prohibition, it is necessary to meet all of the criteria of a particular exception for each financial relationship existing between an entity and a referring physician. The Company believes that several of its financial relationships with referring physicians will meet the criteria for an exception. For example, the Company believes, based on the language of Stark II, that its agreements with Medical Directors or their professional practices materially satisfy the exception for compensation pursuant to a personal services contract. Similarly, the Company believes, based in part on the legislative history to Stark II, that it has a reasonable basis for concluding that its contractual relationships with hospitals for acute inpatient dialysis services should be deemed to satisfy the criteria for the exceptions for personal services or leased equipment arrangements. In the case of certain other financial arrangements, however, there may be no exception available. Stark II also includes an exception for a physician's ownership or investment interest in securities listed on an exchange or quoted on the Nasdaq Stock Market which, in either case, meet certain criteria. Such criteria include a requirement that the issuer of such securities have at least $75.0 million in stockholder equity at the end of the issuer's most recent fiscal year or on average during the previous three fiscal years. Upon closing of the secondary offering on November 22, 1996, the Company exceeded stockholders' equity of $75.0 million. Because physicians under contract with the Company may refer patients to hospitals with which the Company has an acute inpatient dialysis service arrangement, Stark II may be interpreted by HHS to apply to the Company's acute dialysis arrangements with hospitals. However, Stark II contains exceptions for certain equipment rental and personal services arrangements, and the Company believes it has a reasonable basis for concluding that its contractual arrangements with hospitals for acute inpatient dialysis services are in material compliance with the requirements of such exceptions to Stark II. Consequently, if it were to apply, Stark II may require the Company to restructure certain existing compensation agreements with its Medical Directors or, in the alternative, to refuse to accept referrals for designated health services from such physicians. Moreover, since Stark II prohibits Medicare or Medicaid reimbursement of items or services provided pursuant to a prohibited referral, and imposes substantial civil monetary penalties on entities which present or cause to be presented claims for reimbursement in such cases, the Company could be required to repay amounts reimbursed for items and services that HCFA determines to have been furnished in 17 18 violation of Stark II, and could be subject to substantial civil monetary penalties, either or both of which could have a material adverse effect on the Company's operations, net revenue or earnings. The Company believes that if Stark II is interpreted to apply to the Company's operations, the Company will be able on a prospective basis to bring its financial relationships with referring physicians into material compliance with the provisions of Stark II, including relevant exceptions, although prospective compliance would not affect amounts or penalties determined to be owed for past conduct, and there can be no assurance that such prospective compliance, if possible, will not have a material adverse effect on the Company's operations, net revenue or earnings. If Stark II is interpreted by HHS to apply to the Company and the Company is determined to be liable for past violations of Stark II by itself or one or more of the entities it has acquired, the application of Stark II could have a material adverse effect on the Company. Health Care Legislation Because the Medicare program represents a substantial portion of the federal budget, Congress takes action in almost every legislative session to modify the Medicare program for the purpose of reducing the amounts otherwise payable by the program to health care providers for a number of reasons, including deficit reduction. Legislation or regulations may be enacted in the future that may significantly modify the Medicare ESRD program or substantially reduce the amount paid for the Company's services. For example, the 1995 budget reconciliation bill sent by Congress to the President (and subsequently vetoed by the President) proposed extending the period during which Medicare payment for ESRD would be secondary to a patient's employer group health plan from 18 to 30 months. In addition, the conference report to the reconciliation bill called for HHS to report to Congress not later than December 31, 1999 with recommendations on expanding the definition of individuals eligible to enroll in the bill's proposed MedicarePlus managed care plans to include ESRD patients, and the President's response would have immediately made such persons eligible for participation in such plans. The Health Insurance Portability and Accountability Act of 1996 ("Kennedy-Kassebaum legislation"), signed into law in August 1996, will, among other things, provide for insurance portability for individuals who lose or change jobs, limit exclusions for preexisting conditions, and establish a pilot program for medical savings accounts. In addition, this legislation also greatly expands federal efforts at combating health care fraud and abuse by making numerous amendments to the Social Security Act and the federal criminal code. Among other things, the new legislation creates a new "Health Care Fraud and Abuse Control Account," provides for the issuance of "advisory opinions" by the OIG regarding the application of the anti-kickback statute, extends certain criminal penalties for Medicare and Medicaid fraud to other federal health care programs, expands the exclusion authority of the OIG, extends Medicare and Medicaid civil monetary penalty provisions to other federal health care programs, increases the amounts of civil monetary penalties, and establishes a criminal health care fraud statute. From time to time, the Company pays Medicare supplemental insurance premiums for patients with financial need. The provisions of the Kennedy-Kassebaum legislation issued January 1, 1997 may limit the Company's ability to pay for policy premiums for patients even with proven financial hardship. However, the Company believes that the bill did not intend to limit the 18 19 Company's ability to pay premiums for insurance coverage to third-party or governmental payors. Furthermore, the Company believes that the bill may be amended to include provisions for the payment of premiums on behalf of ESRD patients or allow the Company to make grants to a foundation that may provide for such premium payments on behalf of ESRD patients. Furthermore, statutes or regulations may be enacted which impose additional requirements on the Company to maintain eligibility to participate in the federal and state payment programs. Such new legislation or regulations may have a material adverse effect on the Company's operations, revenue or earnings. COMPETITION The dialysis industry is fragmented and highly competitive. Competition for qualified physicians to act as Medical Directors is also significant. According to HCFA, there were in excess of 2,800 dialysis centers in the United States at the end of 1995. The Company believes that approximately 45% were owned by multi-center dialysis companies, 25% were owned by independent physicians and other companies and 30% were hospital-affiliated centers. Certain of the Company's competitors have substantially greater financial resources than the Company and may compete with the Company for acquisitions, development and/or management of dialysis centers and nephrology practices. The Company believes that competition for acquisitions has increased the cost of acquiring dialysis centers and will likely increase the cost of acquiring nephrology practices. The Company may also experience competition from centers established by former Medical Directors or other referring physicians. There can be no assurance that the Company will be able to compete effectively with any such competitors. INSURANCE The Company maintains a $1,000,000 per occurrence general liability insurance policy for all of its operations. To date no payments have been made under the Company's general liability insurance policies because of any action brought as a result of the operations of any of its facilities. The Company also maintains insurance in amounts it deems adequate to cover professional liability, property and casualty risks, workers' compensation and directors and officers liability. There can be no assurance that the aggregate amount and kinds of the Company's insurance are adequate to cover all risks it may incur or that insurance will be available in the future. EMPLOYEES At December 31, 1996 the Company employed 1,640 full-time employees and 212 part-time employees. Of such full-time employees 26 were employed at the Company's headquarters and 1,826 were employed at the Company's facilities. In the opinion of management, employee relations are considered good. 19 20 ITEM 2. PROPERTIES PROPERTIES Excluding the 10 managed centers, the Company operates 81 dialysis centers in 12 states, of which 61 are located in leased facilities and 20 are owned. The following is a summary of the Company's outpatient dialysis centers.
Centers Acquired Company States Owned Managed - ---------------- ------ ----- ------- Kidney Care Mississippi, Arkansas Louisiana, Florida 26 - DMN Indiana, Ohio 6 1 Tyler Texas 6 2 Kansas Kansas, Oklahoma 10 - Tennessee Tennessee, Ohio, Kentucky Missouri - 7 Main Line Pennsylvania 5 - The Nephrology Center Florida, Alabama 6 - RenalWest Arizona 22 - -- -- 81 10
Certain of the premises are leased from physicians who practice at the center and who are stockholders of the Company. The Company's leases generally have terms ranging from one to 15 years and typically contain renewal options. The sizes of the Company's centers range from approximately 400 to 17,000 square feet. The Company leases office space in Nashville, Tennessee for its corporate headquarters and university division under leases that expire in 2002 and 1999. The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. Expansion or relocation of the Company's dialysis centers would be subject to compliance with conditions relating to participation in the Medicare ESRD program. In states that require a certificate of need, approval of an application submitted by the Company would be necessary for expansion or development of a new dialysis center. The Company generally owns the equipment used in its outpatient centers. The Company considers its equipment to generally be in good operating condition and suitable for the purposes for which it is being used. 20 21 ITEM 3. LEGAL PROCEEDINGS The Company is subject to claims and suits in the ordinary course of business, including those arising from patient treatment, which the Company believes will be covered by malpractice insurance. The Company is not currently a party to any material legal actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of stockholders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK The Company's Common Stock has been traded on the Nasdaq National Market System under the symbol "RCGI" since February 7, 1996. The following table sets forth the quarterly high and low closing sales prices as reported on the Nasdaq National Market System from February 7, 1996 through December 31, 1996.
Price Range 1996 High Low ---- ------ ------ First Quarter(1) $28.75 $23.25 Second Quarter 36.00 27.75 Third Quarter 38.00 26.50 Fourth Quarter 37.50 30.63
(1) Represents trading of the Common Stock from February 7, 1996 through March 31, 1996. HOLDERS As of March 17, 1997, the approximate number of registered stockholders was 3,442, including 142 stockholders of record and approximately 3,300 persons or entities holding Common Stock in nominee name. DIVIDEND POLICY The Company has never paid any cash dividend on its capital stock. The Company currently anticipates that all of its earnings will be retained to finance the growth and development of its business, and therefore, does not anticipate that any cash dividend will be declared or paid on the Common Stock in the foreseeable future. Any future declaration of 21 22 dividends will be subject to the discretion of the Company's Board of Directors and its review of the Company's results of operations, financial condition, capital requirements and surplus, contractual restrictions to pay such dividends and other factors it deems relevant. SALES OF UNREGISTERED SECURITIES The Company issued the following securities during the 1996 calendar year in transactions that were not registered under the Securities Act of 1933: (A) On February 12, 1996, the Company issued 4,834,000 shares of Common Stock to the former owners of the Founding Companies in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. (B) On April 26, 1996, the Company issued 528,000 shares of Common Stock to the former owners of Main Line in private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. (C) On July 1, 1996, the Company issued 298,775 shares of Common Stock to the former owners of The Nephrology Centers, Inc. in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. (D) On September 30, 1996, the Company issued 2,400,000 shares of Common Stock to the former owners of RenalWest, L.C. in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. (E) On September 30, 1996, the Company issued 70,000 shares of Common Stock to the former owner of Northeast Alabama Kidney Center, Inc. in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA The Selected Historical Financial Data -- Renal Care Group, Inc. on page 24 represents the historical results of operations of the Company and includes the results of operations of Main Line and RenalWest, which were acquired during 1996 in pooling-of-interests transactions. This information does not include the results of operations for the Founding Companies for any periods prior to the date of the initial public offering. The Selected Combined and Pro Forma Financial Data -- Renal Care Group, Inc. and Founding Companies on page 25 represents the results of operations had the Founding Companies and the Company been combined for all periods presented without giving effect to the initial public offering for periods prior to February 1, 1996 except on a pro forma basis. 22 23 The Combination was accounted for using historical cost, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48, because no single owner group from any of the Founding Companies held more than 50% equity interest in the Company as of the closing of the Company's initial public offering. Accordingly, the Company has recorded the net assets acquired at the Founding Companies' historical cost basis, as determined by generally accepted accounting principles. The Selected Historical Financial Data -- Renal Care Group, Inc. for the years ended December 31, 1994, 1995, and 1996, is derived from audited data included elsewhere in the Form 10-K. The unaudited combined financial data has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments consisting of normal, recurring accruals necessary for a fair presentation of the combined financial position and the combined results of operations for the periods presented. The following data should be read in conjunction with the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that appear elsewhere in this Form 10-K. 23 24 SELECTED HISTORICAL FINANCIAL DATA -- RENAL CARE GROUP, INC. (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,(1) --------------------------- 1992 1993 1994 1995 1996 ------ ------- ------- ------- -------- INCOME STATEMENT DATA: Net revenue......................................... $8,713 $18,126 $41,627 $42,971 $129,518 Patient care costs.................................. 6,309 13,034 25,003 26,908 90,122 General and administrative expenses................. 1,626 3,649 8,721 8,701 13,364 Provision for doubtful accounts..................... 170 584 1,418 2,355 2,446 Depreciation and amortization....................... 153 601 1,484 1,580 4,541 Merger expenses..................................... -- -- -- -- 1,960 ------ ------- ------- ------- -------- Total operating costs and expenses.................. 8,258 17,868 36,626 39,544 112,433 ------ ------- ------- ------- -------- Income from operations.............................. 455 258 5,001 3,427 17,085 Interest income (expense), net...................... (44) (128) (363) (452) 619 ------ ------- ------- ------- -------- Income (loss) before income taxes................... $ 411 $ 130 $ 4,638 $ 2,975 17,704 ====== ======= ======= ======= Provision for income taxes.......................... 6,958 -------- Net income.......................................... $ 10,746 ======== Earnings per share.................................. $ 0.84 ======== Weighted average shares outstanding................. 12,739 ========
DECEMBER 31,(1) --------------- 1992 1993 1994 1995 1996 ------ ------- ------- ------- -------- BALANCE SHEET DATA: Working capital..................................... $ 774 $ 3,519 $ 3,171 $(1,418) $ 49,462 Total assets........................................ 2,613 14,393 17,318 20,765 131,812 Total debt.......................................... 367 5,248 5,420 7,340 -- Stockholders' equity................................ 1,468 4,901 5,919 4,566 93,325 - ----------
(1) The financial information for the years ended December 31, 1992, 1993, 1994 and 1995 does not include the Founding Companies. The financial information for the year ended December 31, 1996 includes the results of operations for the Founding Companies since February 1996 when they were acquired by the Company simultaneously with its initial public offering. (2) Earnings per share amounts are not presented for the years ended December 31, 1992, 1993, 1994 and 1995 as the historical results of operations of the Company for these years consisted of non-taxed earnings from Main Line and RenalWest which were S corporations and therefore all taxes were payable personally by the stockholders of the respective entities. Additionally, the entities had different equity structure from the Company and earnings per share is not considered meaningful. 24 25 SELECTED COMBINED AND PRO FORMA FINANCIAL DATA -- RENAL CARE GROUP, INC. AND FOUNDING COMPANIES (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,(1) --------------------------- 1992 1993 1994 1995(2) 1996(3) ------- -------- -------- -------- -------- INCOME STATEMENT DATA: Net revenue......................................... $64,309 $80,442 $110,670 $115,329 $135,894 Patient care costs.................................. 46,752 58,314 75,366 80,417 94,849 General and administrative expenses................. 4,423 6,799 12,616 12,866 13,797 Provision for doubtful accounts..................... 1,309 2,010 2,914 3,995 2,571 Depreciation and amortization....................... 1,895 2,416 3,414 3,661 4,715 Merger expenses..................................... -- -- -- -- 1,960 ------- ------- -------- -------- -------- Total operating costs and expenses.................. 54,379 69,539 94,310 100,939 117,892 ------- ------- -------- -------- -------- Income from operations.............................. 9,930 10,903 16,360 14,390 18,002 Interest income (expense), net...................... (570) (460) (646) 1,013 525 ------- ------- -------- -------- -------- Income before income taxes.......................... $ 9,360 $10,443 $ 15,714 $13,377 18,527 ======= ======= ======== ======== Provision for income taxes.......................... 7,025 -------- Net income (loss)................................... $ 11,502 ======== Earnings per share.................................. $ 0.85 ======== Weighted average shares outstanding................. 13,496 ========
DECEMBER 31, (1) ---------------- 1992 1993 1994 1995 1996 ------- -------- ------- ------- -------- BALANCE SHEET DATA: Working capital..................................... $ 9,638 $14,761 $18,158 $12,237 $ 49,462 Total assets........................................ 28,670 42,770 49,918 60,899 131,812 Total debt.......................................... 4,037 8,265 8,620 15,915 -- Stockholders' equity................................ 18,506 24,211 26,825 25,358 93,325
- ---------- (1) The financial information for each of the years presented represents the results of operations of Renal Care Group and Founding Companies combined without giving effect to the Company's initial public offering for periods prior to February 1996. (2) Pro forma information for the year ended December 31, 1995 excludes the following adjustments: (a) the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes; (b) additional estimated corporate overhead of approximately $2.6 million that would have been incurred had the Combination occurred at the beginning of 1995; and (c) certain other adjustments to reflect the Combination and the initial public offering. (3) Pro forma information for the year ended December 31, 1996 gives effect to the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes and includes the results of operations for the Founding Companies for the month of January. Net income and earnings per share before merger expenses for the year ended December 31, 1996 would have been $12,738,000 and $0.94, respectively. 25 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Consolidated Financial Statements, including the notes thereto, contained elsewhere in this Annual Report on Form 10-K. OVERVIEW Renal Care Group is a specialized provider of nephrology services to patients with kidney disease, including patients suffering from chronic kidney failure. The Company commenced operations in February 1996 when it acquired the Founding Companies simultaneous with the completion of its initial public offering. At the time of the Combination, the Founding Companies were established businesses engaged in the operation of outpatient dialysis centers as separate, independent entities for an average of 14 years. For the comparative discussion that follows, the selected Combined Financial and Pro Forma Statements include the financial information of the Founding Companies, Main Line, a merger which was completed in April 1996, and RenalWest, a merger which was completed in September 1996. Both the Main Line and RenalWest mergers were accounted for as poolings of interests. RenalWest was organized in September 1993; consequently, the Selected Combined Financial and Pro Forma Statements do not include a full year of operating results for that period. Because the Founding Companies, Main Line and RenalWest were independent entities that had not been operated by the Company's management prior to their respective dates of acquisition, the historical results prior to such times may not be indicative of future performance. In addition, the Selected Combined and Pro Forma Financial Statements do not give effect to any operating efficiencies prior to such dates of acquisition that the Company believes typically would be attainable in an integrated organization. The Company's net revenue has been derived primarily from the following sources: (i) outpatient hemodialysis services; (ii) ancillary services associated with dialysis, primarily the administration of EPO; (iii) home dialysis services; (iv) inpatient hemodialysis services provided pursuant to contracts with acute care hospitals and skilled nursing facilities; (v) management contracts with hospital-based and medical university dialysis programs; and (vi) laboratory services. ESRD patients typically receive 156 dialysis treatments per year, with reimbursement for services provided primarily by the Medicare ESRD program based on rates that are established by HCFA. For the year ended December 31, 1996, approximately 74% of the Company's net revenue was derived from reimbursement under the Medicare and Medicaid programs. Medicare reimbursement is subject to rate and other legislative changes by Congress and periodic changes in regulations, including changes that may reduce payments under the ESRD program. For patients with health insurance, dialysis generally is reimbursed at rates higher than Medicare during the first 18 months of treatment, after which time Medicare becomes the primary payor. Reimbursement for dialysis services provided pursuant to a hospital contract is negotiated with the individual hospital and generally is higher on a per treatment equivalent basis than the Medicare rate. Because dialysis is a life-sustaining therapy used to treat this chronic disease, utilization is predictable and is not subject to seasonal fluctuations. 26 27 RESULTS OF OPERATIONS As indicated elsewhere, in February 1996 the Company commenced its business with the simultaneous acquisition of the five Founding Companies. As a result of this Combination, a comparison of the current operations of the Company to its historical operations is not considered meaningful. Therefore, the results of operations for all periods in the table below and in the period comparisons that follow reflect the historical operations of the Company combined with the operations of the Founding Companies had the Combination occurred for all periods presented. The following table sets forth, results of operations (in thousands) for the periods indicated and the percentage of net revenue represented by the respective financial items:
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 1996 ---- ---- ---- Net Revenue $110,670 100.0% $115,329 100.0% $135,894 100.0% Patient care costs 75,366 68.1 80,417 69.7 94,849 69.8 General and administrative expenses 12,616 11.4 12,866 11.1 13,797 10.2 Provision for doubtful accounts 2,914 2.6 3,995 3.5 2,571 1.9 Depreciation and amortization 3,414 3.1 3,661 3.2 4,715 3.5 Merger expenses -- -- -- -- 1,960 1.4 -------- ----- -------- ----- -------- ----- Total operating costs and expenses 94,310 85.2 100,939 87.5 117,892 86.8 -------- ----- -------- ----- -------- ----- Income from operations $ 16,360 14.8% $ 14,390 12.5% $ 18,002 13.2% ======== ===== ======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net Revenue. Net revenue increased from $115,329,000 for the year ended December 31, 1995 to $135,894,000 for the year ended December 31, 1996, an increase of $20,565,000, or 17.8%. This increase resulted primarily from a 12.6% increase in the number of treatments from 624,988 in the 1995 period to 703,549 in the 1996 period and a 4.3% increase in the average revenue per treatment from $185 in the 1995 period to $193 in the 1996 period. The revenue per treatment increase was due to an increase in EPO utilization and higher-revenue generating acute treatments. The remaining revenue increase resulted from management fee income. Patient Care Costs. Patient care costs consist of costs directly related to the care of patients, including direct labor, drugs, and other medical supplies and operational costs of facilities. Patient care costs increased from $80,417,000 for the year ended December 31, 1995 to $94,849,000 for the year ended December 31, 1996, an increase of $14,432,000, or 17.9%. This increase was due to the increase in the number of treatments, which caused a corresponding increase in the use of drugs, supplies and labor. Patient care costs as a percentage of net revenue increased from 69.7% in the 1995 period to 69.8% in the 1996 period. Average patient care cost per treatment increased from $129 in the 1995 period to $135 in the 1996 period. This increase was due to normal health care inflation, increased EPO utilization and the increase in higher cost acute treatments. 27 28 General and Administrative Expenses. General and administrative expenses include corporate office costs and clinic costs not directly related to the care of patients, including clinic administration, accounting, billing and information systems. General and administrative expenses increased from $12,866,000 for the year ended December 31, 1995 to $13,797,000 for the year ended December 31, 1996, an increase of $931,000, or 7.2%. The net increase was a result of increased corporate overhead expenses partially offset by reduced compensation to prior physician owners. General and administrative expenses as a percentage of revenue decreased from 11.1% in the 1995 period to 10.2% in the 1996 period. Provision for Doubtful Accounts. The provision for doubtful accounts decreased from $3,995,000 for the year ended December 31, 1995 to $2,571,000 for the year ended December 31, 1996. The provision for doubtful accounts as a percentage of net revenue decreased from 3.5% in the 1995 period to 1.9% in the 1996 period. This decrease represented a return to a normal level of provision for doubtful accounts in the 1996 period from the 1995 period when additional expense was recorded due to a deterioration in the aging of certain accounts receivable. The provision for doubtful accounts is a function of patient mix, billing practices and other factors. It is the Company's practice to reserve for doubtful accounts in the period in which revenue is recognized based on management's estimate of the net collectibility of accounts receivable. Depreciation and Amortization. Depreciation and amortization increased from $3,661,000 for the year ended December 31, 1995 to $4,715,000 for the year ended December 31, 1996, an increase of $1,054,000, or 28.8%. This increase was due to the purchase of patient care facilities previously leased, higher than normal replacement cost of dialysis machines and the purchase of a clinical computer system. Merger Expenses. Merger expenses of $1,960,000 represented legal, accounting and employee severance and related benefits in connection with the Main Line, RenalWest and other acquisitions. Income from Operations. Income from operations increased from $14,390,000 for the year ended December 31, 1995 to $18,002,000 for the year ended December 31, 1996, an increase of $3,612,000, or 25.1%. Income from operations as a percentage of net revenue increased from 12.5% in the 1995 period to 13.2% in the 1996 period. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net Revenue. Net revenue increased from $110,670,000 for the year ended December 31, 1994 to $115,329,000 for the year ended December 31, 1995, an increase of $4,659,000, or 4.2%. This increase resulted primarily from a 4.5% increase in the number of treatments from 598,274 in the 1994 period to 624,988 in the 1995 period. Average revenue per treatment remained constant for the 1994 and 1995 periods at $185. 28 29 Patient Care Costs. Patient care costs increased from $75,366,000 for the year ended December 31, 1994 to $80,417,000 for the year ended December 31, 1995, an increase of $5,051,000, or 6.7%. This increase was due to the increase in the number of treatments, which caused a corresponding increase in the use of drugs, supplies and labor. Patient care costs as a percentage of net revenue increased from 68.1% in the 1994 period to 69.7% in the 1995 period. Average patient care costs per treatment increased from $126 in the 1994 period to $129 in the 1995 period. This increase was the net result of normal health care inflation and lower EPO utilization costs. General and Administrative Expenses. General and administrative expenses increased from $12,616,000 for the year ended December 31, 1994 to $12,866,000 for the year ended December 31, 1995, an increase of $250,000, or 2.0%. General and administrative expenses as a percentage of net revenue decreased from 11.4% in the 1994 period to 11.1% in the 1995 period. General and administrative expenses as a percentage of net revenue decreased in the 1995 period due to the growth in revenue. Provision for Doubtful Accounts. The provision for doubtful accounts increased from $2,914,000 for the year ended December 31, 1994 to $3,995,000 for the year ended December 31, 1995. The provision for doubtful accounts as a percentage of net revenue increased from 2.6% in the 1994 period to 3.5% in the 1995 period. This increase was due to additional bad debt expense recorded as a result of a revision in the estimated collectibility of accounts receivable for RenalWest to reflect the Company's accounts receivable valuation policy. Depreciation and Amortization. Depreciation and amortization increased from $3,414,000 for the year ended December 31, 1994 to $3,661,000 for the year ended December 31, 1995, an increase of $247,000, or 7.2%. Depreciation and amortization as a percentage of net revenue increased from 3.1% in the 1994 period to 3.2% in the 1995 period. Income from Operations. Income from operations decreased from $16,360,000 for the year ended December 31, 1994 to $14,390,000 for the year ended December 31, 1995, a decrease of $1,970,000, or 12.0%. Income from operations as a percentage of net revenue decreased from 14.8% in the 1994 period to 12.5% in the 1995 period. LIQUIDITY AND CAPITAL RESOURCES The Company requires capital primarily for the acquisition and the development of dialysis centers, the purchase of property and equipment for existing centers and to finance working capital requirements. At December 31, 1996, the Company's working capital was $49,462,000, cash and cash equivalents were $47,624,000 and the Company's current ratio was 2.3:1. The Company's net cash provided by operating activities was $17,085,000 in the year ended December 31, 1996. Generally, cash provided by operating activities resulted from net income before depreciation and amortization expense, partially offset by increases in accounts receivable. The Company's net cash used in investing activities was $62,513,000 in the year ended December 31, 1996. Cash used in investing activities included $37,853,000 of cash, working capital and 29 30 certain other distributions made at the closing of the Combination, net of cash acquired. Additional uses of cash for investing activities have been related to acquisitions, purchases of equipment and leasehold improvements for the Company's facilities and purchases of investments. Cash provided by financing activities was $91,711,000 for the year ended December 31, 1996. The Company's initial public offering in February 1996 and stock offering in November 1996 resulted in the sale of 5,830,000 shares from which the Company received $112,131,000 after offering costs. Long-term debt repayments totaled $14,713,000, and pre-closing distributions of $6,245,000 were made to former shareholders of acquired companies after the Combination. Under its agreement with Kidney Care in connection with the Combination, the Company has certain contingent payments payable on each of April 30, 1997 and 1998 based on a formula applied to the amount by which pre-tax earnings of the operations acquired from Kidney Care for the 12 months ended December 31, 1996 and 1997, respectively, exceed the pre-tax earnings of such operations for the 12 months ended December 31, 1994. The maximum aggregate amount of the contingent payments is $7,000,000. The Company expects to satisfy this obligation through working capital. The Company's line of credit allows for borrowings of up to $35,000,000 to be used for acquisitions, working capital and capital expenditures. The line of credit requires payments of interest only until May 1998 with the balance outstanding at that time amortized quarterly over the next three years. The credit facility bears interest at one of two floating rates selected by the Company: (i) the base rate plus a margin ranging from 0.00% to 1.00% or (ii) LIBOR plus a margin of 0.95% to 2.70%. A significant component of the Company's growth strategy is the acquisition and development of dialysis centers. The Company believes that existing cash and funds from operations, together with funds available under the line of credit, will be sufficient to meet the Company's acquisition, expansion, capital expenditure and working capital needs through the end of 1997. In order to finance certain large strategic acquisition opportunities, the Company may incur from time to time additional short- and long-term bank indebtedness and may issue equity or debt securities, the availability and terms of which will depend on market and other conditions. There can be no assurance that such additional financing, if required, will be available on terms acceptable to the Company. FORWARD-LOOKING INFORMATION Certain of the matters discussed in the preceding pages of this Form 10-K, particularly regarding implementation of the Company's strategy, development of the dialysis and nephrology industries, anticipated growth and revenues, anticipated working capital and sources of funding for growth opportunities and construction, expenditures, interest, costs and income constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended. Actual results or developments are subject to a number of substantial risks and uncertainties, including general economic market and business conditions; opportunities (or the lack thereof) that may be presented to and pursued by the Company; competitive actions by other companies; changes in laws or regulations; and other factors discussed from time to time in the Company's 30 31 SEC reports and other filings. Many of the foregoing factors are beyond the control of the Company. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date made and which the Company undertakes no obligation to revise to reflect events after the date made. IMPACT OF INFLATION A substantial portion of the Company's net revenue is subject to reimbursement rates that are regulated by the federal government and do not automatically adjust for inflation. The Company is unable to increase the amount it receives for the services provided by its dialysis business that are reimbursed under the Medicare composite rate. Increased operating costs due to inflation, such as labor and supply costs, without a corresponding increase in reimbursement rates, may adversely affect the Company's earnings in the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and financial statement schedules in Part IV, Item 14(a) (1) and (2) of the report are incorporated by reference into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required by this item will appear in, and is incorporated by reference from, the sections entitled "Proposals for Stockholder Action - Proposal 1. Election of Directors" and "Management - Directors and Executive Officers" included in the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will appear in the sections entitled "Executive Compensation", included in the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which information, other than the Compensation Committee Report and Performance Graph required by Items 402(k) and (l) of Regulation S-K, is incorporated herein by reference. 31 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will appear in, and is incorporated by reference from, the section entitled "Security Ownership of Directors, Officers and Principal Stockholders" included in the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will appear in, and is incorporated by reference from, the sections entitled "Certain Relationships and Related Transactions" included in the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders. 32 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: (1) Index To Financial Statements Page ---- Report of Independent Public Accountants F-1 Consolidated Balance Sheets at December 31, 1995 and 1996 F-2 Consolidated Statements of Operations for the years ended December 31, 1994, 1995, and 1996 F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995, and 1996 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995, and 1996 F-6 Notes to Consolidated Financial Statements F-8 (2) Index to Financial Statement Schedules. Report of Independent Accountants F-18 Schedule II - Valuation and Qualifying Accounts F-19 (3) The Exhibits are listed in the Index of Exhibits Required by Item 601 of Regulation S-K included herewith, which is incorporated herein by reference. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Report. 33 34 EXHIBIT INDEX
Exhibit Number Description of Exhibits - ------- ----------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company (1) 3.2 Amended and Restated Bylaws of the Company (1) 4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Bylaws of the Company defining rights of holders of Common Stock of the Company (1) 4.2 Specimen stock certificate for the Common Stock of the Company (1) 10.1 Employment Agreement, dated February 6, 1996, between the Company and Sam A. Brooks (2)* 10.2 Employment Agreement, dated February 6, 1996, between the Company and Ron Hinds(1)* 10.3 Employment Agreement between the Company and Raymond Hakim, M.D. (1)* 10.4 Employment Agreement, dated April 1, 1994, between the Company and Joseph A. Cashia (2)* 10.5 Employment Agreement, dated February 12, 1996, between the Company and Anne N. Bower (2)* 10.6 Medical Director Services Agreement, dated February 12, 1996, between the Company and Kansas Nephrology Physicians, P.A. (2) 10.7 Medical Director Services Agreement, dated February 12, 1996, between the Company and Indiana Dialysis Management, P.C. (2) 10.8 Medical Director Services Agreement, dated February 12, 1996, between the Company and Tyler Dialysis & Transplant Associates, P.A. (2) 10.9 Lease Agreement, dated February 5, 1996, between the Company and MEL, Inc. relating to approximately 20,000 square feet of space. (2) 10.10 Lease Agreement, dated February 12, 1996, among the Company and Thomas A. Lowery, M.D., James R. Cotton, M.D., Roy D. Gerard, M.D. and Kevin A. Curran, M.D., relating to property in Carthage, Texas. (2) 10.11 Lease Agreement, dated February 12, 1996, among the Company and Thomas A. Lowery, M.D., James R. Cotton, M.D., Roy D. Gerard, M.D., and Kevin A. Curran, M.D., relating to property in Tyler, Texas. (2) 10.12 Sublease agreement between M-W-R Investment and Kansas Nephrology Associates, P.A. dated February 1, 1990, to be assumed by the Company, and related Lease Agreement between Dodge City Medical Center Building, Inc. and M-W-R Investment (1)
35
Exhibit Number Description of Exhibits - ------- ----------------------- 10.13 Sublease Agreement, dated February 12, 1996, with Tyler Nephrology Associates, Inc. (2) 10.14 Dialysis Center Management Agreement, dated May 11, 1994, between Renal Care Group, Inc. (of Tennessee) and Vanderbilt University (1)* 10.15 1996 Stock Option Plan for Outside Directors (1)* 10.16 Amended and Restated 1996 Stock Option Plan(3)* 10.17 Employee Stock Purchase Plan (1)* 10.18 Agreement between the Company and Healthcare Suppliers, Inc. dated December 7, 1995 (1) 10.19 Amendment No. 1 to the Company's Employee Stock Purchase Plan(3)* 10.21 Chief Medical Officer Agreement, dated February 12, 1996, between the Company and John D. Bower, M.D.(3) 10.22 Medical Director Services Agreement, dated September 30, 1996, between the Company and a group of individual physicians(3) 10.23 Employment Agreement, dated June 30, 1996, between the Company and Gary Brukardt(3) * 10.24 Management Agreement, dated March 1, 1996, between the Company and The Cleveland Clinic Foundation(3) * 10.25 Loan Agreement, dated May 30, 1996, among the Company, its subsidiaries and NationsBank of Tennessee, N.A.(3) 10.26 Revolving/Term Note, dated May 30, 1996, made by the Company and its subsidiaries to the order of NationsBank of Tennessee, N.A.(3) 10.27 Stock Pledge Agreement, dated May 30, 1996, between the Company and NationsBank of Tennessee, N.A.(3) 10.28 Asset Purchase Agreement with an effective date of February 1, 1997 among the Company, RCG Indiana, LLC, Eastern Indiana Kidney Center, Indiana Kidney Center, Indiana Kidney Center South, LLC, St. Vincent Dialysis Center, Saint Joseph Dialysis Center and Indiana Dialysis Services PC and Community Hospitals of Indiana, Inc., Seton Health Corporation of Central Indiana, Inc., Reid Hospital & Health Care Services, Inc., and Saint Joseph Hospital and Health Care Center of Kokomo, Indiana, Inc. and Indiana Dialysis Services, PC, Reid Hospital Physicians, Greenwood Dialysis Services, PC and certain individuals named on the signature pages thereto and Indiana Nephrology & Internal Medicine, P.C. 10.29 Asset Purchase Agreement and Bill of Sale, dated effective as of January 1, 1997, among the Company, RCG Laboratory, Inc., and Kidney Care, Inc. 11.1 Statement regarding computation of per share earnings 21.1 List of subsidiaries of the Company
36
23.2 Consent of Ernst & Young LLP 24.1 Power of Attorney (contained on the signature page of this report) 27 Financial Data Schedule (for SEC use only)
- ------------ (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. No. 333-80221) effective February 6, 1996. (2) Incorporated by reference to the Company's Form 10-Q for the Quarter ended March 31, 1996 (Commission File No. 0-27640). (3) Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. No. 333-13813) effective October 30, 1996. * Management contract or executive compensation plan or arrangement. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Nashville, State of Tennessee, on the 28th day of March, 1997. RENAL CARE GROUP, INC. By: /s/ Sam A. Brooks, Jr. ----------------------------- Sam A. Brooks, Jr., President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sam A. Brooks, Jr. and Ronald Hinds and each of them his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and, in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated. /s/ Sam A. Brooks, Jr. President, Chief Executive March 28, 1997 - ---------------------------- Officer and Director Sam A. Brooks, Jr. (Principal Executive Officer) /s/ Ronald Hinds Executive Vice President, March 28, 1997 - ---------------------------- Chief Financial Officer Ronald Hinds Secretary/Treasurer (Principal Financial Officer and Principal Accounting Officer) /s/ Joseph C. Hutts Director March 26, 1997 - ---------------------------- Joseph C. Hutts
38 /s/ Harry R. Jacobson Director and Chairman March 28, 1997 - ---------------------------- of the Board Harry R. Jacobson, M.D. /s/ Thomas A. Lowery Director March 20, 1997 - ---------------------------- Thomas A. Lowery /s/ John D. Bower Director March 20, 1997 - ---------------------------- John D. Bower, M.D. /s/ Stephen D. McMurray Director March 24, 1997 - ---------------------------- Stephen D. McMurray, M.D. /s/ W. Tom Meredith Director March 22, 1997 - ---------------------------- W. Tom Meredith, M.D. /s/ Kenneth Johnson Director March 28, 1997 - ---------------------------- Kenneth Johnson, M.D.
