SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from _________to_________
Commission file number: 1-10261
VIVRA INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 94-3096645
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1850 Gateway Drive, Suite 500, San Mateo, California 94404
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (415) 577-5700
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of 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 the voting stock held by non-affiliates of
the registrant on January 31, 1997, based on the closing price on the New York
Stock Exchange, was: $1,233,685,320.
Number of shares of Common Stock outstanding on January 31, 1997:
40,448,699
Documents Incorporated By Reference
Definitive Proxy Statement for the Company's May 9, 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (incorporated in Part III hereof to the extent indicated in
Items 10, 11, 12 and 13 hereof).
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PART I
Item 1. Business.
Overview
Vivra Incorporated ("Vivra" or the "Company") is a specialty care company.
The Company's business strategy is to compete in specialties/disease states
where Vivra can demonstrably deliver differentiated care to high-cost patient
populations. The Company provides services through Vivra Renal Care ("VRC") and
Vivra Specialty Partners ("VSP"). VRC is the second largest provider of dialysis
services in the United States and, as of November 30, 1996, had approximately
14,400 patients at 251 centers in 28 states and the District of Columbia. VSP
provides physician network and disease management services to entities
responsible for coordinating health care for a patient population, principally
managed care organizations. VSP coordinates care in multiple specialties,
including asthma/allergy, cardiology, diabetes, dialysis/nephrology,
otolaryngology ("ENT"), obstetrics/gynecology and orthopedics. In these
specialties, VSP currently provides services for approximately 4.6 million
"Specialty Lives" through 44 contracts and also owns 32 specialty practices with
97 physicians and manages one additional specialty practice with 15 physicians.
When used in this Report on Form 10-K, the words "estimate," "project" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including those
discussed in the Risk Factors section below, that could cause actual results to
differ materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.
RISK FACTORS
Grand Jury Subpoena. On December 18, 1996, the Company received from the
United States Attorney for the District of Massachusetts a grand jury subpoena
which calls for records pertaining to the operations of VRC. The subpoena
appears to focus on VRC's previous relationship with Damon Clinical Laboratories
and other affiliated entities, as well as utilization patterns and procedures
pertaining to clinical laboratory blood tests billed to the Medicare and/or
Medicaid programs. In connection with the receipt of this subpoena, the Company
has been advised that VRC is now a subject of the United States Attorney's
investigation. The Company intends to cooperate with the United States Attorney
in connection with this investigation. The investigation is in the preliminary
stage and, as a result, management currently is unable to predict the ultimate
resolution of such investigation or its impact on the Company's results of
operations.
Medicare and Medicaid Dialysis Reimbursement. The Company estimates that
approximately 72% of its dialysis revenues, including revenues from the
reimbursement of the administration of the drug erythropoietin ("EPO"), for
fiscal 1995 and 1996, respectively, were reimbursements from Medicare and
Medicaid under the End-Stage Renal Disease ("ESRD") program administered by the
Health Care Financing Administration ("HCFA"). Numerous Congressional actions
have resulted in changes in the average Medicare reimbursement rate from a fixed
fee of $138 per treatment in 1983, to a current average rate of $126. The
Medicaid programs are also subject to statutory and regulatory changes that
could affect the rate of Medicaid reimbursement. The Company is not able to
predict whether and to what extent changes to Medicare and Medicaid
reimbursement rates will be made in the future, including the impact of
potential legislative measures regarding welfare reform, the Medicare trust fund
deficit, the health care delivery system and the approval of a federal budget.
Any reduction in reimbursement rates would have a material adverse effect on the
Company's revenues and net earnings. See "Business--Vivra Renal Care."
In March 1996, HCFA published a request for proposals from managed care
companies to arrange for the treatment of ESRD patients on a large scale. While
the Company is unable to predict the effect of the introduction of managed care
on dialysis services, such introduction could result in a reduction in the rates
of reimbursement for the Company's services. The Company may also be required to
enter into contracts directly with managed care providers.
