Renex Corp. ("Renex" or the "Company") is a high quality provider of
dialysis and ancillary services to patients suffering from chronic kidney
failure, generally referred to as end stage renal disease ("ESRD"). The Company
has grown through DE NOVO development and acquisitions, and seeks to distinguish
itself on the basis of quality patient care and responsiveness to the
professional needs of its referring nephrologists. As of December 31, 1998, the
Company provided dialysis services to approximately 1,200 patients in eight
states, through 20 outpatient dialysis facilities and a staff-assisted home
dialysis program. Additionally, the Company provided inpatient dialysis services
at 17 hospitals as of December 31, 1998.
THE DIALYSIS INDUSTRY
END STAGE RENAL DISEASE
ESRD is the state of advanced chronic kidney disease that is characterized
by the irreversible loss of kidney function. A normal human kidney removes waste
products and excess water from the blood, preventing water overload, toxin
buildup and eventual poisoning of the body. Chronic kidney disease can be caused
by a number of conditions, including inherited diseases, diabetes, hypertension
and other illnesses. Patients suffering from ESRD require routine dialysis
treatments or kidney transplantation to sustain life. Transplantation is
significantly limited due to the scarcity of suitable organ donors, the
incidence of organ transplant rejection and the ineligibility of many ESRD
patients for transplantation due to health and age. As a result, the vast
majority of ESRD patients must rely on dialysis for the remainder of their
lives.
According to the Health Care Financing Administration ("HCFA"), the number
of patients receiving chronic kidney dialysis services in the United States has
increased from 66,000 patients in 1982 to over 208,000 patients in 1996.
According to the National Institutes of Health, the number of ESRD patients is
projected to reach 300,000 by the year 2000. HCFA estimates that the national
incidence rate of new cases of ESRD in 1996 was approximately 268 patients per
million when considering all age groups, but was 1,144 patients per million in
individuals age 65 to 74, and 1,079 patients per million in individuals age 75
and over. The Company attributes the growth in the number of ESRD patients
principally to: (i) the aging of the U.S. population; (ii) better treatment and
longer survival of patients suffering from diabetes, hypertension, and other
illnesses that lead to ESRD; and (iii) improved dialysis technology which has
enabled dialysis to be provided to older patients and patients who previously
could not tolerate dialysis due to their physical condition.
According to HCFA, total spending for ESRD in the United States in 1996 was
an estimated $14.6 billion, of which Medicare paid an estimated $11.0 billion.
The Company estimates that approximately $7.0 billion of the $14.6 billion was
spent on dialysis and ancillary services. Since 1972, most ESRD patients in the
United States have been entitled to Medicare benefits, regardless of age or
financial circumstances. Currently, 93% of all ESRD patients in the United
States receive Medicare reimbursement for treatment.
DIALYSIS FACILITIES; TREATMENTS AND STAFF
FACILITIES. Patients with ESRD generally receive dialysis treatment through
a dialysis facility, which may be a free-standing or a hospital-based outpatient
facility. Most dialysis facilities offer a range of services to ESRD patients,
including: dialysis treatments; provision of supplies and equipment; patient,
family and community training and education; insurance counseling; billing
services; dietary counseling and social services support. In 1996, there were
over 3,100 dialysis facilities in the United States, of which approximately 77%
were free-standing and approximately 23% were hospital-based outpatient
facilities. The primary function of dialysis facilities is to provide ESRD
patients with life sustaining kidney dialysis, including both hemodialysis and
peritoneal dialysis.
HEMODIALYSIS. HCFA estimates that as of December 31, 1996, approximately 84%
of ESRD patients in the United States were receiving hemodialysis treatments
(83% in outpatient facilities and 1% in the home). Hemodialysis uses an
artificial kidney, called a dialyzer, to remove certain toxins and fluid from
the patient's blood and a machine to control external blood flow and to monitor
certain vital signs of the patient. Hemodialysis patients are connected to a
dialysis machine via a vascular access device. The dialysis process occurs
across a semipermeable membrane that divides the dialyzer into two distinct
chambers. While the blood is circulated through one chamber, a premixed
dialysate solution is circulated through the other chamber. The toxins and
excess fluid from the blood cross the membrane into the dialysate solution. A
typical hemodialysis treatment lasts three to four hours and is administered
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three times per week. During the dialysis procedure, patients generally remain
seated next to the hemodialysis machine, but are able to read, watch television
(if available) or converse with other patients or clinic staff. Most clinics
provide some flexibility in scheduling (such as evening and weekend hours) to
minimize disruption to the patients' lives. In certain cases, hemodialysis may
also be performed at home for patients who are medically suitable and have a
willing and capable assistant. Home hemodialysis requires training for both the
patient and the caregiver, and requires monitoring by a designated outpatient
facility.
PERITONEAL DIALYSIS. As of December 31, 1996, HCFA estimates that
approximately 16% of all ESRD patients were receiving peritoneal dialysis in the
home, under the supervision of an outpatient facility. There are several
variations of peritoneal dialysis. The most common forms are continuous
ambulatory peritoneal dialysis ("CAPD") and continuous cycling peritoneal
dialysis ("CCPD"). All forms of peritoneal dialysis use the patient's peritoneal
(abdominal) cavity to eliminate fluid and toxins from the patient's blood. CAPD
utilizes a sterile, pharmaceutical grade dialysate solution, which is introduced
into the patient's peritoneal cavity through a surgically implanted catheter.
Toxins in the blood continuously cross the peritoneal membrane into the
dialysate solution. After several hours, the patient must drain and replace the
fluid. CCPD is performed in a manner similar to CAPD but utilizes a mechanical
device to cycle the dialysate solution while the patient is sleeping. Peritoneal
dialysis patients are closely monitored by the designated dialysis facility,
either through periodic (at least monthly) visits to the facility or through
visits to the patient's home by a dialysis facility nurse.
PATIENT CARE PROFESSIONALS. ESRD patients are generally under the care of a
nephrologist, who is typically supported by a team of dialysis professionals,
including:
NEPHROLOGISTS. Nephrology is a subspecialty within the specialty of internal
medicine. Nephrologists specialize in the management of all forms of
kidney-related ailments and the administration of related services.
Nephrologists typically are the primary care physicians for ESRD patients. As
specialists, nephrologists provide consultation services to other physicians'
patients who suffer from kidney-related ailments and examine and treat pre-ESRD
patients. Nephrologists serve as the primary gatekeepers of ESRD patients and,
in consultation with their patients, play a significant role in determining
which dialysis facilities and hospitals will be used by such patients. While
managed care directs a small minority of these patients (estimated by HCFA at 3%
in 1996), nephrologists direct the vast majority of patients.
PATIENT CARE PERSONNEL. Patient care personnel include registered nurses and
patient care technicians who work under the supervision of registered nurses.
Patient care personnel administer the dialysis treatment in accordance with the
nephrologists' prescriptions. Nurses also assess the patient's condition
throughout treatment, administer all medication, provide psycho-social
assessments, and educate patients regarding their treatment.
DIETICIANS. Dialysis patients in general, and hemodialysis patients in
particular, must follow a restricted diet. The effectiveness and the efficiency
of each patient's dialysis treatment is influenced by the patient's compliance
with these dietary restrictions. In addition, many dialysis patients receive a
complex regimen of nutritional supplements to augment their diet. Dialysis
facilities generally employ dieticians who are responsible for designing a
patient's diet, educating and training the patient about the importance of the
diet, and continually monitoring the patient's nutritional status and compliance
with dietary guidelines.
SOCIAL WORKERS. Federal regulations require that a social worker, having a
masters degree in social work and a background in clinical practice, provide
assessment and counseling to ESRD patients and their families. Social workers
are also required to assist ESRD patients in obtaining transportation to and
from the dialysis facility, financial support services from government and
private sources when needed, insurance and dialysis services when traveling away
from home.
BUSINESS STRATEGY
The Company's goal is to continue expanding its geographic coverage and
market penetration while maintaining high quality patient care and physician
satisfaction with its services. Renex intends to enter new markets primarily
through acquisitions and to penetrate existing markets primarily through DE NOVO
development, same facility growth and the establishment of alliances with
hospitals and managed care organizations.
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BUSINESS DEVELOPMENT ACTIVITIES
In March 1998, the Company through its wholly-owned subsidiary, Renex
Dialysis Clinic of South Georgia, Inc., purchased certain of the assets and the
operating business and assumed certain liabilities of South Georgia Dialysis
Services, LLC, a Georgia limited liability company ("SGDS") which operated four
dialysis facilities in southern Georgia.
During 1998, the Company developed three facilities located in Maplewood,
Missouri; Union, Missouri; and Bloomfield, New Jersey. These facilities began
servicing patients between March 1998 and August 1998.
OPERATIONS
OUTPATIENT FACILITIES
As of December 31, 1998, the Company operated 20 outpatient dialysis
facilities, with a total of 319 certified dialysis stations. All of the
facilities are operated through wholly-owned subsidiaries.
OPERATION OF FACILITIES
The Company's dialysis facilities are designed specifically for outpatient
hemodialysis and for the training of peritoneal dialysis and home hemodialysis
patients. Each facility has between 10 and 21 dialysis stations and many
facilities are designed to accommodate additional stations as patient census
increases. In addition, each facility generally contains a reception room, a
patient preparation area, a nurse's station, a patient examination room, a
patient training room, a water treatment room, a dialyzer reprocessing room,
staff work areas, offices, a kitchen, a supply room, and a lounge. All of the
Company's facilities contain state-of-the-art equipment and modern
accommodations and are typically located near public transportation. The
facilities are designed to provide a pleasant and comfortable environment for
each patient and include such amenities as color television sets for each
patient station, VCRs for patient education and entertainment, and portable
telephones.
Each facility is managed by a full time professional administrator or nurse
manager with experience in the dialysis industry. Each administrator or manager
is supported by nursing professionals, social workers, dieticians, technicians
and clerical support staff. In accordance with Medicare regulations, each
facility is supervised by a practicing physician, typically a nephrologist, who
serves as medical director. The medical director is responsible for implementing
the Company's policies and procedures to assure high quality patient care. The
medical director's responsibilities also include patient education,
recommendation of appropriate equipment, development of staff training programs
and community relations.
The Company also offers peritoneal dialysis, both CAPD and CCPD, at all of
its facilities. Such services consist of patient training, the provision of
equipment and supplies, patient monitoring and follow-up assistance to patients
who prefer and are able to receive this form of dialysis. Patients and their
families or other caregivers are trained over a two week period by a registered
nurse to perform peritoneal dialysis.
INPATIENT DIALYSIS SERVICES
The Company provides inpatient dialysis services to 17 hospitals pursuant to
contracts negotiated with the hospitals for treatments. Treatment fees are paid
directly by the hospitals. The Company's inpatient dialysis services are
provided in hospitals located in Mississippi, Massachusetts, Pennsylvania,
Illinois and Georgia. In most instances, the Company provides the dialysis
equipment and supplies and administers the dialysis treatment when requested.
Examples of cases in which inpatient services are required include patients with
acute kidney failure resulting from trauma or other causes, newly diagnosed but
clinically unstable ESRD patients and ESRD patients who require hospitalization.
The Company also provides hemapheresis treatments in several hospitals in
Georgia.
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STAFF-ASSISTED HOME HEMODIALYSIS SERVICES
In addition to the Company's outpatient dialysis facilities, the Company
provides staff-assisted home hemodialysis services in St. Louis, Missouri. In
this program, the Company provides dialysis equipment, supplies and a qualified
nurse or technician to administer the hemodialysis treatments in the patient's
home. Such treatments are performed three times per week on a schedule
convenient to the patient.
ANCILLARY SERVICES
The Company provides a full range of ancillary services to ESRD patients,
the most prominent of which is the physician prescribed administration of
bioengineered erythropoietin ("EPO"). EPO is a substitute for the natural
protein, erythropoietin, which is secreted by the kidneys and stimulates the
production and development of red blood cells. Low levels of erythropoietin in a
patient's blood often result in anemia. EPO is useful in the treatment of anemia
associated with ESRD and reduces the need for blood transfusions. Substantially
all ESRD patients receive EPO in dosages varying with a patient's weight and
blood count. Overall, the Company derived approximately one-third of its net
revenues for the years ended December 31, 1996, 1997 and 1998 from the provision
of ancillary services. The majority of such net revenues were from the
administration of EPO. EPO is produced by only one manufacturer. Although the
Company has not experienced any difficulty in obtaining supplies of EPO, there
can be no assurance that the Company will be able to obtain sufficient supplies
at reasonable prices, or at all.
Other ancillary services that the Company provides to its ESRD patients
include electrocardiograms, bone densitometry studies, nerve conduction studies,
chest x-rays, blood transfusions and the administration of pharmaceutical
products specific to ESRD, such as iron dextran (an intravenous iron
supplement), calcitriol (an intravenous calcium supplement) and intradialytic
parenteral nutrition ("IDPN").
MEDICAL DIRECTORS
Medicare regulations mandate that, in order to receive reimbursement under
the Medicare ESRD program, the dialysis facility must be "under the general
supervision of a Director who is a physician." Generally, the medical director
must be certified or board eligible in internal medicine, with at least twelve
months of training or experience in the care of ESRD patients at dialysis
facilities. Some facilities may also have associate medical directors.
Medical directors and associate medical directors enter into written
agreements with the Company which specify their duties and establish their
compensation. Compensation is fixed for periods of one year or more, is
separately negotiated for each facility, and generally depends upon competitive
factors in the local market and the medical director's professional
qualifications and responsibilities. Agreements between the Company and its
medical directors have a minimum term of five years and may extend for as much
as ten years. Under these agreements, the Company pays its medical directors a
base annual compensation, which is paid in monthly installments. Medical
director agreements, to the extent permitted by law, restrict the medical
director from acting as a medical director, owner or equity holder in competing
dialysis facilities within a specific geographic area. However, the agreements
do not prohibit the physician from providing direct patient care services at
other locations, and do not require or compensate the physician for referrals of
patients to the facility.
In connection with acquisitions, the Company generally requires
non-competition agreements from the sellers, whether physicians or otherwise.
Such non-competition agreements prohibit such sellers from owning, operating,
maintaining or otherwise participating in competing facilities within specific
geographic areas for periods of two to ten years.
QUALITY ASSURANCE/CONTINUOUS QUALITY IMPROVEMENT
Renex has established a system-wide quality assurance process, which
includes its Continuous Quality Improvement ("CQI") program, to ensure that a
high standard of care is provided to all of the Company's patients. The CQI
program is modeled after the Joint Commission on Accreditation of Healthcare
Organization's ten step process. The CQI program is implemented at the facility
level by the medical director, clinic administrator and director of nursing.
This process involves the continuous collection and analysis of patient care
data to identify areas for improvement and to monitor progress of previously
implemented measures. Each facility regularly audits its quality of care and
equipment to ensure that all aspects of patient care meet the standards set by
the Company's corporate office. The Company manages the CQI program at the
corporate level through the compilation and analysis of all facilities'
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statistical data. These data are used to compare the Company's overall
performance and each facility's specific performance to the national core
indicators established for the dialysis industry by HCFA and the regional ESRD
networks. Results of these comparisons are used to effect Company-wide
improvements.
Additional quality assurance support is provided by the Company's corporate
office through a quality assurance department. The department develops, monitors
and audits the quality standards of each dialysis facility on an ongoing basis
through reporting mechanisms and site inspections to ensure the facilities meet
the regulations of HCFA and the Occupational Safety and Health Administration.
SOURCES OF REIMBURSEMENT
The following table provides information regarding the percentage of net
revenues received by the Company by source:
The Company obtains a substantial portion of its reimbursement under a
prospective Medicare reimbursement system for dialysis services provided to ESRD
patients. The Social Security Act ("SSA") provides Medicare coverage for
individuals who are medically determined to have ESRD, regardless of age. 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. Once an individual is
medically determined to have ESRD, the SSA 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 SSA provides that
entitlement begins 90 days after the month in which a regular course of dialysis
is initiated.
Under the Medicare ESRD program, reimbursement rates per treatment are fixed
in advance and have been adjusted from time to time by the U.S. Congress.
Payment for dialysis services is based on a prospective system which was
implemented by HCFA in 1972. Providers are paid a base reimbursement rate per
dialysis treatment (the "Composite Rate"). The Composite Rate constitutes
payment for all routinely provided supplies, drugs, tests and services
incidental to dialysis. Other dialysis related ancillary services, including
certain drugs such as EPO, blood transfusions and certain tests ordered by
physicians, are separately reimbursed in accordance with Medicare's
reimbursement policies. Although this form of reimbursement limits the allowable
charge per treatment, it provides the Company with predictable and recurring per
treatment net revenue. Medicare, through its carriers, pays 80% of the amounts
set by the Medicare prospective reimbursement system. The remaining 20% is paid
by Medicaid, secondary private insurance coverage, if any, and/or the patient.
From time to time, the U.S. Congress adjusts the applicable Composite Rate
and fees based upon a review of several factors, including provider cost data
from prior years. Prior to 1983, the average Composite Rate was established at
$138 per treatment. In 1983, the average Composite Rate was reduced to $127 per
treatment for free-standing outpatient dialysis facilities. In 1986, the average
Composite Rate was further reduced to $125 per treatment. In January 1991, the
average composite rate was increased to $126, the current level. The Composite
Rate varies from region to region based on regional wage variations. In its
March 1999 REPORT TO THE CONGRESS, the Medicare Payment Advisory Commission
("MedPAC") recommended that the Composite Rate be increased in the range of 2.4%
to 2.9%. The Company is unable to predict what, if any, future changes may occur
in the Composite Rate. Any reductions in the Composite Rate could have a
material adverse effect on the Company's business, financial condition and
results of operations.
One ancillary item that provides the Company with significant net revenues
is the provision of Erythropoiten. Since 1989, the ESRD Program has funded the
administration of erythropoiten. Erythropoiten is produced synthetically in the
form of Epogen ("EPO"), a drug manufactured by only one supplier. Naturally
occurring erythropoiten, which is created in healthy kidneys and stimulates the
production of red blood cells in bone marrow, is not produced in sufficient
quantities in most ESRD patients. Consequently, ESRD patients are typically
anemic and require EPO hormonal replacement therapy.
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Initially, the ESRD Program funded EPO use at $40 per treatment for dosing
to 10,000 units and $70 for dosages in excess of 10,000 units. In 1990 HCFA
adopted a policy to fund at $11 per 1,000 units, a rate which remained unchanged
for four years. This system was subject to ceiling hematocrit levels (a
measurement of the percentage of red blood cells per unit volume of blood), with
exceptions made for patients that provided medical justification. In 1994,
funding for EPO was cut to $10 per 1,000 units. No further change in the
reimbursement level of EPO has been made since 1994. The current administration
proposed budget for fiscal year includes a proposal to reduce reimbursement for
EPO from $10 to $9 per 1,000 units administered.
Prior to June 1997, HCFA did not fund EPO reimbursement claims involving
patients for whom hematocrit levels exceeded 36% in any billing period. This
policy was modified in July 1997 when HCFA adopted a 36.5% ceiling based on a
90-day trailing hematocrit average. On June 20, 1998, HCFA issued a Program
Memorandum to its intermediaries and carriers that removed certain requirements
relating to EPO reimbursement and effectively raised the hematocrit ceiling to
37.5%.
HCFA is also developing a medical justification exception policy that will
establish rigid guidelines for sustaining hematocrit levels greater than 36%.
Until this is developed, intermediaries are instructed to conduct post-payment
review for claims above 36% to ensure that medical justification is properly
documented. The Company cannot predict future changes in the reimbursement rate
for the administration of EPO, the future reimbursement dosage limit per
administration, or the cost of the drug. Any reductions in reimbursement, dosage
limitations, or increases in the cost of the drug could have a material adverse
effect on the Company's business, financial condition and results of operations.
Effective January 1, 1998, the reimbursement rates for drugs other than EPO
were reduced by approximately 5%. The current administration proposed budget for
fiscal year proposes to reduce the amount of reimbursement for drugs, other than
EPO, from 95% to 83% of the average wholesale price. The Company cannot predict
future changes in the reimbursement rate, dosage limitations or costs of these
drugs administered to its patients. Any reductions in reimbursement, dosage
limitations, or increases in the costs of the drugs could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In March 1996, HCFA published a request for proposals ("RFP"), requesting
bids from managed care companies to participate in a three year test program for
the comprehensive treatment of ESRD patients, including dialysis, kidney
transplantation, physician and hospital services. Currently, managed care
companies are only permitted to arrange for the dialysis treatment of existing
members of their programs who develop ESRD subsequent to their enrollment in the
managed care plan. HCFA selected four managed care companies which were allowed
to recruit ESRD patients beginning in mid-1997 in a test program over a three
year period. One managed care company subsequently withdrew from the test
program and was not replaced. The results of the test program will determine
whether HCFA will open up the market to additional managed care companies. The
RFP included a capitation payment scale for ESRD patients. HCFA also required
that the managed care companies offer certain extra services including
rehabilitation counseling, free transportation to physicians' offices and
discounted prescription drugs to all ESRD patients. The Company is unable to
predict whether the HCFA test program will be successful and result in large
numbers of ESRD patients enrolling in managed care programs, or the impact, if
any, of such enrollment on the Company's operations. The widespread introduction
of managed care to the dialysis industry could result in a change of the
reimbursement rates for the Company's services, which could have a material
effect on the Company's business, financial condition and results of operations.
MEDICARE ELIGIBILITY. Medicare laws provide that any individual, regardless
of age, who has no primary insurance coverage from a private insurance company
or managed care organization and is diagnosed as having ESRD is automatically
covered under Medicare if he or she is Medicare eligible and applies for
coverage. Coverage varies depending upon the age of the patient and the status
of other insurance coverage. For ESRD patients over age 65, who are not covered
by an employer group health insurance plan, Medicare coverage commences
immediately. For ESRD patients over age 65 who are covered by an employer group
health plan, Medicare coverage begins after a 30 month coordination of benefits
period.
For ESRD patients under age 65 who are not covered by an employer group
health insurance plan, Medicare coverage begins 90 days following the month in
which the patient begins dialysis. During the first 90 days, Medicaid (if the
patient is eligible), private insurance, or the patient is responsible for
payment for dialysis services. If an ESRD patient who is not covered by an
employer group health plan begins home dialysis training during the first 90
days of dialysis, Medicare immediately becomes the primary payor.
Effective August 1997, ESRD patients under age 65 who are covered by an
employer group health insurance plan must wait 33 months (consisting of the
three months' entitlement waiting period described above and an additional 30
months coordination of benefits period) before Medicare becomes the primary
payor. During the 33 month period, the employer group health plan is
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responsible for paying primary benefits at its negotiated rate or, in the
absence of such a rate, at the Company's usual and customary charges. Following
such 33 month period, Medicare becomes the primary coverage and the group
insurance becomes secondary. If an ESRD patient who is covered by an employer
group health plan elects home dialysis training during the first 90 days of
dialysis, Medicare becomes the primary payor after 30 months.
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. In certain states, Medicaid serves as
the primary payor for patients who are not eligible for Medicare benefits. The
programs also serve as supplemental insurance programs for the Medicare
co-insurance portion and provide coverage for certain services that are not
covered by Medicare. State regulations generally follow Medicare reimbursement
levels and coverages without any co-insurance requirements. 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 PAYOR REIMBURSEMENT/ACUTE CARE CONTRACTS. The Company receives
reimbursement from private payors for ESRD treatments and ancillary services
prior to Medicare becoming the primary payor, at rates which can be
significantly higher than the per treatment rate set by Medicare. After Medicare
becomes a patient's primary payor, private payors become secondary payors and
generally reimburse the Company for the 20% of the Medicare allowable rate not
paid by Medicare. The Company has also negotiated non-exclusive managed care
contracts in certain markets with certain payors at rates which range from the
Medicare composite rate to significantly higher amounts. The Company also
receives payments for the provision of dialysis services from several hospitals
under acute care contracts at rates significantly higher than the Medicare
composite rate.
GOVERNMENT REGULATION
GENERAL
The Company's operations are subject to extensive government regulation at
the federal, state and local levels. These government regulations require, among
other things, that the Company meet various standards governing the construction
and management of facilities, personnel, maintenance of proper records,
equipment and quality assurance programs. In order to receive Medicare
reimbursement, dialysis facilities must be certified by Medicare and are subject
to periodic inspection to assure compliance with applicable regulations.
Medicare's approval is also required for the addition of dialysis stations at
existing facilities. All of the Company's facilities are Medicare certified.
All states have specific regulations governing dialysis services. These
regulations vary from state to state and many include approval of owners and
construction plans, licensure of facilities, inspections or certificates of need
("CON"). Except for its facilities located in Mississippi, the Company does not
presently operate in any state which has an applicable CON law. However, the
Company may in the future acquire or develop facilities in such states. In such
event, the Company would apply for approval through the applicable CON process
and comply with all applicable licensing requirements.
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 net revenues is derived or a change reducing dialysis reimbursement or
reducing or eliminating coverage for dialysis services would have a material
adverse effect on the Company's business, financial condition and results of
operations. 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 or budget initiatives will not
result in a material adverse change to the Company.
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FRAUD AND ABUSE
ANTI-KICKBACK STATUTE. The Company's operations are subject to the illegal
remuneration provisions of the federal SSA governing federally funded health
care programs, including Medicare and Medicaid, and similar state laws that
impose criminal penalties 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. Violations of the federal anti-kickback statute are
punishable by criminal penalties, including imprisonment, fines, freezing of
assets, asset forfeiture and exclusion of the provider from future participation
in the Medicare or Medicaid programs. Civil penalties for violations of the
federal anti-kickback statute include assessments of $10,000 per improper claim
for payment, plus three times the amount of such claim and suspension 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.
To provide guidance regarding the federal anti-kickback statute, the OIG has
published regulations that create exceptions or "safe harbors" for certain
business transactions. The safe harbors are narrowly drafted and many lawful
transactions fall outside their scope. However, 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.
Since the federal anti-kickback statute has been broadly interpreted by the
government and through court decisions, it could limit the manner in which the
Company conducts its business. The Company seeks to structure its various
business arrangements, including its relationship with physicians, to comply
with the federal provisions. However, there can be no assurance that the
Company's arrangements with physicians and other business arrangements comply in
all material respects with the federal anti-kickback statute and all other
applicable related laws and regulations. Because of the broad provisions of the
federal anti-kickback statute, the OIG or another governmental agencies may
require the Company to change its practices causing a material adverse effect on
its business, financial condition and results of operations.
LEASES WITH PHYSICIANS. Certain of the Company's dialysis facilities are
leased from entities in which physicians who refer patients to the Company hold
interests. Because of the referral of patients by these physicians, the federal
anti-kickback statute may apply. HHS has promulgated a safe harbor relevant to
such arrangements relating to space rental. While the Company seeks to structure
its arrangements to satisfy the safe harbor provisions, there can be no
assurance that the Company's leases are in compliance with the federal
anti-kickback statute.
MEDICAL DIRECTOR RELATIONSHIPS. Because the Company's medical directors
refer patients to the Company's facilities, the federal anti-kickback statute
could apply to such referrals. The Company seeks to comply with the requirements
of the federal anti-kickback statute, or if applicable, the personal services or
employment safe harbor provisions, when entering into agreements or contracts
with its medical directors and other physicians. However, there can be no
assurance that the Company's contractual arrangements with its medical directors
are in compliance with the federal anti-kickback statute.
ACUTE DIALYSIS SERVICES. Under the Company's acute inpatient dialysis
service arrangements, the Company agrees to provide a hospital with supervised
emergency or acute dialysis services, including qualified nursing, technical
personnel and services, and, in most cases, equipment. Because physicians under
contract with the Company may refer patients to hospitals with which the Company
has an acute dialysis service arrangement, the federal anti-kickback statute
could apply. There can be no assurance that the Company's contractual
arrangements with hospitals for acute inpatient dialysis services are in
compliance with the federal anti-kickback statute.
CERTAIN RELATIONSHIPS WITH LABORATORIES AND IDPN SUPPLIERS. The Company
enters into arrangements with laboratories for purposes of obtaining blood tests
and laboratory services for its patients. Such services include tests currently
reimbursed under the Composite Rate, as well as tests reimbursed separately from
the Composite Rate. In October 1994, the OIG published a Special Fraud Alert
which stated that the federal anti-kickback statute could be violated when a
dialysis facility obtains discounts from a laboratory for tests encompassed
within the Composite Rate in return for referring all or most of the dialysis
facility's tests not included in the composite rate to the laboratory. In
addition, the Company has arrangements with suppliers of IDPN. In May 1993, the
OIG issued a report indicating its belief that many ESRD patients receive IDPN
although they do not meet Medicare coverage guidelines for the treatment.
Furthermore, in July 1993, the OIG issued a Management Advisory Report
indicating that "administration fees" paid by
8
IDPN suppliers to dialysis facilities for administering IDPN to patients during
dialysis could violate the federal anti-kickback statute when the payments made
to the dialysis facilities are unreasonably high.
While the Company seeks to structure all of its arrangements so as not to
violate the anti-kickback statute, Tthere can be no assurance that the Company's
current arrangements with laboratories, IDPN suppliers, and other persons or
entities who either refer patients to the Company or from whom the Company
purchases items or services are in material compliance with the federal
anti-kickback statute or that the Company's future arrangements will not be
challenged, required to be changed, or result in sanctions. Furthermore, there
can be no assurance that the Company will not be challenged or subject to
sanctions for any of its 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 business, financial condition and results of
operations.
STARK LAW. Stark II restricts physician referrals for certain "designated
health services" to entities with which a physician or an immediate family
member has a "financial relationship." The entity is prohibited from claiming
payment under the Medicare or Medicaid programs for services rendered pursuant
to a prohibited referral and is liable for the refund of amounts received
pursuant to prohibited claims. The entity also can incur civil penalties of up
to $15,000 per improper claim and can be excluded from participation in the
Medicare or Medicaid programs. Stark II provisions became effective on January
1, 1995. Comparable provisions applicable to clinical laboratory services
("Stark I") became effective in 1992.
A "financial relationship" under the Stark provisions 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 associations, and in one case a medical director is a
general partner of a partnership which leases real property to the Company.
Certain medical directors also own shares of the Company's Common Stock, and/or
options to purchase shares of Common Stock. Accordingly, such medical directors
have a "financial relationship" with the Company which may be applicable to the
Stark provisions.
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 and prosthetic
devices and supplies; physical and occupational therapy services; outpatient
prescription drugs; durable medical equipment, and inpatient and outpatient
hospital services. Kidney dialysis is not a designated health service under
Stark II. However, the 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 were considered
separately rather than collectively as dialysis. The Stark I regulations provide
an exception for certain clinical laboratory services reimbursed under the
Medicare composite rate for dialysis. HHS recently promulgated regulations
clarifying that ancillary services administered in conjunction with dialysis
treatments which are not included in the Composite Rate, such as EPO,
non-routine parenteral items and non-routine laboratory services, are considered
part of the dialysis treatment and are not therefore a designated health
service.
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. Although the Company does not believe Stark II
applies to its operations, the Company believes that several of its financial
relationships with referring physicians meet the criteria for an exception. For
example, the Company believes, based on the language of Stark II, that its
agreements with its medical directors or their professional associations satisfy
the exceptions for compensation pursuant to employment relationships, personal
services contracts or space leasing arrangements.
With respect to physician ownership/investments in the Company, Stark II
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 million in stockholder equity at the
end of the issuer's most recent fiscal year or on average during the previous
three fiscal years. The Company is not currently eligible to rely on this
exception. There can be no assurance that if Stark II is ultimately interpreted
to apply to the Company's operations, the
9
Company will be able to bring its financial relationships with referring
physicians into compliance with the provisions of Stark II, including relevant
exceptions. If the Company cannot achieve such compliance and Stark II is
broadly interpreted by HCFA to apply to the Company, such application of Stark
II could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, there can be no assurance that
the Company will not be challenged or subjected to sanctions for any of its past
arrangements, including repayment of amounts made pursuant to a prohibited
referral. Any such challenge, including any related sanctions which might be
assessed, may cause a change in the Company's operations and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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 the federal government to apply to
the Company's acute dialysis arrangements with hospitals. However, Stark II
contains exceptions for certain equipment rental and personal services
arrangements. There can be no assurance that the Company's contractual
arrangements with hospitals for acute inpatient dialysis services are in
compliance with the requirements of such exceptions to Stark II.
STATE REFERRAL REGULATIONS. Several states have enacted statutes prohibiting
physicians from holding financial interests in various types of medical
facilities to which they refer patients. The Company believes, based on its
understanding of such state laws, that its arrangements with physicians are in
material compliance with such laws. However, given the recent enactment of such
state laws, there is an absence of definitive interpretative guidance in many
areas and there can be no assurance that one or more of the practices of the
Company might not be subject to challenge under such state laws. If one or more
of such state laws are interpreted to apply to the Company and the Company is
determined to be liable for violations of such state laws, the application of
such state laws could have a material adverse effect on the Company's business,
financial condition and results of operations.
THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 AND THE
BALANCED BUDGET ACT OF 1997. In August 1996, President Clinton signed the Health
Insurance Portability and Accountability Act ("HIPAA") which requires, among
other things, that the Secretary of HHS issue advisory opinions regarding what
constitutes a violation under the federal anti-kickback statute and whether an
arrangement satisfies a statutory exception or regulatory safe harbor to the
federal anti-kickback statute. Prior to HIPAA's enactment, advisory opinions
regarding the federal anti-kickback statute could not be obtained from the OIG.
The OIG recently issued regulations regarding the procedures for obtaining
advisory opinions. The Company has not sought any advisory opinions from the OIG
to date.
The Balanced Budget Act of 1997 also includes numerous health fraud
provisions, including: (i) new Medicare and Medicaid exclusion authority for the
transfer of ownership or control interest in an entity to an immediate family or
household member in anticipation of, or following, a conviction, assessment, or
exclusion; (ii) increased mandatory exclusion periods for multiple health fraud
convictions, including permanent exclusion for those convicted of three health
care-related crimes; (iii) authority for the Secretary of HHS to refuse to enter
into Medicare agreements with convicted felons; (iv) new civil money penalties
for contracting with an excluded provider or violating the Medicare and Medicaid
anti-kickback statute; (v) new surety bond and information disclosure
requirements for certain providers and suppliers; and (vi) an expansion of the
mandatory and permissive exclusions added by HIPAA to any federal health care
program (other than the Federal Employees Health Benefits Program).
FALSE CLAIMS. The Company is also subject to federal and state laws
prohibiting an individual or entity from knowingly and willfully presenting
claims for payment by Medicare, Medicaid or other third party payors that
contain false or fraudulent information. These laws provide for both criminal
and civil penalties. Furthermore, providers found to have submitted claims which
they knew or should have known were false, fraudulent, or for items or services
that were not provided as claimed, may be excluded from Medicare and Medicaid
participation, required to repay previously collected amounts, and/or subject to
substantial civil monetary penalties. In addition, the OIG has taken the
position that violations of the anti-kickback statute and the Stark law
constitute false claims. Although dialysis facilities are generally reimbursed
by Medicare based upon prospectively determined composite rates, the submission
of Medicare cost reports and other requests for payment by dialysis facilities
are covered by these laws. The Company believes that it has procedures to ensure
the accurate completion of cost reports and other requests for payment. However,
there can be no assurance that cost reports or other requests for payment filed
by the Company's dialysis facilities will be materially accurate or will not be
subject to challenge under these laws. Such challenge, if successful, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
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
10
by the program to health care providers in order to achieve deficit reduction
targets, or to establish new quality standards, among other reasons. In that
regard, the Conference Report to the Balanced Budget Act of 1997 requires the
Secretary of HHS to audit cost reports for each renal dialysis provider at least
once every three years, beginning with costs reports for 1996, and requires the
Secretary to develop, not later than January 1, 1999, a method to measure and
report quality of Medicare renal dialysis services. The method must be
implemented by January 1, 2000. 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. 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. It is unknown whether such new legislation or regulations would have a
material adverse effect on the Company's business, financial condition and
results of operations.
OTHER REGULATIONS. The Company's operations are subject to various state
medical waste disposal laws. In addition, regulations under the Occupational
Safety and Health Act ("OSHA") attempt to limit occupational exposure to blood
and other potentially infectious materials. These regulations apply to all
industries in which employees could reasonably be expected to come in contact
with blood pathogens, including dialysis facilities. The regulations require
employers to provide Hepatitis B vaccinations and personal protective equipment.
Employers must establish policies and procedures for infection control,
hazardous waste disposal techniques and other matters to minimize risk of
contamination. Employers also have specific record maintenance requirements.
The Company believes it is in compliance with the OSHA regulations.
The Company believes that the health care services industry will continue to
be subject to substantial regulation at the federal and state levels, the scope
and effect of which cannot be predicted by the Company. Any loss by the Company
of its various federal certifications, its authorization to participate in the
Medicare and Medicaid programs or its licenses under the laws of any state or
other governmental authority from which a substantial portion of its net
revenues is derived would have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The dialysis industry is fragmented and highly competitive, particularly
with respect to the acquisition of existing dialysis facilities. Competition for
qualified nephrologists to act as medical directors is also intense. According
to HCFA, as of December 31, 1996, there were in excess of 3,000 dialysis
facilities in the United States. According to industry estimates, as of December
31, 1998, over half of all ESRD patients were treated by the four largest
outpatient dialysis providers. The largest multi-facility provider is Fresenius
Medical Care AG. Other large publicly owned dialysis companies include Gambro
Health Care Patient Services, Inc. (a subsidiary of Incentive AB), Total Renal
Care Holdings, Inc. and Renal Care Group, Inc. Many of the Company's competitors
have substantially greater financial resources than the Company and often
compete with the Company for acquisitions, development and/or management of
dialysis facilities. The Company may also experience competition from facilities
established by former medical directors or other referring physicians. In
addition, there are also a number of health care providers that have
substantially greater financial resources than the Company who may decide to
enter the dialysis industry. The Company believes that competition for
acquisitions increases the cost of acquiring dialysis facilities and there can
be no assurance that the Company will be able to compete effectively with such
competitors either for acquisitions or generally.
The Company believes that other important competitive factors in the
dialysis industry are the development of relationships with physicians, quality
of patient care, location and convenience of facilities.
INSURANCE
The Company maintains property and general liability insurance, professional
liability insurance on its professional staff and other insurance appropriate
for its operations. The Company believes that its current levels of such
insurance are adequate in amounts and coverage. However, there can be no
assurance that any future claims will not exceed applicable insurance coverage.
Furthermore, no assurance can be given that malpractice and other liability
insurance will be available in the future at a reasonable cost, or that the
Company will be able to maintain adequate levels of malpractice insurance
coverage in the future. Each medical director and each other physician with
staff privileges at the Company's facilities is required to maintain his or her
own malpractice insurance for patient care activities at the facilities.
11
EMPLOYEES
As of December 31, 1998, the Company had 247 full-time and 37 part-time
employees in its dialysis operations and an additional 33 full-time and 4
part-time employees in its corporate office. The Company's employees are not
represented by a labor union or covered by a collective bargaining agreement.
The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company maintains its principal executive offices in Coral Gables,
Florida and also maintains an office in Marietta, Georgia for its acute dialysis
services division. The Company owns and operates 20 dialysis centers in 8
states, all of which are located in leased facilities. The Company's facilities
generally occupy between 4,000 and 10,000 square feet of leased space, with
lease terms of five to ten years, typically renewable for at least five years.
The Company considers its properties to be in good operating condition and
suitable for the purposes for which they are being used. The following are the
locations of such facilities:
LOCATION OF FACILITY
University City, MO Orange, NJ
Pittsburgh, PA Woodbury, NJ
Tampa, FL North Andover, MA
Creve Coeur, MO Thomasville, GA
Amesbury, MA Camilla, GA
Philadelphia, PA Bainbridge, GA
Bridgeton, MO Quitman, GA
Jackson, MS Maplewood, MO
Delta, LA Union, MO
Port Gibson, MS Bloomfield, NJ
Expansion or relocation of the Company's dialysis facilities are subject to
compliance with conditions relating to participation in the Medicare ESRD
program and certain states' health department requirements. In states that
require a CON, approval of an application submitted by the Company would be
necessary for expansion or development of a new dialysis facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatments, which the Company
believes are covered by insurance. The Company is not involved in any material
litigation and is not aware of any potential claims which would give rise to
material liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the Company's fiscal year ended December 31, 1998.
12
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
System ("NASDAQ/NMS") under the symbol "RENX" since October 8, 1997 when the
Company completed its initial public offering.
The following tables sets forth for the periods indicated, the range of high
and low closing prices for the Company's Common Stock on the Nasdaq National
Market System.