39 REPORT OF INDEPENDENT AUDITORS The Board of Directors Renal Care Group, Inc. We have audited the accompanying consolidated balance sheets of Renal Care Group, Inc. as of December 31, 1995 and 1996, and the related consolidated income statements, statements of changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Renal Care Group, Inc. as of December 31, 1995 and 1996 and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Nashville, Tennessee February 28, 1997 F-1 40 RENAL CARE GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
1995 1996 ------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 1,341 $ 47,624 Investments, held to maturity............................. -- 5,814 Accounts receivable, net.................................. 8,557 28,842 Inventories............................................... 727 2,658 Prepaid expenses and other current assets................. 493 1,540 ------- -------- Total current assets.............................. 11,118 86,478 Property and equipment, net................................. 9,225 30,739 Goodwill, net............................................... -- 11,066 Intangible assets, net...................................... 53 2,749 Other long-term assets...................................... 369 780 ------- -------- Total assets...................................... $20,765 $131,812 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,175 $ 7,984 Accrued wages and benefits................................ 1,420 6,263 Due to third party payors................................. 4,265 6,593 Due to related parties.................................... 270 7,000 Accrued expenses and other current liabilities............ 729 6,588 Income taxes payable...................................... -- 2,588 Current portion of long-term debt......................... 3,677 -- ------- -------- Total current liabilities......................... 12,536 37,016 Long-term debt, net of current portion...................... 3,663 -- Deferred income taxes....................................... -- 1,471 ------- -------- Total liabilities................................. 16,199 38,487 ======= ======== Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized, none issued............................................ -- -- Common stock, $.01 par value, 22,000 shares authorized 2,938 and 14,182 shares issued and outstanding at December 31, 1995 and 1996, respectively............... 29 142 Additional paid-in capital................................ 5,254 89,399 Retained (deficit) earnings............................... (717) 3,784 ------- -------- Total stockholders' equity........................ 4,566 93,325 ------- -------- Total liabilities and stockholders' equity........ $20,765 $131,812 ======= ========
See accompanying notes to consolidated financial statements. F-2 41 RENAL CARE GROUP, INC. CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE)
YEAR ENDED DECEMBER 31, --------------------------- 1994 1995 1996 ------- ------- ------- Net revenue................................................. $41,627 $42,971 $129,518 Operating costs and expenses: Patient care costs........................................ 25,003 26,908 90,122 General and administrative expenses....................... 8,721 8,701 13,364 Provision for doubtful accounts........................... 1,418 2,355 2,446 Depreciation and amortization............................. 1,484 1,580 4,541 Merger expenses........................................... -- -- 1,960 ------- ------- -------- Total operating costs and expenses..................... 36,626 39,544 112,433 ------- ------- -------- Income from operations...................................... 5,001 3,427 17,085 Interest, net............................................... (363) (452) 619 ------- ------- -------- Income before taxes......................................... 4,638 2,975 17,704 Provision for income taxes.................................. -- -- 6,958 ------- ------- -------- Net income.................................................. $ 4,638 $ 2,975 $ 10,746 ======= ======= ======== Earnings per share.......................................... $ 0.84 ======== Weighted average shares outstanding......................... 12,739 ========
See accompanying notes to consolidated financial statements. F-3 42 RENAL CARE GROUP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
ADDITIONAL TOTAL COMMON STOCK PAID-IN RETAINED STOCKHOLDERS SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ---------- -------- ------------- Balance at December 31, 1993................... 2,928 $ 29 $ 4,075 $ 797 $ 4,901 Capital contributions........................ -- -- 411 -- 411 Net income................................... -- -- -- 4,638 4,638 Distributions to owners...................... -- -- -- (4,031) (4,031) ------ ---- -------- ------- -------- Balance at December 31, 1994................... 2,928 29 4,486 1,404 5,919 Capital contributions........................ -- -- 768 -- 768 Net income................................... -- -- -- 2,975 2,975 Distributions to owners...................... -- -- -- (5,096) (5,096) ------ ---- -------- ------- -------- Balance at December 31, 1995................... 2,928 29 5,254 (717) 4,566 Issuance of common stock in Initial Public Offering................................... 4,485 45 71,752 -- 71,797 Issuance of common stock to Founders......... 4,834 49 14,817 -- 14,866 Issuance of common stock in acquisitions..... 369 4 2,324 -- 2,328 Issuance of common stock in Secondary Offering................................... 1,345 13 40,321 -- 40,334 Conversion of subordinated notes............. 197 2 1,475 -- 1,477 Exercise of stock options.................... 24 -- 155 -- 155 Net income................................... -- -- -- 10,746 10,746 Distributions to owners...................... -- -- -- (6,245) (6,245) Dividends to Founders........................ -- -- (46,699) -- (46,699) ------ ---- -------- ------- -------- Balance at December 31, 1996................... 14,182 $142 $ 89,399 $ 3,784 $ 93,325 ====== ==== ======== ======= ========
See accompanying notes to consolidated financial statements. F-4 43 RENAL CARE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1994 1995 1996 ------- ------- -------- OPERATING ACTIVITIES Net income.................................................. $ 4,638 $ 2,975 $ 10,746 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 1,484 1,580 4,541 Loss (gain) on sale of property and equipment............. -- 20 (118) Equity in earnings of subsidiary.......................... -- -- (311) Deferred income taxes..................................... -- -- 310 Changes in assets and liabilities: Accounts receivable..................................... (3,284) 781 (8,127) Inventories............................................. (72) 40 (8) Prepaid expenses and other assets....................... 111 185 1,190 Intangibles and other assets............................ 15 (277) (1,133) Accounts payable........................................ 1,646 2,639 1,773 Accrued wages and benefits.............................. 235 38 3,042 Due to related parties.................................. 250 20 (1,392) Accrued expenses and other liabilities.................. 2 184 3,983 Income taxes payable.................................... -- -- 2,588 ------- ------- -------- Net cash provided by operating activities................... 5,025 8,185 17,084 INVESTING ACTIVITIES Proceeds from sale of property and equipment................ -- 171 395 Purchases of property and equipment......................... (2,428) (4,804) (11,365) Cash paid for acquisitions, net of cash acquired............ -- -- (8,201) Distributions received from affiliate....................... -- -- 325 Purchases of investments, held-to-maturity.................. -- -- (14,975) Proceeds from sale of investments, held-to-maturity......... -- -- 9,161 Cash distribution to founders, net of cash contributions.... -- -- (37,852) ------- ------- -------- Net cash used in investing activities....................... (2,428) (4,633) (62,512) FINANCING ACTIVITIES Payments on line of credit.................................. (9,642) (8,414) (15,163) Proceeds from line of credit................................ 9,603 9,155 15,006 Payments on long-term....................................... (1,830) (1,765) (14,713) Proceeds from long-term debt................................ 1,960 2,844 540 Capital contributions....................................... 411 767 -- Proceeds from exercise of stock options..................... -- -- 155 Net proceeds from issuance of common stock.................. -- -- 112,131 Distributions to owners..................................... (4,031) (5,096) (6,245) ------- ------- -------- Net cash (used in) provided by financing activities......... (3,529) (2,509) 91,711 ------- ------- -------- Increase (decrease) in cash and cash equivalents............ (932) 1,043 46,283 Cash and cash equivalents, at beginning of year............. 1,230 298 1,341 ------- ------- -------- Cash and cash equivalents, at end of year................... $ 298 $ 1,341 $ 47,624 ======= ======= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.................................................... $ 386 $ 469 $ 673 ======= ======= ======== Income taxes................................................ $ -- $ -- $ 4,697 ======= ======= ======== SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS: Common Stock to Founders.................................... $ -- $ -- $ 14,866 ======= ======= ======== Conversion of subordinated notes............................ $ -- $ -- $ 1,477 ======= ======= ======== Issuance of Common Stock in acquisitions.................... $ -- $ -- $ 2,328 ======= ======= ========
See accompanying notes to consolidated financial statements. F-5 44 RENAL CARE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1996 1. ORGANIZATION Renal Care Group, Inc. (of Delaware) (the "Company") was formed in June 1995, primarily for the purpose of acquiring four dialysis businesses and Renal Care Group, Inc. (of Tennessee) ("Tennessee"), collectively, known as the "Founding Companies," in exchange for shares of its Common Stock, cash, notes payable and the assumption of certain debt (the "Combination"). As described more fully in Note 8, on February 6, 1996, the Company closed an initial public offering of 4,485 shares of its Common Stock and simultaneously consummated the Combination. The four unrelated businesses acquired in the Combination, which are comprised of numerous legal entities, conduct business as Kidney Care, Inc. and certain operating divisions of Medical Enterprises, Ltd. and Health Care Suppliers, Inc. ("KCI"), DMN Professional Corporation ("DMN"), Tyler Nephrology Associates, P.A. ("Tyler"), and Kansas Nephrology Associates, P.A. ("KNA") and Kansas Dialysis Supply, Inc. ("KDS," combined, "Kansas"). Tennessee and the four unrelated businesses acquired are based in Tennessee, Mississippi, Indiana, Texas, and Kansas. The Combination was accounted for utilizing the historical cost basis in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48 with the stock being valued at the historical cost of the net assets exchanged. Cash consideration given in the Combination is treated for accounting purposes as a dividend from the Company to Tennessee, KCI, DMN, Tyler, Kansas, and their owners. As described more fully in Note 10, the completed mergers with Main Line Suburban Dialysis Centers, Inc. ("Main Line") and RenalWest, L.C., et al ("RenalWest") were accounted for as pooling of interests. These financial statements reflect the restated consolidated financial statements of the Company effecting these pooling of interests. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned and majority owned corporate subsidiaries and partnership interests. Significant intercompany transactions and accounts have been eliminated in consolidation. Investments in affiliates less than 50% owned are generally recorded on the equity method. CASH EQUIVALENTS The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. INVESTMENTS In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), the Company's debt securities are classified as held-to-maturity. The Company has both the positive intent and ability to hold to maturity and therefore the securities are carried at amortized cost. F-6 45 INVENTORIES Inventories consist of drugs, supplies and parts consumed in dialysis treatments and are stated at the lower of cost (using the average cost method and the first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided by the straight-line method over the useful lives of the related assets, ranging from 3 to 40 years. Leasehold improvements are amortized using the straight-line method over the related lease terms. Maintenance and repair costs are charged to operations as incurred. INTANGIBLE ASSETS The excess of aggregate purchase price over the fair value of net assets of businesses acquired is recorded as goodwill. Goodwill is amortized over 40 years using the straight-line method. Other acquired intangibles are allocated to patient lists and non-compete agreements and are amortized over the life of the asset, typically seven to ten years, using the straight-line method. Accumulated amortization on intangible assets is approximately $5 and $378 at December 31, 1995 and 1996, respectively. The carrying value of intangible assets is assessed for any permanent impairment by evaluating the operating performance and future undiscounted cash flows of the underlying businesses. Adjustments are made if the sum of the expected future net cash flows is less than book value. Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121), requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. SFAS 121 was implemented by the Company in 1996 and did not have an impact on the Company's financial statements. INCOME TAXES The Company and its subsidiaries file a consolidated federal tax return and separate company state tax returns. Income taxes are provided under the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under the liability method, deferred income taxes are recognized for the tax consequences of differences between amounts reported for financial reporting and income tax purposes by applying enacted statutory tax rates applicable to future years to such differences. Deferred taxes result from temporary differences in the market value of assets acquired in business combinations accounted for as purchases and their tax bases. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Federal and State income taxes for Main Line and RenalWest prior to their acquisition by the Company were payable personally by the stockholders of Main Line and RenalWest pursuant to S Corporation elections under the Internal Revenue Code. USE OF ESTIMATES The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NET REVENUE Accounts receivable and net revenue are recorded at the estimated net realizable amount from Medicare, Medicaid, patients, commercial insurers and other third party payors for services rendered. The Medicare and Medicaid programs reimburse the Company at amounts that are different from the Company's established rates. F-7 46 Contractual adjustments under these programs represent the difference between the amounts billed for these services and the amounts that are reimbursable by third party payors. A summary of the basis for reimbursement with these payors follows: Medicare The Company is paid by the Medicare program on a prospective payment system for dialysis services. Each facility receives a composite rate that is adjusted to account for geographic differences in the cost of labor. Medicaid Medicaid is a state administered program with reimbursements varying by state. The Medicaid programs administered in each state in which the Company operates reimburse the Company for dialysis services rendered. Other Other payments from patients, commercial insurers and other third party payors are received pursuant to a variety of reimbursement arrangements, which are generally higher than those payments received from the Medicare and Medicaid programs. The allowance for doubtful accounts represent management's estimate of potential credit losses associated with amounts due from patients, commercial insurers and other third party payors. Management of the Company does not believe that receivables from the Medicare and Medicaid programs represent any credit risk. Reimbursements from Medicare and Medicaid at established rates approximated 78%, 71% and 74% of net patient revenue for the years ended December 31, 1994, 1995 and 1996, respectively. ESTIMATED MEDICAL PROFESSIONAL LIABILITY CLAIMS The Company is insured for medical professional liability claims through retrospectively rated commercial insurance policies. It is its policy that provision for estimated premium adjustments to medical professional liability costs be made for asserted and unasserted claims based on its experiences. Provision for such professional liability claims includes estimates of the ultimate costs of such claims. To date, the Company's experience with such claims has not been significant; accordingly, no such provision has been made. EARNINGS PER SHARE Earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding including the dilutive effect of options and warrants. Earnings per share amounts are not presented for 1994 and 1995 as the historical results of operations of the Company for these years consisted of non-taxed earnings from Main Line and RenalWest which were S Corporations. Additionally, the capital structure of the Company during 1996 was significantly different from that of prior years and an earnings per share presentation is not considered meaningful. MARKET VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, investments, accounts receivable, long-term debt and capital lease obligations. The market values for these financial instruments approximates their carrying value at December 31, 1995 and 1996. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to current year presentation. F-8 47 3. INVESTMENTS The amortized cost and estimated fair value of the investments are as follows:
DECEMBER 31, 1996 -------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE --------- ---------- ---------- ------ U.S. Government Agencies................................ $ 100 $ 2 $ -- $ 102 Corporate Bonds and Notes............................... 5,714 9 (19) 5,704 ------ --- ---- ------ Total................................................... $5,814 $11 $(19) $5,806 ====== === ==== ======
4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
DECEMBER 31 ----------------- 1995 1996 ------- ------- Patient accounts receivable................................. $12,185 $31,645 Other receivables........................................... 353 3,900 Allowance for doubtful accounts............................. (3,981) (6,703) ------- ------- Net accounts receivable..................................... $ 8,557 $28,842 ======= ======= Percent of patient accounts receivable related to patients participating in the Medicare and Medicaid programs....... 60% 68%
Other receivables consist primarily of management fees and reimbursable expenses incurred pursuant to certain management agreements. 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31 ----------------- 1995 1996 ------- ------- Medical equipment........................................... $ 8,551 $20,763 Furniture and nonmedical equipment.......................... 2,591 5,693 Leasehold improvements...................................... 2,836 6,298 Buildings................................................... 961 5,322 Construction in progress.................................... -- 714 ------- ------- 14,939 38,790 Less accumulated depreciation............................... (5,714) (8,051) ------- ------- Net property and equipment.................................. $ 9,225 $30,739 ======= =======
F-9 48 6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31 --------------- 1995 1996 ------ ------ Equipment line of credit, advances made through December 31, 1995, bearing interest at the variable bank base rate plus 3/8% (8.88% at December 31, 1995), paid in 1996............ $1,460 -- Convertible senior subordinated promissory notes............. 1,380 -- Term note, bearing interest at the prime rate plus 1/2% (9.0% at December 31, 1995), collateralized by inventory, accounts receivable, property and equipment, paid in 1996.. 1,263 -- Term note, bearing interest at the prime rate plus 3/8% (8.88% at December 31, 1995), collateralized by inventory, accounts receivable, property and equipment, paid in 1996.. 1,200 -- Line of credit, interest at variable Bank Base Rate plus 3/8% (8.88% at December 31, 1995), collateralized by accounts receivable, inventory, equipment, furniture and general intangibles, expired and paid in June 1996................. 785 -- Other........................................................ 1,252 -- ------ ------ Total long-term debt......................................... 7,340 -- Less current portion......................................... 3,677 -- ------ ------ Long-term debt, net of current portion....................... $3,663 $ -- ====== ======
In May, 1996 the Company entered into a line of credit which allows for borrowings of up to $35,000 to be used for acquisitions, working capital and capital expenditures. The line of credit requires payments of interest only until May, 1998 with the balance outstanding at that time amortized quarterly over the next three years. The credit facility bears interest at one of two floating rates selected by the Company: (i) the base rate plus a margin ranging from 0.00% to 1.00% or (ii) LIBOR plus a margin of 0.95% to 2.70%. The Company has pledged the stock of its subsidiaries as collateral and would be obligated to pledge its assets and the assets of its subsidiaries if the Company should become in default under the line of credit. At December 31, 1996, no amounts were outstanding relative to this line of credit. 7. INCOME TAXES The provision for income taxes for the years ended December 31, 1994, 1995, and 1996 consists of the following:
YEAR ENDED DECEMBER 31 1994 1995 1996 ------ ------ ------ Current: Federal................................................... -- -- $5,542 State and local........................................... -- -- 1,106 ------ ------ ------ -- -- 6,648 ====== ====== ====== Deferred: Federal................................................... -- -- $ 261 State and local........................................... -- -- 49 ------ ------ ------ -- -- 310 ====== ====== ====== Provision for income taxes.................................. -- -- $6,958 ====== ====== ======
At December 31, 1996, the Company has net operating loss carryforwards of $2,000 for federal income tax purposes and $1,300 for state income tax purposes that expire in years 2009 through 2011. The utilization of the federal net operating loss may be limited in future years due to changes in Company ownership. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. F-10 49 Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996, are as follows:
YEAR ENDED DECEMBER 31 --------------- 1995 1996 ----- ------- Deferred Tax Assets: Net Operating Loss Carryforwards....................... $ 620 $ 765 Allowance for Doubtful Accounts........................ -- 2,281 Accrued Vacation....................................... -- 861 Other.................................................. 2 5 Less: Valuation Allowance.............................. (607) (1,214) ----- ------- 15 2,698 ----- ------- Deferred Tax Liabilities: Depreciation........................................... 15 913 Cash to Accrual Adjustments............................ -- 3,247 Other.................................................. -- 9 ----- ------- 15 4,169 ----- ------- Net Deferred Tax liability.................................. $ -- $ 1,471 ===== =======
The following is a reconciliation of the statutory federal and state income tax rates to the effective rates as a percentage of income before provision for income taxes as reported in the financial statements for the years ended December 31, 1994, 1995, and 1996:
YEAR ENDED DECEMBER 31 ---------------------- 1994 1995 1996 ----- ----- ---- U.S. federal income tax rate................................ 34.0% 34.0% 35.0% State income tax, net of federal income tax benefit......... 6.1 6.1 5.5 Cash to accrual adjustments................................. -- -- 6.8 Federal and State income tax benefit from S Corporation status of Main Line and RenalWest......................... (40.1) (40.1) (8.8) Other....................................................... -- -- .8 ----- ----- ---- Effective Income Tax Rate................................... --% --% 39.3% ===== ===== ====
8. STOCKHOLDERS' EQUITY INITIAL PUBLIC OFFERING On February 6, 1996, the Company completed an initial public offering of 3,900 shares of Common Stock and on February 20, 1996, the underwriters of the offering fully exercised their over allotment option for an additional 585 shares, all of which were issued at $18 per share. Simultaneously the Company exchanged 4,834 shares of Common Stock, plus cash, notes payable, contingent payments and the assumption of certain debt for either stock or selected assets and liabilities of KCI, NEI, Tyler, Kansas and Tennessee in accordance with executed combination agreements. The exchange was accounted for utilizing the historical cost basis in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48 with the stock being valued at the historical cost of the net assets exchanged. The Company received net proceeds of $71,797 after the deduction of underwriting discounts, commissions and other expenses. F-11 50 SECONDARY STOCK OFFERING On November 22, 1996 the Company completed a secondary offering of 2,500 shares at a price of $32. The Company offered 1,064 of the shares with the remaining shares being offered by certain stockholders of the Company. On December 19, 1996 the underwriters of the offering exercised their over allotment option for an additional 375 shares of which 281 were offered by the Company and the balance offered by certain stockholders. CONVERSION OF SUBORDINATED NOTES In December 1995, the Company sold an aggregate principal amount of $1,380 of Convertible Senior Subordinated Promissory Notes (the "Convertible Notes") bearing interest at a rate of 7.0% to provide funds to complete the Offering. On December 7, 1996, the principal and accrued interest thereof was converted into 197 shares of Common Stock. DIVIDENDS TO FOUNDERS The Company used net proceeds from the initial public offering of $39,699 as the cash portion of the consideration paid to the owners of Tennessee and the four unrelated businesses to be acquired. These amounts were paid in accordance with Staff Accounting Bulletin No. 48 and has been treated as a dividend to Founders for accounting purposes. In addition, the Company has accrued $7,000 pursuant to its agreement with KCI in connection with the Combination. The amount of the contingent payment is based on a formula applied to the amount by which pre-tax earnings of the operations acquired from Kidney Care for the years ended December 31, 1996 and 1997, respectively, exceed pre-tax earnings of such operations for the year ended December 31, 1994. The amount is included as Due to Related Parties in the accompanying financial statement and accounted for as a dividend to Founders. WARRANTS Tennessee issued warrants to two of its officers, effective February 14, 1994, to purchase an aggregate of 160 shares of Common Stock of Tennessee at $7.50 per share. Also effective February 14, 1994, Tennessee issued to Equitable Securities Corporation, as compensation for its investment banking services and for nominal additional consideration, warrants to purchase 60 shares of Common Stock of Tennessee at $7.50 per share. The warrants have a term of ten years from the date of issuance. STOCK OPTION PLANS In January 1996, the Company adopted the Renal Care Group, Inc. 1996 Stock Option Plan (the "1996 Employee Plan"), which was amended and restated effective September 1996. Under the 1996 Employee Plan, Options to purchase a total of 1,000 shares of Common Stock were reserved for grant to eligible employees and other key persons. Subsequent to year end, the Board increased the number of shares for issuance under the 1996 Plan from 1,000 to 2,000 subject to stockholder approval. In 1994, Tennessee adopted the 1994 Stock Option Plan (the "1994 Plan") which provided for the grant of options to purchase up to 320 shares of Common Stock to directors, officers and other key persons. In 1995 the Company issued options outside of a plan ("Free Standing") to key employees, officers, directors and other key persons. F-12 51 The following is a summary of option transactions during the period from January 1, 1994 through December 31, 1996:
1996 WEIGHTED AVERAGE EXERCISE 1996 EMPLOYEE PLAN 1994 PLAN FREE STANDING PRICE --------------------- --------------------- --------------------- -------- EXERCISE EXERCISE EXERCISE OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE ------- ----------- ------- ----------- ------- ----------- Balance, at January 1, 1994.................. -- -- -- Granted.................................... -- 85 $2-$7.50 -- Exercised.................................. -- -- -- Forfeited.................................. -- -- -- ---- ---- ---- Balance, at December 31, 1994................ -- 85 -- Granted.................................... -- 31 $7.50 679 $7.50 Exercised.................................. -- -- -- Forfeited.................................. -- -- -- ---- ---- ---- Balance, at December 31, 1995................ -- 116 $2-$7.50 679 $7.50 $ 8.86 Granted.................................... 876 $18-$37 -- 228 $7.50 $25.50 Exercised.................................. (4) $18 -- (10) $7.50 $10.65 Forfeited.................................. -- -- -- $7.50 -- ---- ---- ---- Balance, at December 31, 1996................ 872 $18-$37 116 $2-$7.50 897 $7.50 $19.30 === === === ====== Exercisable at December 31, 1996............. 97 63 412 $10.55 === === === ====== Available for Grant at December 31, 1996..... 128 204 -- === === ===
The weighted-average fair value of options granted during 1996 is $8.60. The weighted average remaining contractual life of all options is approximately 10 years. The Company has elected to follow Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting for provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company employee stock options equals the market price of the underlying stock on the date of grant no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated a the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996, respectively; risk-free interest rates of 5.50% and 5.50%; dividend yields of 0% and 0%; volatility factor of the expected market price of the Company's common stock of .33 for 1996; and a weighted average expected life of the option of approximately 4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, F-13 52 in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows:
1995 1996 ------ ------- Net income.................................................. $2,975 $10,746 Pro forma compensation expense from stock options, net of taxes..................................................... 596 1,241 ------ ------- Pro forma net income........................................ $2,379 $ 9,505 ====== ======= Pro forma earnings per share................................ $ .75 =======
9. OPERATING LEASES The Company rents office and medical facilities under lease agreements which are classified as operating leases for financial statement purposes. At December 31, 1996, future minimum rental payments under noncancelable operating leases are: 1997 $ 4,230 1998 3,800 1999 3,117 2000 2,379 2001 2,006 Thereafter 4,420 ------- $19,952 =======
Rent expense related to operating leases amounted to $1,428, $1,648, and $3,692 for the years ending December 31, 1994, 1995 and 1996, respectively. 10. BUSINESS ACQUISITIONS POOLING OF INTERESTS On April 26, 1996, the Company completed a merger with Main Line through the exchange of shares of the Company's Common Stock. Renal Care Group, Inc. exchanged 538 shares of its common stock for the outstanding stock of Main Line. On August 7, 1996, the Company entered into a definitive agreement to merge with RenalWest, L.C. et al. This transaction was completed on September 30, 1996. Each share of RenalWest common stock then issued and outstanding was exchanged for 2,400 shares of company common stock. The Main Line and RenalWest mergers have been accounted for as pooling of interests, and accordingly, the consolidated financial statements give retroactive effect to the combined operations of Renal Care Group, Inc. for all periods presented. The following is a summary of the results of operations of the separate entities for periods prior to the Main Line and RenalWest mergers: F-14 53
RCG MAIN LINE RENALWEST COMBINED ------- --------- --------- -------- 1994 Net revenue.......................................... $ -- $10,933 $30,694 $ 41,627 Income from operations............................... -- (807) 5,807 5,000 Net income........................................... -- (841) 5,478 4,637 1995 Net revenue.......................................... -- 10,934 32,037 42,971 Income from operations............................... -- 12 3,415 3,427 Net income........................................... (6) (25) 3,006 2,975 1996 Net revenue.......................................... 81,390 12,276 35,852 129,518 Income from operations............................... 9,902 1,590 5,593 17,085 Net income........................................... 3,954 1,577 5,215 10,746