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EPO Reimbursement and Supply. Since June 1, 1989, Medicare and Medicaid
have provided reimbursement for the administration of EPO to dialysis patients
for the treatment of anemia. During fiscal 1995 and 1996, approximately 87% and
89%, respectively, of the Company's dialysis patients received EPO. The
Company's revenues from the administration of EPO were approximately $54.4
million and $83.3 million, respectively, or 17% and 20% of dialysis revenues,
for those periods. Effective January 1, 1994, Medicare and Medicaid
reimbursement for the administration of EPO was reduced from $11.00 to $10.00
per 1,000 units. Any further reduction in the reimbursement rate for the
administration of EPO could have a material adverse effect on the Company's
revenues and net earnings. In addition, EPO is produced by a single manufacturer
and any interruption of supply could have a material adverse effect on the
Company's revenues and net earnings.
Other Sources of Dialysis Reimbursement. The Company estimates that
approximately 28% of its dialysis revenues for fiscal years 1995 and 1996 was
derived from sources other than Medicare and Medicaid. Of these revenues, the
largest portion came from private insurance, including managed care
organizations. Reimbursement from hospitals for acute dialysis treatments was
also significant. In general, these sources of reimbursement are at rates
significantly in excess of Medicare and Medicaid rates. The percentage of the
costs of dialysis care required to be assumed by private payers may change as
the existing ESRD program is reviewed by the United States Congress. Under
current regulations, private insurance must pay for up to the first 21 months of
dialysis treatment before Medicare reimbursement begins. This requirement is
scheduled to expire in October 1998, at which time private insurance will only
be required to pay for up to the first 15 months of dialysis treatment. The
budget proposed by the Clinton administration would make the current regulations
permanent, but there can be no assurance that the payment obligations of private
insurance will not change. Notwithstanding any legislative action, the Company
expects that non-governmental payers will reduce payment for dialysis services.
In addition, as managed care organizations expand, they will have a strong
incentive to further reduce the costs of specialty care and will aggressively
seek to reduce amounts paid for dialysis treatments. If private payer rates are
reduced or are no longer subject to price increases or their payment obligation
period is shortened, this would have a material adverse effect on the Company's
revenues and net earnings.
Capitated Agreements. The Company believes it will be necessary to contract
with managed care payers on a capitated or at-risk basis in order to maintain or
expand the businesses of VRC and VSP. The Company currently has and intends to
enter into additional capitated agreements. Under capitated or at-risk
contracts, the health care provider agrees to provide care for a fixed rate
based on the number of health care plan members, regardless of the amount of
care required. To the extent that health care plan members require more care
than anticipated, the capitation rate received may be insufficient to cover the
costs associated with the provided services. The Company would, directly or
indirectly, be forced to absorb some of these excess costs, which could have a
material adverse effect on the Company's revenues and net earnings.
Operating Margins. There can be no assurance that the Company will be able
to maintain its historical operating margins in its dialysis business. The
Company's costs are subject to continuing increases as a result of rising labor
and supply costs, opening and start-up expenses for new dialysis centers, the
development of new managed care products and general inflation. At the same
time, reimbursement rates for dialysis treatments, from both public and private
payers, depend on a number of factors and may remain flat or be reduced, as many
payers are seeking to reduce the amounts paid for dialysis services. The Company
is attempting to maintain its operating margins through increased productivity
and various cost containment programs; however, there can be no assurance that
its operating margins will not decline in the future.
VSP has a limited operating history and to date has not been profitable.
The specialty network and physician practice management business is rapidly
evolving, and there can be no assurance that VSP will ever achieve
profitability. In addition, even if VSP's planned operating margins are
achieved, the Company believes that they will be significantly lower than those
in its historical dialysis business.
Limitations on Growth. The dialysis industry is highly competitive with
respect to the acquisition of existing dialysis facilities and the recruitment
of medical directors for new centers. In the past two years, acquisition prices
and the competition for medical directors and new facilities have increased. To
the extent that the Company is unable to acquire existing dialysis facilities
economically, to develop facilities profitably or to recruit medical directors
to operate
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its facilities, its ability to expand its dialysis business and maintain
earnings per share growth and return on total capital would be adversely
impacted.