FISCAL YEAR ENDED DECEMBER 31, 1997 HIGH LOW
----------------------------------- ---- ---
4th Quarter (October 8, 1997 to December 31, 1997)................ $8.25 $4.875
FISCAL YEAR ENDED DECEMBER 31, 1998
-----------------------------------
1st Quarter....................................................... 7.38 4.81
2nd Quarter....................................................... 7.19 5.25
3rd Quarter....................................................... 6.50 3.88
4th Quarter....................................................... 7.25 4.00
The closing sales price of the Company's Common Stock on March 22, 1999 was
$4.75 as reported on NASDAQ/NMS.
HOLDERS
As of March 22, 1999, the approximate number of record stockholders was 200.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since inception.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate that
any cash dividends will be paid on the Common Stock in the foreseeable future.
Any future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial condition,
results of operations, capital requirements, restrictions under any existing
indebtedness and such other factors as the Board of Directors deems relevant.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data of the
Company are qualified in their entirety by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's Consolidated Financial Statements and the Notes
thereto. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Years Ended December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- -----------
(in thousands, except share and operating data)
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $ 2,746 $ 8,794 $ 18,569 $ 26,073 $ 37,811
Operating expenses:
Facilities..................................... 2,405 6,809 14,625 20,182 28,311
General and administrative..................... 1,025 1,682 2,581 2,991 4,754
Provision for doubtful accounts................ 93 495 1,293 962 1,096
Depreciation and amortization.................. 126 509 1,642 1,635 2,394
--------- --------- --------- --------- ---------
Operating income (loss)...................... (903) (701) (1,572) 303 1,256
Other income (expenses):
Gain (loss) on sale of assets.................. -- -- 264 (27) (22)
Net interest income (expense).................. 61 (360) (915) (771) 271
Amortization of deferred financing costs....... -- (126) (226) (162) (29)
--------- --------- --------- ---------- ---------
Income (loss) before taxes....................... (842) (1,187) (2,449) (657) 1,476
Income tax expense............................. -- -- -- -- 106
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item.......... (842) (1,187) (2,449) (657) 1,370
Extraordinary charge for early retirement of
debt ........................................ -- -- -- (1,441) --
--------- --------- --------- ---------- ---------
Net income (loss)............................ $ (842) $ (1,187) $ (2,449) $ (2,098) $ 1,370
========== ========== ========== ========== =========
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) per share before extraordinary item $ (0.48) $ (0.61) $ (0.84) $ (0.14) $ 0.19
Extraordinary charge for early retirement of debt -- -- -- (0.31) --
--------- --------- --------- ---------- ----------
Net income (loss)................................ $ (0.48) $ (0.61) $ (0.84) $ (0.45) $ 0.19
========== ========== ========== ========== ==========
Weighted average shares outstanding.............. 1,741,450 1,944,759 2,930,540 4,672,707 7,065,270
========== ========== ========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) per share before extraordinary item $ (0.48) $ (0.61) $ (0.84) $ (0.14) $ 0.19
Extraordinary charge for early retirement of debt -- -- -- (0.31) --
--------- --------- --------- ---------- ---------
Net income (loss)................................ $ (0.48) $ (0.61) $ (0.84) $ (0.45) $ 0.19
========== ========== ========== ========== ==========
Weighted average shares outstanding.............. 1,741,450 1,944,759 2,930,540 4,672,707 7,123,006
========== ========== ========== ========== ==========
OPERATING DATA:
Patients (at period end)......................... 142 319 691 870 1,157
Treatments....................................... 10,260 33,702 77,919 115,689 157,488
Number of facilities (at period end)............. 4 7 12 13 20
December 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Current assets................ $ 2,527 $ 5,234 $ 6,059 $ 21,116 $ 17,850
Working capital............... 2,136 3,051 2,389 15,638 9,569
Total assets.................. 4,020 11,815 15,161 30,680 36,887
Total debt.................... 220 6,375 7,743 1,954 2,204
Total shareholders' equity.... 3,482 4,164 4,317 23,690 27,087
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company, which was established in July 1993, is a high quality provider
of dialysis and ancillary services to patients with ESRD, as well as acute
dialysis services to patients in hospitals. Since inception, the Company has
implemented an aggressive growth strategy designed to build its presence in
selected regional markets by establishing local clusters of dialysis facilities
through new facility ("de novo") development or the acquisition of existing
facilities. To date, Renex has grown primarily through DE NOVO development
because the Company believes such a strategy minimizes the initial capital
outlay. However, DE NOVO facilities achieve profitability only when they reach
sufficient utilization, which historically does not occur prior to twelve months
following opening. The Company has increased overall facility utilization from
an average of 41% at December 31, 1994 to an average of 63% at December 31,
1998, primarily through marketing efforts directed at local nephrologists,
patients and managed care organizations. The Company's overall facility
utilization decreased from 68% as of December 31, 1997 due to the opening of
three facilities during the year and the acquisition of four dialysis clinics in
March 1998 which had a combined utilization of 50%. In the future, the Company
believes that its growth will be through a combination of acquisitions and DE
NOVO development, which will allow expansion of its regional market presence and
provide entry into new regional markets.
As of December 31, 1998, the Company operated 20 outpatient dialysis
facilities, of which eleven were DE NOVO facilities opened between 1994 and
1998. In addition, from 1995 through 1998, the Company acquired via the purchase
of stock or assets, nine dialysis facilities.
In addition to its outpatient dialysis facilities, the Company manages a
home hemodialysis program and provides acute dialysis and hemapheresis
treatments to 17 hospitals through contractual arrangements with these
hospitals. The majority of these hospital contracts were added during the fourth
quarter of 1997, when the Company acquired certain assets of an acute dialysis
and hemapheresis company.
SOURCES OF NET REVENUES
The Company's net revenue is derived primarily from five sources: (i)
outpatient hemodialysis services; (ii) the administration of EPO and, to a
lesser extent, other ancillary services; (iii) peritoneal dialysis services;
(iv) acute inpatient hemodialysis and hemapheresis services to hospitalized
patients; and (v) home hemodialysis services. Services generally include the
provision of equipment and supplies. The Company's dialysis and ancillary
services are reimbursed primarily under the Medicare ESRD program in accordance
with rates established by HCFA. 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. Payments are
also provided by Medicaid, patients and non-governmental third-party payors for
the first three to 33 months of treatment as mandated by law. Payments made by
non-governmental third-party payors are generally at rates higher than the
Composite Rate. Rates paid for services provided to hospitalized patients are
negotiated with and reimbursed by individual hospitals. For the years ended
December 31, 1997 and 1998, approximately 74% and 67%, respectively, of the
Company's net revenues were derived from reimbursement by Medicare and Medicaid.
The Company will continue to be dependent upon revenue from Medicare and
Medicaid. Since dialysis is an ongoing, life sustaining therapy used to treat a
chronic condition, use of the Company's services is generally predictable and
not subject to seasonal or economic fluctuation. However, the Company's interim
and annual results of operations may be significantly affected by any changes in
Medicare, Medicaid or non-governmental third-party payor reimbursement rates and
the timing and costs of any acquisitions or DE NOVO facilities.
15
RESULTS OF OPERATIONS
The following table sets forth certain income statement items expressed as a
percentage of net revenues for the years ended December 31, 1996, 1997 and 1998:
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
--------- --------- -------
Net revenues.................................... 100.0% 100.0% 100.0%
-------- -------- ---------
Facilities expenses............................. 78.8 77.4 74.9
General and administrative expenses............. 13.9 11.5 12.6
Provision for doubtful accounts................. 7.0 3.7 2.9
Depreciation and amortization expenses.......... 8.8 6.3 6.3
Operating income (loss)......................... (8.5) 1.2 3.3
Net interest income (expense)................... (4.9) (3.0) 0.7
Extraordinary charge for early retirement of debt -- 5.5 --
Net income (loss)............................... (13.2) (8.0) 3.6
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUES. Net revenues for the year ended December 31, 1998 were $37.8
million compared to $26.1 million for the same period in 1997, representing an
increase of 45%. The increase in net revenues of $11.7 million was primarily
attributable to the acquisition of four dialysis clinics and an acute dialysis
services company totaling $4.7 million, a full twelve months' net revenue
totaling $2.2 million for a new facility opened in September 1997, $1.5 million
for three facilities opened during 1998, and the continued growth at existing
facilities of $3.3 million, along with the full impact of the Medicare Secondary
Payor provision which became effective in the second half of 1997.
FACILITIES EXPENSES. Facilities expenses primarily consist of costs and
expenses specifically attributable to the operation of the dialysis facilities,
including operating and maintenance costs of such facilities and all labor,
supplies and service costs related to patient care. Facilities expenses for the
year ended December 31, 1998 were $28.3 million compared to $20.2 million for
the same period in 1997, representing an increase of 40.3%. The increase was due
to the greater number of facilities in operation in 1998. As a percentage of net
revenues, facilities expenses decreased to 74.9% for the year ended December 31,
1998 from 77.4% for the same period in 1997. The decrease as a percentage of net
revenues was attributable to an increase in the commercial insurance/managed
care payor mix from 23.3% for the year ended December 31, 1997 to 27.0% for the
year ended December 31, 1998, and an increase in acute dialysis services, both
of which provide higher margins.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of headquarter expenses including marketing, finance, operations
management, legal, quality assurance, information systems, billing and
collections and centralized accounting support. General and administrative
expenses for the year ended December 31, 1998 were $4.8 million compared to $3.0
million for the same period in 1997, representing an increase of 58.9%. The
increase was due to increased personnel and related expenses to support the
greater number of facilities in operation, accruals related to management
incentive programs and costs associated with being a public company. As a
percentage of net revenues, general and administrative expenses increased to
12.6% for the year ended December 31, 1998 from 11.5% for the same period in
1997. The increase as a percentage of net revenues was due to accruals related
to management incentive programs and an increase in costs associated with being
a public company.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts is a
function of the patient payor mix, collection experience 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. The provision for doubtful accounts for
the year ended December 31, 1998 was $1.1 million compared to $1 million for the
same period in 1997, representing an increase of 13.9%. As a percentage of net
revenues, the provision for doubtful accounts decreased to 2.9% for the year
ended December 31, 1998 from 3.7% for the same period in 1997. The decrease was
primarily due to an increased emphasis upon collection of aged amounts and an
improvement in the aging of the accounts receivable.
16
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the year ended December 31, 1998 were $2.4 million compared to $1.6
million for the same period in 1997, representing an increase of 46.4%. The
increase was primarily attributable to the acquisition of four dialysis clinics,
the opening of three facilities, and the acquisition of an acute dialysis and
hemapheresis business. As a percentage of net revenues, depreciation and
amortization expenses were 6.3% for the years ended December 31, 1998 and 1997.
NET INTEREST INCOME (EXPENSE). Net interest income for the year ended
December 31, 1998 was $271,000 compared to net interest expense of $771,000 for
the same period in 1997, representing an income increase of approximately $1.0
million. The increase was primarily due to the payoff in October 1997 of the
Company's subordinated debt and the investment of the remaining proceeds from
the Company's IPO.
NET INCOME (LOSS). The Company had net income of $1.4 million for the year
ended December 31, 1998 compared to a net loss of $2.1 million for the same
period in 1997, an income increase of approximately $3.5 million.
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET REVENUES. Net revenues for the year ended December 31, 1997 were $26.1
million compared to $18.6 million for the same period in 1996, representing an
increase of 40.4%. The increase in net revenues of $7.5 million was primarily
attributable to the continued growth at existing facilities of $2.7 million, the
full year's revenues of $4.5 million from two facilities opened during the
fourth quarter of 1996, and revenues of $400,000 related to both the opening of
a DE NOVO facility and the acquisition of an acute dialysis and hemapheresis
services company during the fourth quarter.
FACILITIES EXPENSES. Facilities expenses for the year ended December 31,
1997 were $20.2 million compared to $14.6 million for the same period in 1996,
representing an increase of 38.0%. The increase was due to the greater number of
facilities in operation in 1997. As a percentage of net revenues, facilities
expenses decreased to 77.4% for the year ended December 31, 1997 from 78.8% for
the same period in 1996. The decrease as a percentage of revenues was due to
increased patient utilization in 1997 at the facilities opened in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the year ended December 31, 1997 were $3.0 million compared to $2.6 million for
the same period in 1996, representing an increase of 15.9%. The increase was due
to increased personnel and related expenses to support the greater number of
facilities in operation. As a percentage of net revenues, general and
administrative expenses decreased to 11.5% for the year ended December 31, 1997
from 13.9% for the same period in 1996. The decrease as a percentage of revenues
was due to an increase in net revenues from increased utilization of existing
facilities which did not require a proportionate increase in corporate overhead.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts for the
year ended December 31, 1997 was $1.0 million compared to $1.3 million for the
same period in 1996, representing a decrease of 25.6%. As a percentage of net
revenues, the provision for doubtful accounts decreased to 3.7% for the year
ended December 31, 1997 from 7.0% for the same period in 1996. This decrease was
due to an increased emphasis upon and improved collections of aged accounts
which have improved the Company's days sales in accounts receivable.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the year ended December 31, 1997 were $1.6 million for both 1997
and 1996. As a percentage of net revenues, depreciation and amortization
expenses decreased to 6.3% for the year ended December 31, 1997 from 8.8% for
the same period in 1996. This decrease was due to the write-off of certain
intangible assets in 1996 of $437,000 associated with the acquisition in 1996 of
a facility under development.
NET INTEREST INCOME (EXPENSE). Net interest expense for the year ended
December 31, 1997 was $771,000 compared to $915,000 for the same period in 1996
representing a decrease of 15.7%. The decrease of $144,000 was primarily due to
the retirement of the Company's subordinated loan as a result of the Company's
initial public offering ("Offering") in October 1997.
EXTRAORDINARY CHARGE FOR EARLY RETIREMENT OF DEBT. As a part of the use of
proceeds from the Offering, in October 1997 the Company paid off its
subordinated loan which had an outstanding balance of $6.3 million. This early
retirement of debt resulted in a one time charge of $1.4 million which consisted
primarily of the write-off of deferred financing costs, along with certain
prepayment penalties and charges related to the redemption of warrants issued in
connection with such indebtedness.
17
NET LOSS. The Company had a net loss of $2.1 million for the year ended
December 31, 1997 compared to a net loss of $2.4 million for the same period in
1996, a decrease of $351,000, or 14.3%.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital resources for maintenance, refurbishing and
expansion of existing facilities, acquisitions, DE NOVO facilities, working
capital and general corporate purposes. The Company intends to finance its
growth and working capital requirements, as well as purchases of additional
equipment and leasehold improvements, from cash on hand, cash generated from
operations and the Company's secured line of credit described below. As of
December 31, 1998, the Company had working capital of approximately $9.6 million
of which $9.1 million consisted of cash and cash equivalents, compared to
working capital of $15.6 million of which $14.8 million consisted of cash and
cash equivalents and securities available for sale as of December 31, 1997. The
decreases were primarily a result of the cash purchase of four facilities for
$4.5 million and purchases of property and equipment of $3.5 million, primarily
for three DE NOVO facilities opened in 1998.
Net cash provided by operating activities was $3.5 million and $2.4 million
for the years ended December 31, 1998 and 1997, respectively. Net cash provided
by operating activities consisted of the Company's net income, increased by
non-cash expenses such as depreciation, amortization and the provision for
doubtful accounts and adjusted by changes in components of working capital,
primarily accounts receivable, due to third-parties and accrued expenses.
The Company requires substantial working capital to cover the expenses and
initial losses of each DE NOVO facility. Once a DE NOVO facility is operational,
the Company is unable to bill for services until it receives a Medicare provider
number and the Medicare intermediary installs its electronic billing software at
the facility. For these reasons, there is generally a 90-day delay before the
Company will receive payment on its initial services at such facility. In
addition, the dialysis industry is characterized by long collection cycles
because Medicaid and private insurance carriers require substantial
documentation to support reimbursement claims and often take a substantial
amount of time to process claims. As a result, the Company requires significant
working capital to cover expenses during the collection process.
Net cash used for investing activities was $3.4 million and $7.5 million for
the years ended December 31, 1998 and 1997, respectively. The cash used in 1998
related primarily to the $4.5 million cash purchase of four facilities in March
1998, along with $3.5 million for purchases of fixed assets, offset by the sale
of $5.1 million in securities available for sale. The cash used in 1997
consisted primarily of the purchase of $5.1 million in securities available for
sale, along with $1.9 million for purchases of fixed assets. Historically, the
Company's principal uses of cash in investing activities have been related to
purchases of new equipment and leasehold improvements for the Company's existing
facilities, the cost of development of additional facilities and acquisitions.
The Company opened a facility in March 1998 and two more facilities during the
third quarter.
Net cash used for financing activities for the year ended December 31, 1998
was $755,000. This consisted primarily of payments on capital lease obligations
and expenditures associated with the issuance of stock. Net cash provided by
financing activities for the year ended December 31, 1997 was $13.9 million.
This consisted primarily of $21.6 million from the net proceeds of the Company's
initial public offering, offset by payments on the early retirement of debt of
$6.3 million, and the payments on capital lease obligations of $1.0 million.
In April 1998, the Company obtained a $15 million secured line of credit
with a financial institution (the "Line of Credit"). Borrowings under the Line
of Credit are based on cash flow measurements, and bear interest ranging from
the lower of the LIBOR rate, plus 2.25% up to 2.75%, or the prime rate minus .5%
up to the prime rate depending on the Company's leverage ratio. The Line of
Credit will be utilized primarily for acquisitions and also provides working
capital advances via sublimits up to $5 million. The Line of Credit contains
certain financial covenants as to minimum net worth, leverage, capitalization
and cash flow ratios along with restrictions on new indebtedness and payment of
dividends. The Line of Credit replaced the Company's previous $4 million line of
credit, and due to restrictions on indebtedness, it also effectively replaced
the Company's $6 million lease line for equipment financing. As of December 31,
1998, the Company did not have any borrowings under the Line of Credit.
The Company's long-term capital requirements depend on numerous factors,
including the rate at which the Company develops or acquires new facilities. In
addition, the Company has various on-going needs for capital, including: (i)
working capital for operations (including financing receivables as previously
described); and (ii) routine capital expenditures for the maintenance of
facilities, such
18
as equipment and leasehold improvements. In order to implement the Company's
long-term growth strategy, the Company anticipates that capital requirements
will increase substantially from historical levels.
The Company anticipates that the consideration to be paid for the
acquisition of new facilities will consist of cash, promissory notes, assumption
of liabilities and/or the issuance of common stock or securities convertible
into common stock. Currently, the Company does not have any agreements,
commitments or understandings regarding the acquisition of any facilities. The
Company believes that cash on hand, together with the Line of Credit, will be
sufficient to fund the Company's operations and to finance the Company's growth
strategy through the next 12 months. However, there can be no assurance that the
Company will not require substantial additional funds prior to such time.
INCOME TAX LOSS CARRYFORWARDS
As of December 31, 1998, the Company had approximately $3.6 million of net
operating loss carryforwards that may be available to offset future taxable
income for federal income tax purposes. These net operating loss carryforwards
begin to expire in 2008.
POTENTIAL IMPACT OF INFLATION
A majority of the Company's net revenue is subject to reimbursement rates
which are regulated by the federal government and do not automatically adjust
for inflation. These reimbursement rates are adjusted periodically based on
certain factors, including Congressional budget limitations, inflation, consumer
price indexes and costs incurred in rendering the services. Historically,
adjustments to reimbursement rates have had little relation to the actual cost
of doing business.
The Company is not able to increase the amounts it bills for services
provided by its operations that are subject to Medicare and Medicaid
reimbursement rates. Operating costs, such as labor and supply costs, are
subject to inflation without corresponding increases in reimbursement rates.
Such increases may be significant and, as such, have a material adverse effect
on the Company's results of operations.
YEAR 2000
In February 1998, the Company formed a committee to evaluate and develop an
action plan for computer systems issues related to the Year 2000 ("Y2K"). The
committee has evaluated Y2K issues related to third party internal systems used
by the Company. This committee is also evaluating the impact of Y2K issues on
the Company's payors and operating vendors to determine their current status and
plan of action for Y2K readiness.
The Company recognizes its reliance on third parties for its operating and
financial computer output and processing. Based upon ongoing assessments, it
appears that the Company's existing internal software is either Y2K compliant or
that third parties are finalizing minor systems modifications to ensure Y2K
readiness. Testing, modifications and conversions of these third parties'
software are expected to be completed by April 1999. Presently, the Company's
management does not foresee any significant costs related to these potential
modifications and conversions.
The Company has formally communicated with its significant payors and
vendors and has requested a written statement regarding their Y2K readiness and
proof of their Y2K testing by the second quarter of 1999. In the event that a
vendor fails to respond to the Company's request, the Company will then contact
alternative vendors who appear to have greater Y2K readiness to provide the
Company with the same or similar supplies, equipment or services. The Company's
Medicare intermediary, which provides approximately 50% of the Company's cash
receipts, has informed the Company that it is Y2K compliant. However, the
Company has received limited communication regarding Y2K readiness from most of
the state Medicaid payors and several commercial payors. The Company will
continue to actively seek sufficient information from these various payors to
determine what impact any payors may have on the Company's cash flow. The
failure of any of the Company's significant payors or operating vendors to be
Y2K compliant could have a material adverse impact on the operations of the
Company.
19
SHARE REPURCHASE PROGRAM
In November 1998, the Company's Board of Directors approved a share
repurchase program authorizing the Company to repurchase up to 500,000 shares of
common stock on the open market from time to time at prices acceptable to the
Company. Through December 31, 1998, no shares have been repurchased. Subsequent
to December 31, 1998, the Company repurchased 170,500 shares through this
program. See Note 19, Subsequent Events, in the notes to consolidated financial
statements.
IMPORTANT FACTORS RELATING TO FORWARD LOOKING STATEMENTS
This Form 10-K contains certain forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations and business of Renex Corp. and
its subsidiaries, including statements under Management's Discussion and
Analysis of Financial Condition and Results of Operations. These forward looking
statements involve certain risks and uncertainties. No assurance can be given
that any of such matters will be realized. Factors that may cause actual results
to differ materially for those contemplated by such forward looking statements
include, among others, the following: (i) the success of initiatives undertaken
by Renex Corp. to increase its revenues and improve its profitability; (ii)
competitive pressure in the industry; and (iii) general economic conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
20
ITEM 8. FINANCIAL STATEMENTS
Consolidated financial statements and supplementary data required by
this item can be found at the pages listed in the following index.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report........................................... 22
Consolidated Balance Sheets as of December 31, 1997 and 1998........... 23
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998..................................... 24
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998......................... 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998..................................... 26
Notes to Consolidated Financial Statements............................. 27
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Renex Corp. and Subsidiaries
Miami, Florida:
We have audited the accompanying consolidated balance sheets of Renex Corp.
and Subsidiaries (the "Company") as of December 31, 1997 and 1998 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 4, 1999
22
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 9,693,000 $ 9,115,000
Accounts receivable, less allowance for doubtful accounts of
$1,252,000 and $1,793,000, respectively................................. 5,266,000 7,606,000
Securities available for sale............................................. 5,057,000 --
Inventories............................................................... 433,000 578,000
Prepaids and other........................................................ 667,000 551,000
------------- -------------
Total current assets.................................................. 21,116,000 17,850,000
Fixed assets, net........................................................... 7,675,000 10,474,000
Intangible assets, net...................................................... 1,637,000 7,914,000
Notes receivable from affiliates, interest rate at 8% ...................... 85,000 85,000
Other assets................................................................ 167,000 564,000
------------- -------------
Total assets.......................................................... $ 30,680,000 $ 36,887,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 1,436,000 $ 993,000
Accrued expenses and other................................................ 2,080,000 2,354,000
Due to third-parties ..................................................... 1,520,000 4,249,000
Current portion of long-term debt......................................... 6,000 --
Current portion of capital lease obligations.............................. 436,000 685,000
------------- -------------
Total current liabilities............................................. 5,478,000 8,281,000
------------- -------------
Capital lease obligations, less current portion............................. 1,512,000 1,519,000
------------- -------------
Commitments
Shareholders' equity:
Common stock, $.001 par value, 30,000,000 shares authorized,
6,974,247 shares - 1997 and 7,422,966 shares - 1998, issued
and outstanding......................................................... 7,000 7,000
Additional paid-in capital.................................................. 30,618,000 32,645,000
Accumulated deficit......................................................... (6,935,000) (5,565,000)
------------- -------------
Total shareholders' equity............................................ 23,690,000 27,087,000
------------- -------------
Total liabilities and shareholders' equity............................ $ 30,680,000 $ 36,887,000
============= =============
See accompanying notes to consolidated financial statements.
23
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
----------- ------------- -------------
Net revenues......................................... $18,569,000 $ 26,073,000 $ 37,811,000
Operating expenses:
Facilities......................................... 14,625,000 20,182,000 28,311,000
General and administrative......................... 2,581,000 2,991,000 4,754,000
Provision for doubtful accounts.................... 1,293,000 962,000 1,096,000
Depreciation and amortization...................... 1,642,000 1,635,000 2,394,000
------------- ------------- -------------
Operating income (loss) ......................... (1,572,000) 303,000 1,256,000
Other income (expense):
Gain (loss) on sale of assets...................... 264,000 (27,000) (22,000)
Net interest income (expense)...................... (915,000) (771,000) 271,000
Amortization of deferred financing costs........... (226,000) (162,000) (29,000)
------------- ------------- -------------
Income (loss) before taxes........................... (2,449,000) (657,000) 1,476,000
Income tax expense................................. -- -- 106,000
------------- ------------- -------------
Income (loss) before extraordinary item.............. (2,449,000) (657,000) 1,370,000
Extraordinary charge for early retirement of debt.. -- (1,441,000) --
------------- ------------- -------------
Net income (loss)................................ $ (2,449,000) $ (2,098,000) $ 1,370,000
============= ============= =============
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) per share before extraordinary item.... $ (0.84) $ (0.14) $ .19
Extraordinary charge for early retirement
of debt............................................ -- (0.31) --
------------- ------------- -------------
Net income (loss).................................... $ (0.84) $ (0.45) $ .19
============= ============= =============
Weighted average shares outstanding.................. 2,930,540 4,672,707 7,065,270
============= ============= =============
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) per share before extraordinary item.... $ (0.84) $ (0.14) $ .19
Extraordinary charge for early retirement
of debt............................................ -- (0.31) --
------------- ------------- -------------
Net income (loss).................................... $ (0.84) $ (0.45) $ .19
============= ============= =============
Weighted average shares outstanding.................. 2,930,540 4,672,707 7,123,006
============= ============= =============
See accompanying notes to consolidated financial statements.
24
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
REDEEMABLE REDEEMABLE -------------------
PREFERRED STOCK PREFERRED STOCK NUMBER OF
SERIES A SERIES B SHARES AMOUNT
-------- -------- --------- ---------
Balance at December 31, 1995 ....................... $ 10,000 $ -- 2,358,857 $ 3,000
Issuance of common stock for acquisition ......... 333,333
Sale of common stock (net of expenses of
$21,000) ....................................... 351,007
Issuance of preferred stock ...................... 11,000
Conversion of preferred stock .................... (10,000) (8,000) 926,917 1,000
Redemption of preferred stock .................... (3,000)
Net loss .........................................
------------ ----------- ----------- ----------
Balance at December 31, 1996 ....................... -- -- 3,970,114 4,000
Sale of common stock (net of expenses
of $711,000) ................................... 3,004,133 3,000
Retirement of stock warrants issued with debt.....
Net loss .........................................
------------ ----------- ----------- ----------
Balance at December 31, 1997 ....................... -- -- 6,974,247 7,000
Issuance of common stock ......................... 448,719
Expenditures associated with issuance
of common stock ................................
Net income .......................................
------------ ----------- ----------- ----------
Balance at December 31, 1998 ....................... $ -- $ -- 7,422,966 $ 7,000
============ =========== =========== ==========
ADDITIONAL ACCUMULATED
PAID-IN CAPITAL DEFICIT TOTAL
--------------- ------- ----------
Balance at December 31, 1995 ....................... $ 6,502,000 $(2,351,000) $ 4,164,000
Issuance of common stock for acquisition ......... 790,000 790,000
Sale of common stock (net of expenses of
$21,000) ....................................... 1,058,000 1,058,000
Issuance of preferred stock ...................... 1,039,000 1,050,000
Conversion of preferred stock .................... 47,000 (30,000)
Redemption of preferred stock .................... (286,000) (7,000) (296,000)
Net loss ......................................... (2,449,000) (2,449,000)
------------ ----------- -----------
Balance at December 31, 1996 ....................... 9,150,000 (4,837,000) 4,317,000
Sale of common stock (net of expenses
of $711,000) ................................... 21,618,000 21,621,000
Retirement of stock warrants issued with debt..... (150,000) (150,000)
Net loss ......................................... (2,098,000) (2,098,000)
------------ ----------- -----------
Balance at December 31, 1997 ....................... 30,618,000 (6,935,000) 23,690,000
Issuance of common stock ......................... 2,201,000 2,201,000
Expenditures associated with issuance
of common stock ................................ (174,000) (174,000)
Net income ....................................... 1,370,000 1,370,000
------------ ----------- -----------
Balance at December 31, 1998 ....................... $ 32,645,000 $(5,565,000) $27,087,000
============ =========== ===========
See accompanying notes to consolidated financial statements.
25
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
---- ---- ----
Cash Flows from Operating Activities:
Net income (loss)................................................ $ (2,449,000) $ (2,098,000) $ 1,370,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Provisions for doubtful accounts............................... 1,293,000 962,000 1,096,000
Depreciation and amortization.................................. 1,642,000 1,635,000 2,394,000
Amortization of deferred financing costs....................... 226,000 162,000 29,000
(Gain) loss on sale of assets.................................. (264,000) 27,000 22,000
Extraordinary charge for early retirement of debt.............. -- 1,441,000 --
Changes in operating assets and liabilities:
Accounts receivable.......................................... (2,135,000) (1,693,000) (3,436,000)
Inventories.................................................. (75,000) (86,000) (115,000)
Prepaids and other .......................................... (190,000) (442,000) 116,000
Other assets................................................. (245,000) 319,000 (426,000)
Accounts payable and accrued expenses........................ 617,000 1,303,000 (249,000)
Due to third-parties......................................... 624,000 833,000 2,729,000
Other, net..................................................... -- -- 11,000
------------- ------------- -------------
Net cash (used for) provided by operating activities............... (956,000) 2,363,000 3,541,000
------------- ------------- -------------
Cash Flows from Investing Activities:
Purchases of fixed assets........................................ (2,396,000) (1,860,000) (3,452,000)
Proceeds from the sale of fixed assets........................... 776,000 36,000 31,000
Purchase of securities available for sale........................ -- (5,057,000) --
Sales of securities available for sale........................... -- -- 5,057,000
Purchase of business assets...................................... -- (600,000) (5,000,000)
------------- ------------- -------------
Net cash used for investing activities....................... (1,620,000) (7,481,000) (3,364,000)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net change in notes receivable from affiliates................... 27,000 -- --
Repayment of note payable to bank................................ (337,000) -- --
Payments on capital lease obligations............................ (353,000) (953,000) (575,000)
Proceeds from long-term debt..................................... 1,500,000 -- --
Proceeds from line of credit..................................... -- 1,500,000 --
Payments on line of credit....................................... -- (1,500,000) --
Net change in notes payable to affiliates........................ (94,000) -- --
Repayments of long-term debt..................................... (261,000) (6,324,000) (6,000)
Proceeds from sale of stock...................................... 2,108,000 21,621,000 --
Repurchase of warrants........................................... -- (150,000) --
Redemption of preferred stock.................................... (296,000) -- --
Financing charges paid on early retirement of debt............... -- (335,000) --
Expenditures associated with issuance of stock................... -- -- (174,000)
------------- ------------- -------------
Net cash provided by (used for) financing activities......... 2,294,000 13,859,000 (755,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents............... (282,000) 8,741,000 (578,000)
Cash and cash equivalents, beginning of period..................... 1,234,000 952,000 9,693,000
------------- ------------- -------------
Cash and cash equivalents, end of period........................... $ 952,000 $ 9,693,000 $ 9,115,000
============= ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest........................................... $ 971,000 $ 879,000 $ 343,000
============= ============= =============
Cash paid for income tax......................................... $ -- $ -- $ 81,000
============= ============= =============
Non-Cash Investing and Financing Activities:
Equipment acquired through capital lease obligations............. $ 1,689,000 $ 1,604,000 $ --
Conversion of preferred stock.................................... 48,000 -- --
Stock issued related to acquisition.............................. 790,000 -- --
Issuance of Common Stock......................................... -- -- 2,201,000
See accompanying notes to consolidated financial statements.
26
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Renex Corp., a Florida corporation, was incorporated on July
7, 1993. Renex Corp. and its subsidiaries ("Renex" or the "Company") provide
kidney dialysis services to patients suffering from end-stage renal disease or
acute renal failure as a result of trauma or other illnesses. The Company
currently operates 20 dialysis facilities and a home dialysis programs in eight
states. Additionally, the Company has entered into agreements with 17 hospitals
to provide acute dialysis and hemapheresis treatments on an inpatient basis.
The Company has a limited operating history and had an accumulated deficit
of $5,565,000 through December 31, 1998. Although the Company was profitable in
1998, its ability to sustain profitability is dependent upon increased
utilization of its existing facilities, controlling operating costs and its
ability to develop or acquire and manage additional dialysis facilities. In
October 1997, the Company completed an initial public offering (the "IPO"),
raising $21.6 million in net proceeds. The Company has for its availability a
line of credit up to $15 million and will rely on cash on hand and external
financing to meet its cash needs.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly-owned.
All intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of the revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET REVENUES. The Company has agreements with third-party payors that
provide for payments to the Company at amounts different from its established
rates. These third-party payors include Medicare, Medicaid, commercial insurance
carriers, health maintenance organizations and preferred provider organizations.
The basis for payment to the Company under these agreements primarily includes
prospectively determined rates and discounts from established charges. The
Company's net revenues are recorded at the estimated realizable amounts from
third-party payors. The Company provides an allowance for doubtful accounts
based on historical experience of amounts that result to be uncollectible.
Amounts written off are charged against the allowance.
During the years ended December 31, 1996, 1997 and 1998, the Company
received approximately 67%, 74% and 67%, respectively, of its dialysis revenues
from Medicare and Medicaid programs. The remaining balance of dialysis revenues
was from insurance companies and private and other third-party payors.
Revenues associated with the administration of erythropoietin ("EPO") are a
significant source of revenue for the Company. The Company is unable to predict
future changes in the reimbursement rate for EPO administered, the typical
dosage per administration, or the cost of the medication. In addition, EPO is
produced by only one manufacturer. The interruption of supplies of EPO or a
change in the reimbursement rate could have a material adverse effect on the
Company's business, financial condition and results of operations.
CASH EQUIVALENTS. The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
SECURITIES AVAILABLE FOR SALE. At December 31, 1997, securities available
for sale were primarily comprised of marketable debt securities, including U.S.
Government and corporate debt securities. These investments were stated at their
fair value and the fair value approximated cost. These securities were sold
during the first quarter of 1998.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market.
FIXED ASSETS. Fixed assets are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
ranging from five to ten years for medical and other equipment, and furniture
and fixtures. Leasehold improvements are amortized over the lesser of lease term
or the useful life of the assets.
27
Equipment held under capital lease obligations has been capitalized at the
present value of the minimum lease payments. Depreciation of assets capitalized
under lease obligations is computed under the straight-line method over the
lives of the assets or leases, whichever is appropriate, and is included in
depreciation expense.
INTANGIBLE ASSETS.
NON-COMPETE AGREEMENTS. Non-compete agreements are being amortized over
the terms of the agreements, typically from 2 to 10 years, using the
straight-line method.
PATIENT LISTS. Patient lists are amortized over 5 years, using the
straight-line method.
GOODWILL. Goodwill, the excess of the aggregate purchase price over the
fair value of net assets acquired, is amortized over 20 to 25 years using
the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, including intangible
assets, used in the Company's operations are reviewed by management for
impairment when circumstances indicate that the carrying amount of an asset may
not be recoverable. This evaluation is based on certain financial indicators,
such as estimated future undiscounted cash flows.
INCOME TAXES. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
EARNINGS (LOSS) PER SHARE. Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. In the computation of diluted earnings (loss) per
share, the weighted average number of common shares outstanding is adjusted for
the effect of all dilutive potential common stock. In computing diluted earnings
(loss) per share, Renex has utilized the treasury stock method.
For the years ended December 31, 1996 and 1997, there was no difference
between basic and diluted loss per common share. At December 31, 1997, options
and warrants to purchase 845,854 shares of common stock were outstanding but
were not included in the computation of diluted loss per share because they
would have an anti-dilutive effect. A reconciliation of the numerator and the
denominator of the basic and diluted earnings per share computation for net
income is as follows for the year ended December 31, 1998:
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
BASIC EPS:
Net income................................... $ 1,370,000 7,065,270 $ 0.19
============
EFFECT OF DILUTIVE SECURITIES:
Options and warrants......................... -- 57,736
--------------- ---------------
DILUTED EPS:
Net income plus assumed conversion........... $ 1,370,000 7,123,006 $ 0.19
=============== =============== ============
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
include receivables, payables and debt. The fair values of such financial
instruments have been determined based on market interest rates as of December
31, 1998. The fair values were not materially different than their carrying
values.
28
STOCK BASED COMPENSATION. SFAS No. 123 encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation to employees using the intrinsic value method as
prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options issued to employees is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay for the stock. Compensation cost
related to stock options of non-employees is recorded at fair value.
COMPREHENSIVE INCOME. Effective January 1, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components. The Company's
net income for the years ended December 31, 1996, 1997 and 1998 equals
comprehensive income for the same period.
OPERATING SEGMENTS. Effective December 31, 1998, Renex implemented SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for reporting information about a Company's
operating segments and related disclosures about its products, services,
geographic areas of operations and major customers. Renex currently operates
under one segment. The manner in which Renex has presented information
throughout its Consolidated Financial Statements and the accompanying Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is the way the Company's management views and analyzes the business
to make decisions about operating matters.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to current year presentation.
2. BUSINESS COMBINATIONS
In March 1998, the Company purchased certain of the assets and the
operating business and assumed certain liabilities of South Georgia Dialysis
Services, LLC, a Georgia limited liability company ("SGDS") which operated four
dialysis facilities. The purchase price of $4,500,000 was paid in cash at
closing. The consolidated financial statements reflect the results of operations
of the acquired business from the acquisition date. A portion of the purchase
price was allocated to the net assets acquired based on their estimated fair
values. The balance of the purchase price, $3,311,000, was recorded as goodwill.
In December 1997, the Company acquired certain assets and assumed certain
liabilities of an acute hemodialysis, therapeutic hemapheresis and
intra-operative blood retrieval service provider. The consolidated financial
statements reflect the results of operations of the acquired business from the
acquisition date. A portion of the purchase price was allocated to the net
assets acquired based on their estimated fair values. The balance of the
purchase price, $526,000, was recorded as goodwill. In addition, during 1998,
the Company paid $500,000 for the achievement of certain earnout provisions
based on the profitability of this business. Such amounts have been added to
goodwill.
In April 1996, the Company acquired two limited liability companies, Central
Dialysis Center, L.L.C. and Metropolitan Dialysis Center, L.L.C., each with an
interest in separate facilities under development. The acquisitions have been
accounted for under the purchase method.
Central Dialysis Center, L.L.C. was acquired for 166,667 shares valued at
$395,000 and assumed liabilities of $121,000. The Company entered into
non-compete agreements with a group of nephrologists for a period of two and
one-half years and completed the build-out of the facility, which began
operations in October 1996. The purchase price of $516,000 was allocated to the
non-compete agreements. As provided in the agreement, in October 1998 Renex
extended the non-competition agreements with the physicians for an additional
seven and one-half years. As consideration for the extension, the Company issued
445,594 common shares to the physicians representing $2.2 million. See Note 5,
Intangible Assets.
Metropolitan Dialysis Center, L.L.C. was also acquired for 166,666 shares
valued at $395,000 and assumed liabilities of $42,000. The Company also entered
into non-compete agreements with a similar group of nephrologists. However, this
facility was not completed due to the zoning variance request being denied.
Based on the Company's inability to generate revenue without a facility and the
uncertainty that a suitable location would be found, the Company determined the
assets to be impaired and, accordingly, wrote off the intangible assets of
$437,000 in 1996.
29
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company's allowance for doubtful accounts are as follows:
The Company grants credit without collateral to its patients, most of whom
are insured under third party payor agreements, including Medicare and Medicaid,
which represent the most significant portion of the balance of receivables. The
remaining receivables are primarily due from third party commercial insurance
payors, including managed care companies.