PURCHASES During 1996, the Company acquired four dialysis centers, including three acute care contracts, in Alabama, Texas, and Oklahoma for approximately $8,423 in cash, 70 shares of Common Stock, valued at approximately $1,960 which were accounted for under the purchase method. The excess of the purchase price over the fair value of net assets was approximately $9,615 and is being amortized on a straight line basis over 40 years. For the above acquisitions, the results of operations prior to the date of acquisition were not material to the consolidated financial statements. 11. EMPLOYEE BENEFIT PLANS DEFINED CONTRIBUTION PLAN The Company has qualified defined contribution plans covering substantially all employees which permit participants to make voluntary contributions. The Company pays all general and administrative expenses of the plans and makes matching contributions on behalf of the employees. The Company made contributions relating to these plans totaling $284, $157 and $599 for the years ended December 31, 1994, 1995 and 1996, respectively. EMPLOYEE STOCK PURCHASE PLAN Effective April 1996, the Company adopted an Employee Stock Purchase Plan ("Stock Purchase Plan") to provide substantially all employees an opportunity to purchase shares of its common stock to the extent of 10% of eligible compensation limited to $25 of common stock each calendar year. Annually, on December 31, participant account balances are used to purchase shares of stock at the lesser of 85% of the fair market value of shares at the beginning of the year (grant date) or December 31 (exercise date). A total of 300 shares are available for purchase under the plan. At December 31, 1996, approximately $1,100 was included in accrued wages and benefits relating to the Stock Purchase Plan. 12. RELATED PARTY TRANSACTIONS PHYSICIAN SERVICES, MEDICAL DIRECTOR FEES AND MANAGEMENT FEE REVENUE Physician services are provided to the Company by stockholders or legal entities owned by stockholders of the Company. Physician and medical director services are provided to the Company by shareholders, partners or legal entities owned by shareholders or partners of the Company. Physician and medical director fees included in patient care costs were $2,332, $787, and $1,581 for the years ended December 31, 1994, 1995 and 1996, respectively. Management fee revenues were $902 for the year ended December 31, 1996. Such fees are included in net revenue. F-15 54 OTHER RELATED PARTY BALANCES AND TRANSACTIONS Expenses for leases and other services provided through entities owned by shareholders or other related parties aggregated $168, $116 and $613 for the years ended December 31, 1994, 1995 and 1996, respectively. SUPPLY RELATIONSHIP The Company entered into an agreement dated February 12, 1996, with Healthcare Suppliers, Inc. ("HSI"), a former affiliate of Kidney Care, pursuant to which the Company is obligated, for a period of 18 months, to purchase most of the dialysis and related supplies required for its Kidney Care centers at pre-determined prices no greater than the best prices available to any other Founding Company as of November 1995. Purchases through December 31, 1996 amounted to $3,596. LABORATORY MANAGEMENT AND SERVICES CONTRACT The Company entered into a lab agreement with Kidney Care Foundation dated February 12, 1996, pursuant to which the Company provided certain business, management, administrative and equipment maintenance services to the Foundation's clinical laboratory located in Jackson, Mississippi. The laboratory in turn provided clinical testing for certain Company patients on a fee for service basis. In consideration for the management services provided by the Company, the Foundation paid the Company management fees of $221 and reimbursed the Company for its expenses in providing services under the agreement of approximately $1,246. Fees paid by the Company to the Foundation for clinical laboratory testing on its patients amounted to $192 in 1996. The Company obtained an option from the Foundation to purchase the assets of the laboratory for an exercise price of $147. Effective January 1, 1997, the Company exercised the option and acquired the assets of the laboratory. 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summary unaudited quarterly data for the year ended December 31, 1996 has been restated from the Company's filings on Form 10-Q to reflect the mergers accounted for as a pooling-of-interests transaction. The Company believes that the following information includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- Net Operating Revenues...................... $24,533 $31,827 $34,627 $38,531 Operating Expenses.......................... 19,967 26,244 28,323 31,398 Depreciation and Amortization............... 873 1,111 1,212 1,345 Merger Expenses............................. -- 680 1,280 -- ------- ------- ------- ------- Income from Operations...................... 3,693 3,792 3,812 5,788 ------- ------- ------- ------- Interest Income, net........................ 39 202 153 225 ------- ------- ------- ------- Income before Income Taxes.................. 3,732 3,994 3,965 6,013 ------- ------- ------- ------- Income Taxes................................ 998 1,096 2,517 2,347 ------- ------- ------- ------- Net Income.................................. $ 2,734 $ 2,898 $ 1,448 $ 3,666 ======= ======= ======= ======= Net Income Per Share........................ $ 0.26 $ 0.21 $ 0.11 $ 0.26 ======= ======= ======= ========
Pro forma summary results of quarterly operations before nonrecurring merger expenses, had both the Founding Companies and the Company been combined for all of 1996 are as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- Net revenue $30,909 $31,826 $34,627 $ 38,531 Operating expenses: Patient care costs 21,581 22,302 24.251 26,725 General and administrative expenses 3,061 3,354 3,433 3,937 Provision for doubtful accounts 610 587 639 736 Depreciation and amortization 1,046 1,112 1,212 1,345 ------- ------- ------- ------- Total operating costs and expenses 26,298 27,355 29,535 32,743 ------- ------- ------- ------- Income form operations 4,611 4,471 5,092 5,788 Interest, net (55) 202 153 225 ------- ------- ------- ------- Income before income taxes 4,556 4,673 5,245 6,013 Provison for income taxes 1,731 1,729 1,942 2,347 ------- ------- ------- ------- Net Income $ 2,825 $ 2,944 $ 3,303 $ 3,666 ======= ======= ======= ======= Net income per share $ 0.22 $ 0.22 $ 0.24 $ 0.26 ======= ======= ======= =======
14. SUBSEQUENT EVENTS ACQUISITIONS Subsequent to year end, the Company announced that it had acquired substantially all of the assets of seven federated dialysis facilities in Central Indiana: Eastern Indiana Kidney Center, Richmond Indiana; Southern Indiana Kidney Center, Greensburg, Indiana; Saint Joseph Dialysis Center, Kokomo, Indiana; and Indiana Kidney Center, Indiana Kidney Center South, St. Vincent Dialysis Center and St. Vincent Dialysis Center West, all in Indianapolis, Indiana. The facilities currently provide treatment to approximately 600 patients as well as acute, inpatient dialysis treatment services to four local hospitals. The consideration for the purchase transaction, excluding working capital acquired, consisted of cash of approximately $24,800 and $7,200 of restricted common stock. F-16 55 15. SUPPLEMENTAL COMBINING FINANCIAL INFORMATION (UNAUDITED) The following unaudited supplemental financial information presents separately the results of operations of the Company and the Founders, and the results of operations had the Founding Companies and the Company been combined for all periods presented.
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1995 ----------------------------- ------------------------------ COMPANY FOUNDERS COMBINED COMPANY FOUNDERS COMBINED ------- -------- -------- -------- -------- -------- Net revenue.............................. $42,971 $72,358 $115,329 $129,518 $ 6,376 $135,894 Operating costs and expenses: Patient care costs..................... 26,908 53,509 80,417 90,122 4,727 94,849 General and administrative expenses.... 8,701 4,165 12,866 13,364 433 13,797 Provision for doubtful accounts........ 2,355 1,640 3,995 2,446 125 2,571 Depreciation and amortization.......... 1,580 2,081 3,661 4,541 174 4,715 Merger expenses........................ -- -- -- 1,960 -- 1,960 ------- ------- -------- -------- ------- -------- Total operating costs and expenses.. 39,544 61,395 100,939 112,433 5,459 117,892 ------- ------- -------- -------- ------- -------- Income from operations.................... $ 3,427 $10,963 $ 14,390 $ 17,085 $ 917 $ 18,002 ======= ======= ======== ======== ======= ========
F-17 56 REPORT OF INDEPENDENT AUDITORS The Board of Directors Renal Care Group, Inc. We have audited the consolidated financial statements of Renal Care Group, Inc. as of December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 28, 1997 (included elsewhere in this Form 10-K). Our audit also included the consolidated financial statement schedule listed in Item 14(a) of this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Nashville, Tennessee ERNST & YOUNG LLP February 28, 1997 F-18 57 SCHEDULE II RENAL CARE GROUP, INC. CONSOLIDATED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT ----------------------- BALANCE AT BEGINNING ALLOWANCES CHARGED TO CHARGED TO END OF OF PERIOD ACQUIRED EXPENSE REVENUE WRITE-OFFS PERIOD ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Allowance for doubtful accounts: Year ended December 31, 1994..... $ 954 $ -- $1,418 $-- $ (543) $1,829 ====== ====== ====== === ======= ====== Year ended December 31, 1995..... $1,829 $ -- $2,355 $-- $ (204) $3,980 ====== ====== ====== === ======= ====== Year ended December 31, 1996..... $3,980 $4,344 $2,446 $-- $(4,067) $6,703 ====== ====== ====== === ======= ======
F-19 EX-10.28 2 ASSET PURCHASE AGREEMENT 1 Exhibit 10.28 ASSET PURCHASE AGREEMENT BY AND AMONG RCG INDIANA, LLC, RENAL CARE GROUP, INC., INDIANA NEPHROLOGY & INTERNAL MEDICINE, P.C. AND EASTERN INDIANA KIDNEY CENTER, INDIANA KIDNEY CENTER, INDIANA KIDNEY CENTER SOUTH, LLC, ST. VINCENT DIALYSIS CENTER, SAINT JOSEPH DIALYSIS CENTER, AND INDIANA DIALYSIS SERVICES, P.C. AS SELLERS AND INDIANA DIALYSIS SERVICES, PC, COMMUNITY HOSPITALS OF INDIANA, INC., SETON HEALTH CORPORATION OF CENTRAL INDIANA, INC., GREENWOOD DIALYSIS SERVICES, PC, REID HOSPITAL PHYSICIANS, REID HOSPITAL & HEALTH CARE SERVICES, INC., AND SAINT JOSEPH HOSPITAL AND HEALTH CARE CENTER OF KOKOMO, INDIANA, INC. AND CERTAIN INDIVIDUALS AS OWNERS DATED AS OF MARCH 27, 1997 2 SCHEDULES 1.1(c) Leases Assigned 1.1(d) Contracts and Agreements Assigned 1.1(f) Dialysis Names 1.2 Consideration Allocation among Sellers 1.3 Retained Assets (Partnerships held by IDS) 1.6 Obligations to Owners 2.1 Foreign Qualifications 2.3 Conflicting Agreements or Required Consents 2.5 Subsidiaries, Investments and Predecessors 2.6 Financial Statements 2.7 Changes Since September 30, 1996 2.8 Liabilities 2.9 Litigation and Claims 2.10 Violations of Law 2.11(a) Personal Property 2.11(b) Leased Real Property 2.11(c) Zoning 2.11(e) Intangible Property Rights 2.12 Contracts and Commitments 2.13(a) Employees 2.13(c) Employment Matters 2.14(a) Pension Plans 2.14(b) Welfare Plans 2.14(c) Compensation Programs 2.14(n) Extended Coverage Benefits 2.15 Insurance Policies, Exceptions and Claims 2.16 Environmental Matters 2.17 Taxes, Claims, Extensions and Waivers 2.18.1 Licenses, Permits, Authorizations, Provider Agreements and Regulatory Deficiencies 2.18.2 Regulatory Consents, Approvals or Notices 2.18.3 Regulatory Appeals, Adjustments, Challenges, Audits 2.19 Inspections and Investigations 2.20(a) Certain Relationships 2.20(b) Affiliated Physicians and Practices 2.23 Interested Transactions 3.3 Conflicting Agreements or Required Consents 4.9 Absence of Changes 4.10 Liabilities 5.10 Leased Equipment 5.14 Allocation of Options
3 APPENDICES AND EXHIBITS 5.8 Territory for Covenant Not to Compete 5.9 Medical Director Agreement 6.2(b) Assignment and Bill of Sale 6.2(c) Assumption Agreement 6.9 Legal Opinion of Counsel to Sellers, Owners and the Practice 7.2(f) Registration Rights Agreement 7.6 Legal Opinion of Counsel to Buyer and RCG
4 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as of March 27, 1997, but with an effective date for accounting purposes as of 12:01 a.m. February 1, 1997 (the "Effective Date") by and among RENAL CARE GROUP, INC. ("RCG"), a Delaware corporation; RCG INDIANA, LLC, a Delaware limited liability company ("Buyer"); EASTERN INDIANA KIDNEY CENTER, INDIANA KIDNEY CENTER, INDIANA KIDNEY CENTER SOUTH, LLC, ST. VINCENT DIALYSIS CENTER, SAINT JOSEPH DIALYSIS CENTER AND INDIANA DIALYSIS SERVICES, PC (collectively, "Sellers") and COMMUNITY HOSPITALS OF INDIANA, INC., SETON HEALTH CORPORATION OF CENTRAL INDIANA, INC., REID HOSPITAL & HEALTH CARE SERVICES, INC., and SAINT JOSEPH HOSPITAL AND HEALTH CARE CENTER OF KOKOMO, INDIANA, INC. (collectively, "Hospital Owners") and INDIANA DIALYSIS SERVICES, PC, REID HOSPITAL PHYSICIANS, GREENWOOD DIALYSIS SERVICES, PC and certain individuals named on the signature pages hereto (collectively, "Physician Owners," and together with the Hospital Owners, the "Owners"); and INDIANA NEPHROLOGY & INTERNAL MEDICINE, P.C. (the "Practice"). PREAMBLE WHEREAS, Sellers own and operate seven (7) freestanding dialysis centers (the "Centers") in the Indiana area and operate outpatient renal dialysis programs, including outpatient hemodialysis, self-care hemodialysis, peritoneal and hemodialysis home training, and in-patient acute services (collectively, the "Business"); and WHEREAS, Sellers desire to sell to Buyer and Buyer desires to purchase from Sellers substantially all of the assets and contractual rights used in or related to the operation or conduct of the Business on the terms and conditions set forth in this Agreement (the "Acquisition"). NOW, THEREFORE, in consideration of the above and the mutual warranties, representations, covenants and agreements set forth herein, the parties agree as follows: ARTICLE 1 PURCHASE OF RIGHTS AND ASSETS 1.1 Agreement to Purchase and Sell. Subject to the terms and conditions set forth herein, Sellers agree to sell, convey, transfer, assign and deliver to Buyer, and Buyer agrees to purchase, all of Sellers' right, title and interest in and to all of the rights and assets owned by Sellers and used or useful in the operation of the Business (except for Retained Assets as defined in Section 1.3 below), free and clear of all liens, charges, claims or encumbrances ("Liens") whatsoever, including, without limitation, the following (collectively, the "Rights and Assets"): (a) All inventory and tangible personal property used in the operation of Centers, including all furniture, machinery, vehicles, office furnishings, equipment and equipment leasehold improvements of the Sellers existing on the Closing Date; (b) To the extent assignable and subject to applicable regulatory approvals, each of Sellers' valid authorizations, permits and licenses necessary to operate the Business; (c) All leases set forth on Schedule 1.1(c) hereto (including any capital leases), lease purchase arrangement and license agreements pursuant to which Sellers lease or license any real or personal property used in the Business, including any and all security and other deposits, advance rents and any other payments made thereunder prior to Closing for the benefit or to the account of Sellers; 5 (d) All contracts and agreements listed on Schedule 1.1(d) (to be attached prior to the Closing) relating to the Business; (e) All contract rights, leasehold rights, prepaid expenses, guarantees, licenses, warranties and insurance policies; (f) All other intangible assets of Sellers relating to the operation of the Business including, but not limited to, all patents, trademarks, service marks and designs and those trade names, service names and business names relating to the Rights and Assets, which are set forth on Schedule 1.1(f) hereto, all telephone numbers, and the goodwill of Sellers in or arising from the operation of the Centers; (g) All prepaid items including, without limitation, all equipment, utility and other deposits existing on the Effective Date; (h) All patient lists and patient medical or operating records, employment records, medical staff roster and files, customer lists, customer contracts, financial records and other tangible personal property of Sellers relating to the Rights and Assets; (i) All books, records and documents owned, required for or incident to the operation of the Business; (j) All of Sellers' building or construction plans, building permits, designs or drawings related to the Centers; (k) All accounts receivable of Sellers arising for services performed on and after the Effective Date; (l) Cash, if any, in an amount equal to the difference between the cash balance of Sellers on the Closing Date minus the cash balance of Sellers on the Effective Date; (m) Any and all other assets of whatever type or description, other than the Retained Assets (as defined in Section 1.3 hereof) which are (i) reflected in the balance sheet contained in the Financial Statements, except to the extent any such assets have been disposed of in the ordinary course of business since the date of such balance sheet or (ii) used in the operation of the Business. 1.2 Consideration. (a) The total consideration for the Rights and Assets shall be: (i) Twenty Four Million Eight Hundred Three Thousand Six Hundred Eighty Five Dollars ($24,803,685) payable by Buyer in cash by wire transfer to an account designated by Sellers on the Closing Date; and (ii) that number of shares of Common Stock of RCG obtained by dividing Seven Million Two Hundred Thousand Dollars ($7,200,000) by the Base Period Trading Price ((i) and (ii) collectively, the "Consideration"). The "Base Period Trading Price" is defined to mean the average of the daily closing prices for the shares of RCG Common Stock for the ten (10) consecutive trading days on which such shares are actually traded as over-the-counter securities and quoted on the Nasdaq National Market (as reported by The Wall Street Journal or, if not reported thereby, any other authoritative source) ending at the close of trading on the second trading day immediately prior to the Closing Date. (b) The Consideration shall be allocated among the Sellers as set forth in Schedule 1.2 hereto. 1.3 Retained Assets. The parties expressly agree that excluded from the Rights and Assets assigned to Buyer hereunder are (i) except as set forth in Section 1.1(l), cash of the Sellers (ii) accounts - 2 - 6 receivable of the Sellers arising from services rendered prior to the Effective Date, (iii) those trade names, service names and business names not set forth on Schedule 1.1(f) attached hereto, (iv) subject to Section 5.1 hereof, Sellers' stock record books, tax returns and minute books; (v) those partnership, equity or similar interests of Indiana Dialysis Services, PC in those entities listed on Schedule 1.3 hereto; and (vi) those contracts and agreements not listed on Schedule 1.1(d) hereto (the "Retained Assets"). 1.4 Allocation of Consideration. The Consideration paid for the Rights and Assets shall be allocated among the Rights and Assets by the Buyer and Sellers prior to the Closing in a manner which the parties intend, in their reasonable judgment, to be in accordance with the provisions contained in Treasury Regulation Section 1.1060-1T(d) and the parties agree to report the transaction contemplated herein for federal income tax purposes in accordance with such allocation. In furtherance of the foregoing, the parties hereto agree to execute and deliver Internal Revenue Service Form 8594 reflecting such allocation. 1.5 Retained Liabilities. Except as specifically set forth in Section 1.6, Sellers retain all liabilities directly or indirectly arising out of or related to (i) the Retained Assets and (ii) the operation of the Business on and prior to the Closing Date, whether such liabilities are known or unknown, disclosed or undisclosed, matured or unmatured, accrued, absolute or contingent on and as of the Closing Date (collectively, the "Retained Liabilities"). Without limiting the generality of the preceding sentence, neither Buyer nor RCG shall assume or become liable for any obligations and liabilities of Sellers not specifically described in Section 1.6, including without limitation, the following: (a) Any liability or obligation arising out of any employee benefit plan maintained by or covering employees of Sellers or to which a Seller has made any contribution or to which a Seller could be subject to any liability; (b) Any losses, costs, expenses, damages, claims, demands and judgments of every kind and nature (including the defenses thereof and reasonable attorneys' and other professional fees) related to, arising out of, or in connection with the parties' waiver of compliance with the Indiana Bulk Transfer Act or any similar statute as enacted in any jurisdiction, domestic or foreign; (c) Any liability or obligation arising out of any breach by any Seller prior to the Closing of any provision of the Seller Agreements (as defined herein) or any other contract to which a Seller is a party; (d) Any liability of Sellers with respect to any claim or cause of action, regardless of when made or asserted, which arises (i) out of or in connection with the business and operations of Sellers prior to the Closing, (ii) with respect to any product purchased or manufactured or any service provided by Sellers on or prior to the Closing, including without limitation, any liability or obligation (A) pursuant to any express or implied representation, warranty, agreement, or guarantee made by Sellers or (B) imposed or asserted to be imposed by operation of law, in connection with any service performed or product designed, manufactured, sold, or leased by or on behalf of Sellers prior to the Closing, including without limitation, any claim related to any product delivered in connection with the performance of such service and any claims seeking to recover for consequential damage, lost revenue, or income, including pursuant to any doctrine of product liability, or (iii) out of or in connection with the Business and operations of Sellers prior to the Closing under any federal, state, or local law, rule, or regulation relating to (A) environmental protection or clean-up, (B) taxation, or (C) employment or termination of employment; (e) Any liability or obligation, arising prior to or as a result of the Closing, to any employee, agent, or independent contractor of Seller, whether or not employed by Buyer after the Closing, or under any benefit arrangement with respect thereto; (f) Any liability of Sellers existing at the Closing, including any liability related to any matter described on the Schedules hereto; - 3 - 7 (g) Any liability or obligation for federal, state, county, local, foreign and other taxes, assessments, charges, fees, and impositions, including interest and penalties thereon or with respect thereto, whether disputed or not ("Taxes"), including any liabilities or obligations of Sellers relating to sales and use, transfer, documentary, income or other Taxes levied on the transfer of the Rights and Assets; (h) Any liability for any overbillings made by any Seller or overpayments received by any Seller under any Medicare or other government or private payor arrangement in respect of goods or services provided on or prior to the Closing Date; and (i) All wages, commissions, vacation, holiday, workers' compensation and sick pay obligations of Sellers with respect to its respective employees accrued through the Closing Date and all bonuses and fringe benefits as to such employees accrued through the Closing Date, and all severance pay obligations of Sellers to employees resulting from Sellers' consummation of the transactions contemplated by this Agreement. 1.6 Assumed Liabilities. Buyer shall assume on the Closing Date (i) current operating liabilities of the Sellers as of the Effective Date determined in accordance with generally accepted accounting principles and accrued in accordance with past practices (the "Current Liabilities") up to the Liabilities Limit (as defined below), (ii) amounts that may be payable by Buyer or RCG due to any HCFA Liability, (iii) the payment and performance of obligations under those contracts and agreements identified on Schedules 1.1(c) and 1.1(d) hereto arising on and after the Effective Date, except to the extent any such obligations relate to a default occurring on or before the Closing Date (the "Assumed Liabilities"), and (iv) amounts up to $1,100,000 owed by the Sellers to the Owners as scheduled on Schedule 1.6 hereto which shall be satisfied at Closing. 1.7 Adjustments. (a) As soon as practicable following the Closing Date, but in no event later than sixty (60) days following the Closing Date, Buyer shall prepare and deliver to Sellers a balance sheet setting forth the Current Liabilities of Sellers determined in accordance with generally accepted accounting principles as of the Effective Date. Promptly upon determination of the Current Liabilities, Sellers and the Owners shall be obligated, jointly and severally, to pay to Buyer the amount, if any, by which the Current Liabilities exceed $1,600,000 (the "Liabilities Limit"). Alternatively, Buyer and RCG shall pay to the Sellers in the manner specified in Schedule 1.2 and to the account specified pursuant to Section 1.2(b) hereof, the amount, if any, by which the Liabilities Limit exceeds the Current Liabilities. (b) Upon the Closing, Buyer shall remit to the Sellers as additional purchase price in the manner provided on Schedule 1.2 hereto an amount equal to $300,000 multiplied by each full month occurring between the Effective Date and the Closing Date plus $300,000 multiplied by a fraction equal to the number of days passed in the month in which the Closing occurs divided by the number of days in such month (the "Income Amount"). As soon as practicable following the Closing Date, but in no event later than sixty (60) days following the Closing Date, Buyer shall determine the aggregate pre-tax net income of the Centers for the period between the Effective Date and the Closing Date ("Net Income"). Net Income of the Centers shall be computed based on the accrual basis of accounting consistently applied in accordance with generally accepted accounting principles. In the event that such Net Income is greater than the Income Amount, Buyer shall remit to the Sellers in the manner provided on Schedule 1.2 said difference promptly upon such determination. Alternatively, if the Net Income is less than the Income Amount, Sellers and Owners shall be obligated, jointly and severally, to pay to Buyer such difference promptly upon such determination. 1.8 Time and Place of Closing. The closing (the "Closing") will take place on a date not later than two business days following the satisfaction of the conditions set forth in Articles 6 and 7 hereof (the "Closing Date"). The place of Closing shall be at the offices of Alston & Bird, One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia 30309, or such other place as may be mutually agreed upon by the - 4 - 8 Parties. The parties agree and intend that the transactions herein shall for financial accounting and reporting purposes be deemed to have closed on the Effective Date. 1.9 Deliveries. All deliveries, payments and other transactions and documents relating to the Closing (i) shall be independent and none shall be effective unless and until all are effective (except to the extent that the party entitled to the benefit thereof has waived satisfaction or performance thereof as a condition precedent to Closing), and (ii) shall be deemed to be consummated simultaneously. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE OWNERS The Sellers and the Owners jointly and severally represent and warrant the following to Buyer and RCG: 2.1 Organization, Authority and Capacity. Each Seller is a corporation, partnership or limited liability company, duly organized, validly existing and in good standing under the laws of its state of jurisdiction, and has the full power and authority necessary to (i) execute, deliver and perform its obligations under the Acquisition Documents and (ii) carry on its business as it has been and is now being conducted and to own and lease the properties and assets which it now owns or leases. Each Seller is duly qualified to do business and is in good standing in the jurisdictions set forth with respect to that Seller in Schedule 2.1, which includes every jurisdiction in which the failure to be so qualified or in good standing would have a material adverse effect on (i) such Seller's ability to perform its obligations under the Acquisition Documents or (ii) the assets, results of operations or prospects of the Business. 2.2 Authorization and Validity. The execution, delivery and performance of the Acquisition Documents have been duly authorized by all necessary corporate action on the part of each Seller. The Acquisition Documents to be executed and delivered by the Sellers have been or will be, as the case may be, duly executed and delivered by each Seller and constitute or will constitute the legal, valid and binding obligations of each Seller, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, or other laws affecting creditors' rights generally, or as may be modified by a court of equity. 2.3 Absence of Conflicting Agreements or Required Consents. Except as set forth on Schedule 2.3, the execution, delivery and performance by each Seller of the Acquisition Documents to be executed and delivered by each Seller: (i) do not require the consent of or notice to any governmental or regulatory authority or any other third party; (ii) will not conflict with any provision of such Seller's organizational documents; (iii) will not conflict with or result in a violation of any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which such Seller is subject or by which such Seller or any of its properties are bound; (iv) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit to which such Seller is a party or by which such Seller or any of its properties are bound; and (v) will not create any lien, encumbrance or restriction upon any of the assets or properties of such Seller. 2.4 Governing Documents of the Sellers. True and correct copies of the organizational documents and all amendments thereto of each Seller (certified by the Secretary of State of the state of organization, if Seller is a corporation, limited partnership or limited liability company) have been provided to Buyer. Buyer has previously been provided with access to each Seller's minutes, and such minutes accurately reflect in all material respects the proceedings of the board of directors (or other similar governing body) of each Seller (and all committees thereof). The record books of each Seller, which have been made available to Buyer for review, contain true, complete and accurate records of the ownership of each Seller. - 5 - 9 2.5 Subsidiaries and Investments. Except as set forth on Schedule 2.5, no Seller has owned or currently owns, directly or indirectly, of record, beneficially or equitably, any capital stock or other equity, ownership or proprietary interest in any corporation, partnership, limited liability company, association, trust, joint venture or other entity. Except as listed on Schedule 2.5, no Seller has sold or disposed of, by way of asset sale, stock sale, spin-off or otherwise, any material assets or business. 2.6 Financial Statements. Attached hereto as Schedule 2.6 are the unaudited financial statements of the Sellers on a combined basis for the years ended December 31, 1994, 1995 and 1996 and interim financial statements for the nine-month period ending September 30, 1996, which reflect the results of operations and financial condition of the Sellers on a combined basis for such periods and at such dates (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied, except for (i) the omission of notes to unaudited Financial Statements, (ii) the fact that interim Financial Statement are subject to normal and customary year-end adjustments which will not, in the aggregate, be material and (iii) any exceptions that may be indicated in the notes to such Financial Statements. The Financial Statements present fairly in all material respects the financial position of the Sellers as of the dates indicated and present fairly in all material respects the results of the operations of the Sellers on a combined basis for the periods then ended, and are in accordance with the books and records of the Sellers, which have been properly maintained and are complete and correct in all material respects. 2.7 Absence of Changes. Except as set forth on Schedule 2.7, and except as contemplated by this Agreement, since September 30, 1996, the Sellers have conducted the Business only in the ordinary course and have not: (i) suffered any material adverse change in their working capital, condition (financial or otherwise), assets, liabilities, reserves, business or operations; (ii) paid, discharged or satisfied any material liability other than in the ordinary course of business; (iii) written off as uncollectible any account receivable other than in the ordinary course of business; (iv) compromised any debts, claims or rights or disposed of any of its properties or assets other than in the ordinary course of business; (v) entered into any commitments or transactions not in the ordinary course of business involving aggregate value in excess of $50,000 or made aggregate capital expenditures or commitments in excess of $50,000; (vi) made any material change in any method of accounting or accounting practice; (vii) sold, assigned or transferred any of its tangible assets other than in the ordinary course of business or any patents, trademarks, trade names, copyrights or other intangible assets; (viii)subjected any of their assets, tangible or intangible, to any lien, encumbrance or restriction of any nature whatsoever, except for liens for current property taxes not yet due and payable; (ix) increased any salaries, wages or employee benefits or made any arrangement for payment of any bonus or special compensation for any employee of such Seller other than in the ordinary course of business; - 6 - 10 (x) hired, committed to hire or terminated any employee or medical director other than in the ordinary course of business; (xi) terminated or amended any material contract, license or other instrument to which any Seller is a party or suffered any loss or termination or threatened loss or termination of any existing material business arrangement or supplier, the termination or loss of which, in the aggregate, could materially and adversely affect the Sellers; (xii) sold or otherwise transferred any interest in Seller; or (xiii)agreed, whether in writing or otherwise, to take any action described in this Section 2.7. 2.8 No Undisclosed Liabilities. Except as listed on Schedule 2.8 hereto, the Sellers have no material Liabilities or obligations, whether accrued, absolute, contingent or otherwise, except for liabilities and obligations reflected in the Financial Statements or incurred in the ordinary course of its business since the date of the most recent balance sheet included in the Financial Statements. 