The Company intends to expand VSP significantly through the acquisition and
development of related businesses, primarily specialty physician networks and
practices. This expansion will require significant capital commitments, and may
result in the recognition of operating losses. The Company is incurring
expenditures to develop its infrastructure and systems for VSP in anticipation
of significant growth. In addition, there are a number of factors outside the
Company's control which may delay or hinder the expansion of VSP's operations,
including acceptance of the Company's services by physicians and payers. To the
extent VSP's operations do not expand as planned and the Company does not
realize revenues sufficient to offset such increased expenses, the Company's
operating margins will be adversely affected and VSP may experience delays in
attaining profitability or may never become financially viable. Further, VSP may
not realize revenue and operating margins as predictable as those historically
provided by VRC.
Certain companies, some of which have longer operating histories and
greater financial resources than those of VSP, are providing services similar to
those that VSP is providing or pursuing. VSP may be forced to compete with these
entities for acquisitions, network and management contracts and, in some cases,
the employment of practice physicians. There can be no assurance that VSP will
be able to compete effectively with such competitors, that additional
competitors will not enter VSP's markets, or that such competition will not make
it more difficult to expand in such markets on terms beneficial to VSP. See
"Business--Competition."
Limited Operating History of VSP and Integration of Operations. Since
February 1996, VSP has grown aggressively, principally through acquisitions. VSP
will continue to pursue an aggressive growth strategy that includes both
acquisitions and the marketing of network services to payers ("Development
Activities"). VSP negotiates payer contracts to provide specialty physician
care, then acquires or develops specialty physician networks to service the
contracts and in some instances acquires physician practices. The process of
obtaining payer contracts, acquiring or establishing appropriate networks, and
developing management services, administrative organizations, facilities,
management information systems and other aspects of operations, while managing a
larger and geographically expanded entity, presents a significant challenge to
the management of Vivra and VSP, and there can be no assurance that the Company
will be successful in these efforts. The dedication of management resources to
such integration may detract attention from the day-to-day operations of Vivra
and VRC. The difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. There
can be no assurance that there will not be substantial unanticipated costs
associated with such activities or that there will not be other material adverse
effects of these Development Activities. See "Business--Vivra Specialty
Partners."
Dependence on Key Personnel and Physicians. The Company is dependent on
certain key senior management personnel, the loss of any of whom could have an
adverse effect on the Company's business. In addition, the Company will need to
continue to attract and retain highly skilled health care executives, the
competition for whom is intense.
The Company's dialysis facilities depend upon their Medical Directors and
to a lesser extent local nephrologists and other physicians for referrals of
ESRD patients for treatment. As is generally true in the dialysis industry, at
each facility one or a few physicians account for all or a substantial portion
of the patient base. The loss of one or more key physicians at a particular
facility could have a material adverse effect on the operations of that
facility, and the loss of a significant number of physicians could adversely
affect the Company's overall operations.
VSP is dependent upon its affiliations with physicians. Moreover, the
Company believes that its future success will be dependent largely on its
ability to attract and retain qualified physicians. VSP has entered into
management, provider and/or employment agreements with physicians, a significant
number of whom have the right to terminate their individual employment
relationship with limited or no notice. In the event that a significant number
of such physicians terminate their employment or become unable or unwilling to
continue in their roles and the Company is unable to find suitable replacements
in a timely manner, this would have a material adverse effect on the Company's
revenues and net earnings.
Governmental Regulation. The Company is subject to extensive federal and
state regulation regarding, among other things, fraud and abuse, health and
safety, environmental compliance and toxic waste disposal.
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The illegal remuneration provisions of the Social Security Act and similar
state laws impose civil and criminal sanctions. These sanctions include
disqualification from participation in the Medicare and Medicaid programs for
persons who solicit, offer, receive or pay any remuneration, directly or
indirectly, for referring a patient for treatment which is paid for in whole or
in part by Medicare and Medicaid or for otherwise generating revenues reimbursed
by either of these programs. In July 1991 and in November 1992, the federal
government published final regulations that provide exceptions or "safe harbors"
from the illegal remuneration prohibitions for certain business transactions.