4. FIXED ASSETS
Fixed assets are summarized as follows:
DECEMBER 31,
------------------------------
1997 1998
---- ----
Leasehold improvements................................... $ 5,419,000 $ 6,729,000
Medical equipment........................................ 1,065,000 3,044,000
Furniture and fixtures................................... 684,000 1,186,000
Equipment, under capital lease obligations............... 3,553,000 4,413,000
------------- -------------
Total........................................... 10,721,000 15,372,000
Less accumulated depreciation and amortization........... (3,046,000) (4,898,000)
------------- -------------
Fixed assets-- net....................................... $ 7,675,000 $ 10,474,000
============= =============
5. INTANGIBLE ASSSETS
In October 1998, the Company extended the non-competition agreements for an
additional seven and one half years with the physicians who sold to the Company
the Orange, New Jersey facility. As consideration for the extension, the Company
issued 445,594 common shares to the physicians pursuant to the terms of their
non-competition agreements representing $2.2 million which was allocated to
non-compete agreements and goodwill.
The Company maintains general liability and professional malpractice
liability insurance on its staff and other insurance appropriate for its
operations. The general liability policy provides coverage of $1,000,000 per
occurrence and $2,000,000 in the aggregate. The professional liability policy
provides coverage for professional (medical) activities of the Company's
employees. This policy provides coverage of $1,000,000 per occurrence and
$3,000,000 in the aggregate. In addition, the Company maintains excess liability
insurance for both general and professional malpractice liability which provides
additional coverage of $2,000,000 per occurrence and $2,000,000 in the
aggregate.
30
7. LONG-TERM DEBT
On June 5, 1995, the Company entered into a senior subordinated secured loan
agreement for $12,500,000 with a lender. In connection with this debt, the
Company issued 211,023 warrants to the lender. Management allocated $150,000 as
the value of these warrants to additional paid in capital and as a reduction of
long-term debt. In October 1997, the Company completed its IPO netting proceeds
of $21.6 million and used $6.4 million of the net proceeds of the IPO to pay off
the outstanding balance on the loan. In connection with the early extinguishment
of this debt, the Company recorded an extraordinary loss of approximately $1.4
million primarily related to the write-off of unamortized financing costs and
the unamortized cost of the warrants.
8. LINE OF CREDIT
In April 1998, the Company obtained a $15 million secured line of credit
with a financial institution (the "Line of Credit"). Borrowings under the Line
of Credit are based on cash flow measurements, and bear interest ranging from
the lower of the LIBOR rate, plus 2.25% up to 2.75%, or the prime rate minus .5%
up to the prime rate depending on the Company's leverage ratio. The Line of
Credit will be utilized primarily for acquisitions and also provides working
capital advances via sublimits up to $5 million. The Line of Credit contains
certain financial covenants as to minimum net worth, leverage, capitalization
and cash flow ratios along with restrictions on new indebtedness and payment of
dividends. The Line of Credit replaced the Company's previous $4 million line of
credit, and due to restrictions on indebtedness, it also effectively replaced
the Company's $6 million lease line for equipment financing. As of December 31,
1998, the Company did not have any borrowings under the Line of Credit.
9. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations related to purchase of
equipment for its various facilities and obligations assumed from facilities
acquired. Maturities of capital lease obligations for each of the five years
ending December 31 are as follows:
YEAR ENDING TOTAL
----------- -----
1999................................... $ 881,000
2000................................... 859,000
2001................................... 709,000
2002................................... 94,000
2003................................... --
-------------
2,543,000
Less amount representing interest...... (339,000)
-------------
Total.................................. $ 2,204,000
=============
10. PREFERRED STOCK
SERIES A:
On August 2, 1996, the Company notified all shareholders of the redemption
of all the issued and outstanding shares of the Series A on September 1, 1996
(the "Redemption Date"). Each share of Series A was convertible to common stock
at $1.50 per common share. At the Redemption Date, any non-converted shares of
Series A were redeemed by the Company at a redemption price of $1.00 per share
plus accrued cumulative dividends of $.0462 per share.
As a result of the redemption, 988,000 shares of Series A were converted to
658,667 shares of common stock, $.001 par value. The remaining 12,000 shares
were redeemed by the Company, resulting in the payment of $544 in dividends.
SERIES B:
In July 1996, the Company authorized the issuance and sale of 1,050,000
shares of Series B preferred stock, $.10 redeemable convertible series ("Series
B"), $.01 par value at $1.00 per share. The Series B provided for conversion to
common stock on November 15, 1996 if not otherwise redeemed by such date. On
November 15, 1996, the Company notified all shareholders of the redemption of
all issued and outstanding shares of Series B on November 27, 1996. Each share
of Series B was convertible to common stock at the conversion price of $3.00 per
share, plus accrued cumulative dividends through the Series B redemption date of
$.034 per share.
31
As a result of the redemption, 775,000 shares of Series B were converted to
268,250 shares of common stock, $.001 par value. The remaining 275,000 shares
were redeemed by the Company, resulting in the payment of $36,000 in dividends.
11. WARRANTS TO PURCHASE COMMON STOCK
In connection with a December 9, 1994 warrant redemption, the Company
authorized the issuance of new Common Stock Purchase Warrants (the "New
Warrants"). New Warrants to purchase 246,201 shares were issued. Each New
Warrant entitled the holder thereof to purchase one share of common stock at an
exercise price of $9.00 per share through December 1998. In December 1998, the
Company extended the term of the New Warrants to December 2000. The Company has
determined that the fair value of the New Warrants is not material and therefore
no amounts related thereto have been reflected in the accompanying financial
statements. The New Warrants are redeemable by the Company at a redemption price
of $.30 per New Warrant. At December 31, 1997 and 1998, none of the New Warrants
had been exercised and all were outstanding.
In June 1995, the Company issued 211,023 warrants to a lender as an
additional cost of financing. In connection with the early retirement of this
debt, these warrants were redeemed in October 1997. See Note 7, Long-Term Debt.
In July 1996, the Company issued 78,751 warrants in connection with the sale
of 1,050,000 shares of Series B preferred stock ("Series B warrants"). Each
Series B warrant entitles the holder to purchase one share of common stock at an
exercise price of $6.00 per share until July 1999. At December 31, 1997 and
1998, none of these warrants have been exercised and all were outstanding.
In November 1996, the Company issued 116,669 warrants to a financial advisor
in connection with a six month advisory agreement. Each warrant entitles the
holder to purchase one share of common stock at an exercise price of $3.00 per
share until November 1999. Compensation expense has been recorded to reflect the
fair value of the warrants. At December 31, 1997 and 1998, none of these
warrants have been exercised and all were outstanding.
In October 1997, in connection with the IPO, the Company issued warrants to
the Representatives of the Underwriters to purchase 300,000 shares of common
stock at an exercise price of $8.56 until October 2002. At December 31, 1997 and
1998, none of these warrants have been exercised and all were outstanding.
In April 1998, the Company issued 10,000 warrants to financial and
management advisors whereby each warrant entitles the holder to purchase one
share of common stock at exercise prices ranging from $5.25 to $6.00 per share
for three to five years from the date of issuance. Compensation expense has been
recorded to reflect the fair value of the warrants. At December 31, 1998, none
of these warrants have been exercised and all were outstanding.
12. STOCK OPTIONS
The Company has employee and director stock option plans. The employee plan
permits the grant of options to purchase up to 1,000,000 shares of common stock.
The director plan permits the grant of options to purchase up to 166,667 shares
of common stock.
Under the director plan, each non-employee director receives automatic
non-discretionary grants of options each year (the "Annual Grant"). The Annual
Grant date is April 27 of each year. Prior to October 1998, on each Annual Grant
Date, each non-employee director received options to purchase 834 shares of
common stock for service on the board, additional options to purchase 334 shares
of common stock for service on each committee of the board, other than the
executive committee, and additional options to purchase 334 shares for service
as chairman of a committee other than the executive committee. Non-employee
directors receive options to purchase 834 shares for service on the executive
committee and an additional 834 as chairman of the executive committee. The term
of the options granted under the director plan is five years and the options
vest 100% immediately, but are not exercisable for six months from date of
grant. In October 1998, the Board of Directors authorized an amendment to the
Director Plan doubling the amount of options granted on each Annual Grant Date.
The amendment to the Director Plan is subject to shareholder approval.
All officers and employees are eligible for grants of options under the
employee plan (the "Plan") which includes incentive stock options granted for
employees' current services to the Company and non-statutory stock options
granted for special services which employees provide the Company, as determined
by the Plan. The Plan is administered by a stock option committee which has the
discretion to determine to whom, the amount, exercise prices, exercise terms and
all other matters relating to the grant of options under the employee plan. The
Plan prohibits the grant of incentive stock options under the Plan or any other
plan of the Company to any individual in any calendar year for common stock
having an aggregate fair market value determined at the time the option is
granted in excess of $100,000. Options aggregating 285,003 shares granted to
Messrs. Shea, Lugo and Wallace, are vested 100%. Options
32
to purchase 334,373 shares granted under the Plan to all other employees vest
25% six months after the date of grant and 25% on each anniversary of the date
of grant thereafter so long as the individual remains employed by the Company.
All options granted prior to 1999 have a five-year term, but are not exercisable
for six months from the date of grant. In November 1998, options to purchase
86,172 shares were extended through April 2000.
Both the director and employee plans provide for the automatic grant of
reload options to an optionee who would pay all, or part of, the option exercise
price by delivery of shares of common stock already owned by such optionee. The
following table summarizes stock options activity:
DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1997 1998
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DIRECTORS' PLAN SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of period...... 11,676 $ 6.00 19,347 $ 6.00 30,016 $ 6.71
Granted............................. 7,671 6.00 10,669 8.00 13,350 5.62
--------- ------------ --------- ------------ --------- ------------
Outstanding, end of period............ 19,347 $ 6.00 30,016 $ 6.71 43,366 $ 6.37
--------- ------------ --------- ------------ --------- ------------
Options exercisable at end of period.. 18,513 30,016 36,524
--------- --------- ---------
DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1997 1998
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EMPLOYEE PLAN SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- ------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of period...... 94,501 $ 6.00 165,344 $ 6.00 325,048 $ 6.98
Granted............................. 77,510 6.00 159,704 8.00 321,931 6.09
Cancelled........................... (6,667) -- -- -- (27,603) --
--------- ----------- --------- ------------ --------- ------------
Outstanding, end of period............ 165,344 $ 6.00 325,048 $ 6.98 619,376 $ 6.51
--------- ------------ --------- ------------ --------- ------------
Options exercisable at end of period 78,184 155,059 367,241
--------- --------- ---------
DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1997 1998
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OTHER SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- ------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of the period 36,669 $ 6.00 36,669 $ 6.00 49,170 $ 6.51
Granted........................... -- 6.00 12,501 8.00 -- --
--------- ------------ --------- ------------ --------- ------------
Outstanding, end of the period...... 36,669 $ 6.00 49,170 $ 6.51 49,170 $ 6.51
--------- ------------ --------- ------------ --------- ------------
Options exercisable at end of period 36,669 49,170 49,170
--------- --------- ---------
The Company applies APB No. 25 and related interpretations in accounting for
its stock option plans as described in Note 1. Accordingly, no compensation cost
has been recognized in 1996, 1997 or 1998 related to these plans. The Company's
pro forma net income, pro forma net income per common share and pro forma
weighted average fair value of options granted, with related assumptions,
assuming Renex had adopted the fair value method of accounting for all
stock-based compensation arrangements consistent with the provisions of SFAS No.
123, using the Black-Scholes option pricing model, are indicated below:
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
---- ----
Pro forma net income(1)......................................... $ -- $641,000
Pro forma net income per common share(1)........................ $ -- $0.09
Pro forma weighted average fair value of options granted (1).... $ -- $2.31
Expected life (years)........................................... 3 2
Risk-free interest rate......................................... 6.63% 4.35% - 5.60%
Expected volatility............................................. .001 .71
Dividend yield.................................................. 0% 0%
(1) In 1997, the fair value of the options was determined to be zero.
The resulting pro forma compensation cost may not be representative of that
to be expected in future years.
33
13. SHARE REPURCHASE PROGRAM
In November 1998, the Company's Board of Directors approved a share
repurchase program authorizing the Company to repurchase up to 500,000 shares of
common stock on the open market from time to time at prices acceptable to the
Company. Through December 31, 1998, no shares have been repurchased. See Note
19, Subsequent Events.
14. SHAREHOLDER RIGHTS PLAN
In November 1998, the Company's Board of Directors approved a Shareholder
Rights Plan authorizing a dividend distribution of one Preferred Stock Purchase
Right for each outstanding share of the Company's common stock. Under the plan,
in specified circumstances when the rights can be exercised, each Right will
entitle shareholders to purchase one one-hundredth of a share of the Company's
new Series A Junior Participating Preferred Stock at an exercise price of $25.
The Rights will be exercisable only under certain circumstances relating to a
possible acquisition of, or tender offer for, the Company. Each Right will allow
shareholders to purchase a certain number of shares of the Company's common
stock or an acquiring company's common shares depending on the form of the
business combination.
15. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED
DECEMBER 31, 1998
Current:
Federal........................... $ --
State............................. 106,000
------------------
Provision for income taxes.......... $ 106,000
==================
At December 31, 1998, the Company had tax net operating loss carryforwards
of $3.6 million that expire beginning in 2008 and ending in 2012.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December 31,
1997 and 1998 are presented below:
DECEMBER 31,
-------------------------------
1997 1998
---- ----
Deferred tax assets
Net operating loss carryforwards.......................... $ 2,574,000 $ 1,195,000
Other..................................................... 313,000 1,096,000
------------- -------------
Total deferred tax assets............................... 2,887,000 2,291,000
Deferred tax liability
Change to accrual method for income tax purposes.......... (702,000) (198,000)
------------- -------------
Net deferred tax asset (before valuation allowance)......... 2,185,000 2,093,000
Less valuation allowance.................................... (2,185,000) (2,093,000)
------------- -------------
Net deferred tax asset...................................... $ -- $ --
============= =============
34
The reconciliation of the federal income tax rate with the Company's
effective rate is as follows:
YEAR ENDED
DECEMBER 31, 1998
Federal income tax rate........................... 34.0%
State income taxes................................ 7.2%
Realization of valuation allowance................ (28.2)%
Other............................................. (5.8)%
----------
Effective tax rate................................ 7.2%
=========
16. EMPLOYEE BENEFIT PLANS
As of January 1, 1997, the Company adopted a tax qualified employee savings
and retirement plan (the "401(k) Plan") covering the Company's employees.
Pursuant to the 401(k) Plan, eligible employees may elect to contribute to the
401(k) Plan up to the lesser of 15% of their annual compensation or the
statutorily prescribed annual limit ($10,000 in 1998). The Company matches 25%
of the contributions of employees, up to 4% of each employee's salary. All
employees who were employed at December 31, 1996, and new hires who thereafter
attain at least one year's service, are eligible to participate in the 401(k)
Plan. The amount of matching contribution by the Company during the years ended
December 31, 1997 and 1998 was $43,000 and $40,000, respectively.
The Trustees of the 401(k) Plan, at the direction of each participant,
invest the assets of the 401(k) Plan in designated investment options. The
401(k) Plan is intended to qualify under Section 401 of the Code, so that
contributions to the 401(k) Plan, and income earned on the 401(k) Plan
contributions, are not taxable until withdrawn. Matching contributions by the
Company are deductible when made.
17. RELATED PARTY TRANSACTIONS
The Company is a party to the following transactions with related parties by
virtue of common ownership:
COMMITMENTS. The Company leases facility space and equipment under
noncancelable operating leases. Minimum annual lease payments under these leases
are as follows:
Rental expense under these operating leases was $1,046,000, $1,222,000 and
$1,747,000 (of which $257,000, $209,000 and $230,000, respectively, relate to
equipment leases for patient care included in facilities expenses) for the years
ended December 31, 1996, 1997 and 1998, respectively.
35
LITIGATION. The Company is subject to claims and suits in the ordinary
course of business, including those arising from patient treatments, which the
Company believes are covered by insurance. The Company is not involved in any
material litigation and is not aware of any potential claims which would likely
give rise to a material liability.
19. SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company repurchased 170,500 shares of
Renex common stock at a cost of approximately $765,000 under the share
repurchase program described in Note 13, Share Repurchase Program.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of December 31, 1998:
NAME AGE POSITION
---- --- --------
Milton J. Wallace(1)..... 63 Chairman of the Board
Arthur G. Shapiro, M.D.(1) 60 Vice Chairman of Board, Director of Medical
Affairs
James P. Shea(1)......... 57 President, Chief Executive Officer, Director
Orestes L. Lugo.......... 40 Vice President-- Finance, Chief Financial
Officer
Patsy L. Anders.......... 54 Vice President-- Business Development
Mignon B. Early.......... 35 Vice President-- Operations
Jeffery C. Finch......... 37 Vice President
Eugene P. Conese, Sr.(2). 68 Director
C. David Finch, M.D...... 39 Director
John E. Hunt, Sr.(2)..... 80 Director
Charles J. Simons(2)(3).. 80 Director
Mark D. Wallace(3)....... 30 Director, Secretary
Jeffrey H. Watson(3)..... 40 Director
(1) Member of the Executive Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Audit Committee.
MILTON J. WALLACE is a co-founder of the Company and has been Chairman of
the Board of the Company since its inception in July 1993. Mr. Wallace has been
a practicing attorney in Miami for over 30 years, and is currently a shareholder
in the law firm of Wallace, Bauman, Legon, Fodiman & Shannon, P.A. He was a
co-founder and a member of the Board of Directors of Home Intensive Care, Inc.,
a provider of home infusion and dialysis services, serving as Chairman of its
Executive Committee from 1985 through July 1993 and Chairman of the Board from
December 1989 until July 1993when Home Intensive Care, Inc. was acquired by W.R.
Grace & Co. Mr. Wallace is Chairman of the Board of Med/Waste, Inc., a provider
of medical waste management services and a director of Imperial Industries,
Inc., a provider of construction materials. He is a director of several private
companies and is Chairman of the Dade County Florida, Housing Finance Authority.
Mr. Wallace is the father of Mark D. Wallace, a Director of the Company.
ARTHUR G. SHAPIRO, M.D. is a co-founder of the Company and has been Vice
Chairman of the Company's Board and Director of Medical Affairs since the
Company's inception in July 1993. Dr. Shapiro has held an appointment to the
University of Miami School of Medicine as a professor of clinical obstetrics and
gynecology since January 1995. From 1985 until 1995, he was engaged in the
private practice of medicine. He is board certified in obstetrics and
gynecology, reproductive endocrinology and laser surgery. He is a Fellow in the
American College of Obstetrics and Gynecology and the American College of
Endocrinology. Dr. Shapiro was a co-founder of Home Intensive Care, Inc. and
served on its Board of Directors from 1985 until July 1993. Dr. Shapiro also
served as Home Intensive Care, Inc.'s Medical Director from 1990 until July
1993. He is a Director of Med/Waste, Inc.
JAMES P. SHEA has been President and Chief Executive Officer of the Company
since August 1993 and a Director since December 1993. From July 1992 until June
1993, he served as Director General for Home Intensive Care, Inc.'s
international division. From 1986 to 1990, he was Senior Vice President of
Protocare, Inc., an infusion therapy and respiratory care provider, which he
helped establish. From 1985 to 1986, he was General Manager of the health care
products division of The Norton Company, a manufacturer of engineered materials.
From 1983 to 1985, he was President of the infusion division of National Medical
Care, Inc., a kidney dialysis and infusion therapy provider, which is now owned
by Fresenius Medical Care AG.
ORESTES L. LUGO has served as the Company's Vice President -- Finance and
Chief Financial Officer since August 1995. From March 1994 until August 1995, he
was Chief Financial Officer of PacifiCare of Florida, a health maintenance
organization and subsidiary of PacifiCare Health Systems, Inc. From September
1993 until March 1994, he was Chief Financial Officer of Supreme International,
Inc., a clothing manufacturer. From July 1989 until September 1993, Mr. Lugo
served as Vice President of Finance for Home Intensive Care, Inc. From 1980 to
1989, Mr. Lugo was employed by the public accounting firm of Touche Ross, last
as a senior manager. Mr. Lugo is a Certified Public Accountant.
37
PATSY L. ANDERS has served as the Company's Vice President -- Business
Development since January 1996. From the Company's inception in July 1993
through January 1996, she served as the Company's Director of Business
Development. From 1990 until July 1993, Ms. Anders was the Physician Liaison for
Quality Care Dialysis Centers, Inc., the wholly-owned dialysis facility
subsidiary of Home Intensive Care, Inc. From 1986 through 1990, Ms. Anders was
Director of Physician Relations for Home Intensive Care, Inc. In 1989, Ms.
Anders founded Anders and Associates, a physician placement firm specializing in
the placement of nephrologists, and has served as its President since its
inception.
MIGNON B. EARLY, RN, BSN has been the Company's Vice President -- Operations
since January 1997. From July 1995 until January 1997, she was the Company's
Director of Training and Development. From January 1994 until July 1995, she
served as a clinic administrator for the Company in the St. Louis, Missouri
region. From December 1990 until January 1994, Ms. Early was a clinic
administrator for Quality Care Dialysis Centers, Inc. Ms. Early is a registered
nurse.
JEFFERY C. FINCH has been a Vice President of the Company since December
1995. From June 1990 until December 1995, Mr. Finch served as Chief Executive
Officer of Dialysis Facilities, Inc., a dialysis company which owned three
dialysis facilities purchased by the Company in December 1995, which Mr. Finch
co-founded in 1990. He is a principal of JCD Partnership, a real estate and
property management firm. Mr. Finch is the brother of C. David Finch, M.D., a
Director of the Company.
EUGENE P. CONESE, SR. has been a Director of the Company since November
1996. Mr. Conese is Chairman of the Board of World Air Lease, Inc. From 1987
until September 1997, he served as Chairman of the Board of Directors and Chief
Executive Officer of Greenwich Air Services, Inc., a provider of repair and
overhaul services for gas turbine aircraft engines. Greenwich Air Services, Inc.
was acquired by General Electric Company in September 1997. Mr. Conese is a
Director of Trans World Airlines, Inc. and is a member of the Board of Trustees
of Iona College.
C. DAVID FINCH, M.D. has been a Director of the Company since December 1995,
when the Company acquired Dialysis Facilities, Inc., a dialysis company he
co-founded in 1990. He is a board certified nephrologist and maintains a private
practice of medicine in nephrology and hypertension in Jackson, Mississippi. Dr.
Finch serves as the Medical Director of the Company's dialysis facilities in the
Jackson, Mississippi area. He also serves as Director of Dialysis at Vicksburg
Medical Center and Parkview Regional Medical Center. He is a principal in JCD
Partnership, a real estate and property management firm, and the brother of
Jeffery C. Finch, a Vice President of the Company.
JOHN E. HUNT, SR. has been a Director of the Company since its inception in
July 1993. Since August 1983, Mr. Hunt has been Chairman of the Board of Hunt
Insurance Group, Inc., an insurance agency holding company. For the previous 40
years, Mr. Hunt was President of John E. Hunt & Associates, a Tallahassee and
Miami, Florida insurance agency. For the past 13 years, he has also been
President of Insurance Consultants and Analysis, Inc., an insurance consulting
firm. Mr. Hunt serves as Chairman of the Board of Trustees of the Florida Police
Chiefs' Education and Research Foundation, Inc., and as a trustee of Florida
Southern College. Mr. Hunt was a Director of Home Intensive Care, Inc. from 1985
until July 1993.
CHARLES J. SIMONS has been a Director of the Company since its inception in
July 1993. Mr. Simons is the Vice Chairman of the Board of G.W. Plastics, Inc.,
a plastics manufacturer, and is an independent management and financial
consultant. From 1940 to 1981, he was employed by Eastern Airlines, last serving
as Vice Chairman, Executive Vice President and as a Director. Mr. Simons is a
Director of Bessemer Trust of Florida, an investment management firm; Calspan
Corporation, an aerospace company; Med/Waste, Inc., and Viragen, Inc., a
pharmaceutical company; and a number of private companies. Mr. Simons is the
Chairman of the Board of the Matthew Thornton Health Plan.
MARK D. WALLACE has been Secretary and a Director of the Company since the
Company's inception in July 1993. Since July 1992, Mark Wallace has been a
practicing attorney and is currently a partner at the law firm of Stack,
Fernandez, Anderson, Harris & Wallace, P.A. Mr. Wallace is the son of Milton J.
Wallace, Chairman of the Board of the Company.
JEFFREY H. WATSON has been a Director of the Company since July 1994. Since
December 1995, he has been Chairman of the Board and President of J. Watson &
Co., a government relations and business consulting firm. From June 1994 until
December 1995, he was Vice President for Government Relations of the Jefferson
Group, an independent public affairs firm. From January 1993 until June 1994,
Mr. Watson served as Deputy Assistant for Inter-Governmental Affairs for the
Clinton Administration. From December 1991 through November 1992, Mr. Watson was
employed by the election campaign for President Clinton. From 1989 until
November 1991, Mr. Watson served as Finance Administrator for the City of Miami,
Florida's Department of Development and Housing Conservation. From 1986 until
January 1989, he served as an Administrative Assistant for the Mayor of Miami,
Florida. From September 1985 through March 1986, he was a Managing Partner and
Chief Financial Manager of J. Howard Industries, a company involved in
low-income housing redevelopment and construction.
38
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes. The members
of each class serve for staggered three year terms, including three Class I
directors (Charles J. Simons, Jeffrey H. Watson and Eugene P. Conese, Sr.),
three Class II directors (Mark D. Wallace, John E. Hunt, Sr. and James P. Shea)
and three Class III directors (Milton J. Wallace, Arthur G. Shapiro and C. David
Finch). Class II, III and I director terms expire upon the election of directors
at the annual meeting of shareholders to be held in 1999, 2000 and 2001,
respectively. Directors hold office until the expiration of their respective
terms and until their successors are elected, or until death, resignation or
removal. Each officer serves at the discretion of the Board of Directors,
subject to certain contractual rights described below.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established standing Executive, Audit and
Compensation and Stock Option Committees. The Executive Committee consists of
Milton J. Wallace, Arthur G. Shapiro and James P. Shea. When the Board of
Directors is not in session, the Executive Committee possesses all of the powers
of the Board. Although the Executive Committee has broad powers, in practice it
meets infrequently to take formal action on a specific matter when it would be
impractical to call a meeting of the full Board.
The Audit Committee consists of Charles J. Simons, Jeffrey H. Watson and
Mark Wallace. The functions of the Audit Committee are to recommend to the Board
the appointment of independent public accountants for the annual audit of the
Company's financial statements; review the scope of the annual audit and other
services the auditors are asked to perform; review the report on the Company's
financial statements following the audit; review the accounting and financial
policies of the Company; and review management's procedures and policies with
respect to the Company's internal accounting controls.
The Compensation and Stock Option Committee consists of Eugene P. Conese,
Sr., John E. Hunt, Sr. and Charles J. Simons. The functions of the Compensation
and Stock Option Committee are to review and approve salaries, benefits and
bonuses for all executive officers of the Company; to review and recommend to
the Board matters relating to employee compensation and benefit plans; and to
administer the Company's 1994 Employee Stock Option Plan.
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company receive no additional
compensation for their services as members of the Board of Directors. Commencing
1998, non-employee directors receive an annual retainer of $5,000 cash
compensation for service on the Board of Directors and receive reimbursement of
expenses. Non-employee directors also receive $500 for each Board or committee
meeting attended. Non-employee directors also receive annual grants of options
under the Directors Plan.
The Company's officers and directors are required to file Forms 3, 4 and 5
with the Securities and Exchange Commission in accordance with Section 16(a) of
the Securities and Exchange Act of 1934, as amended and the rules and
regulations promulgated thereunder. Based solely on a review of such reports
furnished to the Company as required by Rule 16(a)-3, no director failed to
timely file such reports in 1998.
39
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION. The following table summarizes the
compensation earned by, and paid to, the Company's President and Chief Executive
Officer and each other executive officer for the two years ended December 31,
1997 and 1998 who received compensation in excess of $100,000 for any such
periods (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long Term
Compensation Award
-------------------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary (1) Bonus Compensation Options (#)
------------------------------------ -------- -------------- ------------ --------------------- -------------------------
James P. Shea..................... 1998 $ 205,200 $ 190,000 $ 12,540 92,176
President and CEO 1997 128,465 -- 8,630 33,334
Orestes L. Lugo................... 1998 167,400 124,000 $ 10,800 25,235
Vice President-Finance 1997 114,617 -- 7,110 26,667
And CFO
Milton J. Wallace................. 1998 73,077 100,000 $ 7,940 54,255
Chairman of the Board 1997 -- -- -- 1,667
Patsy L. Anders................... 1998 97,200 41,985 $ 8,004 8,000
Vice President- 1997 70,769 8,600 5,400 20,000
Business Development
Mignon B. Early................... 1998 93,846 38,000 $ -- 8,000
Vice President-Operations 1997 77,580 12,000 -- 20,000
(1) The Company provides its officers with certain non-cash group life and
health benefits generally available to all salaried employees. Such benefits
are not included in the above table pursuant to applicable Securities and
Exchange Commission rules. No Named Executive Officer received aggregate
personal benefits or perquisites that exceed the lesser of $50,000 or 10% of
his total annual salary and bonus for such year.
40
STOCK OPTION GRANTS. The following table sets forth information concerning
grants of stock options to each of the Named Executive Officers during the year
ended December 31, 1998:
OPTIONS GRANTED IN LAST FISCAL YEAR
Individual Grants
---------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rate of
Number of % of Total Options Stock Price Appreciation
Secruities Granted to Exercise or for Option Term ($)(5)
Underlying Optiions Employees in Fiacl Base Price Expiration ---------------------------
Name Granted(#)(1) Year (4) ($/Share) Date 5% 10%
----------------------- ---------------------- ---------------------- -------------- -------------- ------------- -------------
James P. Shea......... 16,176 5% $ 7.19 2/25/00 $ 12,000 $ 24,400
16,000 5% 6.00 4/22/03 26,600 58,600
60,000 18.6% 5.63 12/4/03 93,600 206,400
------ -------
92,176(2) 28.6%
====== =======
Orestes L. Lugo....... 13,235 4.1% $ 7.19 2/25/00 $ 9,800 $ 20,000
12,000 3.7% 6.00 4/22/03 19,900 43,900
------ -------
25,235(2) 7.8%
====== =======
Milton J. Wallace..... 12,255 3.8% $ 7.19 2/25/00 $ 9,100 $ 18,500
12,000 3.7% 6.00 4/22/03 19,900 43,900
30,000 9.3% 5.63 12/4/03 46,800 103,200
------ -------
54,255(2) 16.8%
====== =======
Patsy L. Anders....... 8,000(3) 2.5% $ 6.00 4/22/03 $ 13,300 $ 29,300
===== =======
Mignon B. Early....... 8,000(3) 2.5% $ 6.00 4/22/03 $ 13,300 $ 29,300
===== =======
(1) All such options were granted pursuant to the 1994 Employee Stock Option
Plan.
(2) Options vest 100% immediately but are not exercisable for six months
following grant.
(3) Options vest over three years, with 25% of such options vesting six months
following the date of grant, 25% on the first anniversary from the date of
grant and 25% at the end of each succeeding year from the grant date.
(4) Based on an aggregate of 321,931 options granted to employees in 1998,
including the Named Executive Officers.
(5) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.
41
YEAR-END OPTION HOLDINGS. The following table sets forth certain aggregated
option information for the Named Executive Officers for the year ended December
31, 1998:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS(#) OPTIONS(2)
--------------------------------------- ---------------------------------------
NAME(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- ----------- ------------- ----------- -------------
James P. Shea............ 98,845 60,000 $ 62,600 $ 97,200
Orestes L. Lugo.......... 71,903 -- 40,800 --
Milton J. Wallace........ 45,091 30,000 39,700 48,600
Patsy L. Anders.......... 29,500 18,500 24,400 10,600
Mignon B. Early.......... 19,084 17,250 11,400 9,100
(1) No options were exercised by the above Named Executive Officers during the
fiscal year ended December 31, 1998.
(2) The value of unexercised options represents the difference between the
exercise price of the options and the closing sales price of the Company's
Common Stock on December 31, 1998 of $7.25 as reported by NASDAQ/NMS.
EMPLOYMENT AGREEMENTS
In April 1997, the Company entered into two year employment agreements with
James P. Shea, the Company's President and Chief Executive Officer, and Orestes
L. Lugo, Vice President - Finance and Chief Financial Officer. The terms of
these agreements were amended to five years for Mr. Shea and three years for Mr.
Lugo. In January 1998, the Company entered into a five year employment agreement
with Milton J. Wallace, the Company's Chairman of the Board. The employment
agreements provide for base salaries of $190,000, $155,000 and $100,000 for
Messrs. Shea, Lugo and Wallace, respectively. Mr. Wallace's base salary
commenced April 1998. Base salary for each officer is increased on each
anniversary date of each agreement during the term by a minimum of 6%. Each
officer receives an automobile allowance and certain other non-cash benefits,
including life, health and disability insurance. The employment agreements for
Messrs. Wallace and Shea are automatically renewed for five years at the end of
the initial term and each extended term, unless either party provides notice of
termination at least 180 days prior to the expiration of such term. Mr. Lugo's
employment agreement is automatically renewed for three years at the end of the
initial term and each extended term, unless either party provides notice of
termination at least 120 days prior to the expiration of such term.
Messrs. Shea, Lugo and Wallace are entitled to receive bonuses in each
fiscal year during the term of their agreements. Such agreements require the
Board of Directors to establish incentive bonus plans for each fiscal year which
would provide a means for each officer to earn a bonus upon the achievement of
established goals and criteria.
The respective employment agreements grant to each of Messrs. Shea, Lugo and
Wallace the right to terminate his employment agreement within eighteen months
following a "change of control," and to receive an amount equal to the greater
of: (i) base salary due for the remainder of the term of the agreement and three
times the bonus amount paid in the last 12 months had it not been terminated; or
(ii) $500,000. Such change of control severance is payable 100% in cash on the
effective date of such termination. If Messrs. Shea, Lugo or Wallace is
terminated without cause during the term of their respective agreements, such
officer will be entitled to the same severance mentioned above for a "change of
control".
In April 1997, the Company entered into a two year employment agreement with
Patsy L. Anders, Vice President - Business Development. The agreement currently
provides for a base salary of $90,000 per year. Base salary is increased on the
anniversary of each year during the term by a minimum of 6%. Ms. Anders receives
an automobile allowance and certain other non-cash benefits, including life,
health and disability insurance. Ms. Anders, upon the achievement of established
goals and criteria, is entitled to receive a bonus in each fiscal year during
the term of the agreement. Such agreement requires the Board of Directors to
establish an incentive bonus plan for each fiscal year. Her employment agreement
is automatically renewed for two years at the end of the initial term and each
extended term, unless either party provides written notice of termination at
least 120 days prior to the expiration of such term.
If Ms. Anders is terminated without a cause prior to a "change of control,"
she will be entitled to severance equal to the greater of the remaining base
salary due under the agreement or one year's base salary. If Ms. Anders is
terminated without cause following a "change of control," she will be entitled
to severance equal to the greater of (i) two times the remaining base salary
which would have
42
been paid for the remainder of the term of the agreement or (ii) two times the
sum of one year's base salary then in effect, and any and all bonuses paid to
Ms. Anders in the eighteen months prior to the effective date of termination.
Ms. Anders' employment agreement grants her the right to terminate the agreement
within 180 days following a "change of control," and entitles her to the same
severance as mentioned above under termination without a cause following a
"change of control." Such "change of control" severance is payable 50% in cash
on the effective date of such termination, with the balance payable over a
twelve month period.
In March 1997, the Company entered into a three year employment agreement
with Mignon B. Early, Vice President - Operations. The agreement provides for a
base salary of $80,000 and certain other non-cash benefits, including life,
health and disability insurance. Ms. Early is entitled to receive a bonus in
each fiscal year during the term of her agreement. Such agreement requires the
Board or Directors to establish an incentive bonus plan for each fiscal year
which would provide a means for her to earn a bonus up to 50% of her respective
base salary upon the achievement of established goals and criteria.
If Ms. Early is terminated without cause prior to a "change of control," she
will be entitled to severance equal to the base salary accrued through the
effective date of termination and six months base salary. If Ms. Early is
terminated without cause following a "change of control," she will be entitled
to severance equal to all accrued base salary through the date of termination
and one year's base salary. In April 1998, Ms. Early's base annual salary was
increased to $100,000.
For the purposes of the employment agreements, "change of control" is
defined as: (i) the acquisition, other than from the Company directly, by any
person, entity or group, within the meaning of ss. 13(d) or 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), of beneficial ownership of
25% or more of the outstanding Common Stock; (ii) if the individuals who serve
on the Board as of the date of the employment agreement, no longer constitute a
majority of the members of the Board; provided, however, any person who becomes
a director subsequent to such date, who was elected to fill a vacancy by a
majority of the individuals then serving on the Board, shall be considered as if
a member prior to such date; (iii) approval by a majority of the voting stock of
the Company of a merger, reorganization or consolidation whereby the
shareholders of the Company immediately prior to such approval do not,
immediately after consummation of such reorganization, merger or consolidation
own more than 50% of the voting stock of the surviving entity; or (iv) a
liquidation or dissolution of the Company, or the sale of all or substantially
all of the Company's assets.
STOCK OPTION PLANS
EMPLOYEE PLAN
The Company maintains a 1994 Employee Stock Option Plan ("Employee Plan").
The Employee Plan is designed as an incentive program to cause employees to
increase their interest in the Company's performance and to attract and retain
qualified personnel. Subject to certain anti-dilution provisions, the Employee
Plan consists of 1,000,000 shares of Common Stock reserved for issuance upon the
exercise of options which may be granted, including 619,376 shares subject to
outstanding options as of December 31, 1998.
The Employee Plan is administered by the Compensation and Stock Option
Committee. The Compensation and Stock Option Committee has the discretion, among
other things, as to whom to grant options, the amount of options, the terms of
options and the exercise prices. All employees of the Company are eligible to
receive options under the Employee Plan. Such employees are eligible to receive
either "incentive" or "nonqualified" stock options, subject to the limitations
of the Internal Revenue Code of 1986, as amended (the "Code"). The exercise
price of an incentive stock option may not be less than 100% of the market price
of the underlying Common Stock as of the date of grant. No option may be granted
which has a term longer than 10 years. Stock options may have vesting
requirements as established by the Compensation and Stock Option Committee, but,
except in the case of an employee's death or permanent disability, in no event
may the options be exercisable until six months after grant. All unvested
options under the Employee Plan become immediately vested in full upon a change
of control of the Company, as such term is defined in the Employee Plan.
Upon termination of an optionee's employment with the Company for any
reason, all options granted to such employee under the Employee Plan would
terminate immediately, except that the Compensation and Stock Option Committee
has the discretion to permit such holder to exercise vested options for a period
of 90 days after termination. Options granted under the Employee Plan may not be
transferred and are not exercisable except by the employee.
The Employee Plan provides for the automatic grant of "reload" options to an
employee, who pays all, or a portion of, an exercise price by delivery of shares
of Common Stock then owned by such employee. Reload options are granted for each
share of Common Stock so tendered. The exercise price of such reload option is
the then fair market value of the Common Stock. All other terms of the
43
reload options would be identical to the original options; provided, however,
that if the expiration date is less than one year, the expiration date is
extended to one year from the date of issuance of the reload options.
As of December 31, 1998, options to purchase a total of 619,376 shares of
Common Stock, with a weighted average exercise price of $6.51 have been granted
to executive officers and other employees of the Company. Each option granted
has a term of five years. Options granted to Messrs. Shea, Lugo and Wallace are
vested 100%. For all other officers and employees, options vest 25% at the end
of six months and 25% on each anniversary of such grant until 100% are vested.
Options are not exercisable until six months after the date of grant.
DIRECTORS PLAN
The Company maintains a Directors Stock Option Plan (the "Directors Plan").
