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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-23165
RENEX CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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FLORIDA 65-0422087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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2100 Ponce de Leon Boulevard, Suite 950,
Coral Gables, Florida 33134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
Registrant's telephone number including area code: (305) 448-2044
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value of Renex Corp. Common Stock, $.01 par value held
by non-affiliates of the Company was $35,292,483 as of March 25, 1998 based upon
the closing sales price of the Common Stock as reported on the Nasdaq National
Market System on such date.
Number of shares of Common Stock of Renex Corp. issued and outstanding
as of March 25, 1998: 6,974,247
DOCUMENTS INCORPORATED BY REFERENCE
None
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RENEX CORP.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business.................................................................. 1
Item 2. Description of Property.................................................................. 12
Item 3. Legal Proceedings........................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders...................................... 12
PART II
Item 5. Market for Company's Common Stock and Related Stockholder Matters........................ 13
Item 6. Selected Consolidated Financial and Operating Data....................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation..... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 20
Item 8. Financial Statements and Supplementary Data.............................................. 21
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................... 35
PART III
Item 10. Directors and Executive Officers of the Company.......................................... 36
Item 11. Executive Compensation................................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 42
Item 13. Certain Relationships and Related Transactions........................................... 43
Item 14. Exhibits, Financial Schedules and Reports on Form 8-K.................................... 44
Signatures ......................................................................................... 45
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PART I
ITEM 1. BUSINESS
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 primarily through DE NOVO development and more recently through
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, 1997, the Company provided dialysis services
to approximately 900 patients in seven states, through 13 outpatient dialysis
facilities and two staff-assisted home dialysis programs. Each outpatient
facility is operated through a separate wholly-owned subsidiary. Additionally,
the Company provided inpatient dialysis services at 12 hospitals as of December
31, 1997.
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 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 requiring chronic kidney dialysis services in the United States has
increased from 66,000 patients in 1982 to over 200,000 patients in 1995.
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 1995 was approximately 253 patients per
million when considering all age groups, but was 1,097 patients per million in
individuals age 65 to 74, and 1,035 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 1995 was
an estimated $13.1 billion, of which Medicare paid an estimated $9.7 billion.
The Company estimates that approximately $6.0 billion of the $13.1 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 1995, there were
over 2,800 dialysis facilities in the United States, of which approximately 71%
were free-standing and approximately 29% 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, 1995, 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, 1995, 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. They also 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 1995), 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.
BUSINESS DEVELOPMENT ACTIVITIES
In December 1997, the Company acquired certain assets of Dialysis Services
of Atlanta, Inc. ("DSA"). DSA provides approximately 3,000 hemodialysis and
hemapheresis treatments annually to patients in hospitals located in the
Metropolitan Atlanta area.
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As of December 31, 1997, the Company had three facilities under development
located in Union, Missouri; Maplewood, Missouri; and Bloomfield, New Jersey. The
Maplewood facility construction was completed in December 1997 and began
servicing patients in March 1998, upon obtaining Medicare certification. The
Union and Bloomfield facilities are under construction and are scheduled to open
during the second quarter of 1998.
OPERATIONS
OUTPATIENT FACILITIES
As of December 31, 1997, the Company operated 13 outpatient dialysis
facilities, with a total of 213 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 eight 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 with
experience in the dialysis industry. Each administrator is supported by a
director of nursing, 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.
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 and
Tampa, Florida. In these programs, 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.
INPATIENT DIALYSIS SERVICES
The Company provides inpatient dialysis services to 12 hospitals pursuant to
contracts negotiated with the hospitals for treatments which are paid directly
by the hospitals. Such hospitals are located in Mississippi, Massachusetts,
Pennsylvania, Illinois and Georgia. In most instances, the Company provides the
dialysis equipment and supplies to the hospital 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. In Georgia, the Company also provides
hemapheresis treatments.
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
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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,
1995, 1996 and 1997 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"). Effective July 1, 1997, routine coverage by
Medicare for electrocardiograms, bone densitometry studies, nerve conduction
studies and chest x-rays was eliminated. Medicare continues to pay for these
tests only when there is documentation of medical necessity. These specific
ancillary services represented approximately 2% of the Company's net revenues
for each of the years ended December 31, 1995, 1996 and 1997. The Company does
not anticipate a significant reduction in these net revenues as a result of the
change requiring medical necessity documentation.
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 monthly compensation. 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, but do not prohibit the physician from providing direct patient care
services at other locations and do not require, or otherwise 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, and extend 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'
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.
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SOURCES OF REIMBURSEMENT
The following table provides information regarding the percentage of net
revenues received by the Company by source:
YEARS ENDED
DECEMBER 31,
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1995 1996 1997
--------- --------- --------
Medicare/Medicaid.............. 58.5% 67.2% 74.3%
Private/Managed Care Payors.... 41.5 30.9 23.3
Hospital Inpatient Dialysis
Services..................... -- 1.9 2.4
-------- -------- --------
Total................. 100.0% 100.0% 100.0%
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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. 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 incident
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.
The Composite Rate has been the subject of a number of reports and studies.
In April 1991, the Institute of Medicine, an organization chartered by the
National Academy of Sciences and an advisor to the federal government, released
a report recommending that the Composite Rate be adjusted for the effects of
inflation. In March 1996, after conducting a study on dialysis costs and
reimbursement at the request of the U.S. Congress, the Prospective Payment
Assessment Commission recommended a 2% increase be made in the Composite Rate.
The U.S. Congress is not required to implement either of these recommendations
and can either raise or lower the reimbursement rate. 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 EPO. In June 1989, Medicare started reimbursement for EPO at
the rate of $40 per dosage up to 10,000 units and $70 for dosages in excess of
10,000 units. In January 1991, Medicare reimbursement rates were changed to $11
per 1,000 units with no maximum and later reduced to $10 per 1,000 units in
1993. Currently, the administration of EPO is reimbursed only for patients whose
average hematocrit levels over a 90 day period are 36.5% or less, which include
the vast majority of dialysis patients. Hematocrit is the measurement of the
concentration of oxygen-carrying red blood cells in a patient's bloodstream. The
EPO Medicare reimbursement rate may be adjusted annually to reflect cost of
living changes. 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.
Based on a recommendation by the Office of the Inspector General of the United
States Department of Health ("OIG") to
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HCFA, the Medicare reimbursement rate is expected to be reduced by 10% by the
beginning of 1999. Effective January 1, 1998, the reimbursement rates for drugs
other than EPO have been reduced by approximately 5%.
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. One managed
care company subsequently withdrew from the test program and will not be
replaced. The results of the test program will determine whether HCFA will open
up the market to additional managed care companies. The RFP includes a proposed
capitation payment scale for ESRD patients. HCFA is also requiring 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 5, 1997, as part of the Balanced Budget Act of 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 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.
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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 HCFA and are subject to
periodic inspection to assure compliance with applicable regulations. HCFA's
approval is also required for the addition of dialysis stations at existing
facilities. All of the Company's facilities are certified by HCFA.
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 and Missouri, 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.
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
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has promulgated a safe harbor relevant to such arrangements relating to space
rental. However, there can be no assurance that the Company's leases satisfy the
space rental safe harbor.
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 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.
There 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
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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.