2.9 Litigation, etc. Except as listed on Schedule 2.9 hereto, there are no claims, lawsuits, actions, arbitrations, administrative or other proceedings pending against any Seller. Except as listed on Schedule 2.9, (i) to the knowledge of the Sellers and the Owners, no such matter described in the previous sentence is threatened and there is no basis for any such action, and (ii) there are no governmental or administrative investigations or inquiries pending that involve any Seller, except in either case for any such matter that could not reasonably be expected to have a material adverse effect on the Sellers on a combined basis, financial or otherwise. Except as listed on Schedule 2.9, there are no judgments against or consent decrees binding on any Seller or its assets or, to the knowledge of the Sellers and its Owners, any licensed professional relating to the Business. 2.10 No Violation of Law. (a) Except as set forth on Schedule 2.10, no Seller has been or is currently in violation of any applicable local, state or federal law, ordinance, regulation, order, injunction or decree, or any other requirement of any governmental body, agency or authority or court binding on it, or relating to its property or business or its advertising, sales or pricing practices, except for any such violations as would not individually or in the aggregate have a material adverse effect on the Sellers on a combined basis, financial or otherwise. (b) No Seller is currently subject to any fine, penalty, liability or disability as the result of a failure to comply with any requirement of federal, state or local law or regulation nor has any Seller received any notice of such noncompliance. 2.11 Real and Personal Property. (a) Schedule 2.11(a) sets forth a list of all items of personal and mixed, tangible and intangible property, rights and assets of each Seller having an original or replacement cost or value greater than $10,000. Except as set forth on Schedule 2.11(a), each Seller (i) has good and valid title to all of the personal and mixed, tangible and intangible property, rights and assets which it purports to own, including all the personal property and assets reflected in the Financial Statements; and (ii) owns such rights, assets and personal property free and clear of all liens, encumbrances or restrictions of any nature whatsoever (except for current year ad valorem taxes). All of the Rights and Assets being acquired by Buyer, whether owned or leased, are in the possession and control of the Sellers and are located at the Centers. (b) The Sellers do not own any real property. Schedule 2.11(b) contains a true and correct description of all real property leased by each Seller, including all improvements located thereon. Sellers have valid and binding leases for each property listed on Schedule 2.11(b), and (i) Sellers are current with respect to all payments due under such leases; (ii) Sellers have complied in all respects with its obligations under such leases, and (iii) there are no defaults under any such lease that remain uncured and - 7 - 11 no condition exists which, with the lapse of time or giving of notice, or both, would give rise to a default under any such lease. Buyer has been furnished with true, correct and complete copies of all leases, deeds, easements and other documents and instruments concerning the matters listed on Schedule 2.11(b). No condemnation or similar actions are currently in effect or pending or, to the knowledge of the Sellers and the Owners, threatened against any part of any real property leased by any Seller. To the knowledge of the Seller and the Owners, there are no encroachments, leases, easements, covenants, restrictions, reservations or other burdens of any nature which might impair in any material respect the use of any leased real property in a manner consistent with past practices nor does any part of any building structure or any other improvement thereon encroach on any other property. (c) Except as set forth on Schedule 2.11(c), the present zoning, subdivision, building and other ordinances and regulations applicable to the leased real property permit the continued operation, use, occupancy and enjoyment of such real property consistent with past practices, and each Seller is in compliance with, and has received no notices of violations of, any applicable zoning, subdivision or building regulation, ordinance or other law, regulation, or requirement. Each Seller has all rights and easements necessary for public ingress thereto and egress therefrom and for the provision of all utility services thereto, including any required curb cut or street opening permits or licenses for vehicular access over presently existing roads and driveways. No portion of the leased real property, or any building, structure, fixture or improvement thereon, is the subject of, or affected by, any condemnation, taking, eminent domain or inverse condemnation proceeding currently instituted or pending, and, to the knowledge of Sellers and Owners, none of the foregoing are, or will be, the subject of, or affected by, any such proceedings. (d) Each Seller's assets (including all buildings and improvements in connection therewith) are in good operating condition and repair, ordinary wear and tear excepted, and such assets include all rights, properties, interests in properties, and assets necessary to permit RCG to continue the Business after the Closing Date as presently conducted. (e) Schedule 2.11(e) contains a complete and correct list of all trademarks, trade names, service marks, service names, brand names, copyrights, technology rights and licenses, know-how, software and patents, registrations thereof and applications therefor, and any other intellectual property used in the business of each Seller, together with a complete list of all licenses granted by or to each Seller with respect to any of the foregoing. Neither the Seller nor any of the Owners is currently in receipt of any notice of any violation of, and each has no reason to believe that the Seller's operations are violating, the rights of others with respect to any such matter. 2.12 Contracts and Commitments. (a) Schedule 2.12 contains a complete and accurate list of all contracts, agreements, commitments, instruments and obligations (whether written or oral, contingent or otherwise) of each Seller of or concerning the following matters (the "Seller Agreements"): (i) the lease, as lessee or lessor, or license, as licensee or licensor, of any real or personal property (tangible or intangible); (ii) the employment or engagement of any officer, director, employee, consultant or agent, other than those terminable at will without material severance obligation; (iii) any relationship that requires financial payments, or performance over a period of more than 90 days, with any Owner, or any person or entity affiliated with or related to any Owner or any officer or director; (iv) any arrangement limiting the freedom of such Seller to compete in any manner in any line of business or requiring such Seller to share profits; - 8 - 12 (v) any arrangement that could reasonably be anticipated to have a material adverse effect on such Seller, financial or otherwise; (vi) any material arrangement not in the ordinary course of business; (vii) any power of attorney, whether limited or general, granted by or to such Seller; and (viii)any other arrangement that requires performance for a period of more than 90 days or that requires payments in excess of $10,000. (b) Each Seller has delivered to Buyer true and complete copies of all of its Seller Agreements. Except as indicated on Schedule 2.12, the Seller Agreements are valid and effective in accordance with their terms, and there is not under any of such Seller Agreements (i) any existing or claimed default by any Seller or event which with the notice or lapse of time, or both, would constitute a material default by such Seller or (ii) to the knowledge of the Sellers and the Owners, any existing or claimed default by any other party or event which with notice or lapse of time, or both, would constitute a material default by any such party. Except as indicated on Schedule 2.12, the continuation, validity and effectiveness of the Seller Agreements will not be affected by the Acquisition and the Acquisition will not result in a breach of or default under, or require the consent of any other party to, any of the Seller Agreements. There is no actual or, to the knowledge of the Sellers and the Owners, threatened termination, cancellation or limitation of any Seller Agreements that would have a material adverse effect on the Business, financial or otherwise. To the knowledge of the Sellers and the Owners, there is no pending or threatened bankruptcy, insolvency or similar proceeding with respect to any other party to the Seller Agreements. 2.13 Employment and Labor Matters. (a) Schedule 2.13(a) sets forth (i) the number of full-time and part-time employees of each Seller and (ii) the name and compensation (including benefits) paid to each employee of or consultant to each Seller who received salary and bonuses for either of such Seller's two most recently ended fiscal years in excess of $50,000. (b) Each Seller is in compliance in all material respects with all applicable laws respecting employment and employment practices, terms and conditions of employment, wages and hours, occupational safety and health, including laws concerning unfair labor practices within the meaning of Section 8 of the National Labor Relations Act, and the employment of non-residents under the Immigration Reform and Control Act of 1986. (c) Except as disclosed on Schedule 2.13(c), (i) there are no charges, governmental audits, investigations, administrative proceedings or complaints concerning any Seller's employment practices pending or, to the knowledge of the Sellers and the Owners, threatened before any federal, state or local agency or court that could reasonably be expected to have a material adverse effect on the Business, financial or otherwise, and, to the knowledge of the Sellers and the Owners, no basis for any such matter exists; (ii) to the knowledge of the Sellers and the Owners, there are no inquiries, investigations or monitoring of activities of any licensed, registered, or certified professional personnel employed by, credentialed or privileged by, or otherwise affiliated with any Seller pending or threatened by any state professional board or agency charged with regulating the professional activities of health care practitioners; (iii) no Seller is a party to any union or collective bargaining agreement, and, to the knowledge of the Sellers and the Owners, no union attempts to organize the employees of any Seller have been made, nor are any such attempts now threatened; and - 9 - 13 (iv) no Seller has experienced any organized slowdown, work interruption, strike, or work stoppage by its employees. 2.14 Employee Benefit Matters. (a) The Sellers currently maintain only the employee pension benefit plans, as defined in Section 3(2) of ERISA, as are listed on Schedule 2.14(a) (the "Pension Plans"). The Sellers have never maintained or contributed to any other employee pension benefit plan, as defined in Section 3(2) of ERISA. (b) The Sellers currently maintain only the employee welfare benefit plans, as defined in Section 3(1) of ERISA (including but not limited to, life insurance, medical, hospitalization, holiday, vacation, disability dental and vision plans) as are listed on Schedule 2.14(b) (the "Welfare Plans"). (c) The Sellers currently maintain, or have entered into, only the compensation programs and/or employment arrangements, (including but not limited to, any written or unwritten incentive compensation, fringe benefit, payroll or employment practice, bonus, severance, sick pay, salary continuation, deferred compensation, supplemental executive compensation plans, employment agreements and consulting agreements for the benefit of their officers, directors, employees, former employees, or independent contractors) as are listed on Schedule 2.14(c) (the "Compensation Programs"). (d) No Seller or an ERISA Affiliate contributes or has contributed within the last five years to any multiemployer plan, as defined by Section 3(37) of ERISA. (e) Each Pension Plan and Welfare Plan has been operated and administered in substantial compliance with ERISA and the Code; each Pension Plan which is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified or a request for such determination has been timely filed with the Internal Revenue Service (and no Seller has any knowledge that any event has occurred between the date of the last such determination and the Closing Date that would cause the Internal Revenue Service to revoke such determination). (f) Each Pension Plan and Welfare Plan designed to satisfy the requirements of Section 125, Section 401, Section 401(k), Section 409, Section 501(c)(9), Section 4975(e)(7), and/or Section 4980B of the Code, satisfies such section. (g) No accumulated funding deficiency, as defined in Section 302(a)(2) of ERISA, exists (whether or not waived) with respect to any Pension Plan as of the date hereof. (h) All amounts required to be paid by the Sellers with respect to each Pension Plan, Welfare Plan and Compensation Program on or before the Closing Date have been paid. (i) Neither the execution and delivery of this Agreement nor the consummation of any of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due to any current or former employee, (ii) increase any benefits otherwise payable under any Pension Plan, Welfare Plan or Compensation Program, or (iii) result in any acceleration of the time of payment or vesting of any such benefits. (j) Neither the execution and delivery of this Agreement nor the consummation of any of the transactions contemplated hereby will result in a material increase in the premium costs of any Welfare Plan for which benefits are insured or a material increase in benefit costs of any Welfare Plan which provides self-insured benefits. - 10 - 14 (k) No Pension Plan is subject to a lien (or expected to be subject to a lien) under Code Section 412(n) or ERISA Section 302(f) or to tax under Code Section 4971. No Pension Plan has a "liquidity shortfall" as defined in Code Section 412(m)(5). No event has occurred in connection with a Pension Plan that could result in liability under Title IV of ERISA. None of the Sellers has incurred any liability to the Pension Benefit Guaranty Corporation in connection with any Pension Plan. (l) The assets of each Pension Plan are sufficient to provide all "benefit liabilities" (as defined in ERISA Section 4001(a)(16)) under such Pension Plan if such Pension Plan is terminated, and are also sufficient to provide all other benefits due under the Pension Plan (including, but not limited to, ancillary, disability, shutdown, early retirement and welfare benefits). (m) None of the Pension Plans or a Seller or any party in interest or disqualified person has engaged in any non-exempt "prohibited transactions" as defined in Section 406 of ERISA or Section 4975 of the Code. (n) Except as disclosed in Schedule 2.14(n), no Pension Plan or Welfare Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees beyond their retirement or other termination of service other than (i) coverage mandated by applicable law, (ii) retirement benefits under a Pension Plan, (iii) death benefits under a Welfare Plan, (iv) deferred compensation accrued on the books of the Seller or a Subsidiary, or (v) benefits the full cost of which is borne by the current or former employer (or his or her beneficiary). (o) No "leased employee," as that term is defined in Section 414(n) of the Code, performs services for a Seller. (p) No liability has been, or is expected by a Seller to be, incurred by a Seller under Section 4062 of ERISA with respect to any Pension Plan. (q) No reportable event within the meaning of Title IV of ERISA has occurred with respect to any Pension Plan. (r) The Sellers have furnished Buyer with correct and complete copies of each Pension Plan, Welfare Plan, and Compensation Program, together with any trust agreements, summary plan descriptions, employee informational material, IRS Forms 5500, the most recent actuarial valuation for any Pension Plan, financial statements relating thereto and participant listings. (s) Each Seller has complied with the continuation coverage requirements of Section 1001 of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and ERISA Sections 601 through 608. Each Seller shall be responsible for complying with the requirements of Code Section 4980 B and Part 6 of Title 1 of ERISA for its employees (including the Transferred Employees) and their "qualified beneficiaries" whose "qualifying event" (as such terms are defined in Code Section 4980 B) occurs on or prior to the Closing. 2.15 Insurance Policies. (a) All of the Rights and Assets and the operations of Sellers and the Centers of an insurable nature and of a character usually insured by companies of similar size and in similar businesses are insured by Sellers or Owners in such amounts and against such losses, casualties or risks as is (i) usual in such companies and for such assets, operations and businesses, (ii) required by any Law applicable to Sellers or the Centers, or (iii) required by any contract or agreement of Sellers or Owners relating to the Centers. Schedule 2.15 contains a complete and accurate list of all insurance policies held or owned by Sellers or Owners relating to the Centers and now in force and such Schedule indicates the name of the insurer, the type of policy, the risks covered thereby, the amount of the premiums, the term of each policy, the policy number, the amounts of coverage, the deductible in each case and all outstanding claims thereunder. Correct and complete copies of all such policies have been delivered to Buyer by Sellers on or before the date of this Agreement. All such policies are in full force and effect and enforceable in - 11 - 15 accordance with their terms. None of the Sellers or the Owners, as the case may be, is now in default regarding the provisions of any such policy, including, without limitation, failure to make timely payment of all premiums due thereon, and none of them has failed to five any notice or present any claim thereunder in due and timely fashion. None of Sellers or Owners has been refused, or denied renewal of, any insurance coverage by insurance companies offering such insurance in connection with the ownership or use of the Rights and Assets or the operation of the Centers. In addition to the deductibles set forth on Schedule 2.15, such Schedule discloses all risks that are self-insured by Sellers or Owners that in the ordinary course of business could be insured. (b) Sellers' licensed professional employees have not, in the last seven (7) years, filed a written application for professional malpractice insurance coverage which has been denied by an insurance agency or carrier. Sellers' professional employees have been continuously insured for professional malpractice claims during the same period. None of Sellers' professional employees are in default with respect to any provision contained in any such policy and none of them has failed to give any notice or present any claim under any such policy in due and timely fashion. 2.16 Environmental Matters. Except as set forth in Schedule 2.16, there are no present or past Environmental Conditions in any way relating to the business, properties or assets of any Seller. For the purposes of this Agreement, "Environmental Condition" means (a) the introduction into the environment of any pollution, including without limitation any contaminant, irritant or pollutant or other toxic or hazardous substance, in violation of any federal, state or local law, ordinance or governmental rule or regulations, as a result of any spill, discharge, leak, emission, escape, injection, dumping or release of any kind whatsoever of any substance or exposure of any type in any work places or to any medium, including without limitation air, land, surface waters or ground waters, or from any generation, transportation, treatment, discharge, storage or disposal of waste materials, raw materials, hazardous materials, toxic materials or products of any kind or from the storage, use or handling of any hazardous or toxic materials or other substances, as a result of which any Seller has or may become liable to any person or by any reason of which any of the assets of any Seller may suffer or be subjected to any lien, encumbrance or restriction of any nature, or (b) any noncompliance with any federal, state or local environmental law, rule, regulation or order as a result of or in connection with any of the foregoing. 2.17 Taxes. (a) Except as listed in Schedule 2.17 or as reflected in the Financial Statements, there does not exist any material liability for taxes which may be asserted by any taxing authority against, and no lien or other encumbrance for taxes will attach to, any Seller or any of its assets other than taxes due in respect of periods for which tax returns are not yet due and for which adequate accruals have been made in the Financial Statements. All federal, state and local tax returns and tax reports required to be filed prior to the date hereof with respect to any Seller have been filed (other than returns for which extensions to file have been granted) with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed, all of which are true, correct and complete, and all amounts shown as owing thereon have been paid. (b) Except as listed on Schedule 2.17, no Seller has received notice of any tax claims being asserted or any proposed assessment by any taxing authority and no tax returns of any Seller have been audited by the Internal Revenue Service (the "IRS") or the appropriate state agencies for any fiscal year or period ended prior to the date hereof, and no Seller is presently under, nor has received notice of any, contemplated investigation or audit by the IRS or any state agency concerning any fiscal year or period ended prior to the date hereof. Except as listed on Schedule 2.17, no Seller has executed any extension or waivers of any statute of limitations on the assessment or collection of any tax due that is currently in effect. (c) Each Seller and any of its predecessors in interest have withheld or collected from each payment made to each of their employees the amount of all taxes required to be withheld or collected therefrom and each Seller and any of its predecessors in interest have paid the same to the proper tax depositories or collecting authorities. - 12 - 16 (d) Except as disclosed on Schedule 2.17, there is no liability for taxes on the part of any Seller or any of their subsidiaries (excluding transactions for which the financial reporting gain would exceed applicable income tax liability related to such transaction) (i) that will arise with respect to a current or a future taxable period, (ii) that is wholly or partly a consequence of a transaction or occurrence, or transactions or occurrences, one or more of which occurred before the date hereof, and (iii) that is not fully reserved on the Financial Statements. In addition, except as disclosed on Schedule 2.17, there are no joint venture, partnership or other arrangements or contracts to which any Seller or any of their subsidiaries is a party and that could be treated as a partnership for federal income tax purposes. (e) For purposes hereof, "taxes" shall mean any federal, state, county, local, foreign or other tax, charge, imposition or other levy (including interest or penalties thereon) including without limitation, income taxes estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, taxes on earnings and profits, employment and payroll related taxes, property taxes, real property transfer taxes, Federal Insurance Contributions Act taxes, any taxes or fees related to unclaimed property, taxes on value added and import duties, whether or not measured in whole or in part by net income, imposed by the United States or any political subdivision thereof or by any jurisdiction other than the United States or any political subdivision thereof. 2.18 Licenses, Authorizations and Provider Programs. (a) Each Seller is the holder of all valid licenses and other rights, permits and authorizations required by law, ordinance, regulation or ruling of any governmental regulatory authority necessary to operate the Business. Each Seller is certified for participation and reimbursement under Titles XVIII and XIX of the Social Security Act (the "Medicare and Medicaid programs") (Medicare and Medicaid programs and such other similar federal, state or local reimbursement or governmental programs for which the Seller is eligible are hereinafter referred to collectively as the "Government Programs") and has current provider agreements for such Government Programs and with such private non-governmental programs, including without limitation any private insurance program, under which the Seller directly or indirectly is presently receiving payments (such non-governmental programs herein referred to as "Private Programs"). Set forth on Schedule 2.18.1, as to each facility, is a correct and complete list of such licenses, permits and other authorizations, and provider agreements under all Government and Private Programs, complete and correct copies of which have been provided to Buyer. True, complete and correct copies of all surveys of each Seller or its facilities conducted in connection with any Government Program, Private Program or licensing or accrediting body during the past two (2) years have been provided to Buyer. (b) No violation, default, order or deficiency exists with respect to any of the items listed on Schedule 2.18.1. None of the Sellers or the Owners has received any notice of any action pending or recommended by any state or federal agencies having jurisdiction over the items listed on Schedule 2.18.1, either to revoke, withdraw or suspend any license, right or authorization, or to terminate the participation of any Seller in any Government or Private Program. To the knowledge of the Sellers and the Owners, no event has occurred which, with the giving of notice, the passage of time, or both, would constitute grounds for a material violation, order or deficiency with respect to any of the items listed on Schedule 2.18.1 or to revoke, withdraw or suspend any such license, or to terminate or modify the participation of any Seller in any Government or Private Program. To the knowledge of the Sellers and the Owners, there has been no decision not to renew any provider or third-party payor agreement of any Seller. Except as listed on Schedule 2.18.2, no consent or approval of, prior filing with or notice to, or any action by, any governmental body or agency or any other third party is required in connection with any such license, right or authorization, or Government or Private Program, by reason of the consummation of the Acquisition, and the continued operation of the business of the Sellers thereafter on a basis consistent with past practices. (c) Each Seller has timely filed all cost reports and other reports required to be filed by it prior to the date hereof with respect to the Government and Private Programs, all fiscal intermediaries and other insurance carriers and all such reports are complete and accurate in all material respects and have been prepared in material compliance with all applicable laws, regulations, and principles governing - 13 - 17 reimbursement and payment claims. True and complete copies of such cost reports filed by each Seller for the most recent cost-reporting year, if applicable, have heretofore been delivered to Buyer. Each Seller has paid or caused to be paid or has properly reflected in the Financial Statements all known and undisputed refunds, overpayments, discounts or adjustments which have become due pursuant to such reports and has no liability under any Government or Private Program (known or unknown, contingent or otherwise) for any refund, overpayment, discount or adjustment other than in the ordinary course, and no interest or penalties accruing with respect thereto, except as has been specifically reserved for in the Financial Statements or disclosed herein or in the Schedules hereto. To the knowledge of the Sellers and Owners, except as set forth on Schedule 2.18.3, there are no pending appeals, adjustments, challenges, audits, litigation, or notices of intent to reopen any closed cost reports. There are no other reports required to be filed by any Seller in order to be paid under any Government or Private Program for services rendered, except for cost reports not yet due. 2.19 Inspections and Investigations. Except as set forth and described in Schedule 2.19, (i) neither any of the Seller's right nor, to the knowledge of the Sellers and the Owners, the right of any licensed professional or other individual affiliated with any Seller to receive reimbursements pursuant to any Government or Private Program has been terminated or otherwise adversely affected as a result of any investigation or action whether by any federal or state governmental regulatory authority or other third party, (ii) no Seller, or, to the knowledge of the Sellers and the Owners, any licensed professional or other individual affiliated with any Seller has, during the past three (3) years, been the subject of any inspection, investigation, survey, audit, monitoring or other form of review by any governmental regulatory entity, trade association, professional review organization, accrediting organization or certifying agency based upon any alleged improper activity on the part of such individual, nor has any Seller received any notice of deficiency during the past three years in connection with its operations, (iii) there are not presently, and at the Closing Date there will not be, any outstanding deficiencies or work orders of any governmental authority having jurisdiction over any Seller, or other third party, requiring conformity to any applicable agreement, statute, regulation, ordinance or bylaw, including but not limited to, the Government and Private Programs, and (iv) there is not any notice of any claim, requirement or demand of any licensing or certifying agency or other third party supervising or having authority over any Seller or their operations to rework or redesign any part thereof or to provide additional furniture, fixtures, equipment, appliances or inventory so as to conform to or comply with any existing law, code, rule, regulation or standard. Attached as part of Schedule 2.19 are copies of all reports, correspondence, notices and other documents relating to any matter described or referenced therein. 2.20 Certain Relationships. (a) Except as set forth on Schedule 2.20(a), no Seller has: (i) offered, paid, solicited or received anything of value, paid directly or indirectly, overtly or covertly, in cash or in kind ("Remuneration") to or from any physician, family member of a physician, or an entity in which a physician or physician family member has an ownership or investment interest, including, but not limited to: (A) payments for personal or management services pursuant to a medical director agreement, consulting agreement, management contract, personal services agreement, or otherwise; (B) payments for the use of premises leased to or from a physician, a family member of a physician or an entity in which a physician or family member has an ownership or investment interest; (C) payments for the acquisition or lease of equipment, goods or supplies from a physician, a family member of a physician or an entity in which a physician or family member has an ownership or investment interest; or - 14 - 18 (ii) offered, paid, solicited or received any Remuneration (excluding fair market value payments for equipment or supplies) to or from any healthcare provider, pharmacy, drug or equipment supplier, distributor or manufacturer, including, but not limited to: (A) payments or exchanges of anything of value under a warranty provided by a manufacturer or supplier of an item to the Seller; or (B) discounts, rebates, or other reductions in price on a good or service received by the Seller; (iii) offered, paid, solicited or received any Remuneration to or from any person or entity in order to induce business, including, but not limited to, payments intended not only to induce referrals of patients, but also to induce the purchasing, leasing, ordering or arrangement for any good, facility, service or item; (iv) entered into any joint venture, partnership, co-ownership or other arrangement involving any ownership or investment interest by any physician, or family member of a physician, or an entity in which physician or physician family member has an ownership or investment interest, directly or indirectly, through equity, debt, or other means, including, but not limited to, an interest in an entity providing goods or services to such Seller; (v) entered into any joint venture, partnership, co-ownership or other arrangement involving any ownership or investment interest by any person or entity including, but not limited to, a hospital, pharmacy, drug or equipment supplier, distributor or manufacturer, that is or was in a position to make or influence referrals, furnish items or services to, or otherwise generate business for the Seller; or (vi) entered into any agreement providing for the referral of any patient for the provision of goods or services by such Seller, or payments by such Seller as a result of any referrals of patients to the Seller. (b) Set forth on Schedule 2.20(b) is a list of all affiliated practices or physicians who have privileges to use any Seller's dialysis facilities or who are otherwise involved with the use or operation of or referral of patients to any Seller's dialysis facilities. 