Transactions that satisfy the criteria under the applicable safe harbors are
deemed not to violate the illegal remuneration provisions. The Company seeks to
comply with the safe harbors where possible. Due to the breadth of the statutory
provisions and the absence in certain instances of regulations or court
decisions addressing many of the specific arrangements by which the Company
conducts its business, it is possible that the Company's practices might be
challenged under these laws. The Office of Inspector General (the "OIG") of the
Department of Health and Human Services ("HHS") has previously published
warnings that the industry-wide practices of obtaining discounts on certain
laboratory charges and the payment of remuneration for intradialytic parenteral
nutrition ("IDPN") therapy at dialysis centers may violate certain statutory
provisions. The Company believes that it has a reasonable basis for continuing
these practices and that, if challenged by the OIG, it could defend these
practices. However, there can be no assurance that the Company will not be
required to change one or more of these practices or be subject to sanctions.
The Company's revenues and net earnings would be adversely affected as a result
of any such change or sanctions. The Company believes it complies in all
material respects with these and all other applicable laws and regulations. See
"--IDPN Therapy and Laboratory Services."
The Health Insurance Portability and Accountability Act of 1996, Public Law
104-191 (the "Kennedy-Kassebaum Bill" or the "Act"), which became effective
January 1, 1997, substantively changed federal fraud and abuse laws related to
health care by expanding their reach to all federal health care programs,
establishing new bases for exclusion from participation in Medicare and Medicaid
programs and mandating minimum exclusion terms for those found to have violated
the Act, creating an additional exception to the anti-kickback penalties for
risk-sharing arrangements, requiring the Secretary of HHS to issue advisory
opinions, increasing civil monetary penalties to $10,000 (from $2,000) per item
or service and assessments to three (from two) times the amount claimed,
creating a specific health care offense and related health fraud crimes, and
expanding investigative authority and sanctions applicable to health care fraud.
In addition to establishing minimum periods of exclusion from government
health programs for an entity found to have violated the Act, the law also
authorizes exclusion of an individual with a direct or indirect ownership or
control interest in a sanctioned entity if the individual "knows or should know"
of the activity leading to the conviction or exclusion of the entity or where
the individual is an officer or managing employee of the entity. The Act adds a
number of offenses punishable by imposition of civil monetary penalties,
including: presenting a claim based on a medical procedure code that the person
knows or has reason to know will result in greater payments than appropriate;
submitting a claim that the person knows or has reason to know is for medical
services that are not medically necessary; and offering remuneration to an
individual eligible for Medicare or Medicaid benefits to induce that individual
to order or receive from a particular provider, practitioner or supplier any
item or service reimbursable under Medicare or Medicaid.
Although the Company believes that it is generally in compliance with all
provisions of the Kennedy-Kassebaum Bill, under certain circumstances the
Company's program of assisting dialysis patients in financial need by paying
their health insurance premiums could be construed as a violation of the Act.
The Company's program for payment of health insurance premiums is consistent
with what both independent and other chain dialysis companies were doing and are
continuing to do subsequent to the effective date of the Kennedy-Kassebaum Bill.
The Company believes that the Act was not intended to prohibit this type of
program, and the Company is working with other dialysis providers to obtain a
technical correction to the Act to eliminate any issues concerning the program
thereunder. However, there can be no assurance that the Company will not be
required to discontinue this program or be subject to sanctions or monetary
penalties with respect thereto. If the Company is precluded from assisting
patients through payment of health insurance premiums, this, along with any
sanctions or monetary penalties, would have an adverse effect on the Company's
revenues and net earnings.