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 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 recently enacted 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
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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 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, 1995, there were in excess of 2,800 dialysis
facilities in the United States. According to industry estimates, as of May 31,
1997, 52% of all ESRD patients were treated by the six 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), Renal Treatment
Centers, Inc., Total Renal Care Holdings, Inc. and Renal Care Group, Inc. Renal
Treatment Centers, Inc. recently entered into an agreement to merge with Total
Renal Care Holdings, Inc. Many of the Company's competitors have substantially
greater financial resources than the Company and may compete with the Company
for acquisitions, development and/or management of dialysis facilities. The
Company may also experience competition from facilities established by former
medical directors or other
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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.
EMPLOYEES
As of December 31, 1997, the Company had 192 full-time and 43 part-time
employees in its dialysis operations and an additional 25 full-time and two
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.
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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 13 dialysis centers in 7
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 DATE OF OPENING/ACQUISITION
-------------------- ---------------------------
University City, MO March 1994
Pittsburgh, PA May 1994
Tampa, FL August 1994
Creve Coeur, MO November 1994
Amesbury, MA May 1995
Philadelphia, PA August 1995
Bridgeton, MO August 1995
Jackson, MS December 1995
Delta, LA December 1995
Port Gibson, MS December 1995
Orange, NJ November 1996
Woodbury, NJ December 1996
North Andover, MA September 1997
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, 1997.
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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
- ----------------------------------- ---- ---
Fourth Quarter (October 8, 1997 to December 31, 1997)............. $8.25 $4.875
The closing sales price of the Company's Common Stock on March 25, 1998
was $6.75 as reported on NASDAQ/NMS.
HOLDERS
As of March 25, 1998, the approximate number of record stockholders was
260.
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.
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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."
PERIOD FROM
JULY 7, 1993
(INCEPTION)
TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------
1993 1994 1995 1996 1997
------------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $ -- $ 2,746 $ 8,794 $ 18,569 $ 26,073
Operating expenses:
Facilities........................... -- 2,405 6,809 14,625 20,182
General and administrative........... 355 1,025 1,682 2,681 2,991
Provision for doubtful accounts...... -- 93 495 1,293 962
Depreciation and amortization........ 2 126 509 1,642 1,635
---------- ----------- ----------- ----------- -----------
Operating income (loss)............ (357) (903) (701) (1,672) 303
Other income (expenses):
Gain (loss) on sale of assets........ -- -- -- 364 (27)
Net interest income (expense)........ 35 61 (360) (915) (771)
Amortization of deferred financing
costs.............................. -- -- (126) (226) (162)
---------- ----------- ----------- ----------- ------------
Loss before extraordinary item........... (322) (842) (1,187) (2,449) (657)
Extraordinary charge for early retirement
of debt................................ -- -- -- -- (1,441)
------------ ----------- ----------- ----------- ------------
Net loss............................. $ (322) $ (842) $ (1,187) $ (2,449) $ (2,098)
============= ============ ============ ============ ============
BASIC EARNINGS PER SHARE
Loss per share before extraordinary item $ (0.23) $ (0.48) $ (0.61) $ (0.84) $ (0.14)
Extraordinary charge for early
retirement of debt................... -- -- -- -- (0.31)
----------- ----------- ----------- ----------- -----------
Net loss............................... $ (0.23) $ (0.48) $ (0.61) $ (0.84) $ (0.45)
=========== =========== =========== =========== ===========
Weighted average shares outstanding.... 1,377,401 1,741,450 1,944,759 2,930,540 4,672,707
=========== =========== =========== =========== ===========
DILUTED EARNINGS PER SHARE
Loss per share before extraordinary item $ (0.23) $ (0.48) $ (0.61) $ (0.84) $ (0.14)
Extraordinary charge for early
retirement of debt................... -- -- -- -- (0.31)
----------- ----------- ----------- ----------- -----------
Net loss............................... $ (0.23) $ (0.48) $ (0.61) $ (0.84) $ (0.45)
=========== =========== =========== =========== ===========
Weighted average shares outstanding.... 1,377,401 1,741,450 1,944,759 2,930,540 4,672,707
=========== =========== =========== =========== ===========
OPERATING DATA:
Patients (at period end)............... -- 142 319 691 870
Treatments............................. -- 10,260 33,702 77,919 115,689
Number of facilities (at period end)... -- 4 7 12 13
DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets........ $ 3,543 $ 2,527 $ 5,234 $ 6,059 $ 21,116
Working capital....... 3,503 2,136 3,051 2,389 15,638
Total assets.......... 3,642 4,020 11,815 15,161 30,680
Total debt............ -- 220 6,375 7,743 1,954
Total shareholders'
equity.............. 3,603 3,482 4,164 4,317 23,690
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Renex, which was established in July 1993 and operates through its
wholly-owned subsidiaries, is a high quality provider of dialysis and ancillary
services to patients with ESRD, as well as acute analysis services to patients
in hospitals. Since inception, the Company has implemented an aggressive growth
strategy designed to build the Company's presence in selected regional markets.
A key element of the Company's growth strategy has been to establish local
clusters of dialysis facilities within strong regional networks through new
facility ("DE NOVO") development. 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 occurs twelve to
fifteen months following opening. The Company has increased utilization in its
existing facilities from an average of 41% at December 31, 1994 to an average of
70% at December 31, 1997 primarily through marketing efforts directed at local
nephrologists, patients and managed care organizations. Additionally, Renex has
grown through acquisitions and hospital alliances. 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, 1997, the Company operated 13 outpatient dialysis
facilities, of which nine were opened between 1994 and 1997 through DE NOVO
development. In addition, the Company acquired three facilities in December
1995. In April 1996, the Company acquired the assets of two facilities under
development. The Company opened one of these facilities during the fourth
quarter of 1996 and the second facility is expected to open during the second
quarter of 1998, subject to receipt of applicable state approvals. The Company
sold an additional DE NOVO facility, not included above, in September 1996
because it did not satisfy the Company's strategic objectives.
In addition to its outpatient dialysis facilities, the Company manages two
home hemodialysis programs and provides acute dialysis and hemapheresis
treatments to 12 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, 1996 and 1997, approximately 67% and 74%, 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 the timing and
costs of any acquisitions or DE NOVO facilities.
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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, 1995, 1996 and 1997:
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
--------- --------- -------
Net revenues.................................... 100.0% 100.0% 100.0%
-------- -------- --------
Facilities expenses............................. 77.4 78.8 77.4
General and administrative expenses............. 19.1 14.4 11.5
Provision for doubtful accounts................. 5.6 7.0 3.7
Depreciation and amortization expenses.......... 5.8 8.8 6.3
Operating income (loss)......................... (8.0) (9.0) 1.2
Net interest income (expense)................... (4.1) (4.9) (3.0)
Extraordinary charge for early retirement of
debt............................................ -- -- 5.5
Net loss........................................ (13.5) (13.2) (8.0)
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 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, 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
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, 1997 were $3.0 million compared to $2.7
million for the same period in 1996, representing an increase of 11.6%. 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 14.4% 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 is a
function of 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, 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.
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19
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.