Subject to certain anti-dilution provisions in the Plan, there are 166,667
shares of Common Stock reserved for issuance upon the exercise of options which
may be granted pursuant to the Directors Plan, including 43,366 shares subject
to outstanding options. All non-employee directors are eligible to receive
grants of options ("Eligible Directors"). Each Eligible Director receives
automatic, non-discretionary grants of options based upon specific criteria set
forth in the Directors Plan. Prior to October 1998, on April 27 of each year,
each Eligible Director received non-qualified options to purchase 834 shares of
Common Stock for service on the Board of Directors and additional options to
purchase 334 shares for service on each committee of the Board, other than the
Executive Committee, for which members would receive options to purchase 834
shares. Also, additional options to purchase 334 shares are granted to Eligible
Directors who serve as a chairman of each standing committee of the Board, other
than the chairman of the Executive Committee, who would receive options to
purchase 834 shares. In October 1998, the Board of Directors authorized an
amendment to the Director Plan providing for a special grant of options based on
the formula of annual grants on October 1, 1998. In addition, commencing April
27, 1999, annual option grants are double the amount of options granted in April
1998. The amendment to the Director Plan is subject to stockholder approval.
The exercise price of each option granted under the Directors Plan is equal
to the fair market value of the Common Stock on the date of grant as determined
in accordance with the provisions of the Directors Plan. All options granted
have a term of five years, but, except in the case of an Eligible Director's
death or permanent disability, are not exercisable until six months after the
date of grant. No option is transferable by the Eligible Director, except by the
laws of descent and distribution. If the Eligible Director's membership on the
Board terminates, including by reason of death, such options are exercisable for
the lesser of the remaining term of such option, or one year.
The Directors Plan provides for the automatic grant of "reload" options to
an Eligible Director, who pays all, or a portion of, an exercise price by
delivery of shares of Common Stock then owned by such Eligible Director. Reload
options are granted for each share of Common Stock so tendered. The exercise
price of such reload option is the then fair market value of the Common Stock.
All other terms of the reload options, including the expiration date, would be
identical to the original options, provided, however, that if the expiration
date is less than one year, the expiration date is extended to one year from the
date of issuance of the reload options.
As of December 31, 1998, options to purchase 43,366 shares of Common Stock,
with a weighted average exercise price of $6.37 per share, have been
automatically granted to Eligible Directors as a group and remain outstanding.
401(k) PLAN
As of January 1997, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering the Company's employees. Pursuant
to the 401(k) Plan, eligible employees may elect to contribute to the 401(k)
Plan up to the lesser of 15% of their annual compensation or the statutorily
prescribed annual limit ($10,000 in 1998). The Company matches 25% of the
contributions of employees up to 4% of each employee's salary. All employees who
attain at least one year's service are eligible to participate in the 401(k)
Plan.
The Trustees of the 401(k) Plan, at the direction of each participant,
invest the assets of the 401(k) Plan in designated investment options. The
401(k) Plan is intended to qualify under Section 401 of the Code, so that
contributions to the 401(k) Plan, and income earned on the 401(k) Plan
contributions are not taxable until withdrawn. Matching contributions by the
Company are deductible when made.
44
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Company's Compensation and Stock Option Committee
is or has been an officer or employee of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1998,
with respect to the beneficial ownership of the Company's Common Stock by: (i)
each person who is known by the Company to own more than 5% of such shares of
Common Stock; (ii) each Named Executive Officer; (iii) each of the Company's
directors; and (iv) all directors and executive officers as a group.
NUMBER OF SHARES PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BENEFICIALLY OWNED(3)
--------------------------------------- --------------------- ---------------------
Milton J. Wallace(4)........................ 769,813 10.3%
Arthur G. Shapiro, M.D.(5).................. 759,838 10.2
James P. Shea(6)............................ 283,445 3.7
C. David Finch, M.D.(7)..................... 198,197 2.7
Orestes L. Lugo(8).......................... 113,554 1.5
John E. Hunt, Sr.(9)........................ 82,155 1.1
Charles J. Simons(10)....................... 56,041 *
Patsy L. Anders (11)........................ 43,317 *
Eugene P. Conese, Sr.(12)................... 28,836 *
Mignon B. Early (13)........................ 20,284 *
Mark D. Wallace(14)......................... 16,170 *
Jeffrey H. Watson(15)....................... 8,170 *
William C. Morris(16)....................... 662,400 8.9%
J. & W. Seligman & Co., Inc.(17)............ 662,400 8.9%
All executive officers and directors as group
(13 persons)(18).......................... 2,477,034 31.5%
* Less than one percent.
(1) Unless otherwise indicated, the address for each beneficial owner is c/o
the Company at 201 Alhambra Circle, Suite 800, Coral Gables, Florida
33134.
(2) Except as set forth herein, all securities are directly owned and the
sole investment and voting power are held by the person named. A person
is deemed to be the beneficial owner of securities that can be acquired
by such person within 60 days of December 31, 1998 upon the exercise of
options or warrants.
(3) Based upon 7,422,966 shares of Common Stock issued and outstanding as of
December 31, 1998. Each beneficial owner's percentage is determined by
assuming that all such exercisable options or warrants that are held by
such person (but not those held by any other person) have been
exercised.
(4) Mr. Wallace's address is 1200 Brickell Avenue, Suite 1720, Miami,
Florida 33131. Except as set forth herein, all shares of Common Stock
are owned jointly by Mr. Wallace and his wife. Includes: (i) 12,000
shares of Common Stock owned by Milton J. Wallace and his wife as
custodian for a minor child; (ii) 35,600 shares of Common Stock owned by
Mr. Wallace's Individual Retirement Account; (iii) 106,122 shares of
Common Stock (including 8,655 of Common Stock issuable upon exercise of
warrants and Series B Warrants) owned by a corporation, of which Mr.
Wallace is an officer, director and controlling stockholder, (iv) 45,091
shares of Common Stock issuable upon exercise of stock options; and (v)
15,000 shares of Common Stock issuable upon exercise of Series B
Warrants owned by his Individual Retirement Account.
(5) Except as set forth herein, all shares of Common Stock are owned jointly
by Dr. Shapiro and his wife. Includes: (i) 17,234 shares of Common Stock
owned by Dr. Shapiro's Individual Retirement Account; (ii) 28,376 shares
of Common Stock issuable upon exercise of stock options; (iii) 106,042
shares of Common Stock (including 8,575 shares of Common Stock issuable
upon exercise of warrants and Series B Warrants) owned by a corporation,
of which Dr. Shapiro is an officer and director; (iv) 3,750 shares of
Common Stock issuable upon exercise of Series B Warrants owned by Dr.
Shapiro's Individual Retirement Account, and (v) 3,750 shares of common
stock issued upon exercise of Series B Warrants.
(6) Except as set forth herein all shares of Common Stock and all warrants
are owned jointly by Mr. Shea and his wife. Includes: (i) 98,845 shares
of Common Stock issuable upon exercise of stock options; (ii) 33,334
shares of Common Stock issuable upon exercise of warrants; and (iii)
15,000 shares of Common Stock issuable upon exercise of Series B
Warrants.
(7) Includes 6,000 shares of Common Stock issuable upon exercise of stock
options.
45
(8) Includes: (i) 71,903 shares of Common Stock issuable upon exercise of
stock options; (ii) 3,334 shares of Common Stock issuable upon exercise
of warrants; and (iii) 3,750 shares of Common Stock issuable upon
exercise of Series B Warrants.
(9) Includes: (i) 4,837 shares of Common Stock issuable upon exercise of
stock options; (ii) 6,667 shares of Common Stock issuable upon exercise
of warrants; (iii) 11,667 shares of Common Stock owned by Mr. Hunt's
spouse; (iv) 1,667 shares of Common Stock issuable upon exercise of
warrants owned by his spouse; and (v) 3,750 shares of Common Stock
issuable upon exercise of Series B Warrants. Mr. Hunt disclaims
beneficial ownership of the shares owned by his spouse.
(10) Includes: (i) 6,838 shares of Common Stock issuable upon exercise of
stock options; (ii) 1,667 shares of Common Stock issuable upon exercise
of warrants; and (iii) 7,500 shares of Common Stock issuable upon
exercise of Series B Warrants.
(11) Includes 29,500 shares of Common Stock issuable upon exercise of stock
options.
(12) Includes: (i) 3,836 shares of Common Stock issuable upon exercise of
stock options; and (ii) 5,000 shares of Common Stock issuable upon
exercise of warrants.
(13) Includes 19,084 shares of Common Stock issuable upon exercise of stock
options.
(14) Includes 4,170 shares of Common Stock issuable upon exercise of stock
options.
(15) Includes 5,170 shares of Common Stock issuable upon exercise of stock
options.
(16) Mr. Morris' address is 100 Park Avenue, New York, NY 10017. Mr. Morris
is a principal of J. & W. Seligman & Co., Inc. ("JWS"), an investment
advisor. The shares above include 662,400 shares beneficially owned by
JWS, which also includes 364,000 shares owned by Seligman Frontier Fund,
Inc. (the "Fund"), an investment company under the Investment Company
Act of 1940. JWS is an investment advisor to the Fund.
(17) JWS' address is 100 Park Avenue, New York, NY 10017. Includes 364,000
shares owned by the Fund, to which JWS is an investment advisor.
(18) Includes: (i) 325,650 shares of Common Stock issuable upon exercise of
options; (ii) 65,002 shares of Common Stock issuable upon exercise of
warrants; and (iii) 56,396 shares of Common Stock issuable upon exercise
of Series B Warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JCD Partnership, a real estate holding and property management firm, of
which C. David Finch, M.D., Jeffery Finch and Charles D. Finch, Sr. are the
principals, owns the real property and improvements at the Company's dialysis
facilities at Jackson, Mississippi and Delta, Louisiana. JCD Partnership leases
the properties to the Company pursuant to ten year leases, in which the Company
pays annual rent of $92,400 and $82,500, respectively. The Company paid $427,000
and $175,000 to JCD Partnership in connection with the leasehold improvements at
each facility for the years ended December 31, 1996 and 1997, respectively.
C. David Finch, M.D. owed DFI approximately $85,000 at the time of DFI's
acquisition by the Company evidenced by a note. The notes, with interest at the
rate of 8% per annum, is payable upon demand by the Company. As of December 31,
1997 and 1998, approximately $85,000 in principal remained unpaid, together with
accrued interest of $13,600 and $20,700 as of such dates, respectively.
Milton J. Wallace, Chairman of the Board of Directors of the Company, is a
shareholder of the law firm of Wallace, Bauman, Legon, Fodiman & Shannon, P.A.
The law firm serves as general counsel to the Company for which the firm
received $102,000 during 1998.
46
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits furnished as part of this report:
(1) Financial Statements. The financial statements required are included
in PART II, Item 8.
(b) Report on Form 8K - None.
(c) Exhibits - The following exhibits as required by Item 601 of Regulation
S-K are filed herewith.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*3.1 -- Articles of Incorporation of the Company
*3.2 -- By-Laws of the Company
*4.1 -- Specimen Certificate of Common Stock
10.1 -- Amended and Restated Employment Agreement dated June 30, 1998
by and between Renex Corp. and James P. Shea
10.2 -- Amended and Restated Employment Agreement dated June 30, 1998
by and between Renex Corp. and Orestes L. Lugo
10.3 -- Credit Agreement by and between NationsBank, N.A. as of April
30, 1998
*10.4 -- Directors Stock Option Plan
*10.5 -- 1994 Employee Stock Option Plan
*10.6 -- Master Lease Agreement by and between Renex Corp. and
Morcroft Leasing Corp. as of January 1, 1994
*10.7 -- Lease Agreement by and between JCD Partnership and Renex
Dialysis Facilities, Inc. dated December 29, 1995 for certain
property located in Jackson, Mississippi
*10.8 -- Lease Contract and Agreement by and between JCD Partnership
and Renex Dialysis Facilities, Inc. dated December 29, 1995 for
certain property located in Jackson, Mississippi
*10.9 -- Lease Contract and Agreement by and between JCD Partnership
and Renex Dialysis Facilities, Inc. dated December 29, 1995 for
certain property located in Delta, Louisiana
10.10 -- Employment Agreement dated January 1, 1998 by and between
Renex Corp. and Milton J. Wallace
10.11 -- Employment Agreement dated March 1, 1997 by and between
Renex Corp. and Mignon Early
10.12 -- Employment Agreement dated April 22, 1997 by and between
Patsy L. Anders
21.1 -- Subsidiaries of the Company
27.1 -- Financial Data Schedule (for SEC use only)
*Incorporated by reference to the Company's Registration Statement on Form
S-1 File No. 333-32611.
(d) Financial Statement Schedules - The following financial statement
schedules required by Regulation S-X are herewith filed as follows.
47
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 to be signed on
behalf of the undersigned, thereunto duly authorized.
RENEX CORP.
Date: MARCH 29, 1999 By: /s/ James P. Shea
---------------------------------------
James P. Shea
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicates.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MILTON J. WALLACE Chairman of the Board March 29, 1999
----------------------------- Of Directors
Milton J. Wallace
/s/ ARTHUR G. SHAPIRO, M.D. Vice Chairman of the Board March 29, 1999
----------------------------- Director of Medical Affairs
Arthur G. Shapiro, M.D.
/s/ JAMES P. SHEA President/CEO, Director March 29, 1999
-----------------------------
James P. Shea
/s/ MARK D. WALLACE Director/Secretary March 29, 1999
-----------------------------
Mark D. Wallace
/s/ EUGENE P. CONESE, SR. Director March 29, 1999
-----------------------------
Eugene P. Conese, Sr.
/s/ C. DAVID FINCH, M.D. Director March 29, 1999
-----------------------------
C. David Finch, M.D.
/s/ JOHN E. HUNT, SR. Director March 29, 1999
-----------------------------
John E. Hunt, Sr.
/s/ JEFFREY H. WATSON Director March 29, 1999
-----------------------------
Jeffrey H. Watson
/s/ CHARLES J. SIMONS Director March 29, 1999
-----------------------------
Charles J. Simons
/s/ ORESTES L. LUGO Vice President/Chief March 29, 1999
----------------------------- Financial and Principal
Orestes L. Lugo Accounting Officer
48
EXHIBIT 10.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement")
entered into as of the 30th day of June, 1998 by and between RENEX CORP., a
Florida corporation ("Company"), and JAMES P. SHEA ("SHEA").
R E C I T A L S:
A. The Company is a provider of kidney dialysis treatments in
various parts of the United States to individuals suffering from end stage renal
disease (the "Business"); and
B. SHEA has been in the continuous employ of the Company since
August 1993 as its President/Chief Executive Officer; and
C. The Company and Shea entered into an Employment Agreement
dated April 21, 1997 (the "Employment Agreement");
D. The Company desires to continue to employ SHEA as the
Company's President/Chief Executive Officer and SHEA desires to continue to be
employed by the Company in such position on the terms and conditions provided
herein; and
E. The Company believes that it is in the best interest of the
Company to assure Shea of a secure minimum compensation and to diminish the
inevitable distraction of SHEA that may result in the event of the possibility,
threat or occurrence of a change of control, by providing for certain
compensation arrangements upon a change of control; and
F. The parties desire to amend the Employment Agreement on the
terms hereof and to restate the Employment Agreement, in its entirety herein.
NOW THEREFORE, in consideration of the mutual promises and
covenants contained in this Agreement and such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. RECITATIONS. The above recitations are true and correct and
are incorporated herein by this reference.
2. EMPLOYMENT.
2.1. POSITION OF EMPLOYMENT. The Company hereby continues
the employment of SHEA as its President/Chief Executive Officer upon all of the
terms and conditions hereinafter set forth. SHEA shall perform such duties as
are usually performed by a President/Chief Executive Officer of a business
similar in scope as the Business and such other reasonable additional duties as
may be prescribed from time to time by the Company's Board of Directors, taking
into account SHEA's education, experience and job responsibilities. SHEA shall
report directly to the Board of Directors. All actions shall be subject and
subordinate to review and
approval by the Board of Directors and any and all committees of the Board of
Directors. The precise responsibilities of SHEA may be modified from time to
time in accordance with reasonable policy established by the Board of Directors
of the Company consistent with SHEA's qualifications and experience.
2.2. BOARD MEMBERSHIP. During the term of this Agreement,
the Company shall use its best efforts to nominate and cause the election of
SHEA to the Company's Board of Directors.
2.3. DEVOTION OF TIME. During the term of SHEA's
employment, SHEA shall devote his full business time, ability and attention to
the business affairs of the Company. SHEA agrees to use his best efforts to
perform faithfully and efficiently such responsibilities. SHEA shall be
permitted to (i) serve on corporate, civic or charitable boards or committees;
and (ii) deliver lectures, fulfill speaking engagements or teach at educational
institutions. All income received from such other endeavors shall be for the
exclusive benefit of SHEA and the Company shall have no interest therein.
2.4. WORKING FACILITIES. During the term of this
Agreement, the Company shall furnish, at SHEA's principal place of employment,
an office, furnishings, secretary and such other facilities commensurate and
suitable to his position and adequate for the performance of his duties
hereunder.
2.5. LOCATION OF EMPLOYMENT. Unless otherwise agreed to
by SHEA, SHEA's principal place of business shall be within Dade or Broward
Counties, Florida.
3. TERM OF EMPLOYMENT
3.1. TERM OF EMPLOYMENT. The term of this Agreement shall
be effective as of April 21, 1997 (the "Commencement Date") and shall end five
(5) years thereafter, subject to earlier termination or extension as otherwise
set forth in this Agreement.
3.2. AUTOMATIC EXTENSION. This Agreement shall be
automatically extended for successive five (5) year periods at the end of the
initial or any extended term, unless either party provides written notice of
termination to the other party at least 180 days prior to the expiration of the
initial or extended term respectively.
3.3. TERMINATION OF EMPLOYMENT BY THE COMPANY FOR CAUSE.
The Company may terminate SHEA's employment upon fifteen (15) days written
notice for the reasons set forth in Section 3.3.1 below, if such default is not
cured within such notice period, or such additional time as is reasonably
necessary to cure such default if SHEA is using diligent efforts to cure such
default. The Company shall be entitled to terminate SHEA's employment without
notice or an opportunity to cure for the reasons set forth in Section 3.3.2
herein.
3.3.1. NOTICE. Notice or an opportunity to cure
shall be required for the following reasons:
(a) A default or breach by SHEA of any
of the material provisions of this Agreement detrimental to the Company;
-2-
(b) refusal to follow reasonable and
lawful directives of the Company's Board of Directors or any committee thereof
which are consistent with SHEA's duties and responsibility outlined in this
Agreement; or
3.3.2. NO NOTICE. No notice or an opportunity to
cure shall be required for the following:
(a) actions by SHEA constituting fraud,
embezzlement or dishonesty;
(b) the deliberate and knowing breach
by SHEA of the Company's internal financial controls;
(c) SHEA furnishing false, misleading,
or omissive information or omitting to furnish material information to the
Company's Board of Directors, or any committee thereof, in the reasonable
judgment of the Board of Directors;
(d) any action by SHEA which
constitutes a breach of the confidentiality of the Business and/or trade secrets
of the Company;
(e) SHEA's gross negligence in the
performance of his duties as outlined in this Agreement;
(f) any violation of federal or state
law by SHEA which have a material detrimental impact on the Company;
(g) at such time as SHEA shall have
failed, by reason of mental or physical disability or illness ("Disability" as
hereinafter defined), to perform his services pursuant to this Agreement for a
period of one hundred eighty (180) days. Disability shall be defined to mean the
inability of SHEA to perform his duties under this Agreement, based on injury,
illness or physical or mental conditions as determined by the Company's Board of
Directors, which determination must be supported by two licensed physicians, one
of each selected by the Company and SHEA; provided, however, if the Company
maintains a policy insuring against the disability of SHEA, Disability shall
have the meaning ascribed in such policy. Upon the Board's initial determination
of disability, SHEA will submit to mental and physical examinations which shall
be paid by the Company, unless otherwise covered by health benefits provided by
the Company to SHEA. The failure of SHEA to submit to such reasonable
examinations within fifteen (15) days of such request shall be conclusive that
such Disability exists.
3.3.3. NO ADDITIONAL COMPENSATION. Upon
termination for the reasons set forth in Section 3.3 herein, the Company shall
not be liable for any further compensation or benefits following the date of
termination, other than accrued Base Salary. Notwithstanding, SHEA shall be
entitled to receive all appropriate benefits mandated by the Consolidated Budget
Reconciliation Act of 1985 ("COBRA").
3.4. TERMINATION BY SHEA. SHEA may terminate this
Agreement upon thirty (30) days written notice, upon the occurrence of a
material default of this Agreement by the Company, which default is not cured
within the thirty (30) day notice period. Such notice shall set forth with
particularity the facts underlying the claimed default. If SHEA terminates this
Agreement under this Section 3.4, SHEA shall be entitled to the Severance
Payment as provided in Section 4.6.
-3-
3.5. TERMINATION WITHOUT CAUSE. The Company shall have
the right to terminate this Agreement without Cause on thirty (30) days written
notice, subject to payment by the Company of the Severance Payment described in
Section 4.6 herein. Notwithstanding anything herein to the contrary, in the
event that SHEA's employment is terminated in accordance with this Section 3.5,
SHEA's rights under any and all employee stock option programs or individual
stock option arrangements shall remain in effect and provide to SHEA the ability
to exercise any and all stock options vested as of the date of termination
through the remainder of the terms of such options, which termination dates
shall not be accelerated based on the termination of employment.
3.6. TERMINATION UPON DEATH. This Agreement shall be
terminated immediately upon the death of SHEA. Within thirty (30) days following
such termination, the Company shall pay to SHEA's estate: (i) all accrued Base
Salary and bonuses; and (ii) a sum equal to six (6) months' Base Salary. In
addition, upon the determination of bonuses for the fiscal year in which SHEA
died, the Company shall pay to SHEA's estate, a prorated bonus based on the
number of days SHEA provided services hereunder during the year of his death.
3.7. TERMINATION BY SHEA UPON CHANGE OF CONTROL. SHEA may
terminate this Agreement upon thirty (30) days written notice at any time within
eighteen (18) months after the occurrence of a "Change of Control." Upon such
termination, SHEA shall be entitled to the Severance Payment set forth in
Section 4.6 below. Notwithstanding anything herein to the contrary, in the event
that SHEA's employment is terminated in accordance with this Section 3.7, SHEA's
rights under any and all employee stock option programs or individual stock
option arrangements shall remain in effect and provide to SHEA the ability to
exercise any and all stock options vested as of the date of termination through
the remainder of the terms of such options, which termination dates shall not be
accelerated based on the termination of employment.
3.8. DEFINITION OF CHANGE OF CONTROL. Change of Control
is defined for the purposes of this Agreement as any of the following acts:
3.8.1. The acquisition by any person, entity or
"group" within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934 (the "Exchange Act") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of twenty-five (25%) percent or
more of either the then outstanding shares of the Company's common stock or the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors. Notwithstanding, any
purchase by underwriters pursuant to a firm commitment underwriting shall not
constitute a Change of Control; or
3.8.2. If the individuals who serve on the
Company Board of Directors as of the Commencement Date (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that any person who becomes a director subsequent
to the Commencement Date whose election or nomination for election by the
Company's shareholders was approved by a vote of at least a majority of the
directors then compiling the Incumbent Board shall be for purposes of this
Agreement considered as if such person was a member of the Incumbent Board; or
-4-
3.8.3. Approval by the Company's stockholders of
(i) a merger, reorganization or consolidation whereby the Company's shareholders
immediately prior to such approval do not, immediately after consummation of
such reorganization, merger or consolidation own more than 50% of the combined
voting power entitled to vote generally in the election of directors of the
surviving entity's then outstanding voting securities; or (ii) liquidation or
dissolution of the Company; or (iii) the sale of all or substantially all of the
assets of the Company.
4. COMPENSATION AND BENEFITS
4.1. SALARY. Subject to the provisions of Section 4.2
herein, the Company shall pay to SHEA, a base salary at a total annual rate of
$190,000 (the "Base Salary") payable in cash. Base Salary shall be paid in
regular payroll intervals consistent with payroll policy established by the
Company from time to time.
4.2. COST OF LIVING INCREASE. On each anniversary date of
the Commencement Date during the term hereof or any extension, Base Salary shall
be increased by the greater of (i) six (6%) percent of then existing Base
Salary, or (ii) the percentage increase, if any, of the consumer price index for
Urban Wage Earners and Clerical Workers (Greater Metropolitan Miami area; all
items) issued by the Bureau of Labor Statistics of the U.S. Department of Labor.
The Company's Board of Directors shall have the discretion to grant increases in
Base Salary in excess of the amounts provided herein.
4.3. BONUS. Prior to the commencement of each fiscal
year, the Board of Directors or its compensation committee, if any, shall
establish in good faith a reasonable and justifiable incentive bonus plan for
SHEA for such fiscal year. The incentive bonus plan shall provide SHEA the
ability to earn a bonus based upon certain goals and objectives to be
established in such incentive bonus plan. Such bonus, if any, shall be payable
within thirty (30) days following the completion of the Company's audit for such
fiscal year by its independent auditors.
4.4. STOCK OPTIONS. SHEA shall be eligible from time to
time to receive grants of stock options, under stock option plans or otherwise,
in such amounts and at such times as determined by the Board of Directors or any
committee thereof. All options granted to SHEA shall:
(a) have a minimum term of five (5) years within
which to exercise such options;
(b) have a vesting schedule of no worse than
twenty-five (25%) percent as of the date of grant and twenty-five (25%) on each
anniversary date of such grant thereafter;
(c) vesting shall be accelerated upon a change
of control of the Company;
-5-
(d) have an exercise price no greater than the
market price of the underlying securities as of the date of grant; and
(e) such other terms and conditions as are
customary for similar types of options.
4.5. ADDITIONAL BENEFITS.
4.5.1. VACATION. SHEA shall be entitled to a
reasonable number of discretionary paid vacation days consistent with his level
of employment, duties and seniority during each twelve-month period during the
term of this Agreement, but in no event less than twenty (20) days during each
period. Vacation time may be accumulated for a period of not longer than two (2)
years. SHEA shall not receive compensation for days not used.
4.5.2. AUTOMOBILE EXPENSES. During the term of
this Agreement, the Company shall pay to SHEA an automobile allowance of $700
per month net of taxes, which shall be inclusive of all expenses associated with
the operation of such automobile, including depreciation, gasoline, insurance,
repairs and maintenance.
4.5.3. REIMBURSEMENT OF EXPENSES. SHEA shall be
reimbursed by the Company, upon presentation of adequate receipts, for all
business expenses which are reasonably incurred by SHEA in the performance of
his duties under this Agreement, including but not limited to travel, cellular
phone and similar expenses. All travel expenses shall be incurred in accordance
with reasonable policy established by the Board of Directors.
4.5.4. PARTICIPATION IN EMPLOYEE BENEFIT PLANS.
SHEA shall be entitled to participate, subject to eligibility and other terms
generally established by the Company's Board of Directors, in any group
hospitalization, health, dental care, profit sharing and pension, and other
benefit plans, as may be adopted or amended by the Company from time to time as
affecting employees of similar status. The Company shall provide health
insurance for SHEA and his dependents and shall pay all premiums incurred
thereby.
4.6. SEVERANCE PAYMENT. SHEA shall be entitled to the
Severance Payment as calculated below in the event that SHEA's employment is
terminated (i) by the Company without cause; (ii) by SHEA after a material
default by the Company; (iii) by SHEA after a Change of Control pursuant to
Section 3.7; or (iv) by the Company for any reason after a Change of Control.
The Severance Payment shall be an amount equal to the greater of:
(a) The sum of (i) Base Salary payments SHEA would have
received has his employment continued for the remaining term of this Agreement;
and (ii) three times any bonus paid to SHEA in the preceding twelve (12) months
prior to termination, including the value of any options issued in lieu of cash
bonuses; or
(b) $500,000.
The Severance Payment shall be paid 100% in cash on the effective
date of such termination. In addition to the Severance Payment, SHEA shall be
entitled to all of the benefits
-6-
and personal perquisites otherwise provided in this Agreement for a period of
time which is the greater of (i) the remaining term of this Agreement (if it
were not terminated), or (ii) three (3) years (the "Severance Period"). Such
benefits shall include, but are not limited to, automobile allowance, health and
life insurance and any other benefit SHEA was receiving at the time of
termination. Notwithstanding anything herein to the contrary, reimbursement of
expenses as provided in Section 4.5.3 herein is not a benefit during the
Severance Period. Any benefit or prerequisite that is payable in cash shall be
payable in equal installments on the first day of each month during the
Severance Period.
5. REPRESENTATIONS. SHEA hereby represents to the Company that he
is in good health, he is physically and mentally capable of performing his
duties hereunder and he has no knowledge of any present or past physical or
mental condition which would cause an insurance company to reject an application
by SHEA for life insurance or for accident, sickness or disability insurance.
SHEA represents and warrants that to the best of his knowledge he is not subject
to any restrictive covenants under any other agreements prohibiting his
performance in full hereunder, or which would subject the Company to any valid
claims for tortious interference.
6. CONFIDENTIALITY AND NON-DISCLOSURE OF INFORMATION.
6.1. CONFIDENTIALITY. SHEA shall not, during the term of
this Agreement or at any time thereafter, divulge, furnish or make accessible to
anyone without the Company's prior written consent, any knowledge or information
with respect to any aspect of the Business, including but not limited to: the
Company's costs; fees or models; physician or patient names; provider names;
referral sources; addresses and telephone numbers of patients and referral
sources; billing procedures, prices and terms; its business techniques, computer
programs and printouts; identity of prospective patients, providers or referral
sources; information disclosed by the Company's patients to the Company; or
other information concerning the Business or its employees. All information
given to SHEA in connection with his employment shall be considered confidential
and proprietary.
6.2. OWNERSHIP OF INFORMATION. SHEA recognizes that all
records; patient lists; provider lists; referral lists; material cost data; fees
or models; files and correspondence with patients, referral services,
physicians, and providers of services; computer printouts; contracts; reports;
notes; business plans; compilations of other recorded matter; and copies or
reproductions thereof, relating to the Company's operations and activities made
or received by SHEA in the course of his employment are the exclusive property
of the Company and SHEA holds and uses same as trustee for the Company and
subject to the Company's sole control and will deliver same to the Company at
the termination of his employment, or earlier if so requested. All of such
information, which if used by SHEA outside the scope of his employment, could
cause irreparable and continuing injury to the Business for which there may not
be an adequate remedy at law.
7. RESTRICTIVE COVENANT. As an inducement to cause the Company to
enter into this Agreement, SHEA covenants and agrees that during his employment,
and for a period of one (1) year after he ceases to be employed by the Company,
regardless of the manner or cause of termination:
-7-
7.1. NON-COMPETITION. SHEA will not be an employee,
agent, director, stockholder or owner (except of not more than 1% of the
securities of any publicly traded entity), partner, consultant, financial
backer, creditor or be otherwise directly or indirectly connected with or
participate in the management, operation or control of any business, firm,
proprietorship, corporation, partnership, association, entity or venture engaged
in the provision of services similar to the Company's business as of termination
(a "Competing Business") within 100 miles of any office, center, clinic or other
location of the Company, or any of its subsidiaries or affiliates;
7.2. SOLICITATION OF BUSINESS. SHEA will not contact,
call upon, solicit business from, sell or render services to any patient,
provider, insurer, HMO, managed care company or contract party of the Company,
or any of its affiliates with respect to a Competing Business or purchase from
any supplier or potential supplier any materials for same and SHEA shall not
directly or indirectly aid or assist any other person, firm or corporation to do
any of the aforesaid acts; or
7.3. SOLICITATION OF EMPLOYEES. SHEA will not directly or
indirectly, as principal, agent, owner, partner, stockholder, officer, director,
employee, independent contractor or consultant or in any individual or
representative capacity for himself or on behalf of any business, firm,
corporation, partnership, association or proprietorship enter into any
agreements with, solicit, or directly or indirectly cause others to solicit the
employment of any officer, sales person, agent, or other employee of the
Company, or any of its subsidiaries or affiliates for the purpose of causing
said officer, sales person, agent or other employee to terminate employment with
the Company.
7.4. NON-ENFORCEMENT OF RESTRICTIVE COVENANT:
Notwithstanding anything herein to the contrary, if this Agreement is terminated
(a) by SHEA as a result of the material breach of this Agreement by the Company,
(b) if the Company fails to make any Severance Payment required herein within
ten (10) days after such payment is due, or (c) by SHEA in accordance with
Section 3.7 herein, then in such event the Restrictive Covenants contained in
this Section 7 shall thereafter be unenforceable by the Company. Notwithstanding
termination of the restrictive covenants, the Company will still be obligated to
pay the remaining Severance Payments thereafter due.
8. ACKNOWLEDGMENT. SHEA HEREBY ACKNOWLEDGES AND UNDERSTANDS THIS
AGREEMENT INHIBITS SHEA'S ABILITY TO WORK FOR THE SAME OR SIMILAR KIND OF
BUSINESS FOR A PERIOD OF ONE (1) YEAR AFTER THE END OF SHEA's EMPLOYMENT WITH
THE COMPANY. SHEA acknowledges and confirms that the length of the term and
geographic restrictions contained in this Agreement are fair and reasonable and
not the result of overreaching, duress or coercion of any kind. SHEA further
acknowledges and confirms that his full, uninhibited and faithful observance of
each of the covenants contained in this Agreement will not cause any undue
hardships, financial or otherwise and that enforcement of this Agreement will
not impair SHEA's ability to obtain employment commensurate with SHEA's
abilities and on terms fully acceptable to SHEA. SHEA acknowledges that SHEA
will be receiving significant information regarding the Business which SHEA has
not previously received and would not receive without being employed by the
Company. SHEA acknowledges and confirms that such information would cause the
Company serious injury and loss if used by SHEA for the benefit of a competitor.
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9. MATERIAL VIOLATION. A violation of Sections 6 or 7 shall
constitute a material and substantial breach of this Agreement and shall result
in the imposition of the Company's remedies contained in Section 11. SHEA
acknowledges that compliance with the provisions of Sections 6 and 7 are
necessary to protect the goodwill and proprietary interests of the Company and
is a material condition of employment. SHEA acknowledges and agrees that proof
of one such personal solicitation by SHEA of a patient, referral source, HMO,
managed care company, insurance company, supplier or employee, shall constitute
absolute and conclusive evidence that SHEA has substantially and materially
breached the provisions of this Agreement.
10. MATERIAL COVENANTS. It is understood by and between the
parties that the foregoing covenants set forth in Sections 6 and 7 are essential
elements of this Agreement, and that but for the agreement of SHEA to comply
with such covenants, the Company would not have entered into this Agreement.
Such covenants by SHEA shall be construed as agreements independent of any other
provision of this Agreement and the existence of any claim or cause of action
SHEA may have against the Company whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
these covenants.
11. REMEDIES. SHEA hereby acknowledges, covenants and agrees that
in the event of a material default or breach under this Agreement:
(a) the Company will suffer irreparable and continuing
damages as a result of such breach and its remedy at law will be inadequate.
SHEA agrees that in the event of a violation or breach of this Agreement, in
addition to any other remedies available to them, the Company shall be entitled
to an injunction restraining any such default or any other appropriate decree of
specific performance, without any requirement to prove actual damages or to post
any bond or any other security and to any other equitable relief the court deems
proper; and
(b) Any and all of the Company's remedies described in
this Agreement shall not be exclusive and shall be in addition to any other
remedies which the Company may have at law or in equity including, but not
limited to, the right to monetary damages.
12. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses, sections, subdivisions, subparagraphs, paragraphs
or articles contained in this Agreement shall not affect the enforceability of
the remaining portions of this Agreement or any part thereof, all of which are
inserted conditionally on their being legally valid. In the event that one or
more of the words, phrases, sentences, clauses, sections, subdivisions,
subparagraphs, paragraphs or articles are determined to be unenforceable and if
such invalidity shall be caused by the length of any period of time or the size
of any area set forth in any part hereof, such period of time or such area, or
both, shall be considered to be reduced to a period or area which would cure
such invalidity.
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13. NOTICE. Any notices or other communications to any party
pursuant to or relating to this Agreement must be in writing and shall be deemed
to have been given or delivered when hand-delivered, mailed through the U.S.
Postal Service via certified mail, return receipt requested, postage prepaid,
through a nationally recognized overnight courier, or via facsimile to the party
at their addresses below:
Company: Renex Corp.
2100 Ponce de Leon Boulevard, Suite 950
Coral Gables, Florida 33134
Attention: Chairman of the Board
with a copy to: Bryan W. Bauman, Esq.
Wallace, Bauman, Fodiman & Shannon, P.A.
2222 Ponce de Leon Boulevard, Sixth Floor
Coral Gables, Florida 33134
SHEA: James P. Shea
10295 Collins Avenue
Bal Harbor, Florida 33154
or such other address given by such party to the other party at any time
hereafter.
14. ENTIRE AGREEMENT. This Agreement contains the sole and entire
agreement between the parties with respect to the subject matter hereof and
supersedes any and all other prior written or oral agreements between them as to
such subject matter.
15. AMENDMENT. No amendment, waiver or modification of this
Agreement or any provisions of this Agreement shall be valid unless in writing
and duly executed by both parties.
16. BINDING AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, legal
representatives, successors and assigns.
17. WAIVER. Any waiver by any party of any breach of any
provision of this Agreement shall not be considered as or constitute a
continuing waiver or waiver of any other breach of any provision of this
Agreement.
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18. ASSIGNMENT. No party may assign their rights hereunder
without the prior written consent of the other, except that the Company may
assign its rights to any affiliate or successor entity without the consent of
SHEA subject to the provisions of Section 3.7 herein.
19. CAPTIONS. Captions contained in this Agreement are inserted
only as a matter of convenience or for reference and in no way defines, limits,
extends, or describes the scope of this Agreement or the intent of any
provisions of this Agreement.
20. ATTORNEYS' FEES. In the event of any litigation arising out
of this Agreement, the prevailing party shall be entitled to recover its
attorneys' fees and costs, including attorneys' fees and costs incurred on
appeal.
21. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Florida.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
RENEX CORP., a Florida corporation
By:
ORESTES L. LUGO
Vice President/Chief Financial Officer
JAMES P. SHEA
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EXHIBIT 10.2
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement")
entered into as of the 30th day of June, 1998 by and between RENEX CORP., a
Florida corporation ("Company"), and ORESTES L. LUGO ("LUGO").
R E C I T A L S:
A. The Company is a provider of kidney dialysis treatments in
various parts of the United States to individuals suffering from end stage renal
disease (the "Business"); and
B. LUGO has been in the continuous employ of the Company since
August 1995 as its Vice President/Chief Financial Officer; and
C. The Company and LUGO entered into an Employment Agreement as
of the 21st day of April 1997 (the "Employment Agreement"); and
D. The Company desires to continue to employ LUGO as the
Company's Vice President/Chief Financial Officer and LUGO desires to continue to
be employed by the Company in such position on the terms and conditions provided
herein; and
E. The Company believes that it is in the best interest of the
Company to assure LUGO of a secure minimum compensation and to diminish the
inevitable distraction of LUGO that may result in the event of the possibility,
threat or occurrence of a change of control, by providing for certain
compensation arrangements upon a change of control; and
F. The parties desire to amend the Employment Agreement on the
terms hereof and to restate the Employment Agreement in its entirety herein.
NOW THEREFORE, in consideration of the mutual promises and
covenants contained in this Agreement and such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. RECITATIONS. The above recitations are true and correct and
are incorporated herein by this reference.
2. EMPLOYMENT.
2.1. POSITION OF EMPLOYMENT. The Company hereby continues
the employment of LUGO as its Vice President/Chief Financial Officer upon all of
the terms and conditions hereinafter set forth. LUGO shall perform such duties
as are usually performed by a Vice President/Chief Financial Officer of a
business similar in scope as the Business and such other reasonable additional
duties as may be prescribed from time to time by the Company's Board of
Directors, taking into account LUGO's education, experience and job
responsibilities. LUGO shall report directly to the President. All actions shall
be subject and subordinate to review and approval by the Board of Directors and
any and all committees of the Board of Directors. The
precise responsibilities of LUGO may be modified from time to time in accordance
with reasonable policy established by the Board of Directors of the Company
consistent with LUGO's qualifications and experience.
2.2. DEVOTION OF TIME. During the term of LUGO's
employment, LUGO shall devote his full business time, ability and attention to
the business affairs of the Company. LUGO agrees to use his best efforts to
perform faithfully and efficiently such responsibilities. LUGO shall be
permitted to (i) serve on corporate, civic or charitable boards or committees;
and (ii) deliver lectures, fulfill speaking engagements or teach at educational
institutions. All income received from such other endeavors shall be for the
exclusive benefit of LUGO and the Company shall have no interest therein.
2.3. WORKING FACILITIES. During the term of this
Agreement, the Company shall furnish, at LUGO's principal place of employment,
an office, furnishings, secretary and such other facilities commensurate and
suitable to his position and adequate for the performance of his duties
hereunder.
2.4. LOCATION OF EMPLOYMENT. Unless otherwise agreed to
by LUGO, LUGO's principal place of business shall be within Dade or Broward
Counties, Florida.
3. TERM OF EMPLOYMENT
3.1. TERM OF EMPLOYMENT. The term of this Agreement shall
be from April 21, 1997 (the "Commencement Date") and shall end three (3) years
thereafter, subject to earlier termination or extension as otherwise set forth
in this Agreement.