Under both the Omnibus Budget Reconciliation Act of 1993 ("Stark II") and
certain state legislation, it is unlawful for a physician to refer patients for
certain designated health services to an entity with which the physician has a
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financial relationship. The Company believes that the language and history of
Stark II indicate that Congress did not intend to include dialysis services and
certain services and items provided incident to dialysis services within the
legislative prohibition. However, certain services, including prescription
drugs, clinical laboratory services and parenteral and enteral nutrients,
equipment, and supplies, even when provided in conjunction with dialysis
services, could be construed as designated health services within the meaning of
Stark II. Due to the breadth of the statutory provisions and the absence of
regulations or court decisions addressing the specific arrangements by which the
Company conducts its business, it is possible that certain of the Company's
practices might be challenged under these laws which could result in civil
penalties, including exclusion or suspension of the Company from future
participation in Medicare and Medicaid programs, and substantial fines. Although
there can be no assurance, the Company believes that if Stark II is interpreted
to apply to the Company's operations, the Company will be able to bring its
financial relationships with referring physicians into material compliance under
the provisions of Stark II, including relevant exceptions. If Stark II is
broadly interpreted by HCFA to apply to the Company and the Company cannot
achieve material compliance, it could have a material adverse effect on the
Company's revenues and net earnings.
The health care industry and physicians' medical practices are highly
regulated at the federal and state levels. Because of the uniqueness of the
structure of the relationships between the Company and the physician groups and
its networks and the nature of the Company's business, there can be no assurance
that review of the Company's business by courts or health care, tax, labor and
other regulatory authorities will not result in determinations or actions,
including decertification or disqualification from eligibility to receive
reimbursement from Medicare or Medicaid, that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change in a manner that would restrict the Company's existing operations or
limit the expansion of the Company's business or otherwise adversely affect the
Company. Many state laws restrict the unlicensed practice of medicine, the
splitting or sharing of fees with non-physician entities and the enforcement of
non-competition agreements. Increased attention has been devoted to the
application of federal and state antitrust laws to physician networks and
provider agreements. For example, federal law prohibits conduct that may result
in price-fixing or other anticompetitive conduct. Although management of the
Company believes the operations of the Company are in material compliance with
existing law, there can be no assurance that the Company's existing agreements
with its physicians, including service agreements or network agreements, will
not be successfully challenged. See "Business--Governmental Regulation."
IDPN Therapy and Laboratory Services. IDPN is a nutritional supplement
administered during dialysis to patients suffering from nutritional
deficiencies. In early 1993, HCFA designated four durable medical equipment
regional carriers (the "DMERCs") to process reimbursement claims for IDPN
therapy. These DMERCs have denied most new claims and, in May 1995, the Company
limited administration of this therapy to patients who were grandfathered
(received authorization for coverage prior to early 1993) or who have private
insurance. In April 1996, the DMERC's established new, more stringent medical
qualification criteria for reimbursement of IDPN therapy. These criteria have
substantially reduced the number of ESRD patients who now qualify for IDPN
reimbursement by Medicare.
The OIG has published warnings to the dialysis services industry generally
that it believes that the industry-wide practices of obtaining discounts on
certain laboratory charges and the payment of remuneration for services provided
for IDPN therapy at dialysis centers violate the anti-kickback statute in many,
if not most, circumstances. The Company believes that it has a reasonable basis
for practices which the OIG may regard as within the scope of the warnings and
that, if challenged by the OIG, it could defend these practices. However, there
can be no assurance that the Company will not be challenged under the statutes
or subject to sanctions. Any challenge, including any sanctions, would have an
adverse effect on the Company's revenues and net earnings.
National Health Care Reform. There is significant national concern today
about the availability and rising cost of health care in the United States. It
is anticipated that new federal and/or state legislation will be passed and
regulations adopted to attempt to provide broader and better health care
coverage and to manage and contain its cost. The Company is unable to predict
the content of any legislation or what, if any, changes may occur in the method
and rates of its Medicare and Medicaid reimbursement or in other government
regulations that may affect its businesses, or, whether such changes, if made,
would have a material adverse effect on its revenues and net earnings.
Possible Volatility of Stock Price. There has been volatility in the market
price of securities of health care companies. Future announcements concerning
the Company or its competitors, including governmental regulations,
reimbursement changes, litigation, or other developments, as well as changes in,
or the failure by the Company to meet,
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estimates of securities analysts, may have a significant impact on the
market price of the Company's Common Stock. In addition, broad market
fluctuations and general economic or political conditions may adversely affect
the market price of the Company's Common Stock, regardless of the Company's
actual performance. See "Business--Competition" and "--Governmental Regulation."