2.21 Fraud and Abuse. Sellers, Owners and persons and entities providing professional services for Sellers have not engaged in any activities which are prohibited under 42 U.S.C. Section 1320a-7b, or the regulations promulgated thereunder pursuant to such statutes, or related state or local statutes or regulations, or which are prohibited by rules of professional conduct, including but not limited to the following: (a) knowingly and willfully making or causing to be made a false statement or representation of a fact in any application for any benefit or payment; (b) knowingly and willfully making or causing to be made any false statement or representation of a fact for use in determining rights to any benefit or payment; (c) failing to disclose knowledge by a claimant of the occurrence of any event affecting the initial or continued right to any benefit or payment on its own behalf or on behalf of another, with intent to fraudulently secure such benefit or payment; and (d) knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind or offering to pay or receive such remuneration (i) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part by Medicare or Medicaid, or (ii) in return for purchasing, leasing, or ordering or arranging for or recommending purchasing, leasing, or ordering any good, facility, service or item for which payment may be made in whole or in part by Medicare or Medicaid. 2.22 Rates and Reimbursement Policies. Except for ethical limitations, the jurisdictions in which Sellers are located or conduct business do not currently impose any restrictions or limitations on rates - 15 - 19 which may be charged to private pay patients receiving services provided by Sellers. Sellers do not have any rate appeal currently pending before any governmental authority or any administrator of any Private Programs. None of Sellers or Owners have knowledge of any applicable law, which has been enacted, promulgated or issued within the eighteen (18) months preceding the date of this Agreement or any such legal requirement proposed or currently pending in the jurisdictions in which Sellers are located or does business, which could have an adverse effect on Sellers or may result in the imposition of additional Medicaid, Medicare, charity, free care, welfare, or other discounted or government assisted patients at Sellers or require Sellers to obtain any necessary authorization which Sellers do not currently possess. 2.23 Interested Transactions. Except as set forth on Schedule 2.23, no Seller is a party to any contract, loan or other transaction with any Owner nor does any Seller have any direct or indirect interest in or affiliation with any Owner to any such a contract, loan or other transaction. Except as set forth on Schedule 2.23, no Owner is an employee, consultant, partner, principal, director or owner of, or has any other direct or indirect interest in or affiliation with, any person or business entity that is engaged in a business that competes with or is similar to the business of any Seller. No Seller has made any cash or in-kind distribution to its Owners at any time on or after the Effective Date. 2.24 Accounts Receivable and Payable. To the knowledge of the Sellers and the Owners, the accounts receivable of the Centers outstanding as of the Effective Date represent, and the accounts receivable outstanding as of the Closing Date will represent, bona fide claims for services actually rendered and goods actually provided, subject to no defenses, counterclaims, or rights of setoff other than those arising in the ordinary course of business and for which adequate reserves have been or will be established, as applicable. No accounts payable of the Centers are, at this date, over 30 days old and no accounts payable of the Company will be over 30 days old at the Closing Date. 2.25 Purchase for Investment, Etc. (a) Such Seller is acquiring the RCG Common Stock for such Seller's own account and not with a view to or for sale in connection with any public distribution thereof within the meaning of the 1933 Act; (b) such Seller (i) has sufficient knowledge and experience in financial and business matters to enable him, her or it to evaluate the merits and risks of an investment in the RCG Common Stock, (ii) has the ability to bear the economic risk of acquiring the RCG Common Stock, (iii) has received and reviewed the RCG Documents identified in Section 4.8 below, and (iv) has had an opportunity to ask questions of and to receive answers from the officers of RCG and to obtain additional information in writing as requested, which has been made available to and examined by such Seller or such Seller's advisors; (c) such Seller (i) acknowledges that the RCG Common Stock has not been registered under any securities laws and cannot be resold without registration thereunder or exemption therefrom, (ii) agrees not to transfer all or any of the RCG Common Stock received by such Seller unless such transfer has been registered or is exempt from registration under applicable securities laws and (iii) acknowledges that the certificate(s) representing the RCG Common Stock shall bear a prominent legend with respect to the restrictions on transfer under applicable securities laws; and (d) such Seller has accurately completed the Investor Questionnaire required by RCG contemporaneous with the execution of this Agreement and the statements therein are true and correct. 2.26 Statements True and Correct. No representation or warranty made herein by the Sellers or any of the Owners, nor in any statement, certificate or instrument to be furnished to Buyer or RCG by the Sellers or any of the Owners pursuant to any Acquisition Document, contains or will contain any untrue statement of material fact or omits or will omit to state a material fact necessary to make these statements contained herein and therein not misleading. - 16 - 20 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE OWNERS Each Owner, severally and not jointly, represents and warrants the following to Buyer and RCG: 3.1 Organization, Authority and Capacity. Owner has the full authority and capacity necessary to execute, deliver and perform his or her obligations under the Acquisition Documents to be executed and delivered by Owner. Owner has the legal capacity required for executing, delivering and performing the Acquisition Documents to be executed and delivered by Owner. 3.2 Authorization and Validity. The execution, delivery and performance of the Acquisition Documents to be executed and delivered by Owner have been duly authorized by all necessary action by Owner. If Owner is married and his or her ownership interest constitutes community property, appropriate documentation for consent has been or will be, as the case may be, duly executed and delivered by Owner's spouse. The Acquisition Documents to be executed and delivered by Owner have been or will be, as the case may be, duly executed and delivered by Owner and constitute or will constitute the legal, valid and binding obligations of Owner, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, or other laws affecting creditors' rights generally, or as may be modified by a court of equity. 3.3 Absence of Conflicting Agreements or Required Consents. Except as set forth on Schedule 3.3, the execution, delivery and performance by Owner of the Acquisition Documents to be executed and delivered by Owner (i) do not require the consent of or notice to any governmental or regulatory authority or any other third party; (ii) will not conflict with or result in a violation of any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which Owner is subject or by which Owner is bound; and (iii) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit material to the Acquisition. 3.4 Purchase for Investment, Etc. To the extent the shares of RCG Common Stock are distributed by Sellers to Owners in accordance with a plan of distribution or liquidation, the Owners represent that (a) Such Owner is acquiring the RCG Common Stock for such Owner's own account and not with a view to or for sale in connection with any public distribution thereof within the meaning of the 1933 Act; (b) such Owner (i) has sufficient knowledge and experience in financial and business matters to enable him, her or it to evaluate the merits and risks of an investment in the RCG Common Stock, (ii) has the ability to bear the economic risk of acquiring the RCG Common Stock, (iii) has received and reviewed the RCG Documents identified in Section 4.8 below, and (iv) has had an opportunity to ask questions of and to receive answers from the officers of RCG and to obtain additional information in writing as requested, which has been made available to and examined by such Owner or such Owner's advisors; (c) such Owner (i) acknowledges that the RCG Common Stock has not been registered under any securities laws and cannot be resold without registration thereunder or exemption therefrom, (ii) agrees not to transfer all or any of the RCG Common Stock received by such Owner unless such transfer has been registered or is exempt from registration under applicable securities laws and (iii) acknowledges that the certificate(s) representing the RCG Common Stock shall bear a prominent legend with respect to the restrictions on transfer under applicable securities laws; and - 17 - 21 (d) such Owner has accurately completed the Investor Questionnaire required by RCG contemporaneous with the execution of this Agreement and the statements therein are true and correct. 3.5 Statements True and Correct. No representation or warranty made herein by Owner, nor in any statement, certificate or instrument furnished or to be furnished to Buyer or RCG by Owner pursuant to any Acquisition Document, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein and therein not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER AND RCG Buyer and RCG hereby represent and warrant to the Sellers and the Owners as follows: 4.1 Organization, Authority and Capacity. Buyer is a limited liability company, duly organized, validly existing and in good standing under the laws of the State of Delaware. RCG is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of Buyer and RCG has the full power and authority necessary to (i) execute, deliver and perform its obligations under the Acquisition Documents to be executed and delivered by them, and (ii) carry on its business as it has been and is now being conducted and to own and lease the properties and assets which it now owns or leases. Each of Buyer and RCG is duly qualified to do business and is in good standing in each jurisdiction in which a failure to be so qualified or in good standing would have a material adverse effect on (i) its ability to perform its obligations under the Acquisition Documents to be executed and delivered by it or, (ii) the assets, results of operations or prospects of Buyer or RCG. 4.2 Authorization and Validity. The execution, delivery and performance of the Acquisition Documents to be executed and delivered by Buyer and RCG have been duly authorized by all necessary action by Buyer and RCG. The Acquisition Documents to be executed and delivered by Buyer and RCG have been or will be, as the case may be, duly executed and delivered by Buyer and RCG and constitute or will constitute the legal, valid and binding obligations of Buyer and RCG, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, or other laws affecting creditors' rights generally, or as may be modified by a court of equity. 4.3 Absence of Conflicting Agreements or Required Consents. The execution, delivery and performance by Buyer and RCG of the Acquisition Documents to be executed and delivered by it: (i) do not require the consent of or notice to any governmental or regulatory authority or any other third party; (ii) will not conflict with any provision of Buyer's certificate or articles of organization or operating agreement or RCG's certificate of incorporation or bylaws, respectively; (iii) will not conflict with or result in a violation of any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which Buyer or RCG is a party or by which Buyer or RCG or any of their respective properties is bound; (iv) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit to which Buyer or RCG is a party or by which any of their respective properties is bound; and (v) will not create any lien, encumbrance or restriction upon any of the assets or properties of Buyer or RCG, respectively. 4.4 Governing Documents. True and correct copies of the organizational documents and all amendments thereto of Buyer and RCG (certified by the Secretary of State of the State of Delaware) and copies of the operating agreement of Buyer and bylaws of RCG have been provided to the Sellers and the Owners. - 18 - 22 4.5 Outstanding and Authorized Capitalization. The authorized capital stock of RCG consists of 22,000,000 shares of RCG Common Stock and 10,000,000 shares of $.01 par value Preferred Stock. As of December 31, 1996, RCG had approximately 14,200,000 shares of RCG Common Stock and no shares of Preferred Stock issued and outstanding. All issued and outstanding shares of RCG Common Stock have been duly and validly issued, are fully paid and non-assessable. Except for (i) options to purchase 1,912,993 shares of common stock, and (ii) warrants to purchase 220,000 shares of common stock, there are no outstanding warrants, options, rights, calls or other commitments of any nature relating to shares of capital stock of RCG, no outstanding securities convertible into or exchangeable for shares of capital stock of RCG, and, RCG is not obligated to issue or repurchase any of its shares of capital stock for any reason and no person or entity has any right or privilege (whether preemptive or contractual) for the purchase, subscription or issuance of any unissued shares of capital stock of RCG. Except for rights with respect to 6,888,552 shares outstanding and the 220,000 shares under warrants, there are no outstanding rights to demand registration of any shares of capital stock of RCG or to sell any securities in connection with a registration by RCG under the 1933 Act. No shares of Common Stock are held in RCG's treasury. All RCG Common Stock to be issued in connection with the Acquisition will be duly and validly issued, fully paid and nonassessable, and, based on the representations of the Sellers and the Owners herein and in documents delivered pursuant hereto, will be issued pursuant to a valid exemption from registration under the 1933 Act and all applicable state securities laws. 4.6 Litigation and Claims. There are no claims, lawsuits, actions, arbitrations, administrative or other proceedings, governmental investigations or inquiries pending or threatened against Buyer or RCG which could (i) affect the performance by Buyer or RCG of their respective obligations under the Acquisition Documents, or (ii) materially and adversely affect the condition of Buyer or RCG (financially or otherwise), and, to the knowledge of Buyer and RCG, there is no basis for any such action or any state of facts or occurrence of any event which might give rise to the foregoing. 4.7 Statements True and Correct. No representation or warranty made herein by Buyer or RCG, nor in any statement, certificate or instrument to be furnished to the Sellers or any of the Owners by Buyer or RCG pursuant to any Acquisition Document contains or will contain any untrue statement of material fact or omits or will omit to state a material fact necessary to make these statements contained therein not misleading. 4.8 RCG Documents. RCG has heretofore furnished the following documents to the Sellers: (a) Final Prospectus, dated February 6, 1996, contained in its Registration Statement on Form S-1 (Registration No. 33-80221); (b) Current Report on Form 8-K, dated March 22, 1996 (Commission File No. 0-2764); (c) Press release, dated April 1, 1996; (d) Registration Statement on Form S-8, dated April 22, 1996; (e) Press release, dated April 29, 1996; (f) Current report on Form 8-K/A, dated May 3, 1996; (g) Form 12b-25, dated May 3, 1996; (h) Press release, dated May 6, 1996; (i) Form 12b-25, dated May 13, 1996; - 19 - 23 (j) Form SR, dated May 17, 1996; (k) Form 10-Q, for the quarter ended March 31, 1996, dated May 20, 1996; (l) Form 10-K, dated May 21, 1996; (m) Form 10-K/A, dated June 7, 1996; (n) Press Release, dated July 1, 1996; (o) Press Release, dated July 18, 1996; (p) Press Release, dated August 6, 1996; (q) Press Release dated August 7, 1996; (r) Form 10-Q, for the quarter ended June 30, 1996, dated August 14, 1996; (s) Form 10-K/A dated August 9, 1996; (t) Proxy Statement, dated September 9, 1996; (u) Press Release, dated October 1, 1996; (v) Press Release, dated October 10, 1996; (w) Press Release, dated October 30, 1996; (x) Press Release, dated October 31, 1996; (y) Form 10-Q, for the quarter ended September 30, 1996, dated November 14, 1996; (z) Press Release, dated November 15, 1996 (aa) Current Report on Form 8-K, dated November 15, 1996 (Commission File No. 0-2764); (bb) Final Prospectus, dated November 19, 1996, contained in its Registration Statement on Form S-1 (Registration No. 333-13813); (cc) Press Release, dated November 19, 1996; (dd) Press Release, dated December 2, 1996; and (ee) Press Release, dated December 16, 1996. The foregoing documents together with the exhibits thereto (which will be made available upon written request), are collectively referred to herein as the "RCG Documents." The RCG Documents include accurate and complete copies of each (i) report and registration statement filed with the SEC ("SEC Documents") and (ii) publicly disseminated press release of RCG during the past twelve months ("Press Releases"). As of the time each SEC Document was filed with the SEC, such SEC Document did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein - 20 - 24 or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.9 Absence of Changes. Except as set forth on Schedule 4.9, since September 30, 1996 (the date of last financial statements), neither Buyer nor RCG has suffered any material adverse change in its working capital, condition (financial or otherwise), assets, liabilities, reserves, business or operations. 4.10 No Undisclosed Liabilities. Except as listed on Schedule 4.10, and except for liabilities and obligations reflected in the most recent financial statements of RCG contained in the RCG Documents or incurred in the ordinary course of its business since the date of RCG's most recent balance sheet included in the RCG Documents, neither Buyer nor RCG has any material liabilities or obligations, whether accrued, absolute, contingent or otherwise. 4.11 Compliance with Legal Requirements. To the knowledge of Buyer and RCG, Buyer and RCG are in compliance with all applicable legal requirements, except where the failure to comply with such legal requirements has not had and could not reasonably be expected to have a material adverse effect on Buyer and RCG. Neither Buyer nor RCG has received any notice or any communication from any governmental authority regarding any actual or possible violation of, or failure to comply with, any legal requirement, except where failure to comply with such legal requirement has not had and could not reasonably be expected to have a material adverse effect on Buyer and RCG. ARTICLE 5 ADDITIONAL AGREEMENTS 5.1 Access to Seller Information. At all times prior to the Closing, the Sellers and the Owners will afford the officers and authorized representatives of Buyer and RCG access upon reasonable notice to all of the Sellers' properties, books and records that may relate to or concern the Business and will furnish such parties with such additional financial, operating and other information as to the business and properties of the Sellers as such parties may from time to time reasonably request. Such parties shall also be allowed access, upon reasonable notice, to consult with the officers, employees, accountants, counsel and agents of the Sellers in connection with such investigation of the properties and business of the Sellers. In addition, at all times prior to the Closing, Buyer and RCG will afford to the Sellers and the Owners, and their representatives, access, upon reasonable notice, to all of Buyer's and RCG's and its affiliate's properties, books and records as the Sellers and the Owners may reasonably request. No such investigation shall diminish or otherwise affect any of the representations, warranties, covenants or agreements of any party under this Agreement. At all times following the Closing, the Sellers and the Owners will afford the officers and authorized representatives of Buyer and RCG access upon reasonable notice to all of the Sellers' books and records that are retained by Sellers as part of the Retained Assets as such parties may from time to time reasonably request. 5.2 No-Shop. Unless and until this Agreement is terminated pursuant to Article 8.1 hereof, neither any of the Sellers nor any Owner shall directly or indirectly, through any officer, director, employee, agent, intermediary or otherwise: (i) solicit, initiate or encourage submission of proposals or offers from any person or other entity relating to any purchase of an interest, direct or indirect, in any of the Sellers or the Business; (ii) participate in any discussions or negotiations regarding, or furnish to any other person or other entity, any information with respect to, or otherwise respond to, cooperate or encourage, any effort or attempt by any other person or other entity to purchase any interest in any of the Sellers or the Business (provided that Sellers and Owners may provide information to other parties in the ordinary course of business consistent with past custom and practice, so long as no Seller or Owner has reason to believe that the information may be utilized to evaluate a possible acquisition); (iii) without the prior written consent of RCG, participate in any discussions or negotiations regarding the establishment of any management, medical director or similar agreement, or (iv) approve or undertake any such transaction. The Sellers and - 21 - 25 the Owners shall promptly communicate to RCG the terms of any such oral or written proposal or offer upon knowledge or receipt of such proposal or offer. 5.3 Affirmative Covenants of the Sellers and the Owners. From the date hereof until the earlier of the Closing Date or the termination of this Agreement, unless the prior written consent of RCG shall have been obtained, and except as otherwise expressly contemplated herein, each Seller shall, and the Owners shall cause each Seller to: (i) operate the Business only in the usual, regular, and ordinary course of business, consistent with past practices; (ii) use reasonable commercial efforts to preserve intact its business organization, licenses, permits, government programs, private programs and customers; (iii) use reasonable commercial efforts to retain the services of its employees, agents and consultants on terms and conditions not less favorable than those existing prior to the date hereof and to ensure that there are no material or adverse changes to employee relations; (iv) keep and maintain its assets in their present condition, repair and working order, except for normal depreciation and wear and tear, and maintain its insurance, rights and licenses; (v) pay all accounts payable of the Seller in accordance with past practice and collect all accounts receivable in accordance with past practice, but not less than in accordance with prudent business practices; (vi) confer on a regular and frequent basis with one or more designated representatives of RCG to report material operational matters and to report the general status of ongoing Business operations; (vii) make available to RCG true and correct copies of all internal management and control reports (including aging of accounts receivable, listings of accounts payable, and inventory control reports) and financial statements related to the Business and furnished to management of the Seller; (viii) cause all tax returns that are due and have not been filed prior to the date hereof or which become due prior to the Closing Date, to be prepared and filed on or before the date such tax return is required to be filed (taking into account any extensions of the filing deadlines granted); provided, however, that any such tax return shall not be filed without a reasonable opportunity for prior review and comment by RCG; (ix) as soon as reasonably practicable after they become available, but in no event more than thirty (30) days following the end of each calendar month, deliver to RCG true and complete copies of its monthly financial statements for each calendar month ending subsequent to the date hereof in the format historically utilized by the Seller; (x) perform in all material respects all obligations under agreements relating to or affecting its assets, properties or rights, except for the failure of which performance would not have a material adverse effect on the business of the Sellers taken as a whole, financial or otherwise; (xi) keep in full force and effect present insurance policies or other comparable insurance coverage; and - 22 - 26 (xiii) notify RCG of (i) any event or circumstance which is reasonably likely to have a material adverse effect on the Business or would cause or constitute a breach of any of the Seller's representations, warranties or covenants contained herein; or (ii) any unexpected change in the normal course of business or in the operation of the assets of the Business, and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), adjudicatory proceedings, budget meetings or submissions involving any material property. Each Seller shall keep RCG fully informed of such events and to permit RCG's representatives prompt access to all materials prepared in connection therewith. 5.4 Negative Covenants of the Seller and the Owners. From the date hereof until the earlier of the Closing Date or the termination of this Agreement, no Seller will, and no Owner will cause a Seller to, do any of the following without the prior written consent of RCG: (i) take any action which would (a) adversely affect the ability of any party to the Acquisition Documents to obtain any consents required for the transactions contemplated thereby, or (b) adversely affect the ability of any party hereto to perform its covenants and agreements under the Acquisition Documents; (ii) amend any of its organizational or governing documents, except as provided herein or for the purpose of accomplishing the transactions contemplated by this Agreement; (iii) impose, or suffer the imposition, on any material asset of the Business of any lien or permit any such lien to exist; (iv) other than pursuant to the Acquisition Documents, sell, pledge or encumber, or enter into any contract to sell, pledge or encumber, any interest in the assets of the Business; (vi) purchase or acquire any assets or properties related to the Business, whether real or personal, tangible or intangible, or sell or dispose of any assets or properties, whether real or personal, tangible or intangible, except in the ordinary course of business and consistent with past practices; (vii) grant any increase in compensation or benefits to the employees or officers of the Seller, except in accordance with past practice; pay any severance or termination pay or any bonus other than pursuant to written policies or written contracts in effect as of the date hereof and disclosed on the Schedules hereto; enter into or amend any severance agreements with officers of the Seller; or grant any material increase in fees or other increases in compensation or other benefits to directors of the Seller except in accordance with past practice; (viii) enter into or amend any employment contract between the Seller and any person or entity (unless such amendment is required by law) that the Seller does not have the unconditional right to terminate without liability (other than liability for services already rendered), at any time on or after the Closing Date; (ix) adopt any new employee benefit plan or make any material change in or to any existing employee benefit plans other than any such change that is required by law or that, in the opinion of counsel, is necessary or advisable to maintain the tax qualified status of any such plan; (x) make any significant change in any tax or accounting methods or systems of internal accounting controls, except as may be appropriate to conform to changes in tax laws or regulatory accounting requirements or GAAP; (xi) commence any litigation other than in accordance with past practice, settle any litigation involving any liability of the Business for material money damages or restrictions upon the operations of the Business; - 23 - 27 (xii) except in the ordinary course of business and which is not material, modify, amend or terminate any material contract or waive, release, compromise or assign any material rights or claims; (xiii) except in the ordinary course of business and, even if in the ordinary course of business, then not in an amount to exceed $50,000 in the aggregate, make or commit to make any capital expenditure, or enter into any lease of capital equipment as lessee or lessor, related to the Business; (xiv) take any action, or omit to take any action, which would cause any of the representations and warranties contained in Article 2 to be untrue or incorrect; or (xv) make any loan to any person or increase the aggregate amount of any loan currently outstanding to any person. 5.5 Affirmative Covenants of Buyer and RCG. From the date hereof until the earlier of the Closing Date or the termination of this Agreement, Buyer and RCG covenant and agree that, unless the prior written consent of Sellers shall have been obtained, and except as expressly contemplated herein, Buyer and RCG shall (i) as soon as reasonably practicable after they become available, deliver to Sellers true and complete copies of its monthly financial statements for each calendar month ending subsequent to the date hereof, in the format historically utilized by RCG; (ii) perform in all material respects all obligations under agreements relating to or affecting its assets, property or rights, except for the failure of which performance would not have a material adverse effect on the business of Buyer and RCG, financial or otherwise; and (iii) notify Sellers of (i) any event or circumstance which is reasonably likely to have a material adverse effect on Buyer and RCG or would cause or constitute a breach of any of Buyer's or RCG's representations, warranties or covenants contained herein; or (ii) any unexpected change in the normal course of business or in the operation of Buyer's or RCG's assets, and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), adjudicatory proceedings, budget meetings or submissions involving any material property. Buyer and RCG agree to keep Sellers fully informed of such events and to permit Sellers' representatives prompt access to all materials prepared in connection therewith. 5.6 Negative Covenants of Buyer and RCG. From the date hereof until the earlier of the Closing Date or the termination of this Agreement, each of Buyer and RCG covenants and agrees that it will not take any action that would (a) adversely affect the ability of any party to the Acquisition Documents to obtain any consents required for the transactions contemplated thereby, or (b) adversely affect the ability of any party hereto to perform its covenants and agreements under the Acquisition Documents. 