3.2. AUTOMATIC EXTENSION. This Agreement shall be
automatically extended for successive three (3) year periods at the end of the
initial or any extended term, unless either party provides written notice of
termination to the other party at least 120 days prior to the expiration of the
initial or extended term respectively.
3.3. TERMINATION OF EMPLOYMENT BY THE COMPANY FOR CAUSE.
The Company may terminate LUGO's employment upon fifteen (15) days written
notice for the reasons set forth in Section 3.3.1 below, if such default is not
cured within such notice period, or such additional time as is reasonably
necessary to cure such default if LUGO is using diligent efforts to cure such
default. The Company shall be entitled to terminate LUGO's employment without
notice or an opportunity to cure for the reasons set forth in Section 3.3.2
herein.
3.3.1. NOTICE. Notice or an opportunity to cure
shall be required for the following reasons:
(a) A default or breach by LUGO of any
of the material provisions of this Agreement detrimental to the Company;
(b) refusal to follow reasonable and
lawful directives of the Company's Board of Directors or any committee thereof
which are consistent with LUGO' duties and responsibility outlined in this
Agreement; or
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3.3.2. NO NOTICE. No notice or an opportunity to
cure shall be required for the following:
(a) actions by LUGO constituting fraud,
embezzlement or dishonesty;
(b) the deliberate and knowing breach
by LUGO of the Company's internal financial controls;
(c) LUGO furnishing false, misleading,
or omissive information or omitting to furnish material information to the
Company's Board of Directors, or any committee thereof, in the reasonable
judgment of the Board of Directors;
(d) any action by LUGO which
constitutes a breach of the confidentiality of the Business and/or trade secrets
of the Company;
(e) LUGO's gross negligence in the
performance of his duties as outlined in this Agreement;
(f) any violation of federal or state
law by LUGO which have a material detrimental impact on the Company;
(g) at such time as LUGO shall have
failed, by reason of mental or physical disability or illness ("Disability" as
hereinafter defined), to perform his services pursuant to this Agreement for a
period of one hundred eighty (180) days. Disability shall be defined to mean the
inability of LUGO to perform his duties under this Agreement, based on injury,
illness or physical or mental conditions as determined by the Company's Board of
Directors, which determination must be supported by two licensed physicians, one
of each selected by the Company and LUGO; provided, however, if the Company
maintains a policy insuring against the disability of LUGO, Disability shall
have the meaning ascribed in such policy. Upon the Board's initial determination
of disability, LUGO will submit to mental and physical examinations which shall
be paid by the Company, unless otherwise covered by health benefits provided by
the Company to LUGO. The failure of LUGO to submit to such reasonable
examinations within fifteen (15) days of such request shall be conclusive that
such Disability exists.
3.3.3. NO ADDITIONAL COMPENSATION. Upon
termination for the reasons set forth in Section 3.3 herein, the Company shall
not be liable for any further compensation or benefits following the date of
termination, other than accrued Base Salary. Notwithstanding, LUGO shall be
entitled to receive all appropriate benefits mandated by the Consolidated Budget
Reconciliation Act of 1985 ("COBRA").
3.4. TERMINATION BY LUGO. LUGO may terminate this
Agreement upon thirty (30) days written notice, upon the occurrence of a
material default of this Agreement by the Company, which default is not cured
within the thirty (30) day notice period. Such notice shall set forth with
particularity the facts underlying the claimed default. If LUGO terminates this
Agreement under this Section 3.4, LUGO shall be entitled to the Severance
Payment as provided in Section 4.6.
-3-
3.5. TERMINATION WITHOUT CAUSE. The Company shall have
the right to terminate this Agreement without Cause on thirty (30) days written
notice, subject to payment by the Company of the Severance Payment described in
Section 4.6 herein. Notwithstanding anything herein to the contrary, in the
event that LUGO's employment is terminated in accordance with this Section 3.5,
LUGO's rights under any and all employee stock option programs or individual
stock option arrangements shall remain in effect and provide to LUGO the ability
to exercise any and all stock options vested as of the date of termination
through the remainder of the terms of such options, which termination dates
shall not be accelerated based on the termination of employment.
3.6. TERMINATION UPON DEATH. This Agreement shall be
terminated immediately upon the death of LUGO. Within thirty (30) days following
such termination, the Company shall pay to LUGO's estate: (i) all accrued Base
Salary and bonuses; and (ii) a sum equal to six (6) months' Base Salary. In
addition, upon the determination of bonuses for the fiscal year in which LUGO
died, the Company shall pay to LUGO's estate, a prorated bonus based on the
number of days LUGO provided services hereunder during the year of his death.
3.7. TERMINATION BY LUGO UPON CHANGE OF CONTROL. LUGO may
terminate this Agreement upon thirty (30) days written notice at any time within
eighteen (18) months after the occurrence of a "Change of Control." Upon such
termination, LUGO shall be entitled to the Severance Payment set forth in
Section 4.6 below. Notwithstanding anything herein to the contrary, in the event
that LUGO's employment is terminated in accordance with this Section 3.7, LUGO's
rights under any and all employee stock option programs or individual stock
option arrangements shall remain in effect and provide to LUGO the ability to
exercise any and all stock options vested as of the date of termination through
the remainder of the terms of such options, which termination dates shall not be
accelerated based on the termination of employment.
3.8. DEFINITION OF CHANGE OF CONTROL. Change of Control
is defined for the purposes of this Agreement as any of the following acts:
3.8.1. The acquisition by any person, entity or
"group" within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934 (the "Exchange Act") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of twenty-five (25%) percent or
more of either the then outstanding shares of the Company's common stock or the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors. Notwithstanding, any
purchase by underwriters pursuant to a firm commitment underwriting shall not
constitute a Change of Control; or
3.8.2. If the individuals who serve on the
Company Board of Directors as of the Commencement Date (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that any person who becomes a director subsequent
to the Commencement Date whose election or nomination for election by the
Company's shareholders was approved by a vote of at least a majority of the
directors then compiling the Incumbent Board shall be for purposes of this
Agreement considered as if such person was a member of the Incumbent Board; or
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3.8.3. Approval by the Company's stockholders of
(i) a merger, reorganization or consolidation whereby the Company's shareholders
immediately prior to such approval do not, immediately after consummation of
such reorganization, merger or consolidation own more than 50% of the combined
voting power entitled to vote generally in the election of directors of the
surviving entity's then outstanding voting securities; or (ii) liquidation or
dissolution of the Company; or (iii) the sale of all or substantially all of the
assets of the Company.
4. COMPENSATION AND BENEFITS
4.1. SALARY. Subject to the provisions of Section 4.2
herein, the Company shall pay to LUGO, a base salary at a total annual rate of
$155,000 payable in cash. Base Salary shall be paid in regular payroll intervals
consistent with payroll policy established by the Company from time to time.
4.2. COST OF LIVING INCREASE. On each anniversary date of
the Commencement Date during the term hereof or any extension, Base Salary shall
be increased by the greater of (i) six (6%) percent of then existing Base
Salary, or (ii) the percentage increase, if any, of the consumer price index for
Urban Wage Earners and Clerical Workers (Greater Metropolitan Miami area; all
items) issued by the Bureau of Labor Statistics of the U.S. Department of Labor.
The Company's Board of Directors shall have the discretion to grant increases in
Base Salary in excess of the amounts provided herein.
4.3. BONUS. Prior to the commencement of each fiscal
year, the Board of Directors or its compensation committee, if any, shall
establish in good faith a reasonable and justifiable incentive bonus plan for
LUGO for such fiscal year. The incentive bonus plan shall provide LUGO the
ability to earn a bonus based upon certain goals and objectives to be
established in such incentive bonus plan. Such bonus, if any, shall be payable
within thirty (30) days following the completion of the Company's audit for such
fiscal year by its independent auditors.
4.4. STOCK OPTIONS. LUGO shall be eligible from time to
time to receive grants of stock options, under stock option plans or otherwise,
in such amounts and at such times as determined by the Board of Directors or any
committee thereof. All options granted to LUGO shall:
(a) have a minimum term of five (5) years within
which to exercise such options;
(b) have a vesting schedule of no worse than
twenty-five (25%) percent as of the date of grant and twenty-five (25%) on each
anniversary date of such grant thereafter;
(c) vesting shall be accelerated upon a change
of control of the Company;
(d) have an exercise price no greater than the
market price of the underlying securities as of the date of grant; and
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(e) such other terms and conditions as are
customary for similar types of options.
4.5. ADDITIONAL BENEFITS.
4.5.1. VACATION. LUGO shall be entitled to a
reasonable number of discretionary paid vacation days consistent with his level
of employment, duties and seniority during each twelve-month period during the
term of this Agreement, but in no event less than fifteen (15) days during each
period. Vacation time may be accumulated for a period of not longer than two (2)
years. LUGO shall not receive compensation for days not used.
4.5.2. AUTOMOBILE EXPENSES. During the term of
this Agreement, the Company shall pay to LUGO an automobile allowance of $600
per month net of taxes, which shall be inclusive of all expenses associated with
the operation of such automobile, including depreciation, gasoline, insurance,
repairs and maintenance.
4.5.3. PROFESSIONAL EDUCATION. During each
calender year during the term of this Agreement, the Company shall pay for the
cost of 40 hours of continuing professional education ("CPE") credits necessary
for LUGO to maintain his certified public accounting license. Such CPE costs
shall include LUGO's attendance at one national out-of-town CPE class of his
choice during each calender year, up to a maximum of $3,000 for such attendance,
which expenses shall include the cost of the CPE credits, travel, hotel
accommodations and other reimbursement of expenses consistent with normal
Company travel policy.
4.5.4. REIMBURSEMENT OF EXPENSES. LUGO shall be
reimbursed by the Company, upon presentation of adequate receipts, for all
business expenses which are reasonably incurred by LUGO in the performance of
his duties under this Agreement, including but not limited to travel, cellular
phone and similar expenses. All travel expenses shall be incurred in accordance
with reasonable policy established by the Board of Directors.
4.5.5. PARTICIPATION IN EMPLOYEE BENEFIT PLANS.
LUGO shall be entitled to participate, subject to eligibility and other terms
generally established by the Company's Board of Directors, in any group
hospitalization, health, dental care, profit sharing and pension, and other
benefit plans, as may be adopted or amended by the Company from time to time as
affecting employees of similar status. The Company shall provide health
insurance for LUGO and his dependents and shall pay all premiums incurred
thereby.
4.6. SEVERANCE PAYMENT. LUGO shall be entitled to the
Severance Payment as calculated below in the event that LUGO's employment is
terminated (i) by the Company without cause; (ii) by LUGO after a material
default by the Company; (iii) by LUGO after a Change of Control pursuant to
Section 3.7; or (iv) by the Company for any reason after a Change of Control.
The Severance Payment shall be an amount equal to the greater of:
(a) The sum of (i) Base Salary payments LUGO
would have received has his employment continued for the remaining term of this
Agreement; and (ii) three
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times any bonus paid to LUGO in the preceding twelve (12) months prior to
termination, including the value of any stock options or stock issued in lieu of
cash bonuses; or
(b) $500,000.
The Severance Payment shall be paid 100% in cash on the effective
date of such termination. In addition to the Severance Payment, LUGO shall be
entitled to all of the benefits and personal perquisites otherwise provided in
this Agreement for a period of time which is the greater of (i) the remaining
term of this Agreement (if it were not terminated), or (ii) three (3) years (the
"Severance Period"). Such benefits shall include, but are not limited to,
automobile allowance, health and life insurance and any other benefit LUGO was
receiving at the time of termination. Notwithstanding anything herein to the
contrary, reimbursement of expenses as provided in Section 4.5.4 herein is not a
benefit during the Severance Period. Any benefit or prerequisite that is payable
in cash shall be payable in equal installments on the first day of each month
during the Severance Period.
5. REPRESENTATIONS. LUGO hereby represents to the Company that he
is in good health, he is physically and mentally capable of performing his
duties hereunder and he has no knowledge of any present or past physical or
mental condition which would cause an insurance company to reject an application
by LUGO for life insurance or for accident, sickness or disability insurance.
LUGO represents and warrants that to the best of his knowledge he is not subject
to any restrictive covenants under any other agreements prohibiting his
performance in full hereunder, or which would subject the Company to any valid
claims for tortious interference.
6. CONFIDENTIALITY AND NON-DISCLOSURE OF INFORMATION.
6.1. CONFIDENTIALITY. LUGO shall not, during the term of
this Agreement or at any time thereafter, divulge, furnish or make accessible to
anyone without the Company's prior written consent, any knowledge or information
with respect to any aspect of the Business, including but not limited to: the
Company's costs; fees or models; physician or patient names; provider names;
referral sources; addresses and telephone numbers of patients and referral
sources; billing procedures, prices and terms; its business techniques, computer
programs and printouts; identity of prospective patients, providers or referral
sources; information disclosed by the Company's patients to the Company; or
other information concerning the Business or its employees. All information
given to LUGO in connection with his employment shall be considered confidential
and proprietary.
6.2. OWNERSHIP OF INFORMATION. LUGO recognizes that all
records; patient lists; provider lists; referral lists; material cost data; fees
or models; files and correspondence with patients, referral services,
physicians, and providers of services; computer printouts; contracts; reports;
notes; business plans; compilations of other recorded matter; and copies or
reproductions thereof, relating to the Company's operations and activities made
or received by LUGO in the course of his employment are the exclusive property
of the Company and LUGO holds and uses same as trustee for the Company and
subject to the Company's sole control and will deliver same to the Company at
the termination of his employment, or earlier if so requested. All of such
information, which if used by LUGO outside the scope of his employment, could
cause irreparable and continuing injury to the Business for which there may not
be an adequate remedy at law.
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7. RESTRICTIVE COVENANT. As an inducement to cause the Company to
enter into this Agreement, LUGO covenants and agrees that during his employment,
and for a period of one (1) year after he ceases to be employed by the Company,
regardless of the manner or cause of termination:
7.1. NON-COMPETITION. LUGO will not be an employee,
agent, director, stockholder or owner (except of not more than 1% of the
securities of any publicly traded entity), partner, consultant, financial
backer, creditor or be otherwise directly or indirectly connected with or
participate in the management, operation or control of any business, firm,
proprietorship, corporation, partnership, association, entity or venture engaged
in the provision of services similar to the Company's business as of termination
(a "Competing Business") within 100 miles of any office, center, clinic or other
location of the Company, or any of its subsidiaries or affiliates;
7.2. SOLICITATION OF BUSINESS. LUGO will not contact,
call upon, solicit business from, sell or render services to any patient,
provider, insurer, HMO, managed care company or contract party of the Company,
or any of its affiliates with respect to a Competing Business or purchase from
any supplier or potential supplier any materials for same and LUGO shall not
directly or indirectly aid or assist any other person, firm or corporation to do
any of the aforesaid acts; or
7.3. SOLICITATION OF EMPLOYEES. LUGO will not directly or
indirectly, as principal, agent, owner, partner, stockholder, officer, director,
employee, independent contractor or consultant or in any individual or
representative capacity for himself or on behalf of any business, firm,
corporation, partnership, association or proprietorship enter into any
agreements with, solicit, or directly or indirectly cause others to solicit the
employment of any officer, sales person, agent, or other employee of the
Company, or any of its subsidiaries or affiliates for the purpose of causing
said officer, sales person, agent or other employee to terminate employment with
the Company.
7.4. NON-ENFORCEMENT OF RESTRICTIVE COVENANT:
Notwithstanding anything herein to the contrary, if this Agreement is terminated
(a) by LUGO as a result of the material breach of this Agreement by the Company,
(b) if the Company fails to make any Severance Payment required herein within
ten (10) days after such payment is due, or (c) by LUGO in accordance with
Section 3.7 herein, then in such event the Restrictive Covenants contained in
this Section 7 shall thereafter be unenforceable by the Company. Notwithstanding
termination of the restrictive covenants, the Company will still be obligated to
pay the remaining Severance Payments thereafter due.
8. ACKNOWLEDGMENT. LUGO HEREBY ACKNOWLEDGES AND UNDERSTANDS THIS
AGREEMENT INHIBITS LUGO'S ABILITY TO WORK FOR THE SAME OR SIMILAR KIND OF
BUSINESS FOR A PERIOD OF ONE (1) YEAR AFTER THE END OF LUGO's EMPLOYMENT WITH
THE COMPANY. LUGO acknowledges and confirms that the length of the term and
geographic restrictions contained in this Agreement are fair and reasonable and
not the result of overreaching, duress or coercion of any kind. LUGO further
acknowledges and confirms that his full, uninhibited and faithful observance of
each of the covenants contained in this Agreement will not cause any undue
hardships, financial or otherwise and that enforcement of this Agreement will
not impair LUGO's ability to obtain employment commensurate with LUGO's
abilities and on terms
-8-
fully acceptable to LUGO. LUGO acknowledges that LUGO will be receiving
significant information regarding the Business which LUGO has not previously
received and would not receive without being employed by the Company. LUGO
acknowledges and confirms that such information would cause the Company serious
injury and loss if used by LUGO for the benefit of a competitor.
9. MATERIAL VIOLATION. A violation of Sections 6 or 7 shall
constitute a material and substantial breach of this Agreement and shall result
in the imposition of the Company's remedies contained in Section 11. LUGO
acknowledges that compliance with the provisions of Sections 6 and 7 are
necessary to protect the goodwill and proprietary interests of the Company and
is a material condition of employment. LUGO acknowledges and agrees that proof
of one such personal solicitation by LUGO of a patient, referral source, HMO,
managed care company, insurance company, supplier or employee, shall constitute
absolute and conclusive evidence that LUGO has substantially and materially
breached the provisions of this Agreement.
10. MATERIAL COVENANTS. It is understood by and between the
parties that the foregoing covenants set forth in Sections 6 and 7 are essential
elements of this Agreement, and that but for the agreement of LUGO to comply
with such covenants, the Company would not have entered into this Agreement.
Such covenants by LUGO shall be construed as agreements independent of any other
provision of this Agreement and the existence of any claim or cause of action
LUGO may have against the Company whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
these covenants.
11. REMEDIES. LUGO hereby acknowledges, covenants and agrees that
in the event of a material default or breach under this Agreement:
(a) the Company will suffer irreparable and continuing
damages as a result of such breach and its remedy at law will be inadequate.
LUGO agrees that in the event of a violation or breach of this Agreement, in
addition to any other remedies available to them, the Company shall be entitled
to an injunction restraining any such default or any other appropriate decree of
specific performance, without any requirement to prove actual damages or to post
any bond or any other security and to any other equitable relief the court deems
proper; and
(b) Any and all of the Company's remedies described in
this Agreement shall not be exclusive and shall be in addition to any other
remedies which the Company may have at law or in equity including, but not
limited to, the right to monetary damages.
12. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses, sections, subdivisions, subparagraphs, paragraphs
or articles contained in this Agreement shall not affect the enforceability of
the remaining portions of this Agreement or any part thereof, all of which are
inserted conditionally on their being legally valid. In the event that one or
more of the words, phrases, sentences, clauses, sections, subdivisions,
subparagraphs, paragraphs or articles are determined to be unenforceable and if
such invalidity shall be caused by the length of any period of time or the size
of any area set forth in any part hereof, such period of time or such area, or
both, shall be considered to be reduced to a period or area which would cure
such invalidity.
-9-
13. NOTICE. Any notices or other communications to any party
pursuant to or relating to this Agreement must be in writing and shall be deemed
to have been given or delivered when hand-delivered, mailed through the U.S.
Postal Service via certified mail, return receipt requested, postage prepaid,
through a nationally recognized overnight courier, or via facsimile to the party
at their addresses below:
Company Renex Corp.
2100 Ponce de Leon Boulevard, Suite 950
Coral Gables, Florida 33134
Attention: President
with a copy to: Bryan W. Bauman, Esq.
Wallace, Bauman, Fodiman & Shannon, P.A.
2222 Ponce de Leon Boulevard, Sixth Floor
Coral Gables, Florida 33134
LUGO: 1900 Sunset Harbor Drive, Unit 1102
Miami Beach, Florida 33140
or such other address given by such party to the other party at any time
hereafter.
14. ENTIRE AGREEMENT. This Agreement contains the sole and entire
agreement between the parties with respect to the subject matter hereof and
supersedes any and all other prior written or oral agreements between them as to
such subject matter.
15. AMENDMENT. No amendment, waiver or modification of this
Agreement or any provisions of this Agreement shall be valid unless in writing
and duly executed by both parties.
16. BINDING AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, legal
representatives, successors and assigns.
17. WAIVER. Any waiver by any party of any breach of any
provision of this Agreement shall not be considered as or constitute a
continuing waiver or waiver of any other breach of any provision of this
Agreement.
18. ASSIGNMENT. No party may assign their rights hereunder
without the prior written consent of the other, except that the Company may
assign its rights to any affiliate or successor entity without the consent of
LUGO subject to the provisions of Section 3.7 herein.
19. CAPTIONS. Captions contained in this Agreement are inserted
only as a matter of convenience or for reference and in no way defines, limits,
extends, or describes the scope of this Agreement or the intent of any
provisions of this Agreement.
20. ATTORNEYS' FEES. In the event of any litigation arising out
of this Agreement, the prevailing party shall be entitled to recover its
attorneys' fees and costs, including attorneys' fees and costs incurred on
appeal.
-10-
21. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Florida.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
RENEX CORP., a Florida corporation
By:
JAMES P. SHEA
President/Chief Executive Officer
ORESTES L LUGO
-11-
EXHIBIT 10.3
CREDIT AGREEMENT
BY AND BETWEEN
RENEX CORP.,
A FLORIDA CORPORATION
AND
NATIONSBANK, N.A.,
A NATIONAL BANKING ASSOCIATION
DATED AS OF APRIL 30, 1998
TABLE OF CONTENTS
PAGE
----
ARTICLE I - DEFINITIONS...............................................................4
1.1 DEFINITIONS..............................................................4
1.2 ACCOUNTING TERMS........................................................11
1.3 OTHER DEFINITIONAL PROVISIONS...........................................11
ARTICLE II - REVOLVING CREDIT COMMITMENT.............................................12
2.1 REVOLVING CREDIT COMMITMENT.............................................12
2.2 NOTICE AND MANNER OF BORROWING..........................................12
2.3 NOTE....................................................................12
2.4 INTEREST................................................................13
2.5 PAYMENTS................................................................14
2.6 COLLATERAL..............................................................14
2.7 FEES....................................................................14
ARTICLE III - AVAILABILITY...........................................................15
3.1 Availability............................................................15
ARTICLE IV - GUARANTY................................................................15
4.1 GUARANTY................................................................15
ARTICLE V - COLLATERAL...............................................................16
5.1 COLLATERAL..............................................................16
5.2 CROSS-COLLATERAL........................................................16
ARTICLE VI - CONDITIONS PRECEDENT TO BORROWING.......................................16
6.1 EACH LOAN...............................................................16
6.2 INITIAL LOAN............................................................16
ARTICLE VII - CONDITIONS PRECEDENT TO ACQUISITIONS...................................18
7.1 Acquisitions............................................................18
ARTICLE VIII - REPRESENTATIONS AND WARRANTIES........................................20
8.1 CORPORATE EXISTENCE AND POWER...........................................20
8.2 CORPORATE AUTHORITY.....................................................20
8.3 FINANCIAL CONDITION.....................................................20
8.4 FULL DISCLOSURE.........................................................21
8.5 LITIGATION..............................................................21
8.6 PAYMENT OF TAXES........................................................21
1
8.7 NO ADVERSE RESTRICTIONS OR DEFAULTS.....................................21
8.8 INVESTMENT COMPANY ACT..................................................22
8.9 AUTHORIZATIONS..........................................................22
8.10 REIMBURSEMENT FROM THIRD PARTY PAYORS..................................22
8.11 FRAUD AND ABUSE........................................................22
8.12 LICENSING AND ACCREDITATION............................................23
8.13 SUBSIDIARIES AND AFFILIATES............................................23
8.14 TITLE TO PROPERTIES....................................................23
8.15 USE OF LOANS...........................................................23
8.16 ERISA..................................................................24
ARTICLE IX - AFFIRMATIVE COVENANTS...................................................24
9.1 LOAN PROCEEDS...........................................................24
9.2 CORPORATE EXISTENCE.....................................................25
9.3 MAINTENANCE OF BUSINESS AND PROPERTIES..................................25
9.4 INSURANCE...............................................................25
9.5 PAYMENT OF INDEBTEDNESS, TAXES, ETC.....................................25
9.6 COMPLIANCE WITH LAWS....................................................26
9.7 NOTICE OF DEFAULT.......................................................26
9.8 FINANCIAL STATEMENTS, REPORTS, ETC......................................26
9.9 VISITATION RIGHTS.......................................................28
9.10 NOTICE OF LITIGATION AND OTHER PROCEEDINGS.............................28
9.11 ERISA..................................................................28
9.12 NET WORTH..............................................................29
9.13 CURRENT RATIO..........................................................29
9.14 CURRENT MATURITIES COVERAGE RATIO......................................29
9.15 LEVERAGE RATIO.........................................................29
9.16 CAPITALIZATION RATIO...................................................29
9.17 BOOKS AND RECORDS......................................................30
9.18 OPERATING ACCOUNTS.....................................................30
9.19 MANAGEMENT.............................................................30
9.20 REIMBURSEMENT FROM THIRD PARTY PAYORS..................................30
ARTICLE X - NEGATIVE COVENANTS.......................................................31
10.1 LIMITATION ON LIENS....................................................31
10.2 LIMITATION ON INDEBTEDNESS.............................................31
10.3 THIRD-PARTY GUARANTIES.................................................32
10.4 DIVIDENDS..............................................................32
10.5 MERGERS, CONSOLIDATIONS AND ACQUISITION OF ASSETS......................32
10.6 SALE, LEASE, ETC.......................................................32
10.7 INVESTMENTS............................................................32
10.8 TRANSACTIONS WITH AFFILIATES...........................................33
10.9 SALE AND LEASEBACK.....................................................33
10.10 PURCHASE OF OWN SHARES................................................33
2
10.11 TRANSFER OF SHARES....................................................33
10.12 BUSINESS OPERATIONS...................................................33
10.13 OWNERSHIP OF ASSETS...................................................33
10.14 LOANS AND ADVANCES....................................................33
10.15 CAPITAL EXPENDITURES..................................................29
10.16 FRAUD AND ABUSE.......................................................33
ARTICLE XI - ENVIRONMENTAL...........................................................34
11.1 HAZARDOUS AND TOXIC MATERIALS GENERALLY................................34
ARTICLE XII - EVENTS OF DEFAULT......................................................35
12.1 EVENTS OF DEFAULT......................................................35
ARTICLE XIII - MISCELLANEOUS.........................................................38
13.1 NO WAIVER, REMEDIES CUMULATIVE.........................................38
13.2 SURVIVAL OF REPRESENTATIONS............................................38
13.3 EXPENSES...............................................................38
13.4 NOTICES................................................................39
13.5 CONSTRUCTION...........................................................39
13.6 SUCCESSORS AND ASSIGNS.................................................39
13.7 JURISDICTION, SERVICE OF PROCESS.......................................39
13.8 LIMIT ON INTEREST......................................................40
13.9 PAYMENT ON OTHER THAN BUSINESS DAY.....................................41
13.10 NET PAYMENTS..........................................................41
13.11 INDEMNIFICATION OF LENDER.............................................41
13.12 COUNTERPARTS..........................................................42
13.13 HEADINGS..............................................................42
13.14 SEVERABILITY..........................................................42
13.15 COURSE OF DEALING; AMENDMENT; SUPPLEMENTAL AGREEMENTS.................42
13.16 RIGHT OF SETOFF.......................................................42
13.17 ARBITRATION...........................................................43
3
THIS CREDIT AGREEMENT, dated as of April 30, 1998 (the
"Agreement"), is by and between RENEX CORP., a Florida corporation (the
"Borrower") and NATIONSBANK, N.A. (the "Lender").
R E C I T A L S
A. The Borrower has requested Lender to provide to the
Borrower a revolving credit facility as set forth herein.
B. The Lender is willing to provide a revolving credit
facility to the Borrower for the purposes, upon the terms, and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
promises herein contained, and for other good and valuable consideration, it is
agreed as follows:
ARTICLE I - DEFINITIONS
1.1 DEFINITIONS.
In addition to terms defined elsewhere in this Agreement, the
following terms have the meanings indicated which meanings shall be equally
applicable to both the singular and the plural forms of such terms:
"ACCOUNTS OR ACCOUNTS RECEIVABLE" shall have the meaning ascribed to
Account in Section 679.106 of the Florida Statutes and shall include all present
and future accounts, General Intangibles, Chattel Paper, Instruments, notes,
acceptances, Documents or other rights to payment and all forms of obligations
owing at any time to the Borrower or any of its Subsidiaries arising out of the
sale or lease of Inventory or rendition of services, all rights of the Borrower
or any of its Subsidiaries earned or yet to be earned under contracts to sell or
lease Inventory or render services and all documents of any kind in respect of
any of the foregoing, and all the proceeds thereof, of every kind and nature and
in whatsoever form.
"ACQUISITION" shall mean the acquisition by Borrower of a Dialysis
Facility.
"ACQUISITION ADVANCE" shall mean a Borrowing for the purpose of
financing an Acquisition.
"ADJUSTED ACQUISITION EBITDA" shall mean: (i) the actual earnings
before Interest Expense, taxes, depreciation and amortization of the Dialysis
Facility being acquired, for the immediately preceding four (4) fiscal quarters,
adjusted in order to give effect to any increase or decrease in expenses related
to compensation due to newly contracted employee's compensation on a going
forward basis as set forth in a written employment agreement; (ii)
contractually identified increase or decrease in expenses approved by Lender in
its reasonable discretion; and (iii) proforma adjustments approved by Lender in
its sole discretion.
4
"ADJUSTED EBITDA" shall mean the actual earnings before Interest
Expense, taxes, depreciation and amortization of Borrower, adjusted in order to
give effect to any increase or decrease in expenses resulting from: (i) the
Adjusted Acquisition EBITDA relating to any Acquisitions; and (ii) expenses
related to compensation due to newly contracted employee's compensation as set
forth in a written employment agreement.
"AFFILIATE" shall mean any Person which directly or indirectly through
one or more intermediaries controls, or is controlled by or is under common
control with, the Borrower. The term "control" means the possession, directly or
indirectly, of the power to cause the direction of the management and policies
of a Person, whether through the ownership of voting securities, by contract or
otherwise.
"AGREEMENT" means this Credit Agreement, as the same may from time to
time be amended, modified, extended or renewed.
"BORROWER" has the meaning assigned to that term in the introduction to
this Agreement.
"BORROWING" shall mean the drawing down by the Borrower of a loan or
loans from the Lender on any given Borrowing Date.
"BORROWING BASE" has the meaning assigned to that term in Article III
of this Agreement.
"BORROWING DATE" shall mean the date as of which a Borrowing is
consummated.
"BUSINESS DAY" shall mean a day on which commercial banks are open for
business in Miami, Florida.
"CAPITAL EXPENDITURES" shall mean any expenditure by a Person which is
or is required to be capitalized on its balance sheet for financial reporting
purposes in accordance with generally accepted accounting principles, including,
without limitation, the incurrence by such Person of any Capitalized Lease
Obligations, excluding any expenditures paid for with insurance proceeds.
"CAPITALIZED LEASE OBLIGATIONS" shall mean, as to any Person, the
obligations or such Person, as lessee or guarantor, to pay rent or other amounts
under a lease of (or other agreement conveying the right to use) real and/or
personal property, which obligations are required to be classified and accounted
for as a capital lease on a balance sheet of the Person under generally accepted
accounting principles.
"CAPITALIZATION RATIO" shall mean the ratio derived by comparing
Borrower's: (i) aggregate outstanding of all Funded Indebtedness; to (ii)
aggregate outstanding of all Funded Indebtedness plus stockholder's equity.
"CHATTEL PAPER" shall have the meaning ascribed to said term in Section
679.105 of the Florida Statutes.
"CLOSING DATE" shall mean as of April 30, 1998.
5
"CODE" shall mean the Internal Revenue Code of 1986, as the same may be
from time to time hereafter modified or amended.
"COLLATERAL" has the meaning assigned to that term in Section 5.1 of
this Agreement.
"CONTRACT PROVIDER" means any Person who provides professional/medical
health care services under or pursuant to any contract with the Borrower or any
Subsidiary.
"CURRENT MATURITIES COVERAGE RATIO" shall mean the ratio derived by
comparing Borrower's: (i) Adjusted EBITDA plus Rentals plus Interest Income less
cash income tax payments; to (ii) Interest Expense, plus Rentals, plus current
maturities of long term Indebtedness, plus current maturities of Capitalized
Lease Obligations, plus twenty percent (20%) of the aggregate outstanding
balance of all Revolving Credit Loans.
"CURRENT RATIO" shall mean the ratio derived by comparing Borrower's:
(i) current assets as shown on the balance sheet of Borrower at any particular
date; to (ii) current Liabilities as shown on the balance sheet of Borrower on
such date.
"DEFAULT" shall mean any event which, with the lapse of time, the
giving of notice, or both, would become an Event of Default, provided such
Default has not been waived in writing by Lender.
"DEFAULT RATE" shall mean, for the period commencing on the date of the
occurrence of an Event of Default and terminating on the date the Event of
Default is cured, a rate equal to the lessor of: (i) the maximum rate of
interest permitted by law; or (ii) two percent (2%) in excess of the Prime Rate.
"DIALYSIS FACILITIES" shall mean certain facilities or acute dialysis
or hemapheresis services programs which provide dialysis and ancillary services
for patients suffering from end stage renal disease.
"DOCUMENTS" shall have the meaning ascribed to said term in Section
679.105 of the Florida Statutes and shall include all bills of lading, airway
bills, dock warrants, dock receipts, warehouse receipts or orders for the
delivery of goods, and also any other document which in the regular course of
business or financing is treated as adequately evidencing that the person in
possession of it is entitled to receive, hold and dispose of the document and
the goods it covers.
"DOLLARS" or "$" shall mean dollars in lawful currency of the United
States of America.
"ELIGIBLE ACCOUNTS RECEIVABLE" shall mean the net amount of Borrower's
Accounts Receivable outstanding after eliminating from the aggregate amount of
outstanding Accounts Receivable such Accounts Receivable which are unpaid more
than one hundred fifty (150) days after the invoice date.
"EQUIPMENT" shall have the meaning ascribed to said term in Section
679.109 of the Florida Statutes and shall include all of the Borrower's or any
of its Subsidiary's goods,
6
machinery, equipment, fixed assets, rolling stock, fixtures, furniture, office
equipment, tools, parts and other items of personal property of every kind and
description, now owned or hereafter acquired by the Borrower or any Subsidiary,
wheresoever located, together with all additions, attachments, accessions,
parts, replacements and substitutions thereof.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as the same may from time to time be amended.
"EVENT OF DEFAULT" has the meaning assigned to that term in Section
12.1 hereof.
"FUNDED INDEBTEDNESS" Indebtedness on which interest is paid or payable
in accordance with the terms and conditions of such Indebtedness.
"GENERAL INTANGIBLES" shall have the meaning ascribed to said term in
Section 679.106 of the Florida Statutes and shall include, without limitation,
any personal property other than goods, Accounts, Inventory, Equipment, Chattel
Paper and Instruments, including, all franchises, licenses, leases and subleases
whereby Borrower or any Subsidiary leases to another any of Borrower's or any
Subsidiary's Inventory or Equipment, contracts, permits and authorizations of
governmental agencies and others, tradenames, trademarks, service marks,
patents, copyrights, intellectual property and all other intangible property of
the Borrower or any Subsidiary.
"HCFA" shall mean the United States Health Care Financing
Administration and any successor thereto.
"INDEBTEDNESS" of any Person shall mean (a) all indebtedness for
borrowed money or for the deferred purchase price of any property or services
(other than accounts payable and accruals in the ordinary course of business)
for which the Person is liable as principal, (b) all indebtedness (excluding
unaccrued finance charges) secured by a Lien on property owned or being
purchased by the Person, whether or not such indebtedness shall have been
assumed by the Person, (c) all Capitalized Lease Obligations (excluding
unaccrued finance charges) of the Person, (d) any arrangement (commonly
described as a sale-and-leaseback transaction) with any financial institution or
other lender or investor providing for the leasing to the Person of property
which at the time has been or is to be sold or transferred by the Person to the
lender or investor, or which has been or is being acquired from another Person
by the lender or investor for the purpose of leasing the property to the Person,
(e) any contingent obligation or liability including those under Third-Party
Guaranties and letters of credit for borrowed money, and (f) all obligations of
partnerships or joint ventures in respect of which the Person is primarily or
secondarily liable as a partner or joint venturer or otherwise (provided that in
any event for purposes of determining the amount of the Indebtedness, the full
amount of such obligations, without giving effect to the contingent liability or
contributions of other participants in the partnership or joint venture, shall
be included to the extent such Person is liable therefor).
"INTERCOMPANY INDEBTEDNESS" shall mean Indebtedness by and between
Borrower and its Subsidiaries.
7
"INTEREST EXPENSE" for any period shall mean the aggregate amount of
interest charges on all Indebtedness of the Borrower or any Subsidiary, as the
case may be (said amount not to include the netting or inclusion of Interest
Income).
"INTEREST INCOME" for any period shall mean the aggregate amount of
interest earned by Borrower or any Subsidiary, as the case may be (said amount
not to include the netting or inclusion of Interest Expense).
"INSTRUMENTS" shall have the meaning ascribed to said term in Section
679.105 of the Florida Statutes.
"INVENTORY" shall mean all goods, merchandise and other personal
property now owned or hereafter acquired by Borrower or any Subsidiary,
wheresoever located, which are held for sale or lease or are furnished under a
contract of service or are raw materials, work in process or materials used or
consumed or to be used or consumed in Borrower's or any Subsidiary's business,
in all of its forms, together with all Inventory in transit, repossessed or
returned Inventory and all Documents of title representing the Inventory, and
all accessions thereto and products thereof.
"INVESTMENTS" shall mean, with respect to any Person, all advances,
loans or extensions of credit to any other Person, all purchases or commitments
to purchase any stock, bonds, notes, debentures or other securities of any other
Person, and any investment in other Persons, including partnerships or joint
ventures.
"LENDER" has the meaning assigned to that term in the introduction to
this Agreement.
"LEVERAGE RATIO" shall mean the ratio derived by comparing Borrower's:
(i) aggregate outstanding of all Funded Indebtedness; to (ii) Adjusted EBITDA.
"LIABILITIES" shall mean, at the time any determination thereof is to
be made, the aggregate amount of all liabilities of the Borrower or any
Subsidiary determined in accordance with generally accepted accounting
principles, including, without limitation, the contingent obligation of the
Borrower or any Subsidiary to reimburse amounts outstanding under any letters of
credit or under other similar facilities.
"LIEN" shall mean a mortgage, pledge, lien, security interest, or other
charge or encumbrance or any segregation of assets or revenues or other
preferential arrangement (whether or not constituting a security interest) with
respect to any present or future assets, including fixtures, revenues, or rights
to the receipt of income of the Person referred to in the context in which the
term is used.
"LIBOR RATE" shall mean the fluctuating rate of interest per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Telerate Page 3750 (or any successor page) as the thirty (30) day London
interbank offered rate for deposits in Dollars. If, for any reason, such rate is
not available, the term "LIBOR" shall mean the rate per annum (rounded upwards,
if necessary to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page
as the thirty (30)
8
day London interbank offered rate for deposits in Dollars; provided, however, if
more than one rate is specified on Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all rates. As used herein, "Telerate Page 3750"
means the British Bankers Association Libor Rates (determined at 11:00 a.m.
London, England time) that are published by Dow Jones Telerate, Inc.
"MATERIAL ADVERSE CHANGE" shall mean any material adverse change in or
material adverse effect upon the business, assets, liabilities (actual or
contingent), condition (financial or otherwise), operations, properties of
Borrower and its Subsidiaries taken as a whole.
"MEDICAID CERTIFICATION" shall mean certification by HCFA or a state
agency or entity under contract with HCFA that health care operations are in
compliance with all the conditions of participation set forth in the Medicaid
Regulations, to the extent applicable.
"MEDICAID PROVIDER AGREEMENT" shall mean an agreement entered into
between a state agency or other such entity administering the Medicaid program
and a health care operation under which the health care operation agrees to
provide services for Medicaid patients in accordance with the terms of the
agreement and Medicaid Regulations.
"MEDICAID REGULATIONS" shall mean all federal statutes, rules,
regulations and laws (whether set forth in Title XIX of the Social Security Act
or elsewhere) affecting the medical assistance program established by Title XIX
of the Social Security Act and all state statutes, regulations, rules and laws
enacted in connection therewith, as may be amended, supplemented or otherwise
modified from time to time.