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%.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET REVENUES. Net revenues for the year ended December 31, 1996 were $18.6
million compared to $8.8 million for the same period in 1995, representing an
increase of 111.2%. The increase in net revenues of $9.8 million was primarily
attributable to a full year's net revenues of $4.3 million in 1996 from three
facilities opened in 1995 which only had $900,000 of revenues in 1995, the
acquisition in December 1995 of three facilities representing $3.6 million and
the continued growth at existing facilities of $2.7 million.
FACILITIES EXPENSES. Facilities expenses for the year ended December 31,
1996 were $14.6 million compared to $6.8 million for the same period in 1995,
representing an increase of 114.8%. The increase was due to the greater number
of facilities in operation in 1996. As a percentage of net revenues, facilities
expenses increased to 78.8% for the year ended December 31, 1996 from 77.4% for
the same period in 1995. The increase as a percentage of revenues was due to the
lack of full patient utilization in 1996 at the facilities opened in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the year ended December 31, 1996 were $2.7 million compared to $1.7 million for
the same period in 1995, representing an increase of 59.4%. 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 14.4% for the year ended December 31, 1996
from 19.1% for the same period in 1995. 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, 1996 was $1.3 million compared to $495,000 for the same
period in 1995, representing an increase of 161.2%. As a percentage of net
revenues, the provision for doubtful accounts increased to 7.0% for the year
ended December 31, 1996 from 5.6% for the same period in 1995. This increase was
due to increased revenue, a continuing evaluation of the collectible amounts
outstanding and an increase in Medicare patients without secondary insurance
coverage resulting from the three facilities acquired in December 1995.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the year ended December 31, 1996 were $1.6 million compared to
$509,000 for the same period in 1995, representing an increase of 222.6%. As a
percentage of net revenues, depreciation and amortization expenses increased to
8.8% for the year ended December 31, 1996 from 5.8% for the same period in 1995.
This increase was due to the amortization and write-off of certain intangible
assets associated with the acquisition in 1996 of two facilities under
development and the acquisition and opening of new facilities in 1995.
NET INTEREST INCOME (EXPENSE). Net interest expense for the year ended
December 31, 1996 was $915,000 compared to $360,000 for the same period in 1995,
representing an increase of 154.2%. The increase of $555,000 was primarily due
to the increase in the Company's borrowings for working capital purposes.
Pursuant to the Company's subordinated loan, $6.3 million and $4.8 million were
outstanding as of December 31, 1996 and 1995, respectively.
NET LOSS. The Company had a net loss of $2.4 million for the year ended
December 31, 1996 compared to a net loss of $1.2 million for the same period in
1995, an increase of $1.2 million, or 106.3%.
17
20
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital for maintenance, refurbishing and expansion of
existing facilities, acquisitions, DE NOVO developments, the integration of
newly developed and acquired facilities and working capital and general
corporate purposes. As of December 31, 1997, the Company had working capital of
approximately $15.6 million, of which $9.7 million consisted of cash and cash
equivalents and $5.1 million consisted of available for sale securities,
compared to working capital and cash and cash equivalents of $2.4 million and
$952,000, respectively, at December 31, 1996. The increase in both was primarily
as a result of the net proceeds of $21.6 million from the Company's Offering.
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, the Company's secured line of credit
("Line of Credit") and its equipment lease line ("Lease Line").
Net cash provided by operating activities was $2.4 million for the year
ended December 31, 1997, compared to net cash used in operating activities of
$956,000 for the year ended December 31, 1996. Net cash used in operating
activities consists of the Company's net loss, decreased 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. During 1996, the Company performed an extensive review of its aged
accounts receivable, including those of acquired facilities, and adjusted
amounts to expected collectibility. An increased emphasis upon collections of
aged amounts resulted in the Company improving its days sales outstanding from
89 to 74 days for the years ended December 31, 1996 and 1997, respectively.
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 in investing activities was $7.5 million and $1.6 million for
the years ended December 31, 1997 and 1996, respectively. The large increase in
1997 related primarily to the investment of $5.1 million in securities available
for sale as a result of the Offering. 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 and the cost of
development of additional facilities. The Company opened a DE NOVO facility in
March 1998 and there are two DE NOVO facilities under construction that are
expected to open during the second quarter of 1998. These facilities require
substantial cash outlay for construction of leasehold improvements. The Company
estimates that this balance of construction will cost approximately $1.8
million, of which the Company anticipates paying from the net proceeds of its
Offering. Additionally, the Company estimates that it will purchase
approximately $1.2 million in equipment for these three facilities from the net
proceeds of its Offering.
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 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. Net cash provided by financing activities for the year ended December
31, 1996 was $2.3 million. The principal sources of cash from financing
activities were $1.5 million in proceeds from the Company's subordinated loan
and equity financings aggregating $1.8 million through the sale of Series B
Preferred Stock (net of redemptions) and Common Stock in the year ended December
31, 1996. The proceeds from these financings were reduced by payments of various
debt obligations.
The Company has a $4.0 million secured Line of Credit. Borrowings under the
Line of Credit are limited to 80% of the net collectible value of eligible
accounts receivable. As of December 31, 1997, the borrowing base availability
was approximately $3.9 million. There were no amounts outstanding as of December
31, 1997. The Line of Credit bears interest on the outstanding balance at the
prime rate, plus 2.0%. The Line of Credit is utilized for the development of
dialysis facilities and for working capital and general corporate purposes and
is secured by the Company's accounts receivable. The Line of Credit contains
financial covenants relating to the maintenance of a minimum net worth and
specified net worth to debt ratios. These covenants do not permit the sum of
subordinated debt plus tangible net worth to be less than $6,000,000 and do not
permit the ratio of total liabilities minus subordinated debt divided by
tangible net worth plus subordinated debt to be greater than 1.2:1. As of
December 31, 1997, the Company was in compliance with the financial covenants
contained in the Line of Credit. The Line of Credit also requires the lender's
approval for any acquisitions in
18
21
excess of $5,000,000 in the aggregate in any calendar year and for the payment
of cash dividends. The Line of Credit will continue to be available through its
expiration in August 1998.
The Company also has available a $6.0 million Lease Line with an equipment
financing company. The Lease Line is used primarily to finance dialysis related
equipment and furnishings at the Company's facilities and bears interest at the
five year U. S. Treasury bond yield rate plus 3.91% (9.62% as of December 31,
1997). As of December 31, 1997 and 1996, the Company had borrowed approximately
$1.6 million and $1.5 million, respectively, on the Lease Line. The Lease Line
will continue to be available to the Company through its expiration in August
2001.
In March 1998, the Company signed a commitment letter for a $15 million
facility with a financial institution to be used primarily for working capital
and acquisitions. The financial institution must complete its due diligence and
the terms of the credit agreement must still be finalized. If successfully
negotiated, this facility would replace the Line of Credit and the Lease Line.
The Company's long-term capital requirements will 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, and 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 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.
The Company believes that the net proceeds received from the Offering, together
with the Line of Credit, the Lease Line and internally generated funds, 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, 1997, the Company had approximately $6.8 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 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 will first evaluate Y2K issues related to internal systems used by the
Company through third parties. This committee will then evaluate 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 initial assessments, it
appears that the Company's existing internal software is either Y2K compliant or
that third parties are taking appropriate and timely steps to ensure Y2K
readiness. Testing, modifications and conversions are expected to be completed
by December 31, 1998. Presently, the Company's management does not foresee any
significant costs related to these potential modifications and conversions.