5.7 Confidentiality, Public Announcements. Each party hereto agrees (i) not to disclose any aspect of the discussions, negotiations, terms, status or conditions relating to the transactions contemplated herein to any third party other than their respective officers, directors, authorized employees and authorized representatives and then only on a need to know basis and shall cause and require all such persons to who such information is disclosed to abide by the provisions of this Section 5.7, and (ii) not to issue any press release or other general public announcement (including in any trade journal or other publication) of the transactions, in either case, without the prior written consent of each of the parties hereto, except to the extent that disclosure may be required by law, in which case the party required to made such disclosure will give the other party prior written notice, and except that Sellers and Owners acknowledge that RCG shall issue a press release promptly upon the execution of this Agreement. - 24 - 28 5.8 Confidentiality, Noncompetition and Nonsolicitation. (a) Each Seller and Physician Owner agrees that, for a period of ten (10) years after the Closing Date, such party will not in any manner, directly or indirectly, by itself, himself or herself or in conjunction with any other person, conduct activities that are competitive with the business of RCG or acquire, establish or own any financial, beneficial or other interest in (other than an interest consisting of less than one percent (1%) of a class of publicly traded security), make any loan to or for the benefit of, or render any managerial, marketing or other business advice, to any entity that is then conducting activities that are competitive with the business of RCG, in either case within a geographic territory defined as the counties listed on Exhibit 5.8 hereto and the territory within a fifty (50) mile radius around any of the Centers (the "Territory"). For purposes of this Section 5.8, the "business of RCG" shall mean owning or operating a renal dialysis center, unit or facility or providing renal dialysis supplies or services to any other center, unit or facility or any acute care facility or any home renal dialysis patient, including the provision of pharmaceuticals or laboratory services related to renal dialysis. (b) Each Hospital Owner agrees that, for a period of ten (10) years after the Closing Date, neither it nor any of its affiliates will in any manner, directly or indirectly, by itself, or in conjunction with any other person, conduct activities that are competitive with the business of RCG or acquire, establish or own any financial, beneficial or other interest in (other than an interest consisting of less than one percent (1%) of a class of publicly traded security), make any loan to or for the benefit of, or render any managerial, marketing or other business advice, to any entity that is then conducting activities that are competitive with the business of RCG, in either case within the Territory, provided, however, that each Hospital Owner may (i) subject to Section 5.24 hereof, provide acute care dialysis services to inpatients of its hospital, and (ii) any Hospital Owner may acquire (by merger or otherwise) another hospital that may be engaged in the business of RCG within the Territory, provided that (A) a primary purpose of such acquisition is not to reenter such business within the Territory, (B) for so long as such business is owned by such Hospital Owner or any of its affiliates, the resources (financial or otherwise) dedicated to the conduct of such business shall not be substantially increased and (C) the Hospital Owner shall notify RCG of any such acquisition and shall, if it determines to sell such business substantially as a discreet operation to any unaffiliated party, give RCG at least sixty (60) days notice thereof prior to accepting any offer for such business, during which time it will provide RCG a first right of refusal to purchase said business on the same or substantially similar terms and conditions as contained in the offer from the unaffiliated party. (c) Each Seller and Owner further agrees that, for a period of ten (10) years after the Closing Date, such Seller and Owner will keep confidential and not directly or indirectly divulge to anyone or use or otherwise appropriate for his or its own benefit or for the benefit of others, any knowledge or information of a confidential nature with respect to the business of the Sellers, RCG, or any of their affiliates, including all trade secrets, pricing information, marketing information or technical information (hereinafter referred to as the "Confidential Data"), except for (i) a disclosure that is required by law; or (ii) information that has been made generally available to the public by the act of one who has the right to disclose such information. Each Seller and Owner hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies which RCG may have available pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of confidential information, and the enforcement by RCG of its rights and remedies pursuant hereto shall not be construed as a waiver of any other rights or available remedies which RCG may possess in law or equity. Each Seller and Owner acknowledges that RCG has taken reasonable and appropriate steps to ensure the confidentiality and non-disclosure of all such Confidential Data. (d) Each Seller and Owner also agrees that, for a period of ten (10) years after the Closing Date, such Seller or Owner will not, for his or her own benefit or the benefit of others, solicit any person or entity that has had, or disrupt or attempt to disrupt, any relationship, contractual or otherwise (including with any patient, payor, physician, provider, managed care organization or supplier), with RCG or any of its affiliates (including the Sellers, prior to the closing), for the purpose of assisting, or creating such a relationship for, any business entity that is conducting activities competitive with the business of the Sellers within the Territory. - 25 - 29 (e) Each Seller and Owner further agrees that, for a period of ten (10) years after the Closing Date, such Seller or Owner shall not induce, nor attempt to induce, any employee of RCG, or any of its affiliates, to terminate his or her association with any such party. (f) The covenants contained in this Section 5.8 are considered by the parties hereto to be fair, reasonable and necessary for the protection of RCG and the Business. The parties mutually agree that if a violation of any covenant contained in this Section 5.8 occurs, such violation or threatened violation will cause irreparable injury to RCG and the remedy at law for any such violation or threatened violation will be inadequate. Each Seller and Owner therefore agrees that RCG shall be entitled to appropriate equitable relief, including but not limited to a temporary restraining order or a preliminary injunction, in addition to any other remedy that might be available at law or in equity. (g) Nothing in this Section 5.8 shall be deemed to prohibit any Owner who is a physician from exercising his or her medical judgment concerning the treatment of his or her patient in any manner whatsoever in any location whatsoever, and shall not be deemed to require the referral of any such patient to any facility of RCG or any of its affiliates. (h) The covenants contained in paragraphs (a) and (b) of this Section 5.8 shall terminate in the event that none of the Centers or any other dialysis unit, facility or center shall continue to be operated within the Territory by RCG or any of its affiliates or any of its or their successors or permitted assigns. 5.9 Medical Director Agreement. The parties hereto agree that the Practice, its physician shareholders and employees who are nephrologists, and any other nephrologists having an equity or other ownership interest in the Centers, shall enter into a Medical Director Agreement at Closing under which they shall provide medical director services to the Centers. Such Medical Director Agreement shall be substantially in the form of Exhibit 5.9 and shall have an initial term of ten (10) years with two renewal terms for additional five year periods and shall provide for (i) an aggregate annual fee to be paid by Buyer to the Practice of $550,000 (subject to agreed upon modifications) to be divided among the Practice at the Practice's discretion, (ii) certain restrictive covenants, including but not limited to a covenant not to compete with a duration of the term of the Medical Director Agreement and three (3) years after termination of the Medical Director Agreement, and (iii) other customary terms and conditions. 5.10 Right of First Refusal; Management of Practice. (a) The Physician Owners recognize the opportunities to provide care for End Stage Renal Disease in an integrated manner and agree to work in good faith with RCG to pursue opportunities for RCG and its affiliates to offer the full range of dialysis services, including physician and transplant services, to payors, health maintenance and other managed care organizations. Furthermore, the Physician Owners agree to work in good faith with RCG or any of its affiliates for the provision of medical director services for dialysis treatment and for the provision of nephrology physician services at the Centers after the Closing. The Owners and the Practice hereby agree that for a period of five years from the Closing Date, the Practice will allow RCG to have a right of first refusal with respect to any proposed contract or other arrangement with a third party for the sale or management of the Practice on the same terms and conditions as proposed by such third party, provided that any shareholders of Practice that are not nephrologists may opt out of such sale or management by separating their practice from the Practice. RCG or any of its affiliates may accept the offer by giving written notice of such acceptance at any time within 20 days following receipt of written notice of the offer. No activities of any Physician Owner under this Section 5.10 shall be deemed a violation of Section 5.8 hereof. (b) The Practice, Buyer and RCG acknowledge and agree that certain personnel of the Practice may become employed by Buyer or RCG (the "Practice Personnel"). Buyer and RCG agree to work in good faith with the Practice to make available the services of the Practice Personnel to perform - 26 - 30 substantially the same functions for the Practice as have been performed by such persons for the Practice prior to the Closing Date and the Practice agrees to reimburse Buyer or RCG its for their reasonable direct and indirect costs and expenses associated therewith. The Practice, Buyer and RCG acknowledge and agree that certain equipment used by the Centers is owned by the Practice as listed on Schedule 5.10 hereto (the "Leased Equipment"). For so long as requested by Buyer, the Practice agrees to continue to make available to Buyer the use of such equipment on the same terms and conditions that such Leased Equipment has been made available by the Practice to the Centers prior to the date hereof. In addition, the Practice leases certain administrative office space located at 10585 North Meridian Street that, for so long as requested by Buyer, it agrees to sublease to Buyer on the same terms and conditions that such property has been leased by the Practice prior to the date hereof. The Practice, Buyer and RCG agree to negotiate in good faith to formalize and enter into an agreement under which Buyer or RCG will provide traditional physician practice management services and Practice will lease to Buyer or RCG the Leased Equipment and the office space, for a term and for a fee as may be negotiated between the parties in good faith prior to Closing. 5.11 Delivery of Schedules. As soon as reasonably practical following the execution hereof but not later than five days following the execution hereof, the Sellers and the Owners shall deliver all Schedules to be delivered by them to RCG and its counsel that have not previously been delivered, if any, accompanied by a certificate, executed by the Sellers and the Owners stating that all Schedules required to be delivered by them hereunder have been delivered. The Sellers and the Owners understand and acknowledge that RCG's obligation to consummate the Closing is subject to its satisfactory review of said Schedules as contemplated by Section 6.6 hereof. 5.12 Availability of Rule 144 Information. For so long as RCG is subject to the 1934 Act, RCG shall take all actions necessary to enable the Sellers and Owners to sell any shares of RCG Stock received by them without registration under the 1933 Act within the limitations of the exemption provided by Rule 144 under the 1933 Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission, including filing on a timely basis all reports required to be filed by the 1934 Act. 5.13 Approval of Transactions. Subject to Article 8 hereof, each Owner that constitutes an "accredited investor" under the Securities Act of 1933, as amended, through the execution and delivery of this Agreement, irrevocably votes for and approves the Acquisition in its capacity as partner or member of each Seller and each such Owner does hereby waive any required notice for any meeting concerning such matters. Subject to Article 8 hereof, at any further meeting of the Sellers of the Owners called to vote on the Acquisition or in any other circumstances upon which a vote, consent or other approval with respect to the Acquisition is sought, such Owner shall vote (or cause to be voted) in favor of the Acquisition and the execution, delivery and performance by the Sellers of the Acquisition Documents. Each Owner acknowledges and agrees that he, she or it has had adequate opportunity to review the terms and conditions of the Acquisition and to seek independent legal, tax and financial advice. 5.14 Grant of Options. Subject to Section 6.12, RCG shall grant options to purchase an aggregate of 90,000 shares of RCG Common Stock to certain employees and management of Sellers at the Closing as set forth on Schedule 5.14 attached hereto and physicians who later join the Practice. Such options shall (i) to the extent possible be granted under RCG's 1996 Stock Option Plan, (ii) be non-qualified stock options for tax purposes, (iii) be allocated among the employees or consultants of the Sellers in a manner mutually agreed by RCG and the Board of Directors of the Practice prior to the Closing, (iv) vest over a five-year period, and (v) have exercise prices equal to the closing price of the RCG Common Stock on the Nasdaq National Market on the date of grant. The additional terms of said options shall be commensurate with similar stock options granted generally by RCG to similarly situated employees and affiliates of RCG. 5.15 Bulk Sales Act. The parties hereby waive compliance with the Indiana Bulk Sales Act, to the extent that it may be applicable to the transactions contemplated hereby. Sellers and the Owners shall indemnify Buyer and RCG with respect to such waiver as a Retained Liability as provided in Section 9.1. - 27 - 31 5.16 Retained Liabilities. Owners covenant and agree to cause Sellers to pay and Sellers agree to pay all Retained Liabilities, as and when due. Sellers and Owners further covenant and agree that they will not take or fail to take any action which is likely to affect RCG's relationship with any of its suppliers or representatives between the date hereof and the Closing Date, and following the Closing. 5.17 Use of Names; License Agreement. On the Closing Date, Sellers shall cease to use the names listed on Schedule 1.1(f) or any derivation thereof or other name confusingly similar thereto for any commercial or other public purpose without the prior written consent of Buyer. On the Closing Date, St. Vincent Dialysis Center and Saint Joseph Dialysis Center shall enter into a License Agreement with Buyer in form and substance satisfactory to Buyer providing for the royalty-free licensure of those names of the Centers which include the name of such Hospital Owners. 5.18 Conditions to Closing. The Owners, the Sellers, Buyer and RCG agree to use their commercially reasonable efforts to satisfy the closing conditions set forth in Articles 6 and 7 of this Agreement by March 15, 1997, and if not by such time, as soon thereafter as possible. Owners and Sellers agree, on or prior to the Closing Date, to execute those documents listed in Article 6 hereof to which they are a party. Buyer and RCG agree, on or prior to the Closing Date, to execute those documents listed in Article 7 hereof to which they are a party. 5.19 Risk of Loss. Sellers and Owners shall maintain all risk of condemnation, destruction, loss or damage due to fire or other casualty from the date of this Agreement until the Closing. If the condemnation, destruction, loss or damage is such that the operation of the Business is materially interrupted or curtailed or the Rights and Assets of Sellers are materially affected, then Buyer and RCG shall have the right to terminate this Agreement. If Buyer and RCG nonetheless elect to close, Sellers and Owners shall remit all net condemnation proceeds or third party insurance proceeds to Buyer and the purchase price shall be adjusted at Closing to reflect such condemnation, destruction, loss or damage to the extent that insurance or condemnation proceeds are not sufficient to cover such destruction, loss or damage. 5.20 Certain Tax Matters. (a) Each Seller shall file all Tax Returns required to be filed by it on or before the Closing Date. (b) Buyer and RCG, on the one hand, and Sellers and Owners, on the other hand, shall provide the other parties to this Agreement, at the expense of the requesting party, with such assistance as may reasonably be requested by any of them in connection with the preparation of any Tax Return, any audit or other examination by any Regulatory Authority, or any judicial or administrative proceedings relating to Liability for Taxes, and each will retain and provide the requesting party with any records or information that may be relevant to any of the foregoing. 5.21 Title Search; Discharge of Liens. As soon as practicable after the date hereof, Sellers and Owners shall (i) each use commercially reasonable efforts to ascertain all Liens, if any, to which any of the Rights and Assets is subject, (ii) notify Buyer in writing of the nature and extent thereof, and (iii) discharge all such Liens. Without limiting the generality of the foregoing, Sellers and Owners shall provide to Buyer Uniform Commercial Code searches (conducted as soon as possible after the date hereof of filings made pursuant to Article 9 thereof in all jurisdictions where Seller has any Rights and Assets. 5.22 Agreement with Hospital Owners Concerning Certain Managed Care Arrangements. (a) Fee for Service Contracts. (i) With respect to any contract to which a Hospital Owner or any managed care network entity of which the Hospital Owner is a member, owner, sponsor or with which the Hospital Owner is affiliated (a "Hospital Party") is a party with any payor, health insurance company, health maintenance or managed care organization or employer (a "Managed Care Contract") between the Closing Date and the - 28 - 32 third anniversary thereof (the "Covered Period") under which the Hospital Party has or will agree to provide outpatient dialysis services to patients suffering from end stage renal disease ("ESRD") on either a fee for service basis or discounted fee for services basis, (A) the Hospital Party shall, during the Covered Period, engage Buyer (subject to Buyer or its applicable facilities meeting applicable credentialing requirements) to provide such services to the patients of such Hospital Party, and (B) if so engaged, Buyer shall provide such services to the patients of such Hospital Party during the Covered Period for a fee for such services equal to 90% of the list charges of the Centers as of January 1, 1997, a schedule of which is attached hereto as Schedule 5.22(a). (ii) The foregoing rates shall be increased or decreased at the end of each calendar year during the Covered Period by the same percentage increase or decrease in the consumer price index for all urban consumers, in the Indianapolis metropolitan area (as published by the United States Department of Labor), occurring during the preceding calendar year. Neither the Buyer (or its affiliates) nor any Hospital Party shall have any obligation under the foregoing agreements contained in this Section 5.22(a) after the end of the Covered Period notwithstanding any remaining term under any Managed Care Contract to which a Hospital Party may be a party. (b) Risk-Based Contracts. (i) With respect to any Managed Care Contract to which a Hospital Party is a party during the Covered Period which includes the Hospital Party's agreement to provide "ESRD Care" (as defined below) to patients of the Hospital Party on a capitated or at-risk basis, (A) the Hospital Party shall, during the Covered Period, engage Buyer (subject to Buyer or its applicable facilities meeting applicable credentialing requirements) to provide such ESRD Care, and (B) if so engaged, Buyer shall, during the Covered Period, provide such ESRD Care on a case rate basis to those patients covered by any such Managed Care Contract who are actually diagnosed with ESRD, with a case rate for such ESRD Care as may be agreed upon between Buyer and the Hospital Party or, failing such agreement within 30 days after the effective date of any such Managed Care Contract, at a case rate applicable to such services as determined by an independent actuary mutually agreeable to each such party by using such actuary's expected cost of ESRD Care, on a per case basis, for the persons entitled to benefits under the Managed Care Contract. (ii) With respect to any ESRD Care actually provided by Buyer under the foregoing provisions, Buyer agrees to engage the Hospital Owner affiliated with the contracting Hospital Party for the provision of hospital in-patient services within the scope of such ESRD Case, provided that the Hospital Party's charges for such services and standard of care are competitive within the market area. (iii) "ESRD Care" shall mean all of the typical medical services, including professional services, provided to patients suffering from ESRD and related co-morbid or causatory conditions or complications, but shall not include services as a result of accidents or other diagnoses outside of co-morbid or causatory conditions or complications, such as cancer, and shall not include hospitalization or other costs unrelated to ESRD. (iv) Within 30 days after the end of any calendar year during the Covered Period, either the Hospital Party or the Buyer may request that the case rate applicable to the services described above be reset by an independent actuary mutually agreeable to each such party, the determination of which shall result in a new case rate applicable for the duration of the remaining Covered Period, unless either party shall again request a change at the end of any calendar year falling within the Covered Period. Neither the Buyer nor any of its affiliates nor any Hospital Party shall have any obligation under the foregoing agreements contained in this Section 5.22(b) after the end of the Covered Period notwithstanding any remaining term under any Managed Care Contract to which a Hospital Party may be a party. With respect to any Managed Care Contract described in this Section 5.22(b) that is in effect as of the Closing Date, the Hospital Party and Buyer will implement the agreements in this Section 5.22(b) within 180 days following the Closing Date. - 29 - 33 (c) The Physician Owners recognize the opportunities to provide care under Managed Care Contracts on a collaborative basis with Buyer and agree to work in good faith with Buyer, and to cause the Practice to work in good faith with Buyer, to provide physician services that may be included under the requirement to provide ESRD Care under any of the Managed Care Contracts. This collaboration likely may include the development of a joint venture MSO capable of assuming full risk ESRD services. 5.23 Development of Certain New Facilities. In the event that the Practice notifies RCG in writing of an opportunity to develop a new facility within the State of Indiana and provides therewith a written analysis supporting the profitability of such new center (including an analysis of whether any patients are expected to be drawn from any other center then owned by RCG or one of its affiliates), and RCG or one of its affiliates fails to commit to develop such new facility within 30 days of such written notice, then, if such new facility is outside of a 10-mile radius of, and is projected by such written analysis to draw no more than 10% of the patients from, any then existing facility of RCG or any of its affiliates, then the Practice shall have the right to pursue the development of such facility notwithstanding the covenants contained in Section 5.8(a) hereof or in Article VII of the Medical Director Agreement, provided that the Practice shall offer to RCG or any of its affiliates the right to invest 60% of the development capital for such facility at the time of the opening of such facility for a 60% interest in and the right to control the operations of such facility. Furthermore, whether or not such investment by RCG is exercised, RCG or any of its affiliates shall have the right to manage the operations of such new facility for a fair market value management fee. In addition, for any new facility in which RCG does not invest pursuant to the previous provisions of this Section 5.23, RCG shall have the option, exercisable for a period of two years following the date such facility commences operations, to acquire a 60% interest in and the right to control the operations of such facility for a purchase price equal to (i) 60% of the book value of such facility; plus (ii) if the option is exercised in its first year, 20% of the amount determined in clause (i); plus (iii) if the option is exercised in its second year, an additional 1.67% of the amount in clause (i) for each full month that passes between the date of commencement of the second year of the option and the date such option is exercised. 5.24 Acute Care Services. Hospital Owners, other than Community Hospital of Indiana, Inc. ("CHI"), agree, effective upon the Closing, to engage Buyer to provide acute care dialysis services to inpatients of such Hospital Owners on a basis consistent with past practices with the Centers, but for a period of no less than three (3) years from the date hereof and with the pricing and other terms contained in the acute care contracts to which such Hospital Parties are a party listed in Schedule 1.1(d). In addition, Hospital Owners, other than CHI, hereby grant RCG a first right of refusal to continue to provide such services to such Hospital Owners after the expiration of the initial 3-year term and CHI hereby grants RCG a first right of refusal to provide such services at such time as it elects to obtain acute care dialysis services for its inpatients from an outside source. 5.25 Collection of Accounts Receivable. For a period of one (1) year following the Closing Date, Buyer shall use its reasonable best efforts to collect the accounts receivable of the Sellers arising from services rendered prior to the Effective Date. Buyer shall promptly transfer or deliver to the appropriate Seller any cash or other property that Buyer may receive in payment of such accounts receivable, provided that Buyer shall have a right of offset for any amounts due to Buyer from Sellers or the Owners hereunder. ARTICLE 6 CONDITIONS TO OBLIGATIONS OF BUYER AND RCG The obligation of Buyer and RCG to consummate the Acquisition is subject to the satisfaction or waiver, at or prior to Closing, of each of the following conditions: 6.1 Representations and Warranties. The representations and warranties of the Sellers and the Owners set forth in this Agreement, or any document or instrument delivered to Buyer or RCG hereunder, shall be true and correct as of the Closing Date with the same force and effect as if such - 30 - 34 representations and warranties had been made at and as of the Closing Date, except with respect to any of such representations and warranties referring to a state of facts existing on a specified date prior to the Closing Date, it shall be sufficient if at the Closing Date such representation and warranty continues to describe accurately the state of facts existing on the date so specified. 6.2 Performance; Covenants. All of the terms, covenants and conditions of the Acquisition Documents to be complied with or performed by the Sellers or the Owners at or prior to Closing shall have been complied with and performed in all material respects including, but not limited to, the delivery of the following documents: (a) A certificate of existence regarding the Sellers which are not general partnerships, certified by the Secretary of State of its state of organization dated within ten (10) business days of the Closing; (b) An Assignment and Bill of Sale in substantially the form of Exhibit 6.2(b) hereof; (c) An Assumption Agreement in substantially the form of Exhibit 6.2(c) hereof; (d) A certificate dated as of the Closing Date signed by the duly authorized officers of the Sellers and by the Owners certifying the satisfaction of the condition in Section 6.1 and that the Sellers and each of the Owners have fulfilled all of the conditions of this Article 6; (e) Written consents of all third parties necessary for the consummation of the transactions contemplated by the Acquisition Documents; (f) Resolutions of the Sellers (board and shareholder or partner) in form and substance reasonably satisfactory to Buyer and RCG approving the execution, delivery and performance of this Agreement and the consummation of the Acquisition, certified by an appropriate officer of each Seller; (g) Incumbency certificates certifying the identity of the officers of the Sellers; (h) The Medical Director Agreement entered into by the Practice as described in Section 5.9; (i) Employment Agreement with David Holst in form and substance satisfactory to Buyer; (j) Estoppel Certificates or status letters from each landlord of leased real property related to the Business dated no more than ten (10) days prior to the Closing Date, which estoppel certificate or status letter certifies (1) the lease being valid and in full force and effect, (2) there being no other agreements between Seller and such landlord with respect to the leased real property, (3) the rents and charges payable by Seller under such lease and the date to which they have been paid, (4) whether there are, to the knowledge of said landlord, any defaults thereunder, and if so, specifying the nature thereof, and (5) the existence of any Lien, prior interests or superior interests of any nature that currently do, or potentially could, terminate or otherwise adversely affect such leased real property or any of Seller's right or interest therein; (k) The License Agreement referred to in Section 5.17 in form and substance satisfactory to Buyer; and (l) All books and records of the Sellers pertaining to the Business, including all corporate and other records, books of accounts, contracts, agreements and such other documents or certificates as shall be reasonably requested by Buyer and RCG (except minute books and stock records). - 31 - 35 6.3 [Intentionally left blank]. 6.4 Necessary Consents and Approvals. Buyer, RCG, the Sellers and the Owners shall have obtained all licenses, consents and permits, provided all notices, and all waiting periods required by Law shall have expired, necessary in order for Buyer, RCG and the Sellers to consummate the Acquisition and for the continued operation of the Business after the Closing Date consistent with its operation prior to the Closing Date, including all consents and approvals listed on the Schedules hereto. 6.5 No Material Adverse Change. There shall not have occurred any material adverse change in the business, assets, liabilities or condition, financial or otherwise, of the Sellers, between the date hereof and the Closing Date, and a certificate shall have been delivered to Buyer to such effect signed by each of the executive officers of the Sellers as Buyer may request. 6.6 No Injunction, Etc. No action, proceeding, investigation or legislation shall have been instituted, threatened or proposed before any court, governmental agency, or legislative body to enjoin, restrain, prohibit or obtain substantial damages in respect of, or which is related to, arises out of, this Agreement or the consummation of the Acquisitions, or which is related to or arises out of the business or operations of the Sellers, if such action, proceeding, investigation or legislation, in the reasonable judgment of Buyer, RCG or their counsel, would make it inadvisable to consummate such transactions. 6.7 Satisfactory Due Diligence. Buyer shall in all respects be reasonably satisfied with the results of its due diligence investigation of the Sellers, including its continuing review of matters contained or not contained in the Schedules. 6.8 SEC and Exchange Approval. Buyer and RCG shall have taken all actions and complied in all material respects with requirements necessary to notify and obtain any consents from the SEC, Nasdaq and any state securities law regulatory agency of all actions contemplated by this Agreement. 6.9 Legal Opinion. Buyer shall have received an opinion of counsel to the Sellers, Owners and the Practice substantially in the form attached as Exhibit 6.9. 6.10 Approval of RCG Board of Directors. This Agreement and the Acquisition shall have been approved by the Board of Directors of RCG. 6.11 Approval of Allocation. Buyer shall have approved the allocation and distribution of the Consideration among the Sellers as set forth on Schedule 1.2 hereof. 6.12 Covenants Not to Compete. Buyer shall have received Covenants Not to Compete from those nephrologists affiliated with the Practice who are not parties to this Agreement pursuant to which such nephrologists agree not to compete with Buyer for a period of five (5) years on the same terms as Section 5.8 hereof. ARTICLE 7 CONDITIONS TO OBLIGATIONS OF THE SELLERS AND THE OWNERS The obligations of the Sellers and the Owners to close the Acquisition are subject to the satisfaction or waiver, at or prior to Closing, of each of the following conditions: 7.1 Representations and Warranties. The representations and warranties of Buyer and RCG set forth in this Agreement, or any document or instrument delivered to any party hereunder, shall be true and correct as of the Closing Date with the same force and effect as if such representations and warranties had been made at and as of the Closing Date, except with respect to any of such representations and - 32 - 36 warranties referring to a state of facts existing at a specified date prior to the Closing Date, it shall be sufficient if at the Closing Date such representation and warranty continues to describe accurately the state of facts existing on the date so specified. 7.2 Performance; Covenants. All of the terms, covenants and conditions of this Agreement to be complied with or performed by Buyer and RCG at or prior to the Closing shall have been complied with and performed in all material respects, including, but not limited to delivery of the following documents: (a) An Assumption Agreement in substantially the form of Exhibit 6.2(c) hereof; (b) A certificate dated as of the Closing Date signed by a duly authorized officer of Buyer and RCG certifying the satisfaction of the condition in Section 7.1 and that Buyer and RCG have fulfilled all of the conditions of this Article 7; (c) Resolutions adopted by the Members of Buyer and the Board of Directors of RCG in form and substance satisfactory to the Sellers and the Owners approving the execution, delivery and performance of this Agreement and the consummation of the Acquisitions, certified by Buyer and the Secretary of RCG; (d) The Medical Director Agreement entered into by RCG as described in Section 5.9; (e) An incumbency certificate certifying the identity of the officers of RCG; and (f) A Registration Rights Agreement in substantially the form of Exhibit 7.2(f) hereto signed by RCG. 7.3 Necessary Consents and Approvals. Buyer, RCG, the Sellers and the Owners shall have obtained all licenses, consents and permits, provided all notices, and all waiting periods required by Law shall have expired, necessary in order for Buyer, RCG and the Sellers to consummate the Acquisitions and for the continued operation of the business of the Seller after the Closing Date consistent with their operation prior to the Closing Date, including all consents and approvals listed on the Schedules hereto. 7.4 No Material Adverse Change. There shall not have occurred any material adverse change in the business, assets, liabilities or condition, financial or otherwise, of Buyer or RCG between the date hereof and the Closing Date, and a certificate shall have been delivered to the Sellers and the Owners to such effect signed by an authorized officer of Buyer and RCG. 7.5 No Injunction, Etc. No action, proceeding, investigation or legislation shall have been instituted, threatened or proposed before any court, governmental agency, or legislative body to enjoin, restrain, prohibit or obtain substantial damages in respect of, or which is related to, arises out of, this Agreement or the consummation of the Acquisitions, or which is related to or arises out of the business or operations of Buyer or RCG, if such action, proceeding, investigation or legislation, in the reasonable judgment of the Sellers or their counsel, would make it inadvisable to consummate such transactions. 7.6 Legal Opinion. The Sellers shall have received an opinion of counsel to Buyer and RCG substantially in the form attached as Exhibit 7.6. 