"MEDICAL DIRECTOR AGREEMENT" shall mean an agreement between the
Borrower or any of its Subsidiaries and a physician responsible for professional
medical director services at a Dialysis Facility as required by Medicare
Regulations or Medicaid Regulations.
"MEDICARE CERTIFICATION" shall mean certification by HCFA or a state
agency or entity under contract with HCFA that the health care operation is in
compliance with all the conditions of participation set forth in the Medicare
Regulations.
"MEDICARE PROVIDER AGREEMENT" shall mean an agreement entered into
between a state agency or other such entity administering the Medicare program
and a health care operation under which the health care operation agrees to
provide services for Medicare patients in accordance with the terms of the
agreement and Medicare Regulations.
"MEDICARE REGULATIONS" shall mean all federal statutes, rules,
regulations and laws (whether set forth in Title XVIII of the Social Security
Act or elsewhere) affecting the health insurance program for the aged and
disabled established by Title XVIII of the Social Security Act, as may be
amended, supplemented or otherwise modified form time to time.
"NET WORTH" shall mean, at the time any determination thereof is to be
made, (i) the aggregate amount of all assets of a Person, as may be properly
classified as such, under generally accepted accounting principles, less (ii)
the aggregate amount of all Liabilities of such Person, all as determined in
accordance with generally accepted accounting principles applied on a consistent
basis.
9
"NOTE" has the meaning assigned to that term in Section 2.3 of this
Agreement.
"PERMITTED LIENS" shall mean a mortgage, pledge, lien, security
interest or other charge or encumbrance or any segregation of assets or revenues
or other preferential arrangement (whether or not constituting a security
interest and including, without limitation, any conditional sale or other title
retention agreement, and the filing of, or agreement to give, any financing
statement under the Uniform Commercial Code or comparable law of any
jurisdiction) with respect to any present or future assets, including fixtures,
revenues or rights to the receipt of income of the Person referred to in the
context in which the term is used which are permitted to exist under this
Agreement pursuant to Section 10.1 of this Agreement.
"PERSON" shall mean any natural person, corporation, unincorporated
organization, trust, joint-stock company, joint venture, association, company,
partnership or government, or any agency or political subdivision of any
government.
"PLAN" shall mean any employee benefit plan which is subject to the
provisions of Title IV of ERISA and which is maintained in whole or in part for
employees of the Borrower or any of its Subsidiaries.
"PRIME RATE" shall mean the index rate of interest announced or
published by Lender from time to time as its Prime Rate. Said rate is a
reference rate for the information and use of Lender in establishing the actual
rates to be charged to its borrowers. The Prime Rate may be determined on a
daily basis with any change in the Prime Rate to be effective on the date of any
such change.
"RELATED DOCUMENTS" shall mean the Note, the Security Agreement, the
Guaranties, the UCC-1's and any and all other documents statements, and
opinions described in the Closing Documents List attached hereto as Exhibit C.
"RENTALS" of any Person shall mean, as of any date, the aggregate
amount of the obligations and liabilities of such Person to make payments under
all leases, subleases and similar arrangements for the use of real, personal or
mixed property, other than Capitalized Lease Obligations.
"REVOLVING CREDIT COMMITMENT" shall mean the obligation of the Lender
to make a Revolving Credit Loan or Revolving Credit Loans to the Borrower in an
aggregate principal amount not to exceed Fifteen Million Dollars
($15,000,000.00) pursuant and subject to Section 2.1(a) hereof.
"REVOLVING CREDIT LOAN" OR "REVOLVING CREDIT LOANS" shall mean the
principal amount and the aggregate principal amount, respectively, advanced by
the Lender as a loan or loans to the Borrower under Article II, or, where the
context so requires, the amount thereof then outstanding or any portion thereof.
10
"REVOLVING CREDIT MATURITY DATE" shall mean the date the Revolving
Credit Commitment will mature, which for the purposes of this Agreement is April
30, 2001.
"SUBORDINATED INDEBTEDNESS" shall mean Indebtedness subordinated in
repayment priority to that of Indebtedness of Borrower to Lender pursuant to the
terms and conditions of a subordination agreement acceptable to Lender, in its
reasonable discretion, which subordination agreement: (i) must have a maturity
date of no sooner than the Revolving Credit Maturity Date; (ii) shall prohibit
payment of principal; and (iii) shall prohibit payments of interest in the event
of a Default or Event of Default under this Agreement.
"SUBSIDIARY" shall mean any Person in which the Borrower may own,
directly or indirectly, an equity interest of more than fifty percent (50%), or
which may effectively be controlled by the Borrower, during the term of this
Agreement, as well as all Subsidiaries and other Persons from time to time
included in the consolidated financial statements of the Borrower.
"TERMINATION EVENT" shall mean a "reportable event" as defined in
Section 4043(b) of ERISA or the filing of a notice of intent to terminate under
Section 4041 of ERISA.
"Third Party GUARANTY" shall mean, as to any Person, all liabilities or
obligations of such Person in respect of any Indebtedness or other obligations
of others guaranteed, directly or indirectly, in any manner by such Person, or
in effect guaranteed, directly or indirectly, by such Person through an
agreement, contingent or otherwise, to purchase such Indebtedness or obligation,
or to purchase or sell property, or to purchase or sell services, primarily for
the purpose of enabling the debtor to make payment of the Indebtedness or
obligation or to assure the owner of such Indebtedness or obligation against
loss, or to supply funds to or in any manner invest in the debtor, or otherwise.
"WORKING CAPITAL ADVANCES" shall mean a Borrowing for the purpose of
financing Borrower's purchases of equipment, leasehold improvements and working
capital requirements.
1.2 ACCOUNTING TERMS.
Accounting terms not specifically defined in this Agreement
shall have the meaning given to them under accounting principles and practices
generally accepted in the United States, applied on a consistent basis with the
financial statements referred to in Section 9.8 hereof, and shall be determined
both as to classification of items and amounts in accordance therewith. All
Subsidiaries shall be consolidated to the fullest extent permitted by such
principles and practices, and any accounting terms, financial covenants, and
financial statements referred to herein shall be determined and prepared on the
basis of such consolidation.
1.3 OTHER DEFINITIONAL PROVISIONS.
The words "hereof," "herein," and "hereunder" and words of
similar import when used in this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement, and section, subsection,
and exhibit references refer to this Agreement unless otherwise specified.
* END OF ARTICLE I *
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ARTICLE II - REVOLVING CREDIT COMMITMENT
2.1 REVOLVING CREDIT COMMITMENT.
(a) The Lender agrees, subject to the terms and conditions of
this Agreement, to make Revolving Credit Loans in United States Dollars to the
Borrower for a period terminating on the earlier of the Revolving Credit
Maturity Date or the termination in full of the Revolving Credit Commitment of
the Lender pursuant to Article XII hereof, at such times and in such amounts as
the Borrower shall request in accordance with the provisions of this Agreement,
provided that the aggregate principal amount of the Revolving Credit Loans
outstanding at any one time shall not exceed the Revolving Credit Commitment.
Within the limits of the Revolving Credit Commitment, and subject to the
provisions of this Agreement, the Borrower may borrow, repay, and reborrow from
time to time for a period from the date hereof to and including the earlier of
the Revolving Credit Maturity Date or the termination in full of the Revolving
Credit Commitment of the Lender pursuant to Article XII hereof.
(b) Any Revolving Credit Loan made under this Article II and,
to the extent permitted by law, interest thereon which is not paid when due
(whether at stated maturity, by acceleration, or otherwise), after giving effect
to any applicable cure period, shall bear interest at the Default Rate (computed
on the actual number of days elapsed over a 360-day year).
2.2 NOTICE AND MANNER OF BORROWING.
(a) Borrower shall give written notice (or telephonic notice,
promptly confirmed in writing) to the Lender in a form to be provided by Lender,
prior to 2:00 p.m., Miami time, on each proposed Borrowing Date.
(b) Each Borrowing under this Article II shall be made at the
office of the Lender, at its address as set forth opposite its signature at the
end of this Agreement, by crediting the Borrower's general deposit account with
the Lender in the amount thereof.
2.3 NOTE.
(a) The Revolving Credit Loans made by the Lender under this
Article II shall be evidenced by, and repaid with interest in accordance with, a
single Master Revolving Credit Note executed by the Borrower in favor of the
Lender in substantially the form of Exhibit A attached hereto and made a part
hereof, with appropriate insertions, in the amount of the Revolving Credit
Commitment, dated the initial Borrowing Date and payable to the order of the
Lender (the "Note").
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(b) Each Revolving Credit Loan evidenced by the Note and all
prepayments of the principal thereof shall be evidenced by the records of the
Lender.
(c) Although the stated amount of the Note shall be equal to
the Revolving Credit Commitment, the Note shall be enforceable, with respect to
the Borrower's obligation to pay the principal amount thereof, only to the
extent of the unpaid principal amount of the Revolving Credit Commitment at the
time evidenced thereby. Interest on the Note shall be payable on, and only for
the period during which, the principal amount of the Loan evidenced thereby is
outstanding.
2.4 INTEREST.
(a) The principal balance outstanding from time to time under
the Note shall bear interest at a fluctuating rate per annum equal to one of the
following interest rate options: (i) Fifty (50) basis points less than the Prime
Rate (the "Prime Option"); or (ii) two hundred twenty-five (225) basis points in
excess of the LIBOR Rate (the "LIBOR Option").
(b) The interest rate applicable to the Revolving Credit
Commitment shall increase or decrease, commencing the first (1st) day of the
first (1st) month following receipt of financial statements for the end of a
fiscal quarter referred to in Section 9.8(b) of this Agreement, in accordance
with the following:
(1) In the event Borrower achieves a Leverage Ratio
less than or equal to 2.0 to 1.0 the LIBOR Option shall be adjusted to two
hundred twenty-five (225) basis points in excess of the LIBOR Rate and the Prime
Option shall be adjusted to fifty (50) basis points less than the Prime Rate.
(2) In the event Borrower achieves a Leverage Ratio
less than or equal to 2.5 to 1.0 but not less than 2.0 to 1.0; the LIBOR Option
shall be adjusted to two hundred fifty (250) basis points in excess of the LIBOR
Rate and the Prime Option shall be adjusted to twenty-five (25) basis points
less than the Prime Rate.
(3) In the event Borrower achieves a Leverage Ratio
less than or equal to 3.0 to 1.0 but not less than 2.5 to 1.0; the LIBOR Option
shall be adjusted to two hundred seventy-five (275) basis points in excess of
the LIBOR Rate and the Prime Option shall be adjusted to the Prime Rate.
(c) Interest on the principal balance from time to time
outstanding under the Note shall be due and payable monthly on the fifth (5th)
day of each month commencing the fifth (5th) day of the first (1st) month
following the Borrowing of a Revolving Credit Loan. If such payment day is not a
Business Day, the Business Day immediately preceding such date shall be the date
on which interest shall be due and payable. Interest under the Note shall be
charged only on the Revolving Credit Loans advanced and shall be computed from
the date of such advance to the date of repayment.
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(d) All interest under the Note shall be computed on a daily
basis, based on a 365-day year. In no event shall interest be due at a rate in
excess of the highest lawful rate in effect from time to time. It is not the
intention of the parties hereto to make any agreement which shall be violative
of the laws of the State of Florida or the United States of America relating to
usury. In no event shall Borrower pay or Lender accept or charge any interest
which, together with any other charges upon the principal or any portion
thereof, howsoever computed, after taking into account any requirement for
commitment and facility fees, shall exceed the maximum lawful rate of interest
allowable under the laws of the State of Florida or the United States of America
from time to time. Should any provision of this Agreement or any existing or
future notes, loan agreements or any other agreements between the parties be
construed to require the payment of interest which, together with any other
charges upon the principal or any portion thereof, after taking into account any
requirement for commitment and facility fees, shall exceed such maximum lawful
rate of interest, then any such excess shall be applied against the remaining
principal balance.
(e) Any principal and, to the extent permitted by law,
interest which is not paid when due under the Note (whether at stated maturity,
by acceleration or otherwise) and which constitutes an Event of Default shall
bear interest at a rate per annum (computed as aforesaid) equal to the Default
Rate.
2.5 PAYMENTS.
All payments of principal and interest under the Note shall be to the
Lender at its address as set forth opposite its signature at the end of this
Agreement or as otherwise directed by Lender, in immediately available funds.
2.6 COLLATERAL.
All obligations of the Borrower under the Revolving Credit Commitment
shall be secured by the Collateral set forth in Article V of this Agreement.
2.7 FEES.
In connection with the Revolving Credit Commitment Borrower shall pay
to Lender the following fees:
(a) UPFRONT FEE: An upfront fee equal to One Hundred Thirty
One Thousand Two Hundred Fifty Dollars ($131,250.00) due and payable on or
before the Closing Date.
(b) UNUSED FEE: A fee computed at a rate equal to twelve and
one half (12.5) basis points per annum multiplied by the average daily unused
portion of the Revolving Credit Commitment for the immediately preceding
calendar quarter, payable in arrears within fifteen (15) days of the end of each
calendar quarter, commencing on the first (1st) of such date to occur after the
Closing Date.
* END OF ARTICLE II *
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ARTICLE III - AVAILABILITY
3.1 ACQUISITION ADVANCE AVAILABILITY.
Acquisition Advances under the Revolving Credit Commitment for the
purpose of financing Acquisitions ("Advances") shall be governed by the
following: (i) Acquisition Advances shall be limited to fifty (50%) percent of
the aggregate purchase price of an Acquisition up to the unused principal amount
of the Revolving Credit Commitment; (ii) the Adjusted Acquisition EBITDA of the
Dialysis Facilities being acquired shall be equal to or greater than One Dollar
($1.00); and (iii) Borrower shall be in compliance with all financial covenants
set forth in Sections 9.12, 9.13, 9.14, 9.15 and 9.16 herein, immediately
following such Acquisition as determined by Lender.
3.2 WORKING CAPITAL ADVANCE AVAILABILITY.
Working Capital Advances under the Revolving Credit Commitment shall be
limited to, in the aggregate, Five Million Dollars ($5,000,000.00), provided,
however, in the event any Working Capital Advance would cause the aggregate of
all Working Capital Advances to exceed Two Million Dollars ($2,000,000.00),
Working Capital Advances shall be limited to a borrowing base equal to the
lesser of: (i) Five Million Dollars ($5,000,000.00); or (ii) eighty percent
(80%) of Eligible Accounts Receivable. Notwithstanding the foregoing, Working
Capital Advances to finance the purchase of equipment or leasehold improvements
in connection with any new Dialysis Facility shall be limited to One Million
Five Hundred Thousand Dollars ($1,500,000.00).
* END OF ARTICLE III *
ARTICLE IV - GUARANTY
4.1 GUARANTY.
The full and timely payment and performance of the Revolving Credit
Commitment, as well as all obligations of Borrower to Lender, howsoever and
whenever created, shall be unconditionally guaranteed by all Subsidiaries of
Borrower, now owned or hereafter acquired or created (hereinafter referred to
individually as a "Guarantor" and collectively, as the "Guarantors"), pursuant
to a Guaranty (hereinafter referred to individually as a "Guaranty" and
collectively. as the "Guaranties") in form and content acceptable to Lender and
its counsel.
* END OF ARTICLE IV *
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ARTICLE V - COLLATERAL
5.1 COLLATERAL.
In order to secure the full and timely payment of the Revolving Credit
Loans outstanding under the Revolving Credit Commitment, as well as any
renewals, extensions or modifications thereof, and to secure performance of all
obligations of Borrower to Lender, however and whenever created, Borrower agrees
that it will execute or cause to be executed and delivered to Lender a security
agreement in favor of Lender (the "Security Agreement") and a UCC-1 financing
statement in favor of Lender (the "UCC-1"), in form and substance acceptable to
Lender, granting to Lender a first priority perfected security interest subject
to no other liens or encumbrances except for Permitted Liens or as may be
otherwise set forth in the Security Agreement or this Agreement, in the
following, together with the proceeds and products thereof: (1) all Borrower's
and each Subsidiary's presently existing and hereafter created Accounts or
Accounts Receivable; (2) all Borrower's and each Subsidiary's presently owned
and hereafter acquired Inventory; (3) all Borrower's and each Subsidiary's
presently owned and hereafter acquired Equipment; and (4) all Borrower's and
each Subsidiary's presently owned and hereafter acquired Chattel Paper,
Documents, Instruments and General Intangibles;
All of the above-described collateral is hereafter referred to as "Collateral".
5.2 CROSS-COLLATERAL.
The Collateral shall secure all Indebtedness, howsoever or whenever
incurred, whether direct or indirect, contingent or absolute, of Borrower or any
Subsidiary to Lender.
* END OF ARTICLE V *
ARTICLE VI - CONDITIONS PRECEDENT TO BORROWING
The Lender shall not be obligated to make any Revolving Credit Loan to
the Borrower hereunder unless, except as specifically provided for herein, the
following conditions precedent shall have been satisfied in the sole opinion of
the Lender:
6.1 EACH LOAN.
The obligation of the Lender to make each Revolving Credit Loan
pursuant to Article II herein is subject to the condition precedent that: (i)
the Borrower shall have delivered to the Lender the notice of Borrowing provided
for in Section 2.2 hereof; and (ii) all representations and warranties set forth
in Article XIII herein shall be true and correct in all material respects as of
the date thereof.
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6.2 INITIAL LOAN.
The obligation of the Lender to enter into this Agreement and make the
initial Revolving Credit Loans pursuant to Article II herein is subject to the
following additional conditions precedent, each of which shall have been met,
performed or delivered to Lender by the initial Borrowing Date:
(a) NOTE. The Note, duly executed and completed in the form of
Exhibit B attached hereto and made a part hereof.
(b) OPINION OF COUNSEL. A legal opinion reasonably acceptable
to the Lender and its counsel.
(c) INSURANCE. Evidence that all of the Borrower's insurable
properties, are insured as required by Section 9.4 of this Agreement. All
insurance policies covering the Collateral shall name the Lender as "Loss Payee"
and shall grant the Lender at least thirty (30) days prior written notice of
intended policy cancellation, non-renewal or material modification.
(d) CORPORATE DOCUMENTS. Certified copies of the Articles of
Incorporation and Bylaws of the Borrower and each Subsidiary and all amendments
thereto, together with a Certificate of Good Standing of the Borrower and each
Subsidiary and proof of qualification of each to do business in each
jurisdiction in which its business is conducted.
(e) CERTIFICATION OF NO ADVERSE CHANGE. Evidence or
certification from Borrower that, from the date of the latest financial
information furnished to Lender by Borrower there has been no Material Adverse
Change.
(f) LITIGATION CERTIFICATE. Opinion from Borrower's counsel
that there exists no pending or threatened litigation, the result of which could
result in a Material Adverse Change.
(g) SUPPORTING DOCUMENTS. This Agreement, each of the Related
Documents and each of the certificates and any and all other documents described
in the Closing Documents List attached hereto as Exhibit D and made a part
hereof.
(h) LIEN SEARCH. Completion and satisfaction of a lien search
conducted in each jurisdiction where Borrower or a Guarantor or their assets are
located.
(i) DUE DILIGENCE. Completion and satisfaction of due
diligence analysis and review with respect to the assets, liabilities,
businesses, operations, conditions, and prospects of Borrower, and each
Guarantor (with respect to Contract Providers limited to licensing and good
standing to provide services), as applicable but not limited to: (i) a
NationsBank Business Credit Audit; and (ii) a review of Borrower's fiscal year
1999 financial projections.
(j) GOVERNMENT REGULATIONS. The proceeds of advances under the
Revolving Credit Commitment will be expended in compliance with all applicable
governmental and regulatory laws, rules and regulations (including without
limitation Federal Reserve Regulation U).
17
(k) FEES. Lender shall have been paid all fees and expenses
payable on or prior to the due date thereof in accordance with the terms hereof.
(l) SOLVENCY. A certificate of Borrower's chief executive
officer or chief financial officer confirming the solvency of Borrower (after
consummation of the transactions contemplated hereby) and satisfaction of all
other conditions precedent to the initial borrowing.
(m) CONSENTS. All requisite third parties shall have approved
or consented to the transactions contemplated hereby to the extent required, and
there shall be no governmental or judicial action, actual or threatened, that
has or would have a reasonable likelihood of restraining, preventing or imposing
burdensome conditions on the transactions contemplated hereby.
(n) MEDICARE AUDIT. Any Medicare Audits of Borrower or its
Subsidiaries shall be submitted to Lender and said audits shall be satisfactory
to Lender in its sole discretion.
(o) OTHER. All other documents, agreements or instruments
required in connection with this Agreement.
* END OF ARTICLE VI *
ARTICLE VII - CONDITIONS PRECEDENT TO ACQUISITIONS
7.1 ACQUISITIONS.
Borrower acknowledges and agrees that so long as there are no
outstanding Revolving Credit Loans under the Revolving Credit Commitment and
Borrower is not seeking any Acquisition Advances , no Lender approval shall be
required for an Acquisition. If there are Advances outstanding under the
Revolving Credit Commitment or if Borrower is seeking Acquisition Advances,
Lender approval is required for all Acquisitions; provided, however, until the
aggregate total consideration for Acquisitions by Borrower after the Closing
Date equals or exceeds Five Million Dollars ($5,000,000.00), Lender approval
shall only be required for Acquisitions where the total consideration in
connection with an Acquisition equals or exceeds Two Million Dollars
($2,000,000.00). Lender approval of the above referenced Acquisitions shall be
based upon the following conditions having been satisfied:
(a) Satisfactory review and approval by Lender of the purchase
documentation related to each proposed Acquisition, which documentation shall
include but not be limited to subordination of any seller's notes or
Indebtedness to any seller entered into with respect to such Acquisition.
18
(b) Delivery and satisfactory review and approval by Lender of
a minimum of two (2) years of compiled historical financial statements prepared
on an accrual basis of the proposed Acquisition to the extent such Acquisition
was in operation for two fiscal years.
(c) Satisfactory review of Borrower's pro forma consolidated
balance sheet giving effect to the proposed Acquisition.
(d) Satisfactory review of Borrower's consolidated and
consolidating financial projections on a pro forma basis giving effect to the
proposed Acquisition.
(e) Satisfactory review of the Medical Director Agreement
relating to the proposed Acquisition, and any other contracts with Contract
Providers.
(f) Evidence satisfactory to Lender that the proposed
Acquisition will not cause a default under this Agreement including, without
limitation, all representations and warranties, covenants and Events of Default.
(g) Any other information, financial or otherwise, that may be
reasonably requested by Lender.
(h) Borrower shall have obtained all required third party
consents and approvals.
(i) Execution of definitive collateral documentation.
(j) Copy of Borrower's "due diligence" package with respect to
each proposed Acquisition provided to management and board of directors of
Borrower.
(k) a litigation search of each proposed Acquisition
acceptable to Lender in its reasonable discretion.
In no event will Lender approve an Acquisition: (i) which is opposed by
the entity's board of directors or controlling shareholders; or (ii) which is
not in the business of performing dialysis and ancillary services for patients
suffering from end stage renal disease or acute dialysis services.
* END OF ARTICLE VII *
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ARTICLE VIII - REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and
to make the Revolving Credit Loans provided for herein, the Borrower and each
Subsidiary, as applicable, makes the following representations and warranties to
the Lender, all of which shall survive the execution and delivery of this
Agreement and the Note:
8.1 CORPORATE EXISTENCE AND POWER.
The Borrower and each Subsidiary is a corporation duly
incorporated, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation and is duly qualified or licensed to transact
business in all places where such qualification or license is necessary. The
Borrower and each Subsidiary, as applicable, has the corporate power to make and
perform this Agreement, the Note and the applicable Related Documents, and this
Agreement, the Note and the applicable Related Documents, when duly executed and
delivered, will constitute the legal, valid, and binding obligations of the
Borrower, and each Subsidiary, as applicable, enforceable substantially in
accordance with their respective terms, except as the same may be limited by
bankruptcy, insolvency, reorganization, or other laws affecting creditors'
rights generally.
8.2 CORPORATE AUTHORITY.
The making and performance by the Borrower and each
Subsidiary, as applicable, of this Agreement, the Note and the applicable
Related Documents, and any additional documents contemplated to be executed in
connection herewith have been duly authorized by all necessary corporate action
of the Borrower and each Subsidiary, and do not and will not violate any
provision of law or regulation, or any writ, order, or decree of any court,
governmental commission, bureau, or other administrative agency or public
regulatory body or regulatory authority or agency or any provision of the
articles or certificate of incorporation or Bylaws of the Borrower, and each
Subsidiary, and do not and will not, with the passage of time or the giving of
notice, result in a breach of, or constitute a default or require any consent
under, or result in the creation of any Lien, charge or encumbrance upon any
property or assets of the Borrower and each Subsidiary, pursuant to, any
instrument or agreement to which the Borrower or any Subsidiary is a party or by
which the Borrower or any Subsidiary or any of their respective properties may
be bound or affected.
8.3 FINANCIAL CONDITION.
The consolidated balance sheet of the Borrower as of December
31, 1997, and the consolidated statement of operations, statement of cash flows
and statement of shareholder's equity of the Borrower for the twelve (12) month
period ending on that date were prepared in accordance with generally accepted
accounting principles consistently applied on a generally recognized consistent
basis of accounting, as applicable, are complete, correct and fairly present the
financial condition on a consolidated basis of the Borrower and each of its
Subsidiaries as of
20
those dates and the results of Borrower's and each Subsidiary's operations on a
consolidated basis for the periods ending on those dates. Other than as
disclosed by those financial statements or as listed on Schedule II hereto, the
Borrower and each of its Subsidiaries did not have any direct or contingent
obligations or liabilities which would result in a Material Adverse Change.
Since December 31, 1997, there has been no Material Adverse Change.
8.4 FULL DISCLOSURE.
The financial statements referred to in Section 8.3 do not,
nor does this Agreement, or any written statement furnished by the Borrower or
any of its Subsidiaries to the Lender in connection with the negotiation of this
Agreement and the Revolving Credit Loans, contain any untrue statement of a
material fact or omit a material fact necessary to make the statements contained
therein or herein not misleading.
8.5 LITIGATION.
There are no suits or proceedings pending, or to the knowledge
of the Borrower, threatened before any court or by or before any governmental or
regulatory authority, commission, bureau, or agency or public regulatory body
against or affecting the Borrower or any of its Subsidiaries or any Contract
Provider which, if adversely determined, would result in a Material Adverse
Change or would result in the revocation, termination, cancellation or
suspension of Borrower's or any Subsidiary's or, or Medicare Certification,
Medicaid Provider Agreement or Medicare Provider Agreement.
8.6 PAYMENT OF TAXES.
The Borrower has filed or caused to be filed, or has obtained
extensions to file all federal, state, and local tax returns which are required
to be filed, and has paid or caused to be paid, or, with respect to the Borrower
and each of its Subsidiaries, have reserved on its books amounts sufficient for
the payment of, all taxes as shown on said returns or on any assessment received
by it, to the extent that the taxes have become due, except as otherwise
permitted by the provisions hereof. No tax liens have been filed and the
Borrower and each of the Subsidiaries have not been notified of, or otherwise
has knowledge of, any claim being asserted with respect to any such taxes, fees,
or other charges which are reasonably likely to result in a Material Adverse
Change.
8.7 NO ADVERSE RESTRICTIONS OR DEFAULTS.
Neither the Borrower nor any Subsidiary is a party to any
agreement or instrument or subject to any court order or judgment, governmental
decree, charter, or other corporate or other restriction which is materially
adverse to its ability to conduct its business as currently conducted. Neither
the Borrower nor any Subsidiary is in default in the performance, observance, or
fulfillment of any of the obligations, covenants, or conditions contained in any
agreement or instrument to which it is a party or by which the Borrower or any
of its Subsidiaries or their respective properties may be bound or affected, or
under any law, regulation, decree, order, or the like, which is materially
adverse to their respective ability to conduct their
21
business(es) as currently conducted. Neither the Borrower nor any of its
Subsidiaries, nor to the knowledge of Borrower's officers, any Contract
Provider, is in default in the performance, observance or fulfillment of any of
the obligations, covenants or conditions contained in any Medicaid Provider
Agreement, Medicare Provider Agreement or other agreement or instrument to which
the Borrower or any Subsidiary or any Contract Provider is a party, which
default has resulted in, or if not remedied within any applicable grace period
could result in, the revocation, termination, cancellation or suspension of
Medicare Certification of Borrower or any Subsidiary or any Contract Provider.
8.8 INVESTMENT COMPANY ACT.
The Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
8.9 AUTHORIZATIONS.
All authorizations, consents, approvals, and licenses required
under applicable law or regulation for the ownership or operation of the
property owned or operated by the Borrower or any of its Subsidiaries for the
conduct of business in which the Borrower nor any of its Subsidiaries is
engaged, have been duly issued and are in full force and effect, and neither the
Borrower nor any of its Subsidiaries is in default under any order, decree,
ruling, regulation, closing agreement, or other decision or instrument of any
governmental commission, bureau, or other administrative agency or public
regulatory body having jurisdiction over the Borrower or any of its
Subsidiaries, which default would result in a Material Adverse Change. No
approval, consent, or authorization of or filing or registration with any
governmental commission, bureau, or other regulatory authority or agency is
required with respect to the execution, delivery, or performance of this
Agreement, the Note or the Related Documents.
8.10 REIMBURSEMENT FROM THIRD PARTY PAYORS.
The accounts receivable of the Borrower and each Subsidiary
have been and will continue to be adjusted to reflect reimbursement policies of
third party payors such as Medicare, Medicaid, Blue Cross/Blue Shield, private
insurance companies, health maintenance organizations, preferred provider
organizations, alternative delivery systems, managed care systems, government
contracting agencies and other third party payors. In particular, accounts
receivable relating to such third party payors do not and shall not exceed
amounts any obligee is entitled to receive under any capitation arrangement, fee
schedule, discount formula, cost-based reimbursement or other adjustment or
limitation to its usual charges.
8.11 FRAUD AND ABUSE.
Neither the Borrower nor any Subsidiary nor, to the knowledge
of Borrower's officers, any of its stockholders, officers or directors or any
Contract Provider, have engaged in any activities affecting the Borrower which
are prohibited under Medicare Regulations or Medicaid Regulations.
22
8.12 LICENSING AND ACCREDITATION.
The Borrower and each Subsidiary, and, to the knowledge of
Borrower's officers, each Contract Provider, as applicable, have (i) obtained
and maintains Medicaid Certification and Medicare Certification; and (ii)
entered into and maintains in good standing its Medicare Provider Agreement and
its Medicaid Provider Agreement, if any. To the knowledge of Borrower's
officers, each Contract Provider is duly licensed (where license is required) by
each state or state agency or commission, or any other governmental authority
having jurisdiction over the provisions of such services by such Person in the
locations in which the Borrower or such Subsidiary conduct business, required to
enable such Person to provide the professional services provided by such Person
and otherwise as is necessary to enable the Borrower or such Subsidiary to
operate as currently operated and as presently contemplated to be operated. To
the knowledge of Borrower's officers, all such required licenses are in full
force and effect on the date hereof and have not been revoked or suspended or
otherwise limited.
8.13 SUBSIDIARIES AND AFFILIATES.
As of the date of execution of this Agreement, the Borrower
has no Subsidiaries and no Affiliates other than as disclosed in Schedule I
hereto. All the capital stock and evidence of the equity rights held by the
Borrower or a Subsidiary in each Subsidiary hereafter created or acquired will
be owned by the Borrower and/or another Subsidiary, beneficially and of record,
free and clear of all Liens.
8.14 TITLE TO PROPERTIES.
The Borrower and each of its Subsidiaries, as applicable have
good and marketable fee title to all real property, and good title to all other
property and assets, reflected in the latest balance sheet of the Borrower
referred to in Section 8.3 or purported to have been acquired by the Borrower or
any of its Subsidiaries subsequent to such date, except property and assets sold
or otherwise disposed of subsequent to such date in the ordinary course of
business. All property and assets of any kind of the Borrower or any of its
Subsidiaries are free from any Liens except for Permitted Liens. The Borrower
and each of its Subsidiaries enjoys peaceful and undisturbed possession under
all of the leases under which it is operating, none of which contains any
unusual provisions that would result in a Material Adverse Change. All leases
pertaining to real property are valid, subsisting, and in full force and effect
and the Borrower and its Subsidiaries, as applicable have not received notice of
default thereunder, and the Borrower and its Subsidiaries have no leases for
personal property except as disclosed to Lender on the Borrower's financial
statements. The Borrower and each of its Subsidiaries possess all patents,
patent rights or licenses, trademarks, trademark rights, trade names, trade name
rights, and copyrights which are required to conduct its business as now
conducted without known conflict with the rights of others.
8.15 USE OF LOANS.
The proceeds of the Revolving Line of Credit Commitment shall
be used by the Borrower exclusively for: (i) Acquisition Advances; and (ii)
Working Capital Advances. The
23
Borrower is not engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System), and no part of the proceeds of the Revolving Credit
Loans hereunder will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying any margin stock. If
requested by the Lender the Borrower will furnish to the Lender in connection
with the Revolving Credit Loans hereunder a statement in conformity with the
requirements of Federal Reserve Form U-1 referred to in said Regulation.
8.16 ERISA.
(a) None of the Plans or the trusts created thereunder has
engaged in a prohibited transaction which could subject any such Plan or trust
to a material tax or penalty on prohibited transactions imposed under Code
Section 4975 or ERISA.
(b) None of the Plans or the trusts created thereunder has
been terminated; nor has any such Plan incurred any liability to the Pension
Benefit Guaranty Corporation, other than for required insurance premiums which
have been paid when due, or incurred any accumulated funding deficiency; nor has
there been any reportable event, or other event or condition, which presents a
risk of termination of any such Plan by the Pension Benefit Guaranty
Corporation.
(c) The present value of all accrued benefits under the Plans
did not, as of the most recent valuation date, exceed the then current value of
the assets of Plans allocable to such accrued benefits.
(d) Neither the Borrower nor any Subsidiary has been a party
to or has any employees who are covered by any multi-employer pension or benefit
plan.
(e) As used in this Section 8.13, the terms "accumulated
funding deficiency," "reportable event" and accrued benefits" shall have the
respective meanings assigned to them in ERISA, and the term "prohibited
transaction" shall have the meaning assigned to it in Code Section 4975 and
ERISA.
* END OF ARTICLE VIII *
ARTICLE IX - AFFIRMATIVE COVENANTS
The Borrower and each Subsidiary, as applicable, covenants and
agrees that from the Closing Date and until payment in full of the principal of
and interest on the Note and the termination in full of the Revolving Credit
Commitment unless the Lender shall otherwise consent in writing, the Borrower
will and, to the extent that Borrower may from time to time have any
Subsidiaries, will cause each of its Subsidiaries to:
24
9.1 LOAN PROCEEDS.
Use the proceeds of the Revolving Credit Loans only for the
purposes set forth in Section 8.12 and furnish the Lender with all evidence that
it may reasonably require with respect to such use.
9.2 CORPORATE EXISTENCE.
Do or cause to be done all things necessary to maintain,
preserve, and keep in full force and effect its existence in the jurisdiction of
its incorporation, and qualify and remain qualified in each jurisdiction where
qualification is necessary in view of its business operations or the ownership
of its properties except for the discontinuation or cessation of any Subsidiary
in the ordinary course of business and which does not result in a Material
Adverse Change.
9.3 MAINTENANCE OF BUSINESS AND PROPERTIES.
At all times maintain, preserve, and protect all rights,
privileges, patents, franchises, and trade names necessary in the conduct of its
business and preserve all the remainder of its property used or useful in the
conduct of its business and keep the same in good repair, working order, and
condition, and from time to time make, or cause to be made, all needful and
proper repairs, replacements, betterments, and improvements thereto so that the
business carried on in connection therewith may be conducted properly at all
times.
9.4 INSURANCE.
Insure and keep insured with reputable insurance companies and
in amounts consistent with the coverages customarily maintained by other
companies in the same or similar business and location, all insurable property
owned by it against loss or damage from such hazards or risks, including fire;
insure and keep insured employers' and public liability risks in good and
responsible insurance companies of the types and in amounts consistent with the
coverages customarily maintained by other companies in the same or similar
business and location; maintain and cause all Contract Providers to maintain
such other insurance as may be required by law or coverages customarily
maintained by providers of professional health care services in the same or
similar location and practice area (including without limitation, medical
malpractice insurance); and upon request of the Lender furnish a certificate
setting forth in summary form the nature and extent of the insurance maintained
by the Borrower pursuant to this Section 9.4. Each insurance policy maintained
by the Borrower pursuant to this Section 9.4 shall include a provision that the
insurer will provide the Lender with thirty (30) days notice prior to the
termination or expiration of such policy. With respect to all insurance policies
maintained by Borrower covering the Collateral, said policies shall name the
Lender "Loss Payee" and shall grant Lender at least thirty (30) days notice of
intended policy cancellation, non-renewal or material modification.
9.5 PAYMENT OF INDEBTEDNESS, TAXES, ETC.
Pay all of its Indebtedness and obligations before the same
shall become in default and comply in all material respects with all other
agreements, indentures, mortgages, or documents binding on it; and pay and
discharge or cause to be paid and discharged promptly all
25
taxes, assessments, and governmental charges or levies imposed upon it or upon
its property or upon any part thereof, before the same shall become in default,
as well as all lawful claims for labor, materials, and supplies or otherwise
which, if unpaid, might become a Lien upon such properties or any part thereof;
provided, however, that neither the Borrower nor any of its Subsidiaries shall
be required to pay and discharge or to cause to be paid and discharged any tax,
assessment, charge, levy, or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and the Borrower or
Subsidiary, as the case may be, shall have set aside on its books adequate
reserves with respect to any tax, assessment, charge, levy, or claim, so
contested.
9.6 COMPLIANCE WITH LAWS.
Duly observe, conform and comply with and cause all Contract
Providers to observe, conform and comply with all laws, decisions, judgments,
rules, regulations, and orders of all governmental authorities relative to the
conduct Borrower's business, properties, and assets, except those being
contested in good faith by appropriate proceedings diligently pursued including
but not limited to, Titles XVIII and XIX of the Social Security Act, Medicare
Regulations, Medicaid Regulations and all laws, rules and regulations pertaining
to the licensing of professional and other health care providers; and obtain,
maintain, and keep in full force and effect, and cause all Contract Providers to
obtain, maintain and keep in full force and effect, all governmental licenses,
authorizations, consents, and permits necessary to the proper conduct of the
business of the Borrower, including, but not limited to Medicaid Certification,
Medicare Certification, Medicaid Provider Agreement and Medicare Provider
Agreement, and any others required for participation in the Federal Medicare and
Medicaid programs.
9.7 NOTICE OF DEFAULT.
Upon the occurrence of any Default or Event of Default which
management of the Borrower or any Subsidiary has knowledge of, promptly furnish
written notice thereof to the Lender specifying the nature and period of
existence thereof and the action which the Borrower is taking or proposes to
take with respect thereto.
9.8 FINANCIAL STATEMENTS, REPORTS, ETC.
In the case of the Borrower, furnish to the Lender:
(a) within ninety (90) days after the end of each fiscal year
of the Borrower (being December 31), audited consolidated balance sheet and
statement of operations cash flows, and statement of shareholders equity
together with supporting schedules (of the Borrower, all in reasonable detail,
setting forth in each case the corresponding figures for the preceding fiscal
year, prepared in accordance with generally accepted accounting principles,
consistently applied, by a firm of independent certified public accountants of
recognized standing selected by the Borrower and acceptable to the Lender,
showing the financial condition of the Borrower and its Subsidiaries at the
close of such year and the results of operations of the Borrower and its
Subsidiaries during such year;
26
(b) within ninety (90) days after the end of each fiscal year
of Borrower, internally prepared statement of operation of each Subsidiary, in
reasonable detail, certified by the President or Chief Financial Officer of the
Borrower and prepared in accordance with generally accepted accounting
principals showing the profit and loss performance of each Subsidiary at the
close of such fiscal year.
(c) within forty-five (45) days after the end of each of the
first three quarters of each fiscal year of the Borrower, similar financial
statements to those referred to in subparagraph (a) above, internally prepared
by the Borrower, said financial statements to be unaudited and without footnotes
thereto, and certified by the President or Chief Financial Officer of the
Borrower, such consolidated balance sheet to be as of the end of each quarter
and the statement of operations and statement of cash flows to be for the period
from the beginning of the fiscal year to the end of such quarter;
(d) within forty-five (45) days after the end of each of the
second quarter of each fiscal year of Borrower, internally prepared statement of
operations of each Subsidiary, in reasonable detail and certified by the
President or Chief Financial Officer of the Borrower and prepared in accordance
with generally accepted accounting principals, showing the profit and loss
performance of each Subsidiary for such six month period.