However, this evaluation is only at preliminary stages and no initial evaluation
has been done relating to the Company's payors and operating vendors.
Modifications and conversions of any internal software or by any of the
Company's
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22
significant payors or operating vendors that are ultimately deemed necessary
could have a material adverse impact on the operations of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement 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. Both statements will be
adopted by the Company in 1998. The adoption of these statements will not impact
the Company's result of operations, cash flows or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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23
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, 1996 and 1997...... 23
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997................................ 24
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997.................... 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997................................ 26
Notes to Consolidated Financial Statements........................ 27
21
24
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, 1996 and 1997 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE AND TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 3, 1998
22
25
'
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
1996 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 952,000 $ 9,693,000
Accounts receivable, less allowance for doubtful accounts of
$1,261,000 and $1,252,000, respectively................................. 4,535,000 5,266,000
Securities available for sale............................................. -- 5,057,000
Inventories............................................................... 347,000 433,000
Prepaids and other........................................................ 225,000 667,000
------------- -------------
Total current assets.................................................. 6,059,000 21,116,000
Fixed assets, net........................................................... 6,042,000 7,675,000
Intangible assets, net...................................................... 1,309,000 1,637,000
Notes receivable from affiliates, interest rate at 8% ...................... 85,000 85,000
Other assets, including $1,168,000 in 1996 of deferred financing costs...... 1,666,000 167,000
------------- -------------
Total assets.......................................................... $ 15,161,000 $ 30,680,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 708,000 $ 1,436,000
Accrued expenses and other................................................ 2,393,000 3,600,000
Current portion of long-term debt......................................... 46,000 6,000
Current portion of capital lease obligations.............................. 523,000 436,000
------------- -------------
Total current liabilities............................................. 3,670,000 5,478,000
------------- -------------
Long-term debt, less current portion........................................ 6,184,000 --
------------- -------------
Capital lease obligations, less current portion............................. 990,000 1,512,000
------------- -------------
Commitments
Shareholders' equity:
Common stock, $.001 par value, 30,000,000 shares authorized,
3,970,114 shares - 1996, and 6,974,247 shares - 1997 issued
and outstanding......................................................... 4,000 7,000
Additional paid-in capital.................................................. 9,150,000 30,618,000
Accumulated deficit......................................................... (4,837,000) (6,935,000)
------------- -------------
Total shareholders' equity............................................ 4,317,000 23,690,000
------------- -------------
Total liabilities and shareholders' equity............................ $ 15,161,000 $ 30,680,000
============= =============
See accompanying notes to consolidated financial statements.
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26
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
---- ---- ----
Net revenues......................................... $ 8,794,000 $ 18,569,000 $ 26,073,000
Operating expenses:
Facilities......................................... 6,809,000 14,625,000 20,182,000
General and administrative......................... 1,682,000 2,681,000 2,991,000
Provision for doubtful accounts.................... 495,000 1,293,000 962,000
Depreciation and amortization...................... 509,000 1,642,000 1,635,000
------------- ------------- -------------
Operating income (loss).......................... (701,000) (1,672,000) 303,000
Other income (expense):
Gain (loss) on sale of assets...................... -- 364,000 (27,000)
Net interest income (expense)...................... (360,000) (915,000) (771,000)
Amortization of deferred financing costs........... (126,000) (226,000) (162,000)
------------- ------------- -------------
Loss before extraordinary item....................... (1,187,000) (2,449,000) (657,000)
Extraordinary charge for early retirement of debt.... -- -- (1,441,000)
------------- ------------- -------------
Net loss......................................... $ (1,187,000) $ (2,449,000) $ (2,098,000)
============= ============= =============
BASIC EARNINGS PER SHARE
Loss per share before extraordinary item............. $ (0.61) $ (0.84) $ (0.14)
Extraordinary charge for early retirement
of debt............................................ -- -- (0.31)
------------- ------------- -------------
Net loss............................................. $ (0.61) $ (0.84) $ (0.45)
============= ============= =============
Weighted average shares outstanding.................. 1,944,759 2,930,540 4,672,707
============= ============= =============
DILUTED EARNINGS PER SHARE
Loss per share before extraordinary item............. $ (0.61) $ (0.84) $ (0.14)
Extraordinary charge for early retirement
of debt............................................ -- -- (0.31)
------------- ------------- -------------
Net loss............................................. $ (0.61) $ (0.84) $ (0.45)
============= ============= =============
Weighted average shares outstanding.................. 1,944,759 2,930,540 4,672,707
============= ============= =============
See accompanying notes to consolidated financial statements.
24
27
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
REDEEMABLE REDEEMABLE --------------------
PREFERRED STOCK PREFERRED STOCK NUMBER OF ADDITIONAL ACCUMULATED
SERIES A SERIES B SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
--------------- --------------- --------- ------ --------------- ------- -----
Balance at December 31, 1994.... $ 10,000 -- 1,868,000 $ 2,000 $ 4,635,000 $(1,164,000) $3,483,000
Sale of common stock through
exercise of warrants (net of
expenses of $9,000)......... 45,000 261,000 261,000
Sale of common stock.......... 64,333 386,000 386,000
Stock warrants issued with
debt........................ 150,000 150,000
Issuance of common stock...... 4,667 20,000 20,000
Issuance of common stock for
acquisition................. 376,857 1,000 1,050,000 1,051,000
Net loss...................... (1,187,000) (1,187,000)
---------- ---------- ---------- ---------- ------------- ---------- ----------
Balance at December 31, 1995.... 10,000 -- 2,358,857 3,000 6,502,000 (2,351,000) 4,164,000
Issuance of common stock for
acquisition................. 333,333 790,000 790,000
Sale of common stock (net of
expenses of $21,000)........ 351,007 1,058,000 1,058,000
Issuance of preferred stock... 11,000 1,039,000 1,050,000
Conversion of preferred stock. (10,000) (8,000) 926,917 1,000 47,000 (30,000)
Redemption of preferred stock. (3,000) (286,000) (7,000) (296,000)
Net loss...................... (2,449,000) (2,449,000)
---------- ---------- ---------- ---------- ------------- ---------- ----------
Balance at December 31, 1996.... -- -- 3,970,114 4,000 9,150,000 (4,837,000) 4,317,000
Sale of common stock (net of
expenses of $711,000)........ 3,004,133 3,000 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.... -- -- 6,974,247 $ 7,000 $ 30,618,000 $(6,935,000) $23,690,000
========== ========== ========== ========== ============= ===========- ===========
See accompanying notes to consolidated financial statements.