7.7 SEC and Exchange Approval. Buyer and RCG shall have taken all actions and complied in all material respects with requirements necessary to notify and obtain any consents from the SEC, Nasdaq and any state securities law regulatory agency of all actions contemplated by this Agreement. 7.8 Satisfactory Due Diligence. The Owners shall in all respects be satisfied with the results of the due diligence investigation of Buyer and RCG. - 33 - 37 7.9 Approval of Certain Physician Owners. This Agreement and the Acquisition shall have been approved at a duly called meeting of the shareholders or partners of each of the Sellers and Owners. ARTICLE 8 TERMINATION 8.1 Right of Termination. This Agreement and the Acquisition may be terminated at any time prior to the Closing Date: (a) By the mutual written consent of Buyer, RCG and each Seller. (b) By Buyer in the event that the conditions set forth in Article 6 of this Agreement shall not have been satisfied or waived by April 30, 1997, unless such satisfaction shall have been frustrated or made impossible by any act or failure to act of Buyer or RCG. (d) By the Sellers in the event that the conditions set forth in Article 7 of this Agreement shall not have been satisfied or waived by April 30, 1997, unless such satisfaction shall have been frustrated or made impossible by any act or failure to act of any Seller or Owner. (e) By the Sellers or Buyer if the Closing shall not have occurred by May 31, 1997. (f) By Buyer in accordance with Section 5.19 hereof. 8.2 Effect of Termination. In the event of termination in accordance with Section 8.1, this Agreement shall become void and of no further force or effect, without any liability on the part of any of the parties hereto or their respective owners, directors, officers or employees, except the obligations of each party to preserve the confidentiality of documents, certificates and information furnished to such party pursuant thereto and for any obligation or liability of any party based on or arising from any breach or default by such party with respect to its representations, warranties, covenants or agreements contained in the Acquisition Documents. ARTICLE 9 INDEMNIFICATION 9.1 Indemnification by Sellers and Owners. (a) Subject to Sections 9.3 through 9.5, each Owner shall, severally and not jointly, indemnify and hold harmless Buyer, RCG and their respective officers, directors, agents or affiliates, from and against any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), liabilities, costs and expenses, including but not limited to reasonable attorneys' fees ("Losses"), suffered or incurred by any such party by reason of or arising out of any of the following: (i) the breach by Owner or any entity in which Owner has an ownership interest of any representation or warranty contained in Article 3 hereof or in any Acquisition Document or any document or instrument delivered by such Owner in connection therewith; and (ii) the non-fulfillment by Owner or any entity in which Owner has an ownership interest of any covenant or agreement of such Owner contained in the Acquisition Documents or any document or instrument delivered by such Owner in connection therewith. - 34 - 38 (b) Subject to Sections 9.3 through 9.5, the Sellers and Owners shall jointly and severally indemnify and hold harmless Buyer, RCG and their respective officers, directors, agents or affiliates, from and against any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), liabilities, costs and expenses, including but not limited to reasonable attorneys' fees ("Losses"), suffered or incurred by any such party by reason of or arising out of any of the following: (i) the Retained Liabilities and the Retained Assets; (ii) the excess of the Current Liabilities over the Liability Limit as set forth in Section 1.2(c); (iii) the breach of any representation or warranty contained in Article 2 hereof or in any Acquisition Document or any document or instrument delivered by a Seller in connection therewith; and (iv) the non-fulfillment of any covenant or agreement of a Seller contained in the Acquisition Documents or any document or instrument delivered by a Seller in connection therewith. (c) No claim for indemnification with respect to any alleged misrepresentation or breach of warranty may be made after three (3) years following the Closing Date; provided, however, that the right to indemnification shall extend beyond such period (i) with respect to any specific claim for indemnification for which written notice was given to the Sellers or Owners during such period but shall expire on the expiration of the applicable statutes of limitations unless an action has been brought with respect thereto, (ii) with respect to any claim brought for a misrepresentation or breach of Section 2.17 of this Agreement (a "Tax Claim"), until the liability to which any such claim may relate is barred by all applicable statutes of limitations, and (iii) with respect to any claim brought for a misrepresentation or breach of Section 2.11 (an "Ownership Claim") or Section 2.16 (an "Environmental Claim") of this Agreement, indefinitely. 9.2 Indemnification by Buyer and RCG. (a) Subject to Sections 9.3 through 9.5, Buyer and RCG shall indemnify and hold harmless the Sellers and Owners, and any of their officers, directors, agents and affiliates, at all times after the date hereof from and against any and all Losses suffered or incurred by any such party by reason of, or arising out of any of the following: (i) the breach of any representation or warranty contained in Article 4 hereof or in any Acquisition Document or any document or instrument delivered by Buyer or RCG in connection therewith; and (ii) the non-fulfillment of any covenant or agreement of Buyer or RCG contained in the Acquisition Documents or any document or instrument delivered by Buyer or RCG in connection therewith. (b) No claim for indemnification with respect to any alleged misrepresentation or breach of warranty may be made after three (3) years following the Closing Date; provided, however, that the right to indemnification shall extend beyond such period with respect to any specific claim for indemnification for which written notice was given to Buyer or RCG during such period but shall expire on the expiration of the applicable statutes of limitations unless an action has been brought with respect thereto. 9.3 Notice and Opportunity to Defend. The party indemnified under this Article 9 (the "Indemnified Party") shall promptly notify in writing the indemnifying party (the "Indemnifying Party") of any matter giving rise to an obligation to indemnify and the Indemnifying Party shall defend such claim at its expense with counsel reasonably acceptable to the Indemnified Party, provided that the Indemnifying - 35 - 39 Party may not settle any such claim without the consent of the Indemnified Party. The Indemnified Party agrees to cooperate with the Indemnifying Party and to make reasonably available to the Indemnifying Party any necessary records or documents in the possession of the Indemnified Party which are necessary to defend such claim. If the Indemnifying Party does not defend or settle such claim, the Indemnified Party may do so without the Indemnifying Party's participation, in which case the Indemnifying Party shall pay the expenses of such defense, and the Indemnified Party may settle or compromise such claim without the Indemnifying Party's consent. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder except to the extent that the Indemnifying Party is actually prejudiced by such failure to give notice. 9.4 Indemnification Limits. (a) No Indemnifying Party (with the Sellers and Owners as a group deemed as a single Indemnifying Party for this purpose) shall be required to indemnify the Indemnified Party (with the Sellers and Owners as a group deemed as a single Indemnifying Party for this purpose) unless the amount of the loss or claim for which indemnification is sought, when aggregated with all other losses and claims for which indemnification is sought by the Indemnified Party (with the Sellers and Owners as a group deemed as a single Indemnifying Party for this purpose), exceeds $20,000 ("Minimum Aggregate Liability Amount"), at which time rights to indemnification for losses and claims may be asserted for the Minimum Aggregate Liability Amount and any amounts in excess thereof. (b) No Seller or Owner shall be required to satisfy an indemnification obligation in excess of one hundred percent (100%) of the aggregate value of the Consideration received by such Seller or Owner and in no event shall Buyer and RCG collectively be required to satisfy an indemnification obligation in excess of one hundred percent (100%) of the aggregate value of the Consideration. (c) The limitations contained in this Section 9.4 shall not apply to (i) any indemnification claim under Sections 9.1(a)(ii), 9.1(b)(i), 9.1(b)(ii), 9.1(b)(iv) or 9.2(a)(ii); (ii) a Tax Claim, Ownership Claim or Environmental Claim; or (iii) any Loss which results from or arises out of fraud and intentional misrepresentation or an intentional breach of warranty on the part of a party to the Acquisition Documents. 9.5 Survival and Exclusivity. The representations and warranties of the parties contained in the Acquisition Documents or in any document or instrument delivered in connection therewith shall survive the Closing and shall not be extinguished thereby notwithstanding any investigation or other examination by any party, provided that from and after the Closing the remedies set forth in this Article 9 shall constitute the sole and exclusive remedy for any inaccuracy or breach of any such representation or warranty. The limitations contained in this Article 9 shall not apply to fraud or intentional misrepresentation. 9.6 Contribution Among Owners and Sellers. If any Owner or Seller ("Unrelated Indemnifying Parties") is required to make a payment to an Indemnified Party pursuant to Section 9.1(b) of this Agreement that is related to a breach of a representation, warranty or covenant by another Seller or Owner ("Related Indemnifying Parties") with respect to a Center in which such Unrelated Indemnifying Party has no ownership interest, the Related Indemnifying Parties shall promptly pay to the Unrelated Indemnifying Parties the amount of such payment plus any Losses incurred by the Unrelated Indemnifying Parties in the collection of such payment. ARTICLE 10 [RESERVED] - 36 - 40 ARTICLE 11 CERTAIN DEFINITIONS Except as otherwise provided herein, the capitalized terms set forth below shall have the following meanings: "Acquisition Documents" shall mean this Agreement and the other documents and instruments to be delivered pursuant to this Agreement. "Agreement" shall mean this Asset Purchase Agreement, including the Exhibits and Schedules delivered pursuant hereto and incorporated herein by reference. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean, with respect to any entity, any other entity, which, together with such entity, would be treated as a single employer (i) under Section 414(b) or (c) of the Code or (ii) for purposes of any Benefit Plan subject to Title IV of ERISA, under Section 414(b), (c), (m) or (o) of the Code. "Exhibits" shall mean the Exhibits so marked, copies of which are attached to this Agreement. Such Exhibits are hereby incorporated by reference herein and made a part hereof, and may be referred to in this Agreement and any other related instrument or document without being attached hereto. "HCFA Liability" shall mean any Liability for which the Centers may be liable because of the revised Health Care Financing Association interpretation concerning the timing of Medicare eligibility under the Medicare Secondary Payor 1993 amendments which interpretation was applied retroactively to require refunds of certain amounts collected from employer-based group health plans and which is subject to a preliminary injunction issued by the United States District Court for the District of Columbia. "Law" shall mean any code, law, ordinance, regulation, reporting or licensing requirement, rule, or statute applicable to a person or its assets, Liabilities or business, including those promulgated, interpreted or enforced by any Regulatory Authority. "Liability" shall mean any direct or indirect, primary or secondary, liability, indebtedness, obligation, penalty, cost or expense (including costs of investigation, collection and defense), claim, deficiency, guaranty or endorsement of or by any Person (other than endorsements of notes, bills, checks, and drafts presented for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute or contingent, liquidated or unliquidated, matured or unmatured, or otherwise. "1933 Act" shall mean the Securities Act of 1933, as amended. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. "Person" shall mean a natural person or any legal, commercial or governmental entity, such as, but not limited to, a corporation, general partnership, joint venture, limited partnership, limited liability company, trust, business association, group acting in concert, or any person acting in a representative capacity. "RCG Common Stock" shall mean the $0.01 par value common stock of RCG. "Regulatory Authorities" shall mean, collectively, all federal and state regulatory agencies having jurisdiction over the Parties and their respective Subsidiaries, including the SEC. "SEC" shall mean the Securities and Exchange Commission. - 37 - 41 "Tax Return" shall mean any and all returns, reports, filings, declarations and statements relating to Taxes that are required to be filed, recorded, or deposited with any Regulatory Authority, including any attachment thereto or amendment thereof. (b) In addition to the terms defined in Section 11.1(a) above, the terms set forth below shall have the meanings ascribed thereto in the referenced sections: Acquisition - Preamble IRS - Section 2.17(b) Assumed Liabilities - Section 1.3 Losses - Section 9.1(b) Base Period Trading Price - Section 1.2 Medicare and Medicaid programs - Section 2.18 Business - Preamble Minimum Aggregate Liability Amount - Section 9.4(a) Cash Amount - Section 1.1(a)Centers - Preamble Ownership Claim - Section 9.1(c)Pension Plans - Closing - Section 1.7 Section 2.14(a) Closing Date - Section 1.7 Private Programs - Section 2.18 Compensation Programs - Section 2.14(b) RCG Documents - Section 4.8 Confidential Data - Section 5.8(b) Remuneration - Section 2.20 Consideration - Section 1.2 Retained Assets - Section 1.5 Current Liabilities - Section 1.3 Retained Liabilities - Section 1.4 Dialysis Name - Section 5.17 Rights and Assets - Section 1.1 Environmental Condition - Section 2.16 Seller Agreements - Section 2.12 Environmental Claim - Section 9.1(c) SEC Documents - Section 4.8 Financial Statements - Section 2.6 Tax Claim - Section 9.1(c) Government Programs - Section 2.18 Taxes - Section 1.4(g) Indemnified Party - Section 9.3 Territory - Section 5.8(a) Indemnifying Party - Section 9.3 Welfare Plans - Section 2.14(b)
(c) Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed followed by the words "without limitation." ARTICLE 12 MISCELLANEOUS PROVISIONS 12.1 Notices. (a) Any notice sent in accordance with the provisions of this Section 12.1 shall be deemed to have been received (even if delivery is refused or unclaimed) on the date which is: (i) the date of proper posting, if sent by certified U.S. mail or by Express U.S. mail or private overnight courier; or (ii) the date on which sent, if sent by facsimile transmission, with confirmation and with the original to be sent by certified U.S. mail, addressed as follows: If to the Sellers or Owners: c/o David W. Holst Indiana Nephrology & Internal Medicine, P.C. 10585 North Meridian Street Indianapolis, Indiana 46290 Telecopy Number: (317) 574-4737 Copy to Counsel: Hall, Render, Killian, Heath & Lyman, P.C. One American Square Suite 2000, Box 82064 Indianapolis, Indiana 46282 Telecopy Number: (317) 633-4878 Attention: R. Terry Heath, Esq. - 38 - 42 If to Buyer: RCG Indiana, LLC c/o Renal Care Group, Inc. 2100 West End Avenue, Suite 800 Nashville, Tennessee 37203 Telecopy Number: (615) 321-5419 Attention: Mr. Sam A. Brooks If to RCG: Renal Care Group, Inc. 2100 West End Avenue, Suite 800 Nashville, Tennessee 37203 Telecopy Number: (615) 321-5419 Attention: Mr. Sam A. Brooks Copy to Counsel: Alston & Bird One Atlantic Center 1201 W. Peachtree Street Atlanta, Georgia 30309 Telecopy Number: (404) 881-7777 Attention: Steven L. Pottle, Esq. (b) Any party hereto may change its address specified for notices herein by designating a new address by notice in accordance with this Section 12.1. 12.2 Expenses. Notwithstanding Section 12.11, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder; provided, however, that RCG agrees to bear and pay up to $739,148 of the fees and expenses of Merrill, Lynch, Pierce, Fenner & Smith and up to $207,167 of legal, accounting and other expenses incurred by or on behalf of the Sellers and the Owners in connection with the transactions contemplated hereby, payable in the manner provided in Schedule 12.2. 12.3 Further Assurances. Each party covenants that at any time, and from time to time, after the Closing, it will execute such additional instruments and take such actions as may be reasonably requested by the other parties to confirm or perfect or otherwise to carry out the intent and purposes of this Agreement. 12.4 Waiver. Any failure on the part of any party to comply with any of its obligations, agreements or conditions hereunder may be waived by any other party to whom such compliance is owed. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. 12.5 Assignment. This Agreement shall not be assignable by any of the parties hereto without the written consent of all other parties, provided that RCG or Buyer may assign its rights and obligations under this Agreement without the consent of the Sellers and Owners to any direct or indirect subsidiary or affiliate of RCG or to any party that acquires substantially all of the assets or stock of RCG or Buyer or any successor entity resulting from a merger or consolidation of or with RCG or Buyer. No such assignment shall relieve RCG or Buyer of its obligations hereunder. 12.6 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and assigns. This Agreement shall survive the Closing and not be merged therein. 12.7 Headings. The section and other headings in this Agreement are inserted solely as a matter of convenience and for reference, and are not a part of this Agreement. - 39 - 43 12.8 Entire Agreement. All Schedules and Exhibits attached to this Agreement are by reference made a part hereof. This Agreement and the Exhibits, Schedules, certificates and other documents delivered pursuant hereto or incorporated herein by reference, contain and constitute the entire agreement among the parties and supersede and cancel any prior agreements, representations, warranties, or communications, whether oral or written, among the parties relating to the transactions contemplated by this Agreement. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an agreement in writing signed by the party against whom or which the enforcement of such change, waiver, discharge or termination is sought. 12.9 Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware, without regard to any applicable conflicts of Laws. The provisions of this Agreement are severable and the invalidity of one or more of the provisions herein shall not have any effect upon the validity or enforceability of any other provision. 12.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.11 Brokers. The Sellers and the Owners shall jointly and severally indemnify, hold harmless and defend RCG and its affiliates, and RCG shall indemnify, hold harmless and defend Sellers and Owners from and against the payment of any and all broker's and finder's expenses, commissions, fees or other forms of compensation which may be due or payable from or by the indemnifying party, or which may have been earned by any third party acting on behalf of the indemnifying party in connection with the negotiation, execution and consummation of the transactions contemplated hereby. [Signatures Begin on Next Page] - 40 - 44 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf and its corporate seal to be hereunto affixed and attested by officers thereunto as of the day and year first above written. ATTEST: RCG INDIANA, LLC By: /s/ Sam A. Brooks - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: RENAL CARE GROUP, INC. By: /s/ Sam A. Brooks - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: INDIANA NEPHROLOGY & INTERNAL MEDICINE, P.C. By: /s/ Thomas R. Artingh, M.D. - ----------------------- -------------------------------- Secretary Title: ------------------------------ SELLERS: ATTEST: EASTERN INDIANA KIDNEY CENTER By: /s/ James R. Lewis, M.D. - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: INDIANA KIDNEY CENTER By: /s/ Kevin J. Lavelle - ----------------------- -------------------------------- Secretary Title: ------------------------------ - 41 - 45 ATTEST: INDIANA KIDNEY CENTER SOUTH, LLC By: /s/ Douglas R. Maxwell - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: ST. VINCENT DIALYSIS CENTER By: /s/ Clifford A. Jaffe - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: SAINT JOSEPH DIALYSIS CENTER By: /s/ Clifford A. Jaffe - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: INDIANA DIALYSIS SERVICES, PC By: /s/ Kevin J. Lavelle - ----------------------- -------------------------------- Secretary Title: ------------------------------ OWNERS: ATTEST: INDIANA DIALYSIS SERVICES, PC By: /s/ Kevin J. Lavelle - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: COMMUNITY HOSPITALS OF INDIANA, INC. By: /s/ William E. Corley - ----------------------- -------------------------------- Secretary Title: ------------------------------ - 42 - 46 ATTEST: SETON HEALTH CORPORATION OF CENTRAL INDIANA, INC. By: /s/ Clifford A. Jaffe - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: GREENWOOD DIALYSIS SERVICES, PC By: /s/ Douglas R. Maxwell - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: REID HOSPITAL PHYSICIANS By: /s/ James R. Lewis - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: REID HOSPITAL & HEALTH CARE SERVICES, INC. By: /s/ B. Allen Dowell - ----------------------- -------------------------------- Secretary Title: ------------------------------ ATTEST: SAINT JOSEPH HOSPITAL AND HEALTH CARE CENTER OF KOKOMO, INDIANA, INC. By: /s/ Steve Linerode - ----------------------- -------------------------------- Secretary Title: ------------------------------ /s/ Kenneth W. Beckley, M.D. ------------------------------------ Kenneth W. Beckley, M.D. /s/ Ronald K. Bloom, M.D. ------------------------------------ Ronald K. Bloom, M.D. /s/ TaeKae Chong, M.D. ------------------------------------ TaeKae Chong, M.D. - 43 - 47 /s/ Alan E. Handt, M.D. ------------------------------------ Alan E. Handt, M.D. /s/ Kevin J. Lavelle, M.D. ------------------------------------ Kevin J. Lavelle, M.D. /s/ Patsy Maikranz, M.D. ------------------------------------ Patsy Maikranz, M.D. /s/ Ronald I. Reisman, M.D. ------------------------------------ Ronald I. Reisman, M.D. /s/ Jay H. Weiss, M.D. ------------------------------------ Jay H. Weiss, M.D. /s/ Douglas R. Maxwell, M.D. ------------------------------------ Douglas R. Maxwell, M.D. - 44 - 48 EXHIBIT A MANAGEMENT SERVICES - - Executive management and administration - - All facility accounting and reporting, consistent with Medicare requirements - - All budget preparation - - Regulatory compliance monitoring and reporting - - Personnel including hiring, training and development of all non-physician employees, consistent with Medicare requirements - - Computer systems and support - - Facility operations, policies and procedures, consistent with Medicare requirements - - Quality assurance programs, consistent with Medicare requirements - - Patient education programs, customer service programs and staff support programs - - Materials management including purchasing (supplies, pharmaceutical, equipment maintenance) - - Laboratory services - - Billing and technical and facility fees - - Billing of physicians' professional services for chronic dialysis care - - Supervision and management of all records storage, maintenance and security procedures in compliance with all applicable federal, state and local laws and regulations, and in accordance with industry standards. EX-10.29 3 ASSET PURCHASE AGREEMENT AND BILL OF SALE 1 Exhibit 10.29 ASSET PURCHASE AGREEMENT AND BILL OF SALE BY AND AMONG RENAL CARE GROUP, INC., RCG LABORATORY, INC. AND KIDNEY CARE, INC. DATED EFFECTIVE AS OF JANUARY 1, 1997 2 ASSET PURCHASE AGREEMENT AND BILL OF SALE THIS ASSET PURCHASE AGREEMENT AND BILL OF SALE (this "Agreement") is made and entered on January 23, 1997 but with an effective date as of 12:01 a.m. January 1, 1997 (the "Effective Date") by and among RENAL CARE GROUP, INC. ("RCG"), a Delaware corporation, RCG LABORATORY, INC., a Delaware corporation ("Buyer"), and KIDNEY CARE, INC., a Mississippi non-profit corporation ("Seller"). PREAMBLE WHEREAS, Seller owns and operates a clinical laboratory (the "Laboratory"); WHEREAS, Seller and RCG are parties to that certain Amended and Restated Transfer Agreement, dated as of November 14, 1995 (the "Transfer Agreement"), pursuant to which Seller granted RCG an option to acquire the assets of Laboratory; WHEREAS, Seller and RCG are parties to that certain Laboratory Management Agreement, dated as of February 12, 1996 (the "Management Agreement"); WHEREAS, Seller provides certain laboratory services to certain dialysis facilities owned by RCG's affiliates pursuant to those certain Laboratory Services Agreements, each dated as of February 12, 1996 (the "Laboratory Agreements"); WHEREAS, RCG and Buyer desire for Buyer to purchase the Laboratory on the terms and conditions set forth herein (the "Acquisition"); and WHEREAS, the Management Agreement and the Laboratory Agreements shall terminate in accordance with their respective terms. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and the mutual warranties, representations, covenants and agreements set forth herein, the parties agree as follows: ARTICLE 1 PURCHASE OF RIGHTS AND ASSETS 1.1 Agreement to Purchase and Sell. On the terms and conditions set forth herein, Seller hereby sells, grants, conveys, transfers, assigns and delivers to Buyer, and Buyer hereby purchases, all of Seller's right, title and interest in and to all of the rights and assets owned by Seller and used or useful in the operation of the Laboratory (except for Retained Assets as defined in Section 1.5 below), free and clear of all liens, charges, claims or encumbrances whatsoever, including, without limitation, the following (collectively, the "Rights and Assets"): (a) All accounts receivable of Seller relating to the Laboratory arising for services performed on and after the Effective Date; (b) All inventory and tangible personal property used in the operation of the Laboratory, including, but not limited to, such property listed on Schedule 2.8(a), including all furniture, machinery, vehicles, office furnishings, equipment and equipment leasehold improvements of the Seller existing on the date hereof; 3 (c) To the extent assignable, each of Seller's valid authorizations, permits and licenses, including its Medicare and other provider numbers and related agreements as listed on Schedule 1.1(c) necessary to operate the Laboratory and bill for its services on a basis consistent with past practices as listed on Schedule 1.1(c); (d) All contracts and agreements, including leases, listed on Schedule 1.1(d) hereto relating to the Laboratory; (e) All contract rights, leasehold rights, guarantees, warranties and insurance policies and proceeds therefrom relating to the Laboratory; (f) All other intangible assets of Seller relating to the operation of the Laboratory including, but not limited to, all patents, trademarks, service marks and designs and all trade names, service names and business names relating to the Rights and Assets, which are set forth on Schedule 1.1(f) hereto, all telephone numbers, and the goodwill of Seller in or arising from the operation of the Laboratory; (g) Except as set forth in Section 1.5 below, all prepaid items including, without limitation, all equipment, utility and other deposits existing on the Effective Date; (h) All patient lists and patient medical or operating records, employment records, medical staff roster and files, customer lists, customer contracts, financial records and other tangible personal property of Seller relating to the Laboratory; (i) All books, records and documents owned, required for or incident to the operation of the Laboratory; (j) All of Seller's building or construction plans, building permits, designs or drawings related to the Laboratory; and (k) Any and all other assets of whatever type or description, other than the Retained Assets (as defined in Section 1.5 hereof) which are (i) reflected in the balance sheet contained in the Financial Statements, except to the extent any such assets have been disposed of in the ordinary course of business since the date of such balance sheet or (ii) used in the operation of the Laboratory. 1.2 Consideration. The total consideration for the Rights and Assets is $196,384 paid on the date hereof by Buyer in cash by wire transfer to an account designated by Seller (the "Consideration"). The Consideration includes $147,000 specified as the purchase price in the Transfer Agreement, plus $72,596 for additional purchased assets in accordance with Section 5.4 of the Management Agreement (the "Additional Amount"), less $23,212 for the amount of accrued vacation assumed under Section 1.3 below (the "Vacation Amount"). The parties agree that they shall each have until February 28, 1997 to propose any adjustments to the Additional Amount or the Vacation Amount and that if they are unable to agree on any proposed adjustments by March 15, 1997, they shall choose a mutually agreeable "Big 6" accounting firm, the costs of which they shall share equally, to resolve the amount of any adjustment, which resolution shall be final and binding. 1.3 Assumed Liabilities. Buyer hereby assumes (i) the payment and performance of obligations under those contracts and agreements identified on Schedule 1.1(d) hereto arising on and after the Effective Date, except to the extent any such obligations relate to a default occurring on or before the Closing Date (other than a default that may arise by reason of the assignment contemplated hereby and which is disclosed on Schedule 2.3), (ii) trade payables, rent and wages payable accrued on and after the Effective Date, and (iii) Sellers obligations, if any, with respect to vacation and sick time accrued as of the - 2 - 4 Effective Date for employees of Buyer or RCG, the services of whom are provided to Seller by RCG under the Management Agreement (the "Assumed Liabilities"). 1.4 Retained Liabilities. Except as specifically set forth in Section 1.3, Seller retains all liabilities directly or indirectly arising out of or related to (i) the Retained Assets and (ii) the operation of the Laboratory on and prior to the Closing Date, whether such liabilities are known or unknown, disclosed or undisclosed, matured or unmatured, accrued, absolute or contingent on and as of the Closing Date (the "Retained Liabilities"). Without limiting the generality of the preceding sentence, neither Buyer nor RCG shall assume or become liable for any obligations and liabilities of Seller not specifically described in Section 1.3, including without limitation, the following: (a) Any liability or obligation arising out of any employee benefit plan maintained by or covering employees of Seller or to which Seller has made any contribution or to which Seller could be subject to any liability; (b) Any losses, costs, expenses, damages, claims, demands and judgments of every kind and nature related to, arising out of, or in connection with the Mississippi Bulk Transfer Act or any similar statute as enacted in any jurisdiction, domestic or foreign; (c) Any liability or obligation arising out of any breach by Seller on or prior to the Closing Date of any provision of the Seller Agreements (as defined herein) or any other contract to which Seller is a party; (d) Any liability of Seller with respect to any claim or cause of action, regardless of when made or asserted, which arises (i) out of or in connection with the business and operations of Seller on or prior to the Closing, (ii) with respect to any product purchased or manufactured or any service provided by Seller on or prior to the Closing Date, including without limitation, any liability or obligation (A) pursuant to any express or implied representation, warranty, agreement, or guarantee made by Seller or (B) imposed or asserted to be imposed by operation of law, in connection with any service performed or product designed, manufactured, sold, or leased by or on behalf of Seller on or prior to the Closing Date, including without limitation, any claim related to any product delivered in connection with the performance of such service and any claims seeking to recover for consequential damage, lost revenue, or income, including pursuant to any doctrine of product liability, or (iii) out of or in connection with the Laboratory and operations of Seller on or prior to the Closing Date under any federal, state, or local law, rule, or regulation relating to (A) environmental protection or clean-up, (B) taxation, or (C) employment or termination of employment; (e) Any liability or obligation, arising prior to or as a result of the Acquisition, to any employee, agent, or independent contractor of Seller (excluding employees, agents or independent contractors of Buyer or RCG prior to the Closing), whether or not employed by Buyer or RCG after the Closing, or under any benefit arrangement with respect thereto; (f) Any liability of Seller existing on or prior to the Closing Date, including any liability related to any matter described on the Schedules hereto; (g) Any liability or obligation for federal, state, county, local, foreign and other taxes, assessments, charges, fees, and impositions, including interest and penalties thereon or with respect thereto, whether disputed or not ("Taxes"), including any liabilities or obligations of Seller relating to sales and use, transfer, documentary, income or other Taxes levied on the transfer of the Rights and Assets; (h) Any liability for any overbillings made by Seller or overpayments received by Seller relating to the Laboratory under any Medicare or other government or private payor arrangement in respect of services provided on or prior to the Closing Date; and - 3 - 5 (i) All wages, commissions, vacation, holiday and workers' compensation pay obligations of Seller with respect to its respective employees accrued through the Effective Date and all bonuses and fringe benefits as to such employees accrued through the Effective Date, and all severance pay obligations of Seller to employees resulting from Seller's consummation of the transactions contemplated by this Agreement. 