(e) concurrently with the delivery of the financial statements
required in Subsection (a) and each quarterly financial statement submitted in
Subsection (b) hereinabove, a certificate signed by the President or the Chief
Financial Officer of the Borrower stating that they have no knowledge of any
event which constitutes a Default or Event of Default, accompanied by a report
setting forth computations showing, in detail satisfactory to the Lender,
whether the Borrower was in compliance with its obligations under Sections 9.12,
9.13, 9.14 and 9.14 and 9.16;
(f) prior to any request for an Acquisition Advance, an
Acquisition Advance Certificate;
(g) all material reports and other statements (other than
routine reports and other statements prepared in the ordinary course of business
that would not result in a Material Adverse Change) that the Borrower or any
Subsidiary may render to or file with any governmental authority, including
without limitation HCFA.
(h) any management letter received by Borrower from its
independent certified public accountants.
(i) promptly, from time to time, such other information
regarding the assets, operations, business, affairs, and financial condition of
the Borrower and any of its Subsidiaries as the Lender may reasonably request.
All financial statements required to be furnished to the
Lender under this Section 9.8 shall be prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the accounting
practices of the Borrower reflected in its financial statements
27
referred to in Section 9.3 hereof, or to the extent such treatment has changed,
with a reconciliation thereof.
9.9 VISITATION RIGHTS.
Permit any authorized representative of the Lender from time
to time, upon reasonable notice to the Borrower and during normal business
hours, to examine and copy the records, books, papers and financial reports of,
and visit and inspect the properties of, the Borrower or any of its
Subsidiaries, and to discuss the affairs and finances of the Borrower or any of
its Subsidiaries, with any of their respective officers, directors, and as long
as no Default exists, independent public accountants, and in each case at the
expense of the Lender so long as no default exists.
9.10 NOTICE OF LITIGATION AND OTHER PROCEEDINGS.
Give prompt notice in writing to the Lender of the
commencement of (a) all litigation which, if adversely determined, is reasonably
likely to result in a Material Adverse Change; (b) all other litigation
involving a claim against the Borrower or any of its Subsidiaries for
Twenty-Five Thousand Dollars ($25,000.00), or more per occurrence or One Hundred
Thousand Dollars ($100,000.00) or more in the aggregate, in excess of applicable
insurance coverage; and (c) any citation, order, decree, ruling, or decision
issued by, or any denial of any application or petition to, or any proceedings
before any governmental commission, bureau, or other administrative agency or
public regulatory body against or affecting the Borrower or any of its
Subsidiaries or any property of the Borrower or any Subsidiary, (including,
without limitation, any proceedings against the Borrower or any Subsidiary or
any Contract Provider to suspend, revoke or terminate any Medicaid Provider
Agreement, Medicaid Certification, Medicare Provider Agreement or Medicare
Certification of Borrower) or any lapse, suspension, revocation, or other
termination or modification of any certification (including without limitation
Borrower's or any Subsidiary's or any Contract Provider's Medicare Certification
or Medicaid Certification), license, consent, or other authorization of any
agency or public regulatory body, or any refusal of any thereof to grant any
application therefor or renewal thereof, in connection with the operation of any
business conducted by the Borrower or any of its Subsidiaries or any Contract
Provider, which is reasonably likely to result in a Material Adverse Change.
9.11 ERISA.
Furnish to the Lender:
(a) As soon as available and in any event within fifteen (15)
days after Borrower or any of its Subsidiaries knows or has reason to know that
any Termination Event has occurred, a statement of a senior officer of the
Borrower describing the Termination Event and the action which the Borrower or
any of its Subsidiaries proposes to take so that the Termination Event shall not
be continuing;
(b) Promptly after receipt of request therefor by the Lender,
copies of each annual report filed by the Borrower or any of its Subsidiaries
pursuant to Section 104 of ERISA
28
with respect to each Plan (including, to the extent required by Section 103 of
ERISA, the related financial and actuarial statements and opinions and other
supporting statements, certifications, schedules and information referred to in
said Section 103) and each annual report, if any, required to be filed with
respect to each Plan under Section 4065 of ERISA;
(c) Promptly after receipt thereof by the Borrower or any of
its Subsidiaries from the Pension Benefit Guaranty Corporation, copies of each
notice received by such party of the Pension Benefit Guaranty Corporation's
intention to terminate any Plan or to have a Trustee appointed to administer any
Plan; and
(d) Promptly after such request, any other documents and
information relating to any Plan that the Lender may reasonably request from
time to time.
9.12 NET WORTH.
At all times, Borrower shall achieve and maintain a
consolidated Net Worth, tested quarterly, equal to or greater than: (i)
Twenty-Three Million Six Hundred Thousand Dollars ($23,600,000.00) for fiscal
year 1997; (ii) Twenty-Three Million Dollars ($23,000,000.00) for the first and
second fiscal quarters of 1998; and (iii) after the second fiscal quarter of
1998 Twenty-Three Million Dollars ($23,000,000.00); plus (iv) one hundred
percent (100%) of the equity added on the Borrower's balance sheet of a
completed Acquisition; plus (v) one hundred percent (100%) of the proceeds
received by Borrower from equity injections; and plus (vi) commencing June 30,
1998 and each fiscal quarter thereafter Borrower's Net Worth shall increase by
an amount equal to one hundred percent (100%) of Borrower's net profit after
taxes for each respective fiscal quarter; provided, however, for each fiscal
quarter commencing July 1, 1998 and thereafter in no event shall the Net Worth
requirement set forth herein decrease due to a net loss incurred during any
fiscal year.
9.13 CURRENT RATIO.
At all times, Borrower shall maintain a Current Ratio equal or
exceeding 1.0 to 1.0, tested quarterly. Commencing on the second anniversary of
the Closing Date, "Current liabilities" shall include only twenty percent (20%)
of Indebtedness funded under the Revolving Credit Commitment.
9.14 CURRENT MATURITIES COVERAGE RATIO.
At all times, Borrower shall maintain a Current Maturities
Coverage Ratio equal or exceeding: (i) 1.2 to 1.0 for fiscal year 1998; and (ii)
1.4 to 1.0 for each fiscal year thereafter.
9.15 LEVERAGE RATIO.
At all times, Borrower shall maintain a Leverage Ratio not to
exceed 3.0 to 1.0.
29
9.16 CAPITALIZATION RATIO.
At all times, Borrower shall maintain a Capitalization Ratio
of 0.50 to 1.0, tested quarterly.
Each of the covenants set forth in subparagraphs 9.14 and 9.15
are to be calculated on a rolling four quarter basis, utilizing the consolidated
financial statements of the Borrower and its Subsidiaries for the immediately
preceding four (4) fiscal quarters. The rolling four quarter calculation will
include the previous four quarters of financial performance for any acquired
entity or assets on an accrual basis. In no instance shall the Borrower be
subject to financial covenants in its other financing and leasing arrangements
that are more restrictive than those set forth above. For purposes of
calculating the covenants referenced in Paragraphs 9.14 and 9.15 hereinabove,
Interest Income and Interest Expenses shall be calculated on an annualization of
actual Interest Income and Interest Expense reported in Borrower's financial
statements cumulatively up to the first three (3) quarters of fiscal year 1998.
9.17 BOOKS AND RECORDS.
With respect to Borrower, keep and maintain full and accurate
accounts and records of its operations according to generally accepted
accounting principles consistently applied, and will permit Lender or any of
their designated officers, employees, agents and representatives, at Lender's
expense and upon reasonable notice, to have access thereto, and to make audits,
and to inspect and otherwise check its properties, real, personal and mixed, and
to arrange for verification of Accounts Receivable under reasonable procedures,
directly with accounts debtors or by other methods. In addition Borrower and
each Subsidiary shall provide to Lender any Medicare audits, which audits shall
be satisfactory to Bank in its sole discretion.
9.18 OPERATING ACCOUNTS.
With respect to Borrower, maintain its primary depository bank
accounts with Lender.
9.19 MANAGEMENT.
With respect to Borrower, maintain at least two (2) of James
Shea, Milton Wallace and Orestes Lugo as active members of the day-to-day
management team of Borrower.
9.20 REIMBURSEMENT FROM THIRD PARTY PAYORS.
The accounts receivable of the Borrower and each Subsidiary
and each Contract Provider have been and will continue to be adjusted to reflect
reimbursement policies of third party payors such as Medicare, Medicaid, Blue
Cross/Blue Shield, private insurance companies, health maintenance
organizations, preferred provider organizations, alternative delivery systems,
managed care systems, government contracting agencies and other third party
payors.
* END OF ARTICLE IX *
30
ARTICLE X - NEGATIVE COVENANTS
The Borrower and each Subsidiary covenants and agrees that
from the Closing Date and until payment in full of the principal of and interest
on the Note and the termination in full of the Revolving Credit Commitment,
unless the Lender shall otherwise consent in writing, the Borrower will not, nor
will it, to the extent that it may from time to time have any Subsidiaries,
permit any Subsidiary to:
10.1 LIMITATION ON LIENS.
Create or suffer to exist any Lien upon, or transfer or
assignment of, any of its property or revenues or assets now owned or hereafter
acquired to secure any Indebtedness or obligations, or enter into any
arrangement for the acquisition of any property subject to conditional sale
agreements or leases or other title retention agreements; excluding, however,
from the operation of this covenant: (a) Liens given to secure purchase money
transactions which do not exceed Five Hundred Thousand Dollars ($500,000.00) in
the aggregate in any fiscal year, unless otherwise consented to by the Lender,
which consent shall not be unreasonably withheld; (b) deposits or pledges to
secure payment of workers' compensation, unemployment insurance, old age
pensions, or other social security; (c) deposits or pledges to secure
performance of bids, tenders, contracts (other than contracts for the payment of
money) or leases, public or statutory obligations, surety or appeal bonds, or
other deposits or pledges for purposes of like general nature in the ordinary
course of business; (d) Liens for property taxes not delinquent and Liens for
taxes which in good faith are being contested or litigated; (e) mechanic's,
carrier's, workmen's, repairmen's, landlord's or other like liens arising in the
ordinary course of business securing obligations which are not overdue for a
period of thirty (30) days or more or which are in good faith being contested or
litigated; and (f) existing Liens reflected in the financial statements referred
to in Section 8.3 hereof, including any notes thereto, or additional existing
Liens listed in Schedule II attached hereto and made a part hereof.
10.2 LIMITATION ON INDEBTEDNESS.
Incur, create, assume, or permit to exist any Indebtedness,
except:
(a) the Note and any other Indebtedness of the Borrower or any
of its Subsidiaries to the Lender;
(b) Existing Indebtedness reflected in the financial
statements referred to in Section 8.3 hereof, including any notes thereto, or
additional existing Indebtedness listed in Schedule II attached hereto and made
a part hereof;
(c) Indebtedness incurred in connection with purchase money
transactions which does not exceed Five Hundred Thousand Dollars ($500,000.00)
in the aggregate in any fiscal year, unless otherwise consented to by the
Lender, which consent shall not be unreasonably withheld;
(d) Subordinated Indebtedness; and
31
(e) Indebtedness so long as said Indebtedness is eliminated on
the consolidated and consolidating balance sheet of Borrower in accordance with
generally accepted accounting principals.
10.3 THIRD-PARTY GUARANTIES.
Be or become liable in respect of any Third-Party Guaranty,
except for: (a) the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; (b)
Third-Party Guaranties by the Borrower of Indebtedness of its Subsidiaries in
favor of the Lender or otherwise permitted to the extent the Indebtedness is
permitted in Section 10.2 hereof; (c) performance bonds entered into by the
Borrower or its Subsidiaries to secure the obligations of itself or its
Subsidiaries; and (d) Third-Party Guaranties of the Borrower and its
Subsidiaries existing as of the date of execution hereof, as shown on Schedule
II hereto.
10.4 DIVIDENDS.
Declare or pay any cash dividend or authorize or make any
other cash distribution on any stock of the Borrower, whether now or hereafter
outstanding, or make, or permit any Subsidiary to make, any payment on account
of the purchase, acquisition, redemption or other retirement of any shares of
such stock.
10.5 MERGERS, CONSOLIDATIONS AND ACQUISITION OF ASSETS.
Liquidate, dissolve, whether voluntary or involuntarily, merge
or consolidate with or acquire any corporation or all or substantially all of
the assets of any Person (except for Acquisitions as permitted herein), or
dispose of all or substantially all of the assets of any Person.
10.6 SALE, LEASE, ETC.
Sell, lease, assign, transfer or otherwise dispose of any of
its assets or revenues (other than obsolete or worn-out personal property, or
personal property or real estate not used or useful in its business) whether now
owned or hereafter acquired, other than in the ordinary course of business,
including, without limitation, the stock of any Subsidiary, or sell, assign or
discount any of its accounts receivable or any promissory note held by it, with
or without recourse, other than the discount of such notes or accounts
receivable (if permitted by Medicaid Regulations or Medicare Regulations) in the
ordinary course of business for collection.
10.7 INVESTMENTS.
Make or suffer to exist any Investments, except that this
prohibition shall not apply to (i) the investment policy attached as Schedule II
to this Agreement; (ii) the purchase of direct obligations of the government of
the United States of America, or any agency thereof, or obligations
unconditionally guaranteed by the United States of America; (ii) certificates of
deposit of any bank organized or licensed to conduct a banking business under
the laws of the United States or any State thereof having capital, surplus and
undivided profits of not less than
32
One Hundred Million Dollars ($100,000,000.00); (iii) Investments in commercial
paper which, at the time of acquisition by the Borrower or any Subsidiary, is
accorded the three (3) highest rating categories by Standard & Poor's
Corporation, Moody's Investors Services, Inc. or any other nationally recognized
credit rating agency of similar standing; and (iv) other Investments of the
Borrower existing as of the date of execution hereof as shown on Schedule II
hereof.
10.8 TRANSACTIONS WITH AFFILIATES.
Enter into or be a party to, any transaction or arrangement
with any Affiliate (including, without limitation, the purchase from, sale to or
exchange of property with, or the rendering of any service by or for, any
Affiliate), except in the ordinary course of, and pursuant to the reasonable
requirements of the Borrower's or any Subsidiary's business, and in connection
with Acquisitions and upon fair and reasonable terms no less favorable to the
Borrower or any Subsidiary than would be obtained in a comparable arm's length
transaction with a Person other than an Affiliate.
10.9 SALE AND LEASEBACK.
After the sale of any property or assets owned by the Borrower
or any Subsidiary, lease such property or substantially identical property.
10.10 PURCHASE OF OWN SHARES.
Other than redemptions in connection with indemnification
claims pursuant to any Acquisition, purchase, retire or redeem any shares of its
own stock.
10.11 TRANSFER OF SHARES.
Transfer or allow the transfer of any Subsidiary's shares of
capital stock.
10.12 BUSINESS OPERATIONS.
Change its nature of business.
10.13 OWNERSHIP OF ASSETS.
With respect to Borrower, own any assets or conduct any
business other than: (i) Acquisitions permitted herein; or (ii) the ownership
of Subsidiaries;
10.14 LOANS AND ADVANCES.
Make loans or advances to any insiders, or Affiliates
(excluding intercompany Indebtedness which nets to zero on Borrower's
consolidated financial statements) in excess of Fifty Thousand Dollars
($50,000.00) in the aggregate at any one time outstanding.
33
10.15 FRAUD AND ABUSE.
Neither the Borrower nor any Subsidiary nor, to the knowledge
of Borrower's or any Subsidiary's officers, officers or directors or Contract
Providers, have engaged in any activities which are prohibited under Medicare
Regulations or Medicaid Regulations.
Lender acknowledges that the Borrower is disposing of its
Woodbury Facility and accordingly, to the extent said disposition would
otherwise be prohibited hereunder, Lender consents to said disposition.
* END OF ARTICLE X *
ARTICLE XI - ENVIRONMENTAL
11.1 HAZARDOUS AND TOXIC MATERIALS GENERALLY.
(a) The Borrower expressly represents to the Lender that to
the best of its knowledge (i) except as set forth on Schedule III, there has
been no complaint, order, citation, or notice with regard to air emissions,
Hazardous Discharges (as hereinafter defined), or other environmental, health,
or safety matters affecting any of the premises owned or operated by the
Borrower or any of its Subsidiaries (the "Premises") or the businesses therein
conducted which have not been fully satisfied and discharged, and (ii) except as
set forth in Schedule III, there has been no spill, discharge, release, or
cleanup of any hazardous or toxic waste or substance or any petroleum product or
pesticide ("Hazardous Substances") at any of the Premises, including, without
limitation, into or upon any of their respective soils, surface water, ground
water, or the improvements located thereon (a "Hazardous Discharge"), and,
accordingly, such properties are clean of all such wastes and substances. The
Borrower expressly covenants and agrees that to the extent the Premises are used
for the handling, storage, transportation, or disposal of any Hazardous
Substance, it shall (i) implement and maintain a program or system to minimize
the likelihood and effect of any Hazardous Discharge, (ii) use its best efforts
to ensure that such use will be in accordance with all federal, state, and local
environmental laws, rules, and regulations which apply to the handling, storage,
transportation, or disposal of any Hazardous Substance and (iii) obtain any and
all necessary permits, licenses, and approvals with respect to such use.
(b) The Borrower agrees to indemnify and hold the Lender
harmless from and against any claims, losses, damages, liabilities (including,
without limitation, all foreseeable and unforeseeable consequential damages),
penalties, fines, charges, interest, judgments, administrative and judicial
proceedings, voluntary or involuntary, remedial actions of any kind, public or
private, incurred by the Lender as a result of any past, present, or future use,
handling, storage, transportation or disposal of any Hazardous Substance by the
Borrower or any of its Subsidiaries or any other user or operator of any of the
Premises; including, without limitation, all costs and expenses incurred in
connection therewith (including, without limitation, reasonable attorneys' fees
and expenses (including those for appellate proceedings and court costs). The
foregoing indemnity shall survive the repayment of the Revolving Credit Loans
and the termination of this Agreement; provided that the Borrower shall not be
liable to the Lender for its
34
own gross negligence or willful misconduct nor shall the Borrower be liable for
any claims which are barred by any applicable statute of limitations.
(c) Subject to the provisions of this Article XI, the Borrower
and its Subsidiaries shall comply with any and all federal, state, or local
environmental laws, rules, or regulations which apply to the Premises or to any
users or operators of any establishments at the Premises.
* END OF ARTICLE XI *
ARTICLE XII - EVENTS OF DEFAULT
12.1 EVENTS OF DEFAULT.
If any one of the following "EVENTS OF DEFAULT" shall occur
and shall not have been remedied:
(a) Any representation or warranty made by the Borrower or
Guarantor in connection with this Agreement, or any Revolving Credit Loan
hereunder, or in any certificate or report furnished by the Borrower or
Guarantor hereunder shall prove to have been incorrect in any material respect;
or
(b) The Borrower shall fail to pay, when due, any principal of
or interest on the Note, or to pay when due any other sum payable under this
Agreement; or
(c) The Borrower or Guarantor shall default in the performance
of any agreement, covenant or obligation contained herein, other than a default
in payment and such default is not cured within thirty (30) days of the
occurrence thereof; or
(d) Final judgment for the payment of money in an amount in
excess of Twenty-Five Thousand Dollars ($25,000.00) per judgment or One Hundred
Thousand Dollars ($100,000.00) in the aggregate in excess of applicable
insurance coverage shall be rendered against the Borrower or any of its
Subsidiaries, and the same shall remain undischarged for a period of thirty (30)
days, during which period execution shall not effectively be stayed; or
(e) The Borrower shall voluntarily terminate operations or the
Borrower or any Subsidiary or Guarantor shall (1) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of the Borrower or Subsidiary, as the case may be, or of all or of
a substantial part of the assets of the Borrower or Subsidiary or Guarantor, as
the case may be, (2) admit in writing its inability, or be generally unable, to
pay its debts as the debts become due, (3) make a general assignment for the
benefit of its creditors, (4) commence a voluntary case under the United States
Bankruptcy Code (as now or hereafter in effect), (5) file a petition seeking to
take advantage of any other law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, (6) fail to
35
controvert in a timely and appropriate manner, or acquiesce in writing to, any
petition filed against it in an involuntary case under the Bankruptcy Code, or
(7) take any corporate action for the purpose of effecting any of the foregoing;
or
(f) The Borrower shall fail to furnish to the Lender notice of
default in accordance with Section 9.7 hereof, within ten (10) days after any
such Default or Event of Default becomes known to the President or Chief
Financial Officer of the Borrower, whether or not notification to the Borrower
is furnished by the Lender, unless such Default or Event of Default shall be
cured prior to the expiration of such ten (10) day period; or
(g) Without its application, approval or consent, a proceeding
shall be commenced, in any court of competent jurisdiction, seeking in respect
of the Borrower or any Subsidiary or any Guarantor: the liquidation,
reorganization, dissolution, winding-up, or composition or readjustment of debt,
the appointment of a trustee, receiver, liquidator or the like of the Borrower
or Subsidiary or any Guarantor, as the case may be, or of all or any substantial
part of the assets of the Borrower or Subsidiary or any Guarantor, as the case
may be, or other like relief in respect of the Borrower or Subsidiary or any
Guarantor, as the case may be, under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts unless such
proceeding is contested in good faith by the Borrower or Subsidiary or any
Guarantor; and, if the proceeding is being contested in good faith by the
Borrower or Subsidiary or any Guarantor, as the case may be, the same shall
continue undismissed, or unstayed and in effect, for any period of sixty (60)
consecutive days, or an order for relief against the Borrower or any Subsidiary
shall be entered in any involuntary case under the Bankruptcy Code; or
(h) The Borrower or any of its Subsidiaries shall (1) default
in the payment of principal or interest, on any Indebtedness to Lender (other
than the Notes) beyond the period of grace, if any, provided in the instrument
or agreement under which such Indebtedness was created; (2) default in the
payment of principal or interest on any Indebtedness to any other lender beyond
the applicable period of grace pertaining thereto, if any, provided in the
instrument or agreement under which such Indebtedness was created; or (3)
default in the observance or performance of any other agreement contained in any
Indebtedness referred to in (1) or (2) above or in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur, the
effect of which default or other event is to cause, or permit the holder or
holders of such Indebtedness (or a trustee or agent on behalf of such holder or
holders) to cause, such Indebtedness to become due prior to its stated maturity;
provided, however, that no Event of Default shall occur under this Article XII
so long as the Borrower or any of its Subsidiaries shall contest in good faith
its obligations under the Indebtedness described in this Article XII by
appropriate proceedings and the Borrower or Subsidiary, as the case may be,
shall have set aside on its books adequate reserves with respect to any amount
so contested; or
(i) A Termination Event has occurred; or a trustee shall be
appointed to administer any Plan or Plans under Section 4042 of ERISA; or the
Pension Benefit Guaranty Corporation shall institute proceedings to terminate,
or to have a trustee appointed to administer, any Plan or Plans, and the
proceeding shall not be dismissed within thirty (30) days; or a
36
voluntary notice of intent to terminate is filed under Section 4041 of ERISA
which would, in the opinion of the Lender, result in a Material Adverse Change;
or, with respect to any Plan as to which the Borrower or any Subsidiary may have
any liability, there shall exist a deficiency in the Plan assets available to
satisfy the benefits guaranteeable under ERISA with respect to the Plan which is
material to the financial condition of the Borrower and such Subsidiary taken as
a whole, and (1) steps are undertaken to terminate the Plan or (2) the Plan is
terminated or (3) any Reportable Event which presents a material risk of
termination with respect to the Plan shall occur; or
(j) Failure by Borrower or any of its Subsidiaries to conduct
its business in the ordinary course consistent with past practices and in
accordance with all local, state and Federal laws and regulations governing the
conduct of Borrower's or any of Subsidiary's businesses, which failure is
reasonably likely to result in a Material Adverse Change; or
(k) (i) Cancellation, revocation, suspension or termination of
any Medicare Certification, Medicare Provider Agreement, or Medicaid Provider
Agreement affecting the Borrower or any Subsidiary or materially affecting any
Contract Provider, or (ii) the loss of any other permits, licenses,
authorizations, certifications or approvals from any federal, state or local
governmental authority or termination of any contract with any such authority,
in either case which cancellation, revocation, suspension, termination or loss
(X) in the case of any suspension or temporary loss only, continues for a period
greater than thirty (30) days and (Y) results in the suspension or termination
of operations of the Borrower or any Subsidiary or in the failure of the
Borrower or any Subsidiaries to be eligible to participate in Medicare or
Medicaid programs or to accept assignments of rights to reimbursement under
Medicaid Regulations or Medicare Regulations; or
(l) Dissolution of Borrower or failure of the Borrower to
maintain its corporate existence except for the discontinuation or cessation of
any Subsidiary's existence in the ordinary course of business and which does not
result in a Material Adverse Change; or
(m) Any Material Adverse Change shall occur; or
(n) Any default shall occur by Borrower under a Medical
Director Agreement, or any other agreement with a Contract Provider, which is
not cured within any applicable grace period and which has a material adverse
effect on the Borrower and its Subsidiaries taken as a whole.
(o) This Agreement, the Note, the Related Documents or any
other security document in favor of Lender, or any provisions thereof, shall be
invalidated or deemed unenforceable in any material respect; or
(p) Any default shall occur under the Note Agreement or the
Related Documents which default continues beyond any applicable grace or cure
period contained therein;
37
THEREUPON, in the case of any such event the Lender may at its option: (i)
immediately terminate the Revolving Credit Commitment of the Lender hereunder,
and/or (ii) immediately declare the principal of, and interest accrued on, the
Note forthwith due and payable, whereupon the same shall become forthwith due
and payable; and the principal of, and interest accrued on, the Note shall
become immediately due and payable, both as to principal and interest, without
presentment, demand, protest, or other notice of any kind, all of which are
hereby expressly waived, anything contained herein or in the Note to the
contrary notwithstanding; and (iii) exercise any and all rights and remedies
available to Lender under this Agreement, the Note, the Related Documents, the
Uniform Commercial Code in effect in the State of Florida or any other document,
instrument or agreement executed and delivered in connection with this
Agreement, and all rights and remedies available to Lender under any other
applicable law.
* END OF ARTICLE XII *
ARTICLE XIII - MISCELLANEOUS
13.1 NO WAIVER, REMEDIES CUMULATIVE.
No failure on the part of the Lender to exercise and no delay
in exercising any right granted hereunder or in the Notes shall operate as a
waiver thereof, nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and are not exclusive of any
remedies provided by law.
13.2 SURVIVAL OF REPRESENTATIONS.
All representations and warranties made herein shall survive
the making of the Revolving Credit Loans hereunder and the delivery of the
Notes.
13.3 EXPENSES.
Whether or not any of the Revolving Credit Loans herein
provided for shall be made, the Borrower agrees to pay on demand all reasonable
costs and expenses of the Lender in connection with the preparation, printing,
execution, and delivery of this Agreement, the Related Documents, the Note, and
the other instruments and documents to be delivered hereunder and thereunder,
including the reasonable fees and out-of-pocket expenses of legal counsel for
the Lender, with respect thereto, and the reasonable fees of independent public
accountants, and other outside experts retained by the Lender in connection with
the enforcement of this Agreement, the Related Documents, the Note, and the
other instruments and documents to be delivered hereunder and thereunder. In
addition, the Borrower shall pay any and all stamp and other taxes payable or
determined to be payable in connection with the execution and delivery of this
Agreement, the Notes and the instruments and documents to be delivered hereunder
and thereunder, and agrees to save the Lender harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omitting to pay such taxes. All obligations provided for in this Section 13.3
shall survive any termination of this Agreement.
38
13.4 NOTICES.
Except as otherwise provided for in this Agreement, any notice
or other communication hereunder to any party hereto shall be delivered by hand,
registered or certified mail, postage prepaid return receipt requested, in the
United States mail or overnight delivery by a nationally recognized overnight
courier service ("Overnight Courier") and shall be deemed to have been given or
made on the third (3rd) Business Day after the deposit thereof in the mail, or
shall be deemed to have been given or made on the second (2nd) Business Day
after deposit thereof with an Overnight Courier, or when received if delivered
by hand, addressed to the party at its address specified next to its signature
hereto (or at any other address that the party may hereafter specify to the
other parties in writing), except that notices by the Borrower under Section 2.2
hereof shall not be effective until received.
13.5 CONSTRUCTION.
This Agreement, the Related Documents, and the Note shall be
deemed contracts made under the law of the State of Florida and shall be
governed by and construed in accordance with the law of said state.
13.6 SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and shall inure to the
benefit of the Borrower and the Lender, and their respective successors and
assigns; provided, that the Borrower may not assign any of its rights hereunder
without the prior written consent of the Lender. The Lender may, without the
consent of the Borrower, or any other Person, assign, negotiate, hypothecate, or
grant participations in this Agreement or in any of its rights and security
under this Agreement and each of the other documents contemplated to be executed
in conjunction herewith; provided, however, the Lender agrees that in the event
of all such assignments, negotiations, hypothecations, or participations the
Lender shall remain as the holder of the majority amount of the Revolving Credit
Loans and as administrative agent hereunder and shall not assign its obligations
to administer the Revolving Credit Loans. The Borrower shall accord full
recognition to any such assignment, and all rights and remedies of the Lender in
connection with the interest so assigned shall be as fully enforceable by such
assignee as they were by the Lender before such assignment. In connection with
any proposed assignment, the Lender may disclose to the proposed assignee any
information that the Borrower is required to deliver to the Lender pursuant to
this Agreement.
13.7 JURISDICTION, SERVICE OF PROCESS.
(a) Any suit, action, or proceeding against the Borrower or
any Subsidiary with respect to this Agreement, the Note, the Related Documents
or any judgment entered by any court in respect of any thereof may be brought in
the courts of the State of Florida or in the U.S. District Court for the
39
Southern District of Florida as the Lender (in its sole discretion) may elect,
and the Borrower and each Subsidiary hereby accepts the nonexclusive
jurisdiction of those courts for the purpose of any suit, action, or proceeding.
(b) In addition, the Borrower and each Subsidiary hereby
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of venue of any suit, action, or
proceeding arising out of or relating to this Agreement, the Note, the Related
Documents or any judgment entered by any court in respect of any thereof brought
in Miami-Dade County, Florida, and hereby further irrevocably waives any claim
that any suit, action, or proceeding brought in Dade County, Florida has been
brought in an inconvenient forum. The Borrower and each Subsidiary further
agrees that if any such suit, action, or proceeding is pending in more than one
jurisdiction that the Lender's selection of the forum shall be binding on the
Borrower and each Subsidiary.
13.8 LIMIT ON INTEREST.
Anything herein, in the Related Documents, or in the Notes to
the contrary notwithstanding, the obligations of the Borrower under this
Agreement, the Related Documents, and the Note to the Lender shall be subject to
the limitation that payments of interest to the Lender shall not be required to
the extent that receipt of any such payment by the Lender would be contrary to
provisions of law applicable to the Lender (if any) which limit the maximum rate
of interest which may be charged or collected by the Lender; provided, however,
that nothing herein shall be construed to limit the Lender to presently existing
maximum rates of interest, if an increased interest rate is hereafter permitted
by reason of applicable federal or state legislation. If by the terms of this
Agreement, the Related Documents, or the Note, the Borrower is at any time
required or obligated to pay interest in excess of such maximum rate, the rate
of interest payable hereunder and thereunder shall be computed at such maximum
rate and the portion of all prior interest payments in excess of such maximum
rate shall be applied to and shall be deemed to have been payments in reduction
of the principal balance of this Agreement and the Note.
40
13.9 PAYMENT ON OTHER THAN BUSINESS DAY.
Except as otherwise provided for in this Agreement, should any
payment required by this Agreement become due and payable other than on a
Business Day, the maturity thereof shall be the immediately preceding Business
Day.
13.10 NET PAYMENTS.
All payments by the Borrower under this Agreement and the Note
shall be made without setoff or counterclaim and in such amounts as may be
necessary in order that all payments, after deduction or withholding for or on
account of any present or future taxes, levies, imposts, duties, or other
charges of whatsoever nature imposed by any government or any political
subdivision or taxing authority thereof (collectively, the "Taxes"), shall not
be less than the amounts otherwise specified to be paid under this Agreement and
the Note. Notwithstanding anything to the contrary contained in this Section
13.10, the Borrower shall not be liable for the payment of any tax on or
measured by net income imposed on the Lender pursuant to the income tax laws of
the United States or any of the United States or any political subdivision
thereof. The Borrower shall pay all Taxes when due (and indemnify the Lender
against any liability therefor) and shall promptly (and in any event not later
than 30 days thereafter) furnish to the Lender any certificates, receipts, and
other documents which may be required (in the judgment of the Lender) to
establish any tax credit to which the Lender may be entitled. The obligations of
the Borrower under this Section 13.10 shall survive the termination of this
Agreement and the repayment of the Revolving Credit Loans, but such obligations
shall terminate as to any claim or liability for Taxes for which the Borrower is
responsible pursuant to this Section 13.10 on the same date that any such claim
or liability for Taxes is barred by any applicable statute of limitations.
13.11 INDEMNIFICATION OF LENDER.
Borrower and each Subsidiary hereby jointly and severally
indemnify and hold harmless, release and forever discharge Lender, its agents,
servants, employees, officers, directors, affiliates, attorneys, successors and
assigns from all damages, losses, claims, demands, liabilities, obligations,
actions and causes of action whatsoever which may exist as of the date hereof or
arise hereafter or which may be presently known or unknown and which may be of
any nature and extent whatsoever which may be brought by third parties on
account of or in any way directly or indirectly related to, concerning, arising
out of, or founded upon this Agreement, the Related Documents and any agreement,
document or instrument executed or to be executed in conjunction therewith or in
connection with any and all transactions contemplated thereby. This indemnity
and release on the part of the Borrower and the Subsidiary is contractual and
not merely a recital. The foregoing indemnity shall survive the repayment of the
Revolving Credit Loans and the termination of this Agreement; provided that
neither the Borrower nor any Subsidiary shall indemnify or be liable to the
Lender for its own gross negligence or willful misconduct nor shall the Borrower
or any Subsidiary be liable for any claims which are barred by any applicable
statute of limitations.
41
13.12 COUNTERPARTS.
This Agreement may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original and all of which when taken
together shall constitute but one and the same instrument.
13.13 HEADINGS.
The headings and the Table of Contents of this Agreement are
for convenience only and are not to affect the construction of or to be taken
into account in interpreting the substance of this Agreement.
13.14 SEVERABILITY.
In the event that any one or more of the provisions contained
in this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal, or unenforceable provision had never
been contained herein.
13.15 COURSE OF DEALING; AMENDMENT; SUPPLEMENTAL AGREEMENTS.
No course of dealing between the Lender and the Borrower shall
be effective to amend, modify, or change any provision of this Agreement. This
Agreement may not be amended, modified, or changed in any respect except by an
agreement in writing signed by the Lender and the Borrower. The Lender and the
Borrower may, subject to the provisions of this Section 13.15, from time to
time, enter into written agreements supplemental hereto for the purpose of
adding any provisions to this Agreement or changing in any manner the rights and
obligations of the Lender and the Borrower hereunder. Any such supplemental
agreement in writing shall be binding upon the Lender and the Borrower.
13.16 RIGHT OF SETOFF.
Upon the occurrence and during the continuance of any Event of
Default, the Lender is hereby authorized at any time and from time to time,
without notice to the Borrower (any such notice being expressly waived by the
Borrower), to set off and apply any and all deposits (general or special, time
or demand, professional or final) at any time held and any other indebtedness
owing by the Lender to or for the account of the Borrower against any and all of
the obligations of the Borrower now or hereafter existing under this agreement
or the note, or any other instrument executed in connection with this agreement
or the notes or constituting security therefor, irrespective of whether or not
the Lender shall have made demand under this agreement or the note and although
such obligations may be unmatured. The Lender agrees promptly to notify the
Borrower after any such setoff and application, provided that the failure to
give such notice shall not affect the validity of such setoff and application.
The rights of the Lender under this Section 13.16 are in addition to other
rights and remedies (including, without limitation, other rights of setoff)
which the Lender may have.
42
13.17 ARBITRATION.
MANDATORY ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR
AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING
ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY
BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT
APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR
THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION
SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT
OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO
THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING,
TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT
APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
(a) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE
CITY OF THE BORROWER'S DOMICILE AT TIME OF THIS AGREEMENT'S EXECUTION AND
ADMINISTERED BY ENDISPUTE, INC. D/B/A J.A.M.S./ENDISPUTE WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S./ENDISPUTE IS UNABLE OR LEGALLY PRECLUDED FROM
ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL
SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN NINETY (90) DAYS OF THE
DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF
CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN
ADDITIONAL SIXTY (60) DAYS.
(b) RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE
DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A
WAIVER BY LENDER OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. 91 OR ANY
SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF LENDER (A) TO
EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO
FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN
FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO)
INJUNCTIVE RELIEF
43
OR THE APPOINTMENT OF A RECEIVER. LENDER MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES
BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT
PURSUANT TO THIS AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE
INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR
ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date and year first above written.
[BORROWER]:
RENEX CORP.,
a Florida corporation
By:
Print Name: James Shea
Title: President
[Corporate Seal]
2100 Ponce de Leon Boulevard
Coral Gables, Florida 33134
Attention: James Shea
[LENDER]:
NATIONSBANK, N.A., a national
banking association
By:
Print Name: John Foreman
Title: Vice President
100 Southeast 2nd Street
15th Floor
Miami, Florida 33131
Attention: John Foreman and Commercial
Banking Manager
44
[ACKNOWLEDGMENTS APPEAR ON NEXT PAGE]
45
COMMONWEALTH OF BAHAMAS )
ISLAND OF NEW PROVIDENCE )
CITY OF NASSAU )
The foregoing instrument was acknowledged before me in Nassau, Bahamas
this 30th day of April, 1998 by James Shea as President of RENEX CORP., a
Florida corporation, on behalf of the corporation.
Signature of Notary Public
Nassau, Bahamas
Print, Type or Stamp Commissioned Name of
Notary Public
Personally Known ______ or Produced Identification _______
Type of Identification Produced: _____ Driver's License _____ Other ___________
COMMONWEALTH OF BAHAMAS )
ISLAND OF NEW PROVIDENCE )
CITY OF NASSAU )
The foregoing instrument was acknowledged before me in Nassau, Bahamas
this 30th day of April, 1998, by John Foreman, as Vice President of NATIONSBANK,
N.A., a national banking association, on behalf of the Lender.
Signature of Notary Public
Nassau, Bahamas
Print, Type or Stamp Commissioned Name
of Notary Public
Personally Known ______ or Produced Identification _______
Type of Identification Produced: _____ Driver's License _____ Other ___________
46
JOINDER AND CONSENT
The undersigned Guarantors hereby join in and consent to that certain
Credit Agreement by and between Renex Corp. and NationsBank, N.A., dated as of
April 30, 1998 (the "Credit Agreement"), and agrees to be bound by each and
every one of the terms and conditions applicable to Guarantor in the Credit
Agreement.
[SUBSIDIARIES OF THE BORROWER]
By:
--------------------------------
Print Name:
------------------------
As:
--------------------------------
[Corporate Seal]
STATE OF FLORIDA )
)
COUNTY OF MIAMI-DADE )
The foregoing instrument was acknowledged before me on this ____ day of
May, 1998 by _____________________, as ____________ of _____________________, a
___________, on behalf of the _______________.
Signature of Notary Public
State of Florida
Print, Type or Stamp Commissioned Name of
Notary Public
Personally Known ______ or Produced Identification _______
Type of Identification Produced: _____ Driver's License _____ Other ____________
47
SCHEDULE/EXHIBIT LIST
TO
CREDIT AGREEMENT
Schedule I - Subsidiaries, Affiliates
Schedule II - Additional Existing Liens, Permitted Liens, Additional
Existing Indebtedness, Existing Guaranties, Materially
Adverse and Contingent Liabilities, Investments
Schedule III - Environmental Matters
===============================================================================
Exhibit A - Form of Notice and Manner of Borrowing
Exhibit B - Form of Note
Exhibit C - Form of Acquisition Advance Certificate
Exhibit D - Form of Closing Document List
48
SCHEDULE I
TO
CREDIT AGREEMENT
SUBSIDIARIES
LIST TO BE PROVIDED TO LENDER
AFFILIATES
NONE
SCHEDULE II
TO
CREDIT AGREEMENT
ADDITIONAL EXISTING LIENS
NONE
PERMITTED LIENS
NONE
ADDITIONAL EXISTING INDEBTEDNESS
NONE
EXISTING GUARANTIES
NONE
MATERIALLY ADVERSE AND CONTINGENT LIABILITIES
NONE
INVESTMENTS
NONE
SCHEDULE III
TO
CREDIT AGREEMENT
ENVIRONMENTAL MATTERS
NONE
EXHIBIT A
FORM OF NOTE
EXHIBIT B
FORM OF ACQUISITION ADVANCE CERTIFICATE
EXHIBIT C
FORM OF CLOSING DOCUMENT CHECKLIST
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") entered into as of the
1st day of January, 1998 by and between RENEX CORP., a Florida corporation (the
"Company"), and MILTON J. WALLACE ("WALLACE").