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28
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
---- ---- ----
Cash Flows from Operating Activities:
Net loss......................................................... $ (1,187,000) $ (2,449,000) $ (2,098,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provisions for doubtful accounts............................... 495,000 1,293,000 962,000
Depreciation and amortization.................................. 509,000 1,642,000 1,635,000
Amortization of deferred financing costs....................... 126,000 226,000 162,000
Loss on sale of fixed assets................................... -- 100,000 27,000
Gain from sale of facility..................................... -- (364,000) --
Extraordinary charge for early retirement of debt.............. -- -- 1,441,000
Changes in operating assets and liabilities:
Accounts receivable.......................................... (2,171,000) (2,135,000) (1,693,000)
Inventories.................................................. (110,000) (75,000) (86,000)
Prepaids and other current assets............................ 78,000 (190,000) (442,000)
Other assets................................................. (302,000) (245,000) 319,000
Accounts payable and accrued expenses........................ 316,000 1,241,000 2,136,000
------------- ------------- -------------
Net cash (used in) provided by operating activities.......... (2,246,000) (956,000) 2,363,000
------------- ------------- -------------
Cash Flows from Investing Activities:
Purchases of fixed assets........................................ (1,505,000) (2,396,000) (1,860,000)
Cash acquired in acquisitions.................................... 130,000 -- --
Proceeds from the sale of fixed assets........................... -- 776,000 36,000
Purchase of securities available for sale........................ (5,057,000)
Purchase of business assets...................................... -- -- (600,000)
------------- ------------- -------------
Net cash used in investing activities........................ (1,375,000) (1,620,000) (7,481,000)
------------- ------------- -------------
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............................ (225,000) (353,000) (953,000)
Proceeds from long-term debt..................................... 5,600,000 1,500,000 --
Proceeds from stock warrants..................................... 150,000 -- --
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..................................... (800,000) (261,000) (6,324,000)
Proceeds from sale of stock through exercise of warrants......... 261,000 -- --
Proceeds from sale of stock...................................... 386,000 2,108,000 21,621,000
Repurchase of warrants........................................... (26,000) -- (150,000)
Payment of deferred financing costs.............................. (1,510,000) -- --
Redemption of preferred stock.................................... -- (296,000) --
Financing charges paid on early retirement of debt............... -- -- (335,000)
------------- ------------- -------------
Net cash provided by financing activities.................... 3,836,000 2,294,000 13,859,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents............... 215,000 (282,000) 8,741,000
Cash and cash equivalents, beginning of period..................... 1,019,000 1,234,000 952,000
------------- ------------- -------------
Cash and cash equivalents, end of period........................... $ 1,234,000 $ 952,000 $ 9,693,000
============= ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest........................................... $ 446,000 $ 971,000 $ 879,000
============= ============= =============
Non-Cash Investing and Financing Activities:
Equipment acquired through capital lease obligations............. $ 970,000 $ 1,267,000 $ 1,383,000
Lease equipment liability........................................ -- 422,000 221,000
Conversion of preferred stock.................................... -- 48,000 --
Stock issued for acquisition..................................... 1,051,000 790,000 --
Issuance of Common Stock......................................... 20,000 -- --
See accompanying notes to consolidated financial statements.
26
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RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Renex Corp., a Florida corporation, was incorporated on July
7, 1993. Renex Corp. and its subsidiaries (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, through wholly-owned subsidiaries, 13 dialysis facilities and two home
dialysis programs in seven states. Additionally, the Company has entered into
acute dialysis service agreements with 12 hospitals to provide dialysis and
hemapheresis treatments on an inpatient basis.
The Company has a limited operating history and had an accumulated deficit
of $6,935,000 through December 31, 1997 and is subject to all the risks inherent
in the establishment of a new business enterprise. The Company's ability to
achieve 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 ("Offering"), raising $21.6 million in net
proceeds. The Company has availability in its lines of credit and will rely on
cash on hand, securities available for sale 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, 1995, 1996 and 1997, the Company
received approximately 59%, 67% and 74%, 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 treatments, 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 to the Company
would 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. Securities available for sale are primarily
comprised of marketable debt securities, including U.S. Government and corporate
debt securities. These investments are stated at their fair value. At December
31, 1997, the fair value of these securities approximated cost.
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, and twenty years for buildings. Leasehold improvements are
amortized over the lesser of lease term or the useful life of the assets.
27
30
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 years using the
straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, including intangiable
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 PER SHARE. Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement requires the presentation of basic and diluted earnings
per share ("EPS"). Basic EPS is computed by dividing net earnings (loss) by the
weighted average number of common shares outstanding. Diluted EPS reflects the
dilutive effect of potential common shares from securities such as stock options
and warrants, but such securities are excluded if their effects would be
antidilutive. All prior year EPS data has been restated to conform with the
provisions of the new statement.
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 EPS because they would have an antidilutive effect on earnings per
share.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
include securities available for sale, receivables, payables, debt and credit
lines. The fair values of such financial instruments have been determined based
on market interest rates as of December 31, 1997. The fair values were not
materially different than their carrying values.
STOCK BASED COMPENSATION. SFAS 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.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components. In June 1997, the FASB also issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement 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. Both statements will be
adopted by the Company in 1998. The adoption of these statements will not impact
the Company's result of operations, cash flows or financial position.
28
31
2. BUSINESS COMBINATIONS
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. Pro forma results of
operations have not been presented because the effects of this acquisition were
not significant.
In April 1996, the Company, through two wholly owned subsidiaries, acquired
two limited liability companies, Central Dialysis Center, L.L.C. and
Metropolitan Dialysis Center, L.L.C., each with an interest in two facilities
under development. The acquisitions have been accounted for under the purchase
method.
Central Dialysis Center, L.L.C. was acquired for 166,666 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.
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. The
Company is in the process of finding a suitable location to build the new
facility. Based on the Company's inability to generate revenue without a
facility and the uncertainty that a location will be found, the Company has
determined the assets to be impaired and, accordingly, has written off the
intangible assets of $437,000.
In December 1995, Dialysis Facilities, Inc. ("DFI"), which operates three
dialysis facilities and two acute dialysis programs in Mississippi and
Louisiana, was acquired by the Company through a wholly owned subsidiary. The
Company issued 376,857 shares of the Company's common stock with an estimated
value of $1,051,000 to DFI shareholders in exchange for all of the outstanding
common stock of DFI. The transaction was accounted for using the purchase method
of accounting. Accordingly, 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, $846,000, was recorded as goodwill.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company's allowance for doubtful accounts are as follows:
DECEMBER 31,
----------------------------------------------
1995 1996 1997
---- ---- ----
Beginning balance...................... $ 93,000 $ 393,000 $ 1,261,000
Provision for doubtful accounts........ 495,000 1,293,000 962,000
Recoveries............................. 106,000
Write-offs............................. (195,000) (425,000) (1,077,000)
------------- ------------- -------------
Ending balance......................... $ 393,000 $ 1,261,000 $ 1,252,000
============= ============= =============
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. The Company also has receivables due
from patients who are self-payors or owe co-payments.
29
32
4. FIXED ASSETS
Fixed assets are summarized as follows:
DECEMBER 31,
------------------------------
1996 1997
---- ----
Building and leasehold improvements...................... $ 4,008,000 $ 5,419,000
Medical equipment........................................ 872,000 1,065,000
Furniture and fixtures................................... 656,000 684,000
Equipment, under capital lease obligations............... 2,170,000 3,553,000
------------- -------------
Total........................................... 7,706,000 10,721,000
Less accumulated depreciation and amortization........... (1,664,000) (3,046,000)
------------- -------------
Fixed assets-- net....................................... $ 6,042,000 $ 7,675,000
============= =============
5. INTANGIBLE ASSETS
Intangible assets are summarized as follows:
DECEMBER 31,
------------------------------
1996 1997
---- ----
Non-compete agreements................................... $ 106,000 $ 165,000
Patient lists............................................ 106,000 106,000
Goodwill................................................. 1,357,000 1,883,000
------------- -------------
1,569,000 2,154,000
Less accumulated amortization............................ (260,000) (517,000)
------------- -------------
Intangible assets -- net................................. $ 1,309,000 $ 1,637,000
============= =============
6. MEDICAL MALPRACTICE INSURANCE
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 $2,000,000 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.
7. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------------------
1996 1997
---- ----
Senior subordinated debt, net of warrants................ $ 6,184,000 $ --
Various notes payable to banks, collateralized by certain
medical and other equipment, accruing interest at
rates ranging from 7.5% to 10%, due in monthly
installments, with maturities ranging from
February 1997 to April 1998................................ 46,000 6,000
------------- -------------
$ 6,230,000 $ 6,000
============= =============
On June 5, 1995, the Company entered into a senior subordinated secured
loan agreement for $12,500,000 with a lender. This loan accrued interest at 13%
and was collateralized by the capital stock of the subsidiaries of the Company.
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 connection with the loan
agreement, the Company recorded approximately $1,510,000 of deferred financing
costs. Such costs were being amortized over the seven year term of the related
debt. In October 1997, the Company completed its Offering netting proceeds of
$21.6 million and used $6.4 million of the net proceeds of the Offering to pay
off the outstanding balance on the loan. In connection therewith, the Company
redeemed the warrants issued with such indebtedness for approximately $422,000
and wrote-off approximately $1 million of unamortized financing costs. See Note
17 - Extraordinary Item.
30
33
8. LINE OF CREDIT
The Company has available a $4,000,000 revolving line of credit ("Line of
Credit") maturing in August 1998 with interest payable monthly at 2% over the
out prime lending rate (10.25% at December 31, 1996 and 10.50% at December 31,
1997). The borrowing base is limited to 80% of the net collectible value of
eligible receivables less than 180 days, aged from the date of service
(approximately $3.9 million at December 31, 1997). As of December 31, 1996 and
1997, the Company had no amounts outstanding under this agreement. The Line of
Credit contains financial covenants relating to the maintenance of a minimum net
worth and specified net worth to debt ratios. The Line of Credit also requires
the lender's approval for any acquisitions in excess of $5,000,000 in the
aggregate in any calendar year and for the payment of cash dividends. As of
December 31, 1997, the Company was in compliance with the financial covenants of
the Line of Credit.
9. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations related to purchase of
equipment for its various facilities under a $6,000,000 lease line of credit
("Lease Line"). Maturities of capital lease obligations for each of the five
years ending December 31 are as follows:
Year Ending Total
----------- -----
1998................................... $ 609,000
1999................................... 609,000
2000................................... 588,000
2001................................... 462,000
2002................................... 90,000
-------------
2,358,000
Less amount representing interest...... (410,000)
-------------
Total.................................. $ 1,948,000
=============
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 and unpaid 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 and unpaid cumulative dividends through the Series B
redemption date of $.034 per share.
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.
31
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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"). All warrants exercised at December 9, 1994, as well as additional
shares purchased to the extent that such warrants were not exercised, entitled
the shareholder to one New Warrant for each share purchased. Each New Warrant
entitles the holder thereof to purchase one share of common stock at an exercise
price of $9.00 per share for four years after issuance. The New Warrants are
redeemable by the Company at a redemption price of $.30 per New Warrant. A total
of 246,201 shares of the Company's common stock have been reserved for the
exercise of the New Warrants. At December 31, 1996 and 1997, none of the New
Warrants had been exercised and 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. Each warrant entitles the
holder to purchase one share of common stock at an exercise price of $6.00 per
share for three years from the date of issuance. At December 31, 1996 and 1997,
none of these warrants have been exercised and 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 for three years from the date of issuance. Compensation expense of $26,600
has been recorded to reflect the fair value of the warrants. At December 31,
1996 and 1997, none of these warrants have been exercised and 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 666,667 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 the annual anniversary date of shareholders' approval of the
director plan. The initial grant date was April 27, 1994. On each 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.
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. All options granted under the Plan to date 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 have a five-year term, but are not exercisable for six
months from the date of grant.
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.
32
35
The following table summarizes stock options activity:
DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1996 1997
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DIRECTORS' PLAN SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of
period................ 5,838 $ 6.00 11,676 $ 6.00 19,347 $ 6.00
Granted............... 5,838 6.00 7,671 6.00 10,669 8.00
--------- ------------ --------- ------------ --------- ------------
Outstanding, end of period 11,676 $ 6.00 19,347 $ 6.00 30,016 $ 6.71
--------- ------------ --------- ------------ --------- ------------
Options exercisable, end of
period................ 11,676 18,513 30,016
--------- ------ ---------
DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1996 1997
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EMPLOYEE PLAN SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- ------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of
period.................. 50,334 $ 6.00 94,501 $ 6.00 165,344 $ 6.00
Granted................. 54,167 6.00 77,510 6.00 159,704 8.00
Cancelled............... (10,000) (6.00) (6,667) -- -- --
--------- ------------ --------- ----------- --------- ------------
Outstanding, end of period 94,501 $ 6.00 165,344 $ 6.00 325,048 $ 6.98
--------- ------------ --------- ------------ --------- ------------
Options exercisable at end
of period............... 23,716 78,184 155,059
--------- --------- ---------
DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1996 1997
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OTHER SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----- ------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of
the period........... 3,334 $ 6.00 36,669 $ 6.00 36,669 $ 6.00
Granted.............. 33,335 6.00 -- 6.00 12,501 8.00
--------- ------------ --------- ------------ --------- ------------
Outstanding, end of the
period............... 36,669 $ 6.00 36,669 $ 6.00 49,170 $ 6.51
--------- ------------ --------- ------------ --------- ------------
Options exercisable at end
of period............ 36,669 36,669 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 1995, 1996 or 1997 related to these plans. The fair value
of each option granted is determined on the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: no
dividend yield, expected volatility of .001, risk-free interest rate of 6.63%
and expected option life of three years. The fair value of the options was
determined to be zero.
13. INCOME TAXES
At December 31, 1997, the Company had tax net operating loss carryforwards
of $6.8 million that expire beginning in 2008 and ending in 2012.
33
36
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December 31,
1996 and 1997 are presented below:
DECEMBER 31,
------------------------------
1996 1997
---- ----
Deferred tax assets
Net operating loss carryforwards.................. $ 2,542,000 $ 2,574,000
Other.............................................. 72,000 313,000
------------- -------------
Total deferred tax assets........................ 2,614,000 2,887,000
Deferred tax liability
Change to accrual method for income tax purposes... 908,000 702,000
------------- -------------
Net deferred tax asset (before valuation allowance).. 1,706,000 2,185,000
Less valuation allowance............................. (1,706,000) (2,185,000)
------------- -------------
Net deferred tax asset............................... $ -- $ --
============= =============
14. 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 ($9,500 in 1997). 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 year ended
December 31, 1997 was $43,000.
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.