1.5 Retained Assets. The parties expressly agree that excluded from the Rights and Assets assigned to and purchased by Buyer hereunder are (i) Seller's stock record books, tax returns and minute books; (ii) any assets of Seller not related to the Laboratory, (iii) cash and cash equivalents, (iv) prepaid expenses relating to any insurance coverage of Seller or to any equipment acquired or leased by Seller in accordance with Section 5.4 of the Management Agreement; (v) all notes and all accounts receivable relating to services provided prior to the Effective Date, (vi) any records which by law Seller is required to retain in its possession, (vii) claims for refunds and rights to offset in respect thereof relating to operations conducted prior to the Effective Date; and (viii) such other assets as are set forth on Schedule 1.5 hereto (collectively, the "Retained Assets"). 1.6 Time and Place of Closing. The closing (the "Closing") will take place on the date of this Agreement (the "Closing Date") at such place as may be mutually agreed upon by the Parties. The Parties hereto intend and agree that the transactions contemplated herein shall, for financial accounting and reporting purposes and the filing of income tax returns, be deemed to have closed on the Effective Date. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER The Seller represents and warrants the following to Buyer and RCG: 2.1 Organization, Authority and Capacity. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Mississippi, and has the full power and authority necessary to (i) execute, deliver and perform its obligations under this Agreement and the other agreements and documents delivered in furtherance of the transactions contemplated hereby (the "Acquisition Documents") and (ii) carry on its business as it has been and is now being conducted and to own and lease the properties and assets which it now owns or leases. Seller is duly qualified to do business and is in good standing in the jurisdictions set forth in Schedule 2.1, which includes every jurisdiction in which the failure to be so qualified or in good standing would have a material adverse effect on (i) Seller's ability to perform its obligations under the Acquisition Documents or (ii) the assets, results of operations or prospects of the Laboratory. 2.2 Authorization and Validity. The execution, delivery and performance of the Acquisition Documents have been duly authorized by all necessary corporate action on the part of Seller. The Acquisition Documents to be executed and delivered by the Seller have been or will be, as the case may be, duly executed and delivered by Seller and constitute or will constitute the legal, valid and binding obligations of Seller, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, or other laws affecting creditors' rights generally, or as may be modified by a court of equity. 2.3 Absence of Conflicting Agreements or Required Consents. Except as set forth on Schedule 2.3, the execution, delivery and performance by Seller of the Acquisition Documents to be executed and delivered by Seller: (i) do not require the consent of or notice to any governmental or regulatory authority or any other third party; (ii) will not conflict with any provision of Seller's organizational documents; (iii) will not conflict with or result in a violation of any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which Seller is subject or by which Seller or any of its properties are bound; (iv) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or - 4 - 6 accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit to which Seller is a party or by which Seller or any of its properties are bound; and (v) will not create any lien, encumbrance or restriction upon any of the assets or properties of Seller. 2.4 Financial Statements. Attached hereto as Schedule 2.4 is an unaudited income statement for the interim period ending November 30, 1996, which reflects the results of operations of the Laboratory for such period (the "Financial Statements"). The Financial Statements present fairly in all material respects the results of the operations of the Laboratory for the period then ended, and are in accordance with the books and records of the Seller, which have been properly maintained and are complete and correct in all material respects. The accounts receivable of Seller relating to the Laboratory arising on and after the Effective Date and on or prior to the Closing Date arose in the ordinary course of business and represent bona fide claims for the provision of customary laboratory services actually provided by Seller except for customary reserves. 2.5 No Undisclosed Liabilities. Except as listed on Schedule 2.5 hereto, the Seller has no material Liabilities or obligations related to the operations of the Laboratory, whether accrued, absolute, contingent or otherwise, except for liabilities and obligations of the nature reflected as operating costs and expenses in the Financial Statements, which liabilities consist solely of costs and expenses incurred in the ordinary course of business of operating the Laboratory. 2.6 Litigation, etc. Except as listed on Schedule 2.6 hereto, there are no claims, lawsuits, actions, arbitrations, administrative or other proceedings pending against Seller. Except as listed on Schedule 2.6, (i) to the knowledge of Seller, no such matter described in the previous sentence is threatened and there is no basis for any such action, and (ii) there are no governmental or administrative investigations or inquiries pending that involve Seller, except in either case for any such matter that could not reasonably be expected to have a material adverse effect on the Seller, financial or otherwise. Except as listed on Schedule 2.9, there are no judgments against or consent decrees binding on Seller or its assets or, to the knowledge of the Seller, any employee relating to the Laboratory. 2.7 No Violation of Law. (a) Except as set forth on Schedule 2.7, Seller has not been nor is currently in violation of any applicable local, state or federal law, ordinance, regulation, order, injunction or decree, or any other requirement of any governmental body, agency or authority or court binding on it, or relating to its property or business or its sales or pricing practices, except for any such violations as would not individually or in the aggregate have a material adverse effect on the Seller, financial or otherwise. (b) Seller is not currently subject to any fine, penalty, liability or disability as the result of a failure to comply with any requirement of federal, state or local law or regulation nor has Seller received any notice of such noncompliance. 2.8 Real and Personal Property. (a) Schedule 2.8(a) sets forth a list of all items of personal and mixed, tangible and intangible property, rights and assets of Seller relating to the Laboratory having an original or replacement cost or value greater than $5,000. Except as set forth on Schedule 2.8(a), Seller (i) has good and valid title to all of the personal and mixed, tangible and intangible property, rights and assets which it purports to own, including all the personal property and assets reflected in the Financial Statements; and (ii) owns such rights, assets and personal property free and clear of all liens, encumbrances or restrictions of any nature whatsoever (except for current year ad valorem taxes). All of the Rights and Assets being acquired by Buyer, whether owned or leased, are in the possession and control of the Seller and are located at the Laboratory. (b) Seller does not own any real property. Schedule 2.8(b) contains a true and correct description of all real property leased by Seller related to the Laboratory, including all improvements located thereon. Seller has valid and binding leases for each property listed on Schedule 2.8(b), and (i) Seller is current with respect to all payments due under such leases; (ii) Seller has complied in all respects with its obligations under such leases, and (iii) there are no defaults under any such lease that remain - 5 - 7 uncured and no condition exists which, with the lapse of time or giving of notice, or both, would give rise to a default under any such lease. Buyer and RCG have been furnished with true, correct and complete copies of all leases, deeds, easements and other documents and instruments concerning the matters listed on Schedule 2.8(b). (c) The Rights and Assets are in good operating condition and repair, ordinary wear and tear excepted, and such assets include all rights, properties, interests in properties, and assets necessary to permit Buyer to continue the business of the Laboratory after the date hereof as presently conducted. 2.9 Contracts and Commitments. Schedule 2.9 contains a complete and accurate list of all contracts, agreements, commitments, instruments and obligations (whether written or oral, contingent or otherwise) of Seller related to the Laboratory ("Seller Agreements"). Seller has delivered to Buyer and RCG true and complete copies of all of its Seller Agreements. Except as indicated on Schedule 2.9, the Seller Agreements are valid and effective in accordance with their terms, and there is not under any of such Seller Agreements (i) any existing or claimed default by Seller or event which with the notice or lapse of time, or both, would constitute a material default by Seller or (ii) to the knowledge of the Seller, any existing or claimed default by any other party or event which with notice or lapse of time, or both, would constitute a material default by any such party. Except as indicated on Schedules 2.3 and 2.9, the continuation, validity and effectiveness of the Seller Agreements will not be affected by the Acquisition and the Acquisition will not result in a breach of or default under, or require the consent of or notice to any other party to, any of the Seller Agreements. There is no actual or, to the knowledge of the Seller, threatened termination, cancellation or limitation of any Seller Agreements that would have a material adverse effect on the business of the Laboratory, financial or otherwise. To the knowledge of the Seller, there is no pending or threatened bankruptcy, insolvency or similar proceeding with respect to any other party to the Seller Agreements. 2.10 Insurance Policies. (a) Except as described on Schedule 2.10, all of the Rights and Assets are insured in such amounts and against such losses, casualties or risks as are customary for similar properties and businesses, and the Seller has maintained such insurance continuously from the earlier of (i) the date of its inception and (ii) the date of inception of any of its predecessors. All such policies are in full force and effect and the premiums due thereon have been timely paid. 2.11 Licenses, Authorizations and Provider Programs. (a) Seller is the holder of all valid licenses and other rights, permits and authorizations required by law, ordinance, regulation or ruling of any governmental authority necessary to operate the Laboratory. With respect to the Laboratory, Seller or the Laboratory is certified for participation and reimbursement under Titles XVIII and XIX of the Social Security Act, including, without limitation, the end stage renal disease program, (the "Medicare and Medicaid programs") (Medicare and Medicaid programs and such other similar federal, state or local reimbursement or governmental programs for which the Seller is eligible are hereinafter referred to collectively as the "Government Programs") and has current provider agreements for such Government Programs and with such private non-governmental programs, including without limitation any private insurance program, under which the Seller directly or indirectly is presently receiving payments (such non-governmental programs herein referred to as "Private Programs"). Set forth on Schedule 2.11.1, is a correct and complete list of such licenses, permits and other waivers or authorizations, and provider agreements under all Government and Private Programs, complete and correct copies of which have been provided to Buyer and RCG. True, complete and correct copies of all surveys (and plans of correction related thereto) or audits of Seller or the Laboratory conducted in connection with any Government Program, Private Program or licensing or accrediting body during the past two (2) years have been provided to Buyer and RCG. (b) No violation, default, order or deficiency exists with respect to any of the items listed on Schedule 2.11.1. Seller has not received any notice of any action pending or recommended by any state, federal or accrediting agencies having jurisdiction over the items listed on Schedule 2.11.1, either to revoke, withdraw, suspend or limit any license, right or authorization, or to terminate the participation of - 6 - 8 Schedule 2.11.2, no consent or approval of, prior filing with or notice to, or Seller or the Laboratory in any Government or Private Program. To the knowledge of the Seller, no event has occurred which, with the giving of notice, the passage of time, or both, would constitute grounds for a material violation, order or deficiency with respect to any of the items listed on Schedule 2.11.1 or to revoke, withdraw, suspend or limit any such license, or to terminate or modify the participation of Seller in any Government or Private Program. To the knowledge of Seller, there has been no decision by any third party not to renew Seller's participation in any Government Program or Private Program. Except as listed on any action by, any governmental body or agency or any other third party is required in connection with any such license, right or authorization, or Government or Private Program, by reason of the consummation of the Acquisition, and the continued operation of the Laboratory thereafter on a basis consistent with past practices. (c) Seller has timely filed all billing and other reports required to be filed by it prior to the date hereof with respect to the Government and Private Programs, all fiscal intermediaries and other insurance carriers and all such reports are complete and accurate in all material respects and have been prepared in material compliance with all applicable laws, regulations, and principles governing reimbursement and payment claims. Seller has paid or caused to be paid or has properly reflected in its books and records all known and undisputed refunds, overpayments, discounts or adjustments which have become due pursuant to reports and has no liability under any Government or Private Program (known or unknown, contingent or otherwise) for any refund, overpayment, discount or adjustment other than in the ordinary course, and no interest or penalties accruing with respect thereto, except as has been specifically reserved for in its books and records or disclosed herein or in the Schedules hereto. To the knowledge of Seller, except as set forth on Schedule 2.11.3, there are no pending appeals, adjustments, challenges, audits, litigation, or notices of intent to review any such reports. There are no other reports required to be filed by Seller in order to be paid under any Government or Private Program for services rendered, except for reports not yet due. 2.12 Inspections and Investigations. Except as set forth and described in Schedule 2.12, (i) neither Seller's right nor, to the knowledge of the Seller, the right of any licensed professional or other individual affiliated with Seller to receive reimbursements pursuant to any Government or Private Program with respect to the Laboratory has been terminated or otherwise adversely affected as a result of any investigation or action whether by any federal or state governmental regulatory authority or other third party, (ii) none of Seller, or, to the knowledge of the Seller, any licensed professional or other individual affiliated with Seller has, during the past three (3) years, been the subject of any inspection, investigation, survey, audit, monitoring or other form of review by any governmental regulatory entity, trade association, professional review organization, accrediting organization or certifying agency based upon any alleged improper activity on the part of such individual, nor has Seller received any notice of deficiency during the past three years in connection with its operation of the Laboratory, (iii) there are not any outstanding deficiencies or work orders of any governmental authority having jurisdiction over Seller, or other third party, requiring conformity to any applicable agreement, statute, regulation, ordinance or bylaw, including but not limited to, the Government and Private Programs, and (iv) there is not any notice of any claim, requirement or demand of any licensing or certifying agency or other third party supervising or having authority over Seller or its operation of the Laboratory to rework or redesign any part thereof or to provide additional furniture, fixtures, equipment, appliances or inventory so as to conform to or comply with any existing law, code, rule, regulation or standard. Attached as part of Schedule 2.12 are copies of all reports, correspondence, notices and other documents relating to any matter described or referenced therein. 2.13 Stark and Fraud and Abuse. Seller and persons and entities providing professional services for Seller have not engaged in any activities which are prohibited under 42 U.S.C. Section 1395nn or 42 U.S.C. Section 1320a-7b, or the regulations promulgated thereunder pursuant to such statutes, or related state or local statutes or regulations, or which are prohibited by rules of professional conduct. 2.14 Statements True and Correct. No representation or warranty made herein by the Seller, nor in any statement, certificate or instrument to be furnished to Buyer or RCG by the Seller pursuant to any - 7 - 9 Acquisition Document, contains or will contain any untrue statement of material fact or omits or will omit to state a material fact necessary to make these statements contained herein and therein not misleading. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF RCG AND BUYER 3.1 Organization, Authority and Capacity. Each of Buyer and RCG is a corporation duly organized and validly existing under the laws of the State of Delaware, and has the full power and authority necessary to (i) execute, deliver and perform its obligations under the Acquisition Documents and (ii) carry on its business as it has been and is now being conducted and to own and lease the properties and assets which it now owns or leases. Each of Buyer and RCG is duly qualified to do business and is in good standing in the jurisdictions in which the failure to be so qualified or in good standing would have a material adverse effect on Buyer's or RCG's ability to perform its obligations under the Acquisition Documents. 3.2 Authorization and Validity. The execution, delivery and performance of the Acquisition Documents have been duly authorized by all necessary corporate action on the part of each of Buyer and RCG. The Acquisition Documents to be executed and delivered by each of Buyer and RCG have been or will be, as the case may be, duly executed and delivered by Buyer and RCG and constitute or will constitute the legal, valid and binding obligations of such parties, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, or other laws affecting creditors' rights generally, or as may be modified by a court of equity. 3.3 Absence of Conflicting Agreements or Required Consents. The execution, delivery and performance by each of Buyer and RCG of the Acquisition Documents to be executed and delivered by them: (i) do not require the consent of or notice to any governmental or regulatory authority or any other third party; (ii) will not conflict with any provision of such party's organizational documents; (iii) will not conflict with or result in a violation of any law, ordinance, regulation, ruling, judgment, order or injunction of any court or governmental instrumentality to which either such party is subject or by which such party or any of its properties are bound; (iv) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, require any notice under, or accelerate or permit the acceleration of any performance required by the terms of any agreement, instrument, license or permit to which either such party is a party or by which either such party or any of its properties are bound; and (v) will not create any lien, encumbrance or restriction upon any of the assets or properties of either such party. 3.4 Statements True and Correct. No representation or warranty made herein by Buyer or RCG, nor in any statement, certificate or instrument to be furnished to Seller by Buyer or RCG pursuant to any Acquisition Document, contains or will contain any untrue statement of material fact or omits or will omit to state a material fact necessary to make the statements contained herein and therein not misleading. ARTICLE 4 ADDITIONAL AGREEMENTS 4.1 Proration. Seller and Buyer shall prorate as of the Effective Date any amounts which become due and payable after the Closing Date with respect to (i) the contracts listed on Schedule 1.1(d) (ii) ad valorem taxes, if any, on the Rights and Assets, (iii) property taxes on the Rights and Assets, and (iv) all utilities servicing any of the Rights and Assets, including without limitation, water, sewer, telephone, electricity and gas service. 4.2 Post-Closing Access to Information. Seller and Buyer acknowledge that subsequent to Closing each party may need access to information or documents in the control or possession of the other party for the purposes of concluding the transactions herein contemplated, audits, compliance with - 8 - 10 governmental requirements and regulations, and the prosecution or defense of third party claims. Accordingly, Seller and Buyer agree that for a period of five (5) years after Closing each will make reasonably available to the other's agents, independent auditors and/or governmental agencies upon written request and at the request of the requesting party such documents and information as may be available relating to the Rights and Assets for periods prior and subsequent to Closing to the extent necessary to facilitate concluding the transactions herein contemplated, audits, compliance with governmental requirements and regulations and the prosecution or defense of claims. 4.3 Preservation and Access to Records After the Closing. After the Closing, Buyer shall, in the ordinary course of business and as required by law, keep and preserve all medical records and other records of the Laboratory existing as of the Closing and which constitute a part of the Rights and Assets delivered to Buyer at Closing. Buyer acknowledges that as a result of entering into this Agreement and operating the Laboratory it will gain access to patient and other information which is subject to rules and regulations concerning confidentiality. Buyer agrees to abide by any such rules and regulations relating to the confidential information it acquires. Buyer agrees to maintain the patient records delivered to Buyer at Closing in accordance with applicable law (including, if applicable, Section 1861(v)(i)(1) of the Social Security Act (42 U.S.C. Section 1395(v)(1)(l)), and requirements of relevant insurance carriers, all in a manner consistent with the maintenance of patient records generated at the Laboratory after Closing. Upon reasonable notice, during normal business hours Buyer will afford to the representatives of Seller, including its counsel and accountants, reasonable access to, and copies (at their expense) of, the records transferred to Buyer at the Closing. In addition, Seller shall be entitled to remove from the Laboratory any such patient records, but only for purposes of pending or threatened litigation involving a patient to whom such records refer. Any patient records so removed from the Laboratory shall be promptly returned to Buyer following its use by Seller. 4.4 Management Agreement and Laboratory Agreement. Seller and RCG hereby terminate the Management Agreement and the Laboratory Agreements as of the Closing Date, provided that the annual management fee of $250,000 payable to RCG shall terminate as of the Effective Date and that RCG shall continue to administer on behalf of Seller the billing and other procedures in respect of accounts receivable and liabilities existing on and before the Effective Date for a fee equal to 5% of the amount of such receivables as are collected, payable on the 5th day of each month for collections received during the previous month. Notwithstanding anything in this Section 4.4 to the contrary, the rights and obligations of Seller and RCG under the Management Agreement, including, but not limited to, the mutual indemnity provisions contained in Section 2.11 of the Management Agreement, shall continue to apply for matters occurring during the period in which the Management Agreement was in effect. For example, if pursuant to an audit of payments made to Seller under any Government Program for the period during which the Management Agreement was in effect it is determined that Seller received payments in excess of amounts properly due, then Seller shall be responsible for refunding such excess, provided that responsibility as between RCG and Seller for any penalties or interest applicable in respect of any such excess shall be determined, inter alia, with reference to the relative rights, obligations and duties of the parties under the Management Agreement. 4.5 Consents. If and to the extent the assignment of any contract or agreement included in the Rights and Assets requires the consent of another party thereto, then (i) such contract or agreement shall constitute a Right or Asset only upon and subject to receipt of such consent; (ii) such contract or agreement, shall not be included in the Rights and Assets if and for so long as the attempted assignment would constitute a breach thereof; and (iii) Seller shall cooperate fully with Buyer in seeking such consent or reasonable arrangement designed to provide to Buyer the benefits, claim rights arising thereunder. - 9 - 11 ARTICLE 5 INDEMNIFICATION 5.1 Indemnification by Seller. (a) From and after the date hereof, Seller shall indemnify and hold harmless Buyer and RCG and their respective officers, directors, agents or affiliates, from and against any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), liabilities, costs and expenses, including but not limited to reasonable attorneys' fees ("Losses"), suffered or incurred by any such party by reason of or arising out of any of the following: (i) the Retained Liabilities and the Retained Assets; (ii) the breach by Seller of any representation or warranty contained in Article 2 hereof or in any Acquisition Document or any document or instrument delivered by Seller in connection therewith; and (iii) the non-fulfillment of any covenant or agreement of Seller contained in the Acquisition Documents or any document or instrument delivered by Seller in connection therewith. 5.2 Indemnification by Buyer and RCG. (a) From and after the date hereof, Buyer and RCG shall jointly and severally indemnify and hold harmless Seller and its officers, directors, agents or affiliates, from and against any and all Losses suffered or incurred by any such party by reason of or arising out of any of the following: (i) the Assumed Liabilities and the operation of the Rights and Assets from and after the Closing Date; (ii) the breach by Buyer or RCG of any representation or warranty contained in Article 3 hereof or in any Acquisition Document or any document or instrument delivered by Buyer or RCG in connection therewith; and (iii) the non-fulfillment of any covenant or agreement of Buyer or RCG contained in the Acquisition Documents or any document or instrument delivered by Buyer or RCG in connection therewith. 5.3 Survival. The representations and warranties of the parties contained in the Acquisition Documents or in any document or instrument delivered in connection therewith shall survive the Closing for a period of four (4) years. ARTICLE 6 MISCELLANEOUS PROVISIONS 6.1 Notices. (a) Any notice sent in accordance with the provisions of this Section 6.1 shall be deemed to have been received (even if delivery is refused or unclaimed) on the date which is: (i) the date of proper posting, if sent by certified U.S. mail or by Express U.S. mail or private overnight courier; or (ii) the date on which sent, if sent by facsimile transmission, with confirmation and with the original to be sent by certified U.S. mail, addressed as follows: - 10 - 12 If to the Seller: Kidney Care, Inc. 3925 West Northside Drive Jackson, Mississippi 39209 Telecopy Number: (601) 923-3642 Attention: Mr. James F. Dorris Copy to Counsel: Vinson & Elkins, LLP 2300 First City Tower 1001 Fannin Houston, Texas Telecopy Number: (713) 615-5613 Attention: R. Todd Greenwalt, Esq. If to Buyer or RCG: Renal Care Group, Inc. 2100 West End Avenue, Suite 800 Nashville, Tennessee 37203 Telecopy Number: (615) 321-5419 Attention: Mr. Sam A. Brooks Copy to Counsel: Alston & Bird One Atlantic Center 1201 W. Peachtree Street Atlanta, Georgia 30309-3424 Telecopy Number: (404) 881-7777 Attention: Steven L. Pottle, Esq. (b) Any party hereto may change its address specified for notices herein by designating a new address by notice in accordance with this Section 6.1. 6.2 Expenses. Each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder. 6.3 Further Assurances. Each party covenants that at any time, and from time to time, after the Closing, it will execute such additional instruments and take such actions as may be reasonably requested by the other parties to confirm or perfect or otherwise to carry out the intent and purposes of this Agreement. 6.4 Waiver. Any failure on the part of any party to comply with any of its obligations, agreements or conditions hereunder may be waived by any other party to whom such compliance is owed. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. 6.5 Binding Effect. Neither party may assign this Agreement without the express written consent of the other party. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and assigns. This Agreement shall survive the Closing and not be merged therein. 6.6 Headings. The section and other headings in this Agreement are inserted solely as a matter of convenience and for reference, and are not a part of this Agreement. 6.7 No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not the intention of the parties hereto to confer third-party beneficiary rights upon any other person. - 11 - 13 6.8 Entire Agreement. This Agreement and the Exhibits, Schedules, certificates and other documents delivered pursuant hereto or incorporated herein by reference, contain and constitute the entire agreement among the parties and supersede and cancel any prior agreements, representations, warranties, or communications, whether oral or written, among the parties relating to the transactions contemplated by this Agreement. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an agreement in writing signed by the party against whom or which the enforcement of such change, waiver, discharge or termination is sought. 6.9 Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the Laws of the State of Mississippi, without regard to any applicable conflicts of Laws. The provisions of this Agreement are severable and the invalidity of one or more of the provisions herein shall not have any effect upon the validity or enforceability of any other provision. [SIGNATURES ON NEXT PAGE] - 12 - 14 IN WITNESS WHEREOF, each of the parties has caused this Asset Purchase Agreement and Bill of Sale to be executed on its behalf and its corporate seal to be hereunto affixed and attested by officers thereunto as of the day and year first above written. ATTEST: RENAL CARE GROUP, INC. By:/s/ Ronald Hinds - ----------------------- -------------------------- Secretary Title: ----------------------- ATTEST: RCG LABORATORY, INC. By:/s/ Ronald Hinds - ----------------------- -------------------------- Secretary Title: ----------------------- ATTEST: KIDNEY CARE, INC. By:/s/ James F. Dorris - ----------------------- -------------------------- Secretary Title: ----------------------- - 13 - EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 RENAL CARE GROUP, INC. (OF DELAWARE) COMPUTATION OF PER SHARE EARNINGS
December 31, 1996 ----------------- PRIMARY EARNINGS PER SHARE Common Stock issued to Founders 4,431,000 Common Stock issued to Public 4,269,000 Common Stock issued to acquired entities 3,070,000 ----------- Common Stock outstanding 11,770,000 Treasury Stock Method of Options and Warrants 969,000 ----------- Average weighted shares outstanding 12,739,000 =========== Net Income $10,746,000 =========== Earnings Per Share $ 0.84 ===========
EX-21.1 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 RENAL CARE GROUP, INC. Subsidiaries RCG Mississippi, Inc. Renal Care Group of the Midwest, Inc. Renal Care Group Texas, Inc. D.M.N. of Indiana Corporation The Nephrology Center, Inc. Main Line Suburban Dialysis Centers, Inc. Renal Care Group, Inc. RenalWest, L.C. 4-Co., Inc. 3-Co., Inc. 9-Co., Inc. Northeast Alabama Kidney Center, Inc. RenaLab, Inc. RenalNet, Inc. RenalPartners, Inc. RenalNet Florida, Inc. EX-23.2 6 CONSENT OF ERNST & YOUNG 1 Exhibit 23.2 Consent of Independent Auditors We consent to the inclusion in this Annual Report (Form 10-K) of Renal Care Group, Inc, of our reports dated February 28, 1997, included in the 1996 Annual Report to Shareholders of Renal Care Group, Inc. ERNST & YOUNG LLP Nashville, Tennessee March 28, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 47,624 5,814 35,545 6,703 2,658 86,478 38,790 8,051 131,812 37,016 0 0 0 142 93,183 131,812 129,518 129,518 90,122 90,122 19,865 2,446 (619) 17,704 6,958 10,746 0 0 0 10,746 .84 0
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