R E C I T A L S:
A. The Company is a provider of kidney dialysis treatments in
various parts of the United States to individuals suffering from end stage renal
disease (the "Business");
B. WALLACE has served as Chairman of the Board of Directors of
the Company since the Company's inception in July 1993; and
C. The Company believes that it is in the best interest of the
Company to assure WALLACE of a secure minimum compensation and to diminish the
inevitable distraction of WALLACE that may result in the event of the
possibility, threat or occurrence of a Change of Control (as defined below) by
providing for certain compensation arrangements upon a Change of Control.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained in this Agreement, the parties agree as follows:
1. RECITATIONS. The above recitations are true and correct and
are incorporated herein by this reference.
2. POSITION OF EMPLOYMENT.
2.1. EMPLOYMENT POSITION. The Company hereby employs
WALLACE as Chairman of the Board of Directors. This Agreement shall commence as
of the Commencement Date (as defined in Section 3 herein). WALLACE shall perform
such duties as are usually performed by the Chairman of the Board of Directors
of a public company similar in size and scope as the Company. All actions of
WALLACE are subject and subordinate to the review and approval of the Company's
Board of Directors. The Board of Directors shall be the final and exclusive
arbiter of all policy decisions relative to the Company's Business. The precise
services of WALLACE may be modified in accordance with reasonable policy
established by the Board of Directors and not inconsistent with WALLACE's
position. Notwithstanding anything herein to the contrary, the parties agree
that WALLACE shall not have the duties and obligations of an executive officer
of the Company, his sole responsibilities are as a non-executive Chairman of the
Board.
2.2. BOARD MEMBERSHIP. During the term of this Agreement,
the Company shall use its best efforts to nominate and cause the election of
WALLACE to the Company's Board of Directors. If, for any reason WALLACE is
removed from the Board or is not otherwise elected at any of the Company's
annual meetings of shareholders during the term hereof, WALLACE shall be
entitled to the severance payment contained in Section 4.5 herein.
2.3. DEVOTION OF TIME. During the term of this Agreement,
WALLACE agrees to devote sufficient time and attention to the business and
affair of the Company to the extent necessary to discharge the responsibilities
assigned to WALLACE and to use reasonable best efforts to perform faithfully and
efficiently such responsibilities. The Company agrees that WALLACE's position
and employment herein is not full-time. WALLACE is involved in other business
ventures, including the practice of law and serves as an employee of
non-competitive companies. The Company agrees that WALLACE's involvement in such
business ventures or the practice of law is not a conflict with, or in violation
of, this Agreement. All sums received from such other endeavors shall be for the
exclusive benefit of WALLACE and the Company shall have no interest therein.
2.4. CORPORATE OPPORTUNITY. It is the expressly
understanding by and between the Company and WALLACE that the doctrine of
corporate opportunity as set forth in Florida corporate law shall only apply to
WALLACE and the Company for any business opportunities in the dialysis industry
or such other industry in which the Company operates during the term of this
Agreement. WALLACE shall not be required to offer to the Company any business
opportunity or venture in any other industry.
3. TERM OF EMPLOYMENT.
3.1. TERM OF EMPLOYMENT. This Agreement shall begin as of
January 1, 1998 (the "Commencement Date") and end on December 31, 2002, subject
to earlier termination as otherwise set forth in this Agreement.
3.2. AUTOMATIC EXTENSION. This Agreement shall be
automatically extended for successive five (5) year periods at the end of the
initial or extended term, unless either party provides written notice of
termination to the other party at least six (6) months prior to the expiration
of the initial or such extended term, respectively.
3.3. TERMINATION OF EMPLOYMENT BY THE COMPANY FOR CAUSE.
The Company may terminate WALLACE's employment upon fifteen (15) days written
notice for the reasons set forth in Section 3.3.1 below, if such default is not
cured within such notice period, or such additional time as is reasonably
necessary to cure such default if WALLACE is using diligent efforts to cure such
default. The Company shall be entitled to terminate WALLACE's employment without
notice or an opportunity to cure for the reasons set forth in Section 3.3.2
herein.
3.3.1. NOTICE. Notice or an opportunity to cure shall be
required for the following reasons:
(a) A default or breach by WALLACE of
any of the material provisions of this Agreement detrimental to the Company;
(b) refusal to follow reasonable and
lawful directives of the Company's Board of Directors or any committee thereof
which are consistent with WALLACE's duties and responsibility outlined in this
Agreement; or
3.3.2. NO NOTICE. No notice or an opportunity to
cure shall be required for the following:
(a) actions by WALLACE constituting
fraud, embezzlement or dishonesty;
(b) the deliberate and knowing breach
by WALLACE of the Company's internal financial controls;
(c) WALLACE furnishing false,
misleading, or omissive information or omitting to furnish material information
to the Company's Board of Directors, or any committee thereof, in the reasonable
judgment of the Board of Directors;
(d) any action by WALLACE which
constitutes a breach of the confidentiality of the Business and/or trade secrets
of the Company;
(e) WALLACE's gross negligence in the
performance of his duties as outlined in this Agreement;
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(f) any violation of federal or state
law by WALLACE which have a material detrimental impact on the Company;
(g) at such time as WALLACE shall have
failed, by reason of mental or physical disability or illness ("Disability" as
hereinafter defined), to perform his services pursuant to this Agreement for a
period of one hundred eighty (180) days. Disability shall be defined to mean the
inability of WALLACE to perform his duties under this Agreement, based on
injury, illness or physical or mental conditions as determined by the Company's
Board of Directors, which determination must be supported by two licensed
physicians, one of each selected by the Company and WALLACE; provided, however,
if the Company maintains a policy insuring against the disability of WALLACE,
Disability shall have the meaning ascribed in such policy. Upon the Board's
initial determination of disability, WALLACE will submit to mental and physical
examinations which shall be paid by the Company, unless otherwise covered by
health benefits provided by the Company to WALLACE. The failure of WALLACE to
submit to such reasonable examinations within fifteen (15) days of such request
shall be conclusive that such Disability exists.
3.3.3. NO ADDITIONAL COMPENSATION. Upon
termination for the reasons set forth in Section 3.3 herein, the Company shall
not be liable for any further compensation or benefits following the date of
termination, other than accrued Base Salary. Notwithstanding, WALLACE shall be
entitled to receive all appropriate benefits mandated by the Consolidated Budget
Reconciliation Act of 1985 ("COBRA").
3.4. TERMINATION WITHOUT CAUSE. The Company shall have
the right to terminate this Agreement without Cause on thirty (30) days written
notice, subject to payment by the Company of the Severance Payment described in
Section 4.5 herein. Notwithstanding anything herein to the contrary, in the
event WALLACE's employment is terminated in accordance with this Section 3.4,
WALLACE's rights under any and all stock option programs or individual stock
option arrangements shall remain in effect and provide WALLACE the ability to
exercise any and all stock options vested as of the date of termination through
the remainder of the terms of such options, which termination dates shall not be
accelerated based on the termination of employment.
3.5. TERMINATION BY WALLACE. WALLACE may terminate this
Agreement upon thirty (30) days written notice after a material default of this
Agreement by the Company, which default is not cured within the thirty-day
notice period. Such notice shall set forth in reasonable detail the facts
underlying the default. If WALLACE terminates this Agreement under this
Paragraph 3.5, WALLACE shall be entitled to the Severance Payment as provided in
Paragraph 4.5.
3.6. TERMINATION UPON DEATH. This Agreement shall be
terminated immediately upon the death of WALLACE. Within thirty (30) days
following such termination, the Company shall pay to WALLACE's estate: (i) all
accrued Base Salary and bonuses; and (ii) a sum equal to six (6) months' Base
Salary. In addition, upon the determination of bonuses for the fiscal year in
which WALLACE died, the Company shall pay to WALLACE's estate, a prorated bonus
based on the number of days WALLACE provided services hereunder during the year
of his death.
3.7. TERMINATION BY WALLACE UPON CHANGE OF CONTROL.
WALLACE may terminate this Agreement upon thirty (30) days written notice at any
time within eighteen (18) months after the occurrence of a "Change of Control."
Upon such termination, WALLACE shall be entitled to the Severance Payment set
forth in Section 4.5 below. Notwithstanding anything herein to the contrary, in
the event WALLACE's employment is terminated in accordance with this Section
3.7, WALLACE's rights under any and all stock option programs or individual
stock option arrangements shall remain in effect and provide WALLACE the ability
to exercise any and all stock options vested as of the date of termination
through the remainder of the terms of such options, which termination dates
shall not be accelerated based on the termination of employment.
-3-
3.8. DEFINITION OF CHANGE OF CONTROL. Change of Control
is defined for the purposes of this Agreement as any of the following acts:
3.8.1. The acquisition by any person, entity or
"group" within the meaning of ss. 13(d) or 14(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of twenty-five (25%) percent or more
of either the then outstanding shares of the Company's common stock or the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors. The temporary
acquisition by underwriters in any firm commitment underwriting of a public
offering of the Company's stock shall not be considered a Change of Control; or
3.8.2. If the individuals who serve on the
Company Board of Directors as of the Commencement Date (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that any person who becomes a director subsequent
to the Commencement Date whose election or nomination for election by the
Company's shareholders was approved by a vote of at least a majority of the
directors then compiling the Incumbent Board shall be for purposes of this
Agreement considered as if such person was a member of the Incumbent Board; or
3.8.3. Approval by the Company's stockholders
of: (i) a merger, reorganization or consolidation whereby the Company's
shareholders immediately prior to such approval do not, immediately after
consummation of such reorganization, merger or consolidation own more than 50%
of the combined voting power entitled to vote generally in the election of
directors of the surviving entity's then outstanding voting securities; or (ii)
liquidation or dissolution of the Company; or (iii) the sale of all or
substantially all of the assets of the Company.
4. COMPENSATION AND BENEFITS.
4.1. SALARY. Commencing April 1, 1998 and thereafter
during the term of this Agreement, Company shall pay to WALLACE a base salary at
a total annual rate of $100,000 (the "Base Salary"), payable in cash, adjusted
in accordance with Section 4.2 herein. Base Salary shall be paid in regular
payroll intervals consistent with payroll policy established by the Company from
time to time. Notwithstanding, for the period from January 1, 1998 through March
31, 1998, no cash compensation shall be paid to WALLACE, provided however, the
Company shall grant to WALLACE options to purchase 9,000 shares of common stock
effective February 25, 1998. The options shall be for a period of five years,
shall vest 100% immediately upon issuance and shall have an exercise price equal
to the closing sale price of the Company's common stock on February 25, 1998.
All other terms of such options shall be as provided in the Company's Employee
Stock Option Plan.
4.2. COST OF LIVING INCREASE. On each anniversary date of
the Commencement Date during the term hereof or any extension, Base Salary shall
be increased by the greater of (i) six (6%) percent of then existing Base
Salary, or (ii) the percentage increase, if any, of the consumer price index for
Urban Wage Earners and Clerical Workers (Greater Metropolitan Miami area; all
items) issued by the Bureau of Labor Statistics of the U.S. Department of Labor.
The Company's Board of Directors shall have the discretion to grant increases in
Base Salary in excess of the amounts provided herein.
4.3. BONUS. Prior to the commencement of each fiscal year
of the Company, the Board of Directors, or its Compensation Committee, if any,
shall establish in good faith a reasonable and justifiable incentive bonus plan
for WALLACE for such fiscal year. The incentive bonus plan shall provide WALLACE
the ability to earn a bonus based upon certain goals and objectives to be
established in such incentive bonus plan. Such bonus, if any, shall be payable
within thirty (30) days following the completion of the Company's audit for such
fiscal year by its independent auditors.
-4-
4.4. STOCK OPTIONS. WALLACE shall be eligible from time
to time to receive grants of stock options, under a stock option plan or
otherwise, in such amounts and at such times as determined by the Board of
Directors or any committee thereof. All options granted to WALLACE (other than
the options granted pursuant to Section 4.1) shall:
(a) have a minimum term of five (5) years within
which to exercise such options
(b) have a vesting schedule of no worse than
twenty-five (25%) percent as of the date of grant and twenty-five (25%) percent
on each anniversary date of such grant thereafter.
(c) vesting shall be accelerated upon a change
of control of the Company;
(d) have an exercise price no greater than the
market price of the underlying securities as of the date of grant; and
(e) such other terms and conditions as are
customary for similar types of options.
4.5. SEVERANCE PAYMENT. WALLACE shall be entitled to the
Severance Payment as calculated below in the event that WALLACE's employment is
terminated (i) by the Company without cause; (ii) by WALLACE after a material
default by the Company; (iii) by WALLACE after a Change of Control pursuant to
Section 3.7; or (iv) by the Company for any reason after a Change of Control.
The Severance Payment shall be an amount equal to the greater of:
(a) The sum of (i) Base Salary payments WALLACE
would have received has his employment continued for the remaining term of this
Agreement; and (ii) three times any bonus paid to WALLACE in the preceding
twelve (12) months prior to termination, including the value of any stock
options or stock issued in lieu of cash bonuses; or
(b) $500,000.
The Severance Payment shall be paid 100% in cash on the effective date of such
termination. In addition to the Severance Payment, WALLACE shall be entitled to
all of the benefits and personal perquisites otherwise provided in this
Agreement for a period of time which is the greater of (i) the remaining term of
this Agreement (if it were not terminated), or (ii) three (3) years (the
"Severance Period"). Such benefits shall include, but are not limited to,
automobile allowance, health and life insurance and any other benefit WALLACE
was receiving at the time of termination. Notwithstanding anything herein to the
contrary, reimbursement of expenses as provided in Section 4.6.2 herein is not a
benefit during the Severance Period. Any benefit or prerequisite that is payable
in cash shall be payable in equal installments on the first day of each month
during the Severance Period.
4.6. ADDITIONAL BENEFITS.
4.6.1. AUTOMOBILE EXPENSES. During the term of
this Agreement and during any Severance Period thereafter, the Company shall pay
to WALLACE an automobile expense allowance of $700 per month, net of taxes,
which shall be inclusive of all expenses associated with the operation of such
automobile, including depreciation, gasoline, insurance, repairs and
maintenance.
-5-
4.6.2. REIMBURSEMENT OF EXPENSES. WALLACE shall
be reimbursed by the Company, upon presentation of adequate receipts, for all
Business expenses which are reasonably incurred by WALLACE in the performance of
his duties under this Agreement, including but not limited to travel, cellular
phone and similar expenses. All travel expenses shall be incurred in accordance
with reasonable policy established by the Board of Directors.
4.6.3. PARTICIPATION IN EMPLOYEE BENEFIT PLANS.
WALLACE shall be entitled to participate, subject to eligibility and other terms
generally established by the Company's Board of Directors, in any group
hospitalization, health, dental care, profit sharing and pension, and other
benefit plans, as may be adopted or amended by the Company from time to time as
affecting employees of similar status. The Company shall provide health
Insurance for WALLACE and his dependents and shall pay all premiums incurred
thereby.
5. REPRESENTATION BY WALLACE. WALLACE hereby represents to the
Company that he is in good health, he is physically and mentally capable of
performing his duties hereunder and he has no knowledge of any present or past
physical or mental condition which would cause an insurance company to reject an
application by WALLACE for life insurance or for accident, sickness or
disability insurance. WALLACE represents and warrants that to the best of his
knowledge he is not subject to any restrictive covenants under any other
agreements prohibiting his performance in full hereunder, or which would subject
the Company to any valid claims for tortious interference.
6. CONFIDENTIALITY AND NON-DISCLOSURE OF INFORMATION.
6.1. CONFIDENTIALITY. WALLACE shall not, during the term
of this Agreement or at any time thereafter, divulge, furnish or make accessible
to anyone without Company's prior written consent any knowledge or information
with respect to any aspect of the Business, including but not limited to: the
Company's costs; fees or models; physician or patient names; provider names;
referral sources; addresses and telephone numbers of patients and referral
sources; billing procedures, prices and terms; its business techniques, computer
programs and printouts; identity of prospective patients, providers or referral
sources; information disclosed by the Company's patients to the Company; or
other information concerning the Business or its employees. All information
given to WALLACE in connection with his employment shall be considered
confidential and proprietary.
6.2. OWNERSHIP OF INFORMATION. WALLACE recognizes that
all records, patient lists, provider lists, referral lists, material cost data,
fees or models, files and correspondence with patients, referral services,
physicians and providers of services, computer printouts, contracts, reports,
notes, business plans, compilations of other recorded matter, and copies or
reproductions thereof, relating to the Company's operations and activities made
or received by WALLACE in the course of his employment are the exclusive
property of the Company and WALLACE holds and uses same as trustee for the
Company and subject to the Company's sole control and will deliver same to the
Company at the termination of his employment, or earlier if so requested by the
Company in writing. All of such information which if lost or used by WALLACE
outside the scope of his employment could cause irreparable and continuing
injury to the Company's Business for which there may not be an adequate remedy
at law.
7. RESTRICTIVE COVENANT. As an inducement to cause the Company to
enter into this Agreement, WALLACE covenants and agrees that during his
employment and, for a period of one (1) year after he ceases to be employed by
the Company, regardless of the manner or cause of termination:
7.1. RESTRICTION. WALLACE will not be an employee, agent,
director, stockholder or owner (except of not more than a controlling interest
in the voting securities of any publicly traded entity), partner, consultant,
financial backer, creditor or be otherwise directly or indirectly connected with
or participate in the management, operation or control of any Business, firm,
proprietorship, corporation, partnership, association, entity or venture engaged
in the provision of services or supplies similar to the Business (a "Competing
Business") within fifty (50) miles of any office or center of the Company or any
of its subsidiaries existing at the termination of this Agreement (the
"Restricted Area").
-6-
7.2. SOLICITATION OF BUSINESS. WALLACE will not initiate
any contact with, call upon, solicit business from, sell or render services to
any customer of the Company with respect to a Competing Business in the
Restricted Area or purchase from any supplier or potential supplier any
materials for same and WALLACE shall not directly or indirectly aid or assist
any other person, firm or corporation to do any of the aforesaid acts.
7.3. SOLICITATION OF EMPLOYEES. WALLACE will not directly
or indirectly, as principal, agent, owner, partner, stockholder, officer,
director, employee, independent contractor or consultant or in any individual or
representative capacity for himself or on behalf of any business, firm,
corporation, partnership association or proprietorship, initiate contact with or
solicit, or directly or indirectly cause others to solicit the employment of any
officer, sales person, agent, or other employee of the Company, for the purpose
of causing said officer, sales person, agent or other employee to terminate
employment with the Company for the purpose of obtaining employment by a
Competing Business in the Restricted Area.
7.4. NON-ENFORCEMENT OF RESTRICTIVE COVENANT:
Notwithstanding anything herein to the contrary, if this Agreement is terminated
(a) by WALLACE as a result of the material breach of this Agreement by the
Company, (b) if the Company fails to make any severance payment required herein
within ten (10) days after such payment is due, or (c) by WALLACE in accordance
with Section 3.7 herein, then in such event the Restrictive Covenants contained
in this Section 7 shall thereafter be unenforceable by the Company.
Notwithstanding termination of the restrictive covenants, the Company will still
be obligated to pay the remaining Severance Payments thereafter due.
8. ACKNOWLEDGMENT. WALLACE HEREBY ACKNOWLEDGES AND UNDERSTANDS
THIS AGREEMENT INHIBITS WALLACE'S ABILITY TO WORK FOR THE SAME OR SIMILAR KIND
OF BUSINESS FOR A PERIOD OF ONE (1) YEAR AFTER THE END OF WALLACE's EMPLOYMENT
WITH THE COMPANY. WALLACE acknowledges and confirms that the length of the term
and geographic restrictions contained in this Agreement are fair and reasonable
and not the result of overreaching, duress or coercion of any kind. WALLACE
further acknowledges and confirms that his full, uninhibited and faithful
observance of each of the covenants contained in this Agreement will not cause
any undue hardships, financial or otherwise and that enforcement of this
Agreement will not impair WALLACE's ability to obtain employment commensurate
with WALLACE's abilities and on terms fully acceptable to WALLACE. WALLACE
acknowledges that WALLACE will be receiving significant information regarding
the Business which WALLACE has not previously received and would not receive
without being employed by the Company. WALLACE acknowledges and confirms that
such information would cause the Company serious injury and loss if used by
WALLACE for the benefit of a competitor.
9. MATERIAL VIOLATION. A violation of Sections 6 or 7 shall
constitute a material and substantial breach of this Agreement and shall result
in the imposition of the Company's remedies contained in Section 11. WALLACE
acknowledges that compliance with the provisions of Sections 6 and 7 are
necessary to protect the goodwill and proprietary interests of the Company and
is a material condition of employment. WALLACE acknowledges and agrees that
proof of one such personal solicitation by WALLACE of a patient, referral
source, HMO, managed care company, insurance company, supplier or employee,
shall constitute absolute and conclusive evidence that WALLACE has substantially
and materially breached the provisions of this Agreement.
10. MATERIAL COVENANTS. It is understood by and between the
parties that the foregoing covenants set forth in Sections 6 and 7 are essential
elements of this Agreement, and that but for the agreement of WALLACE to comply
with such covenants, the Company would not have entered into this Agreement.
Such covenants by WALLACE shall be construed as agreements independent of any
other provision of this Agreement and the existence of any claim or cause of
action WALLACE may have against the Company whether predicated on this Agreement
or otherwise, shall not constitute a defense to the enforcement by the Company
of these covenants.
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11. REMEDIES. WALLACE hereby acknowledges, covenants and agrees
that in the event of a material default or breach under this Agreement:
(a) the Company will suffer irreparable and continuing
damages as a result of such breach and its remedy at law will be inadequate.
WALLACE agrees that in the event of a violation or breach of this Agreement, in
addition to any other remedies available to them, the Company shall be entitled
to an injunction restraining any such default or any other appropriate decree of
specific performance, without any requirement to prove actual damages or to post
any bond or any other security and to any other equitable relief the court deems
proper; and
(b) Any and all of the Company's remedies described in
this Agreement shall not be exclusive and shall be in addition to any other
remedies which the Company may have at law or in equity including, but not
limited to, the right to monetary damages.
12. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses, sections, subdivisions, or subparagraphs contained
in this Agreement shall not affect the enforceability of the remaining portions
of this Agreement or any part thereof, all of which are inserted conditionally
on their being legally valid. In the event that one or more of the words,
phrases, sentences, clauses, sections, subdivisions, subparagraphs, or articles
are determined to be unenforceable and if such invalidity shall be caused by the
length of any period of time or the size of any area set forth in any part
hereof, such period of time or such area, or both, shall be considered to be
reduced to a period or area which would cure such invalidity.
13. ASSIGNMENT. This Agreement shall be non-assignable by either
the Company or WALLACE without the written consent of the other party, it being
understood that the obligations and performance of this Agreement are personal
in nature.
14. NOTICE. Any notices or other communications to any party
pursuant to or relating to this Agreement must be in writing and shall be deemed
to have been given or delivered when (i) hand-delivered, (ii) mailed through the
U.S. Postal Service via certified mail, return receipt requested, postage
prepaid, or (iii) through a nationally recognized overnight courier, or (iv) via
facsimile, to the party at their addresses below:
WALLACE: 2222 Ponce de Leon Boulevard, 6th Floor
Coral Gables, Florida 33134
The Company: Renex Corp.
2100 Ponce de Leon Boulevard, Suite 950
Coral Gables, Florida 33134
Attention: James P. Shea, President
with a copy to: BRYAN W. BAUMAN, ESQ.
Wallace, Bauman, Fodiman & Shannon, P.A.
2222 Ponce de Leon Boulevard, Sixth Floor
Coral Gables, Florida 33134
or such other address given by such party to the other party at any time
hereafter.
15. ENTIRE AGREEMENT. This Agreement contains the sole and entire
agreement between the parties with respect to the subject matter hereof.
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16. AMENDMENT. No amendment, waiver or modification of this
Agreement or any provisions of this Agreement shall be valid unless in writing
and duly executed by both parties.
17. BINDING AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, legal
representatives, successors and assigns.
18. WAIVER. Any waiver by any party of any breach of any
provision of this Agreement shall not be considered as or constitute a
continuing waiver or waiver of any other breach of any provision of this
Agreement.
19. CAPTIONS. Captions contained in this Agreement are inserted
only as a matter of convenience or for reference and in no way define, limit,
extend, or describe the scope of this Agreement or the intent of any provisions
of this Agreement.
20. ATTORNEYS' FEES. In the event of any litigation arising out
of this Agreement, the prevailing party shall be entitled to recover its
attorneys' fees and costs, including attorneys' fees and costs incurred on
appeal.
21. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Florida.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
RENEX CORP., a Florida corporation
By:
JAMES P. SHEA, President
MILTON J. WALLACE
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EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT entered into as of the 22nd day of
April, 1997 by and between RENEX CORP., a Florida corporation ("Company"), and
PATSY L. ANDERS ("ANDERS").
R E C I T A L S:
A. The Company is a provider of kidney dialysis treatments in
various parts of the United States to individuals suffering from end stage renal
disease (the "Business"); and
B. ANDERS has been in the continuous employ of the Company since
August 1993; and
C. The Company desires to continue to employ ANDERS as the
Company's Vice President/Business Develpoment and ANDERS desires to continue to
be employed by the Company in such position on the terms and conditions provided
herein; and
D. The Company believes that it is in the best interest of the
Company to assure ANDERS of a secure minimum compensation and to diminish the
inevitable distraction of ANDERS that may result in the event of the
possibility, threat or occurrence of a change of control, by providing for
certain compensation arrangements upon a change of control.
NOW THEREFORE, in consideration of the mutual promises and
covenants contained in this Agreement and such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. RECITATIONS. The above recitations are true and correct and
are incorporated herein by this reference.
2. EMPLOYMENT.
2.1. POSITION OF EMPLOYMENT. The Company hereby continues
the employment of ANDERS as its Vice President/Business Development upon all of
the terms and conditions hereinafter set forth. ANDERS shall perform such duties
as are usually performed by a Vice President/Business Development of a business
similar in scope as the Business and such other reasonable additional duties as
may be prescribed from time to time by the Company's Board of Directors, taking
into account ANDERS' education, experience and job responsibilities. ANDERS
shall report directly to the President. All actions shall be subject and
subordinate to review and approval by the Board of Directors and any and all
committees of the Board of Directors. The precise responsibilities of ANDERS may
be modified from time to time in accordance with reasonable policy established
by the Board of Directors of the Company consistent with ANDERS' qualifications
and experience.
2.2. DEVOTION OF TIME. During the term of ANDERS'
employment, ANDERS shall devote her full business time, ability and attention to
the business affairs of the Company. ANDERS agrees to use her best efforts to
perform faithfully and efficiently such responsibilities. ANDERS shall be
permitted to (i) serve on corporate, civic or charitable boards or committees;
and (ii) deliver lectures, fulfill speaking engagements or teach at educational
institutions. All income received from such other endeavors shall be for the
exclusive benefit of ANDERS and the Company shall have no interest therein.
2.3. WORKING FACILITIES. During the term of this
Agreement, the Company shall furnish, at ANDERS' principal place of employment,
an office, furnishings, secretary and such other facilities commensurate and
suitable to her position and adequate for the performance of her duties
hereunder.
2.4. LOCATION OF EMPLOYMENT. Unless otherwise agreed to
by ANDERS, ANDERS' principal place of business shall be within Dade or Broward
Counties, Florida.
3. TERM OF EMPLOYMENT
3.1. TERM OF EMPLOYMENT. The term of this Agreement shall
begin on the date hereof (the "Commencement Date") and shall end two years
thereafter, subject to earlier termination or extension as otherwise set forth
in this Agreement.
3.2. AUTOMATIC EXTENSION. This Agreement shall be
automatically extended for successive two (2) year periods at the end of the
initial or any extended term, unless either party provides written notice of
termination to the other party at least 120 days prior to the expiration of the
initial or extended term respectively.
3.3. TERMINATION OF EMPLOYMENT BY THE COMPANY FOR CAUSE.
The Company may terminate ANDERS' employment upon fifteen (15) days written
notice for the reasons set forth in Section 3.3.1 below, if such default is not
cured within such notice period, or such additional time as is reasonably
necessary to cure such default if ANDERS is using diligent efforts to cure such
default. The Company shall be entitled to terminate ANDERS's employment without
notice or an opportunity to cure for the reasons set forth in Section 3.3.2
herein.
3.3.1. NOTICE. Notice or an opportunity to cure
shall be required for the following reasons:
(a) A default or breach by ANDERS of
any of the material provisions of this Agreement detrimental to the Company;
(b) refusal to follow reasonable and
lawful directives of the Company's Board of Directors or any committee thereof
which are consistent with ANDERS' duties and responsibility outlined in this
Agreement; or
3.3.2. NO NOTICE. No notice or an opportunity to
cure shall be required for the following:
(a) actions by ANDERS constituting
fraud, embezzlement or dishonesty;
(b) the deliberate and knowing breach
by ANDERS of the Company's internal financial controls;
(c) ANDERS furnishing false,
misleading, or omissive information or omitting to furnish material information
to the Company's Board of Directors, or any committee thereof, in the reasonable
judgment of the Board of Directors;
(d) any action by ANDERS which
constitutes a breach of the confidentiality of the Business and/or trade secrets
of the Company;
(e) ANDERS' gross negligence in the
performance of her duties as outlined in this Agreement;
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(f) any violation of federal or state
law by ANDERS which have a material detrimental impact on the Company;
(g) at such time as ANDERS shall have
failed, by reason of mental or physical disability or illness ("Disability" as
hereinafter defined), to perform his services pursuant to this Agreement for a
period of one hundred eighty (180) days. Disability shall be defined to mean the
inability of ANDERS to perform her duties under this Agreement, based on injury,
illness or physical or mental conditions as determined by the Company's Board of
Directors, which determination must be supported by two licensed physicians, one
of each selected by the Company and ANDERS; provided, however, if the Company
maintains a policy insuring against the disability of ANDERS, Disability shall
have the meaning ascribed in such policy. Upon the Board's initial determination
of disability, ANDERS will submit to mental and physical examinations which
shall be paid by the Company, unless otherwise covered by health benefits
provided by the Company to ANDERS. The failure of ANDERS to submit to such
reasonable examinations within fifteen (15) days of such request shall be
conclusive that such Disability exists.
3.3.3. NO ADDITIONAL COMPENSATION. Upon
termination for the reasons set forth in Section 3.3 herein, the Company shall
not be liable for any further compensation or benefits following the date of
termination, other than accrued Base Salary. Notwithstanding, ANDERS shall be
entitled to receive all appropriate benefits mandated by the Consolidated Budget
Reconciliation Act of 1985 ("COBRA").
3.4. TERMINATION BY ANDERS. ANDERS may terminate this
Agreement upon thirty (30) days written notice, upon the occurrence of a
material default of this Agreement by the Company, which default is not cured
within the thirty (30) day notice period. Such notice shall set forth with
particularity the facts underlying the claimed default.
3.5. TERMINATION WITHOUT CAUSE. The Company shall have
the right to terminate this Agreement, without cause, upon thirty (30) days
written notice to ANDERS. Notwithstanding such termination, the Company shall be
obligated to pay to ANDERS as severance herein the following:
3.5.1. PRIOR TO CHANGE OF CONTROL. If
termination without cause is prior to a "Change of Control," ANDERS shall be
entitled to severance equal to the greater of (i) the Base Salary which would
have been paid for the balance of the term of this Agreement if it were not
terminated, or (ii) one (1) year's Base Salary. The severance payment under this
Section 3.5.1 shall be payable in twelve (12) equal monthly installments
commencing on the first day of the month following termination. In addition,
during such twelve (12) month period, all benefits to ANDERS set forth on
Section 4.5 herein shall continue to be paid.
3.5.2. FOLLOWING A CHANGE OF CONTROL. If ANDERS
is terminated without cause at any time following a Change of Control, ANDERS
shall be entitled to severance equal to the greater of (i) two times the Base
Salary which would have been paid for the remainder of the term had the
Agreement not been terminated, or (ii) two times the sum of (A) one year's Base
Salary then in effect, and (B) any and all bonuses paid to ANDERS in the
eighteen (18) months prior to the effective date of termination. The severance
payments under this Section 3.5.2 shall be paid 50% in cash on the effective
date of termination and the balance in twelve (12) equal monthly payments on the
1st day of each month commencing on the 1st day of the month following
termination. In addition, all benefits set forth in Section 4.5 herein shall
continue to be paid during such twelve month period.
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3.5.3. STOCK OPTIONS. Notwithstanding anything
herein to the contrary, in the event that ANDERS' employment is terminated in
accordance with this Section 3.5, ANDERS rights under any and all employee stock
option programs or individual stock option arrangements shall remain in effect
and provide to ANDERS the ability to exercise any and all stock options vested
as of the date of termination through the remainder of the terms of such
options, which termination dates shall not be accelerated based on the
termination of employment.
3.6. TERMINATION UPON DEATH. This Agreement shall be
terminated immediately upon the death of ANDERS. Within thirty (30) days
following such termination, the Company shall pay to ANDERS' estate: (i) all
accrued Base Salary and bonuses; and (ii) a sum equal to six (6) months' Base
Salary. In addition, upon the determination of bonuses for the fiscal year in
which ANDERS died, the Company shall pay to ANDERS's estate, a prorated bonus
based on the number of days ANDERS provided services hereunder during the year
of his death.
3.7. TERMINATION BY ANDERS UPON CHANGE OF CONTROL. ANDERS
may terminate this Agreement at any time within one hundred eighty (180) days
following a "Change of Control" of the Company by providing thirty (30) days
written notice of termination, which notice must be sent within the 180 day
period. Upon such termination, ANDERS shall be entitled to a severance payment
equal to the greater of (i) two times the Base Salary which would have been paid
for the remainder of the term had the Agreement not been terminated, or (ii) two
times the sum of (A) one year's Base Salary then in effect, and (B) any and all
bonuses paid to ANDERS in the eighteen (18) months prior to the effective date
of termination. The severance payment under this Section 3.7 shall be paid 50%
in cash on the effective date of termination and the balance in twelve (12)
equal monthly payments on the 1st day of each month commencing on the 1st day of
the month following termination. In addition, all benefits set forth in Section
4.5 herein shall continue to be paid during such twelve month period.
Notwithstanding anything herein to the contrary, in the event that ANDERS'
employment is terminated in accordance with this Section 3.5, ANDERS rights
under any and all employee stock option programs or individual stock option
arrangements shall remain in effect and provide to ANDERS the ability to
exercise any and all stock options vested as of the date of termination through
the remainder of the terms of such options, which termination dates shall not be
accelerated based on the termination of employment.
3.8. DEFINITION OF CHANGE OF CONTROL. Change of Control
is defined for the purposes of this Agreement as any of the following acts:
3.8.1. The acquisition by any person, entity or
"group" within the meaning of ss. 13(d) or 14(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of twenty-five (25%) percent or more
of either the then outstanding shares of the Company's common stock or the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors. Notwithstanding, any
purchase by underwriters pursuant to a firm commitment underwriting shall not
constitute a Change of Control; or
3.8.2. If the individuals who serve on the
Company Board of Directors as of the Commencement Date (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that any person who becomes a director subsequent
to the Commencement Date whose election or nomination for election by the
Company's shareholders was approved by a vote of at least a majority of the
directors then compiling the Incumbent Board shall be for purposes of this
Agreement considered as if such person was a member of the Incumbent Board; or
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3.8.3. Approval by the Company's stockholders of
(i) a merger, reorganization or consolidation whereby the Company's shareholders
immediately prior to such approval do not, immediately after consummation of
such reorganization, merger or consolidation own more than 50% of the combined
voting power entitled to vote generally in the election of directors of the
surviving entity's then outstanding voting securities; or (ii) liquidation or
dissolution of the Company; or (iii) the sale of all or substantially all of the
assets of the Company.
3.9. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY.
Notwithstanding anything in this Agreement to the contrary, in the event that it
is determined that any payment or distribution required to be made by the
Company to ANDERS following a Change of Control under Sections 3.5.2 or 3.7
herein (a "Change of Control Payment"), would be nondeductible by the Company
for Federal income tax purposes because of Section 280G of the Internal Revenue
Code of 1986, as amended, then the aggregate amounts payable or distributable
pursuant to this Agreement shall be reduced to the "Reduced Amount." The Reduced
Amount shall be the greater of (i) an amount which is the maximum amount of
Change of Control Payments possible without causing any such Change of Control
Payment to be nondeductible by the Company because of Section 280G of the Code,
or (ii) the Change of Control Payment, if the Change of Control Payments
provides ANDERS with a greater after tax benefit than (i) herein. The Reduced
Amount specified in (i) above shall be expressed in present value which
maximizes the aggregate present value of Change of Control Payments without
causing any Reduced Amount to be non-deductible by the Company under Section
280G. In addition, if the Change of Control Payments can be restructured through
the provision by ANDERS of personal services or otherwise following a Change of
Control, then the parties shall in good faith attempt to agree to a change in
such relationship necessary for ANDERS to receive the full benefits of the
Change of Control Payment. However, any restructuring of the relationship shall
not require ANDERS to be employed by the Company or be subject to a
non-competition agreement. The determinations required herein shall be made by
the independent certified public accounting firm which was engaged by the
Company to audit the Company's financial statements for the fiscal year
preceding the year in which the Change of Control occurs. ANDERS shall have the
right to contest such determination.
4. COMPENSATION AND BENEFITS
4.1. SALARY. Subject to the provisions of Section 4.2
herein, the Company shall pay to ANDERS, a base salary at a total annual rate of
$65,000 (the "Base Salary") payable in cash. Base Salary shall be paid in
regular payroll intervals consistent with payroll policy established by the
Company from time to time. Base Salary shall be automatically increased to
$90,000 per year on the earlier of (i) the date that the Company's registration
statement of its initial public offering is declared effective by the Securities
and Exchange Commission; or (ii) a Change of Control.
4.2. COST OF LIVING INCREASE. On each anniversary date of
this Agreement during the term hereof or any extension, Base Salary shall be
increased by the greater of (i) six (6%) percent of then existing Base Salary,
or (ii) the percentage increase, if any, of the consumer price index for Urban
Wage Earners and Clerical Workers (Greater Metropolitan Miami area; all items)
issued by the Bureau of Labor Statistics of the U.S. Department of Labor. The
Company's Board of Directors shall have the discretion to grant increases in
Base Salary in excess of the amounts provided herein.
4.3. BONUS. Prior to the commencement of each fiscal
year, the Board of Directors or its compensation committee, if any, shall
establish in good faith a reasonable and justifiable incentive bonus plan for
ANDERS for such fiscal year. The incentive bonus plan shall provide ANDERS the
ability to earn a bonus based upon certain goals and objectives to be
established in such incentive bonus plan. Such bonus, if any, shall be payable
within thirty (30) days following the completion of the Company's audit for such
fiscal year by its independent auditors.
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4.4. STOCK OPTIONS. ANDERS shall be eligible from time to
time to receive grants of stock options, under stock option plans or otherwise,
in such amounts and at such times as determined by the Board of Directors or any
committee thereof. All options granted to ANDERS shall:
(a) have a minimum term of five (5) years within
which to exercise such options;
(b) have a vesting schedule of no worse than
twenty-five (25%) percent as of the date of grant and twenty-five (25%) on each
anniversary date of such grant thereafter;
(c) vesting shall be accelerated upon a change
of control of the Company;
(d) have an exercise price no greater than the
market price of the underlying securities as of the date of grant; and
(e) such other terms and conditions as are
customary for similar types of options.
4.5. ADDITIONAL BENEFITS.
4.5.1. VACATION. ANDERS shall be entitled to a
reasonable number of discretionary paid vacation days consistent with her level
of employment, duties and seniority during each twelve-month period during the
term of this Agreement, but in no event less than fifteen (15) days during each
period. Vacation time may be accumulated for a period of not longer than two (2)
years. ANDERS shall not receive compensation for days not used.
4.5.2. AUTOMOBILE EXPENSES. During the term of
this Agreement, the Company shall pay to ANDERS an automobile allowance of $500
per month, which shall be inclusive of all expenses associated with the
operation of such automobile, including depreciation, gasoline, insurance,
repairs and maintenance.
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