15. RELATED PARTY TRANSACTIONS
The Company is a party to the following transactions with related parties by
virtue of common ownership:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
---- ---- ----
Legal fees....................... $ 82,000 $ 133,000 $ 260,000
Insurance expense................ 50,000 6,000 75,000
Rent expense..................... 46,000 109,000 180,000
Leasehold expenditures........... -- 427,000 175,000
16. COMMITMENTS
COMMITMENTS. The Company leases facility space and equipment under
noncancelable operating leases. Minimum annual lease payments under these leases
are as follows:
YEAR ENDING AMOUNT
----------- ------
1998............................. $ 1,278,000
1999............................. 1,123,000
2000............................. 909,000
2001............................. 795,000
2002............................. 556,000
Thereafter....................... 4,925,000
-------------
Total............................ $ 9,586,000
=============
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37
Rental expense under these operating leases was $753,000, $1,046,000 and
$1,222,000 (of which $245,000, $257,000 and $209,000, respectively, relate to
equipment leases for patient care and are included in facilities expenses) for
the years ended December 31, 1995, 1996 and 1997, respectively.
As of December 31, 1997, the Company was completing construction of three DE
NOVO facilities. These three facilities will require capital expenditures
relating to leasehold improvements and equipment approximating $3.0 million.
Additionally, lease agreements ranging from five to 20 years contain minimum
annual lease payments ranging from $63,000 to $175,000.
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 give
rise to material liability.
17. EXTRAORDINARY ITEM
In October 1997, as part of the use of proceeds of its Offering, the Company
satisfied a subordinated loan which had an outstanding balance of $6.3 million.
In connection with the early extinguishment of this debt, the Company recognized
an extraordinary charge of approximately $1.4 million consisting of the
following:
Write-off of related unamortized financing costs...... $ 1,006,000
Prepayment finance charge on loan..................... 63,000
Unamortized discount on loan.......................... 100,000
Redemption of warrants costs.......................... 272,000
-------------
Extraordinary charge for early retirement
of debt......................................... $ 1,441,000
=============
18. SUBSEQUENT EVENTS
In March 1998, the Company entered into a definitive agreement to acquire
certain assets of a privately held dialysis service company in the southeast
with four facilities treating approximately 180 patients. The purchase price of
$4.5 million was paid in cash at closing on March 27, 1998.
In March 1998, the Company signed a commitment letter for a $15 million
facility with a financial institution to be used primarily for working capital
and acquisitions. The financial institution must complete its due diligence and
the terms of the credit agreement must still be finalized. If successfully
negotiated, this facility would replace the Line of Credit and the Lease Line.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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, 1997:
NAME AGE POSITION
- ------------------------- --- --------------------------------------------
Milton J. Wallace(1)..... 62 Chairman of the Board
Arthur G. Shapiro, M.D.(1) 59 Vice Chairman of Board, Director of Medical
Affairs
James P. Shea(1)......... 56 President, Chief Executive Officer, Director
Orestes L. Lugo.......... 39 Vice President-- Finance, Chief Financial
Officer
Patsy L. Anders.......... 53 Vice President-- Business Development
Mignon B. Early.......... 34 Vice President-- Operations
Jeffery C. Finch......... 36 Vice President
Eugene P. Conese, Sr.(2). 67 Director
C. David Finch, M.D...... 38 Director
John E. Hunt, Sr.(2)..... 79 Director
Charles J. Simons(2)(3).. 79 Director
Mark D. Wallace.......... 29 Director, Secretary
Jeffrey H. Watson(3)..... 39 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, 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 1993. Home Intensive Care, Inc. was acquired by W.R. Grace & Co.
in July 1993. Mr. Wallace is Chairman of the Board of Med/Waste, Inc., a
provider of medical waste management services. 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 serves as Chairman of the Board of Bankers Savings Bank, Coral Gables,
Florida and as 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.
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39
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 has been a private investor since September 1997. 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 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 Arrow Air, Inc., a cargo air carrier; Bessemer Trust of Florida, an
investment management firm; Calspan Corporation, an aerospace company; and a
number of private companies. He was also a Director of Home Intensive Care, Inc.
from 1988 until July 1993. Mr. Simons is the Chairman of the Board of the
Matthew Thornton Health Plan. From 1985 until 1992, he was a Director of General
Development Corp., now known as Atlantic Gulf Development Corp., a real estate
development company, and became Chairman of the Board and Chief Executive
Officer just prior to that company's Chapter 11 bankruptcy filing in April 1990.
Mr. Simons resigned all positions prior to that company's emergence from
bankruptcy in 1992.
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 and Anderson, 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
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40
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.
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 1998, 1999 and 2000,
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 and Jeffrey H. Watson. 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.
Non-employee directors do not currently receive any cash compensation for
service on the Board of Directors, but received reimbursement of expenses.
Non-employee directors receive annual grants of options under the Directors
Stock Option Plan ("Directors Plan") described below. In addition, Milton J.
Wallace and Dr. Shapiro, as compensation for services rendered to the Company,
each received options to purchase 16,667 shares of Common Stock in April 1995.
Such options have an exercise price of $6.00 per share and are exercisable
through April 2000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 1997.
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41
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 who received compensation in excess of $100,000 for such period (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 1997 $ 128,465 $ -- $ 8,630 33,334
President and CEO 1996 110,000 -- 5,160 13,334
Orestes L. Lugo 1997 $ 114,617 $ -- $ 7,110 26,667
Vice President--Finance 1996 102,500 4,000 5,160 11,667
and CFO
- ----------
(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. Following the Offering, the
Named Executive Officers' annual salaries were increased to $190,000 for Mr.
Shea and $155,000 for Mr. Lugo. See "Employment Agreements" below.
STOCK OPTION GRANTS. The following table sets forth information concerning
grants of stock options to each of the Named Executive Officers during the year
ended December 31, 1997:
OPTIONS GRANTED IN LAST FISCAL YEAR
Individual Grants
--------------------------------------------------------------------------- Potential Realizable
Value at Assumed
Annual Rate of
Number of % of Total Options Stock Price Appreciation
Securities Granted to Exercise or for Option Term ($)(3)
Underlying Options Employees in Fiscal Base Price Expiration ------------------------
Name Granted(#)(1) Year ($/Share) Date 5% 10%
- -------------------------------------------------------------------------------------------------------------- -------------
James P. Shea 33,334 21% $8.00 4/21/02 $ 73,700 $ 162,800
Orestes L. Lugo 26,667 17% $8.00 4/21/02 58,900 130,200
- ----------
(1) All such options were granted pursuant to the 1994 Employee Stock Option
Plan. Options granted during fiscal year 1997 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.
(2) Based on an aggregate of 159,704 options granted to employees in 1997,
including the Named Executive Officers.
(3) 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.
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42
YEAR-END OPTION HOLDINGS. The following table sets forth certain aggregated
option information for the Named Executive Officers for the year ended December
31, 1997:
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 32,085 34,584 -- --
Orestes L. Lugo 18,751 27,917 -- --
- ----------
(1) No options were exercised by the above Named Executive Officers during the
fiscal year ended December 31, 1997.
(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, 1997 of $5.25 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 employment
agreements provide for base salaries of $190,000 and $155,000 for Mr. Shea and
Mr. Lugo, respectively. Base salary for each officer is increased on the
anniversary of each year 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. Each employment agreement is
automatically renewed for two years at the end of the initial term and each
extended term, unless either party provides notice of termination at least 90
days prior to the expiration of such term. If either officer is terminated
without cause during the term of their respective agreements, such officer will
be entitled to severance equal to the greater of the remaining base salary due
under the agreement or one year's base salary.
Both Mr. Shea and Mr. Lugo 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 up to 100% of their respective
base salaries upon the achievement of established goals and criteria.
The respective employment agreements grant to each of Mr. Shea and Mr. Lugo
the right to terminate his employment agreement within 90 days 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 had it not been
terminated; or (ii) two years base salary. Such change of control severance is
payable 50% in cash on the effective date of such termination, with the balance
payable over a six month period. 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
In April 1994, the Company's shareholders approved 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 666,667 shares of Common
Stock reserved for issuance upon the exercise of options which may be granted,
including 325,048 shares subject to outstanding options.
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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 vested 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 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, 1997, options to purchase a total of 325,048 shares of
Common Stock, with a weighted average exercise price of $6.98, have been granted
to executive officers and other employees of the Company. Each option granted
has a term of five years. Options are not exercisable until six months after the
date of grant and vest 25% at the end of six months and 25% on each anniversary
of such grant until 100% are vested.
DIRECTORS PLAN
In April 1994, the Company's shareholders adopted 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 30,016 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. On April 27 of each year, each Eligible Director
receives 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.
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, 1997, options to purchase 30,016 shares of Common Stock,
with a weighted average exercise price of $6.71 per share, have been
automatically granted to Eligible Directors as a group.
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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 ($9,500 in 1997). 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, 1997 and new hires who thereafter 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.
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, 1997,
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)
-------------------------------------------- --------------------- ---------------------
Arthur G. Shapiro, M.D.(4).............. 769,759 11.0%
Milton J. Wallace(5).................... 744,558 10.7
James P. Shea(6)........................ 216,688 3.2
C. David Finch, M.D.(7)................. 195,947 2.8
John E. Hunt, Sr.(8).................... 80,987 1.2
Orestes L. Lugo(9)...................... 60,403 *
Charles J. Simons(10)................... 34,187 *
Eugene P. Conese, Sr.(11)............... 22,334 *
Mark D. Wallace(12)..................... 15,336 *
Jeffrey H. Watson(13)................... 7,002 *
All executive officers and directors as group
(13 persons)(14)...................... 2,283,666 32.7%
- ----------
* Less than one percent.
(1) Unless otherwise indicated, the address for each beneficial owner is c/o
the Company at 2100 Ponce de Leon Boulevard, Suite 950, 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, 1997 upon the exercise of
options or warrants.
(3) Based upon 6,974,247 shares of Common Stock issued and outstanding. 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) 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) 21,669 shares
of Common Stock issuable upon exercise of stock options; (iii) 106,122
shares of Common Stock (including 8,655 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; and (iv) 3,750 shares
of Common Stock issuable upon exercise of Series B Warrants owned by Dr.
Shapiro's Individual Retirement Account.
(5) Mr. Wallace's address is 2222 Ponce de Leon Boulevard, Coral Gables,
Florida 33134. 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
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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) 20,836 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.
(6) Except as set forth herein all shares are owned jointly by Mr. Shea and
his wife. Includes: (i) 32,087 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 3,750 shares of Common Stock issuable upon exercise of stock
options.
(8) Includes: (i) 3,669 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.
(9) Includes: (i) 18,752 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.
(10) Includes: (i) 5,002 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: (i) 2,334 shares of Common Stock issuable upon exercise of
stock options; and (ii) 5,000 shares of Common Stock issuable upon
exercise of warrants.
(12) Includes 3,336 shares of Common Stock issuable upon exercise of stock
options.
(13) Includes 4,002 shares of Common Stock issuable upon exercise of stock
options.
(14) Includes: (i) 148,357 shares of Common Stock issuable upon exercise of
options; (ii) 58,336 shares of Common Stock issuable upon exercise of
warrants; and (iii) 54,488 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.
C. David Finch, M.D. owed DFI approximately $85,000 at the time of DFI's
acquisition by the Company evidenced by a note. C. David Finch, M.D. is
obligated to repay the Company over a three-year period with interest at the
rate of 8% per annum. Such repayments may come from any bonuses C. David Finch,
M.D. may earn in connection with his employment as a medical director with the
Company. The balance of the note, if not then paid, will be payable upon demand
by the Company at the end of three years. As of December 31, 1996 and 1997,
approximately $85,000 in principal remained unpaid, together with accrued
interest of $6,800 and $13,600 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, Fodiman & Shannon, P.A. The law
firm serves as general counsel to the Company for which the firm received
$260,000 during 1997.
John E. Hunt, Sr., a Director of the Company, is Chairman of the Board of
Directors of Hunt Insurance Group, Inc., an insurance agency. Hunt Insurance
Group, Inc. arranges for various types of insurance policies for the Company and
receives commissions as a result of such policies.
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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 7.
(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
- ------ -----------
*2 -- Agreement and Plan of Merger by and between Renex Corp., Renex
Acquisition Corp., Dialysis Facilities, Inc., C. David Finch,
Jr., Charles D. Finch, Sr., and Jeffery C. Finch dated December
29, 1995
*3.1 -- Articles of Incorporation of the Company
*3.2 -- By-Laws of the Company
*4.1 -- Specimen Certificate of Common Stock
*4.2 -- Form of Representatives' Warrant Agreement
*10.1 -- Employment Agreement dated April 22, 1997 by and between Renex
Corp. and James P. Shea
*10.2 -- Employment Agreement dated April 22, 1997 by and between Renex
Corp. and Orestes L. Lugo
*10.3 -- Loan and Security Agreement by and between DVI Business as of
August 23, 1996
*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
11.1 -- Computation of per share earnings
21.1 -- Subsidiaries of the Company
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (Restated) (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.
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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 27, 1998 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 27, 1998
---------------------------- Of Directors
Milton J. Wallace
/s/ ARTHUR G. SHAPIRO, M.D. Vice Chairman of the Board March 27, 1998
---------------------------- Director of Medical Affairs
Arthur G. Shapiro, M.D.
/s/ JAMES P. SHEA President/CEO, Director March 27, 1998
----------------------------
James P. Shea
/s/ MARK D. WALLACE Director March 27, 1998
----------------------------
Mark D. Wallace
/s/ EUGENE P. CONESE, SR. Director March 27, 1998
----------------------------
Eugene P. Conese, Sr.
/s/ C. DAVID FINCH, M.D. Director March 27, 1998
----------------------------
C. David Finch, M.D.
/s/ JOHN E. HUNT, SR. Director March 27, 1998
----------------------------
John E. Hunt, Sr.
/s/ JEFFREY H. WATSON Director March 27, 1998
----------------------------
Jeffrey H. Watson
/s/ CHARLES J. SIMONS Director March 27, 1998
----------------------------
Charles J. Simons
/s/ ORESTES L. LUGO Vice President/Chief March 27, 1998
---------------------------- Financial and Principal
Orestes L. Lugo Accounting Officer
45