Anti-Takeover Provisions. The Company's Restated Certificate of
Incorporation and the Delaware General Corporation Law (the "General Corporation
Law") contain provisions that may have the effect of making more difficult or
delaying attempts by others to obtain control of the Company, even when these
attempts may be in the best interest of stockholders. The General Corporation
Law also imposes conditions on certain business combination transactions with
"interested stockholders" (as defined therein). In addition, the Company has
issued to its holders of Common Stock, pursuant to a stockholders rights plan,
rights that will cause substantial dilution to a person or group that attempts
to acquire the Company on terms not approved by the Company's Board of
Directors.
Vivra Renal Care
Dialysis Services
The Company is the second largest provider of dialysis services in the
United States. The Company intends to develop and acquire facilities primarily
in existing and contiguous geographic markets and to increase the number of
physician and other sources of patient referrals.
Industry Overview
End-Stage Renal Disease. ESRD is the state of advanced renal impairment
that is irreversible and fatal without treatment. According to HCFA, the number
of patients who require chronic dialysis services grew from approximately 66,000
in 1982 to approximately 187,000 in 1994, representing a compound annual growth
rate of 9%. VRC attributes the continuing growth in the number of ESRD patients
principally to the aging of the general population, demographic trends and
medical advances resulting in increased life expectancy of patients with
hypertension, diabetes and other illnesses that lead to ESRD. Additionally,
management believes improved technology has enabled older patients and those who
previously could not tolerate dialysis due to other illnesses to benefit from
this life-prolonging treatment. Since 1973, qualified patients with ESRD have
been entitled to Medicare benefits regardless of age or financial circumstances.
Treatment Options for ESRD. Treatment options for ESRD include
hemodialysis, peritoneal dialysis and kidney transplant surgery. HCFA estimates
that, as of December 31, 1994, 82% of the ESRD patients in the United States
were receiving hemodialysis treatment in outpatient facilities. The remaining
18% were treated in the home or in the hospital as inpatients. Patients treated
in the home are monitored by a designated outpatient facility or qualified
physician's office.
Hemodialysis uses an artificial kidney, called a dialyzer, to remove
certain toxins, fluid and salt from the patient's blood, and a machine to
control external blood flow and to monitor certain vital signs of the patient.
Typically dialysis for the chronic patient is performed three times per week,
for approximately four hours per treatment, and continues for the patient's
lifetime.
Peritoneal dialysis is generally performed by the patient at home. The most
common methods are continuous ambulatory peritoneal dialysis ("CAPD") and
continuous cycling peritoneal dialysis ("CCPD"). Peritoneal dialysis offers
patients an improved lifestyle, but is limited in application by a higher
incidence of infection. Both CAPD and CCPD use the patient's peritoneal
(abdominal) cavity to eliminate fluid and toxins from the patient. CCPD uses a
mechanical device to cycle dialysis solution while a patient is sleeping.
An alternative treatment not provided by VRC is kidney transplantation.
While this option, when successful, is the most desirable form of therapeutic
intervention, the shortage of suitable donors limits the availability of this
surgical procedure as a treatment option. In addition to the foregoing treatment
options, attempts are being made to develop new drugs, medical treatments or
artificial kidneys that reduce or eliminate the necessity for dialysis.
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VRC Facilities and Operations
VRC intends to develop and acquire facilities primarily in existing and
contiguous geographic markets and to increase the number of physician and other
sources of patient referrals. However, the dialysis industry is highly
competitive and, as a result, VRC may not be able to acquire or develop new
dialysis facilities economically. As of November 30, 1996, VRC owned and
operated 251 facilities in 28 states and the District of Columbia. The
facilities range in size from 6 to 41 stations; the average size is 15 stations.
The number of VRC's facilities has increased significantly during the past five
years through the acquisition of 80 existing facilities, the development of 68
new facilities and the management of 2 facilities, offset by the closure of 11
facilities. As a result of a net increase in facilities, as well as an increase
in the number of treatments at existing centers, VRC has increased total
treatments provided by 150% over the past 5 years. During fiscal 1996, VRC's
"same store" patient growth was approximately 6.5%. There can be no assurance
that VRC will continue to experience similar growth in the future.
<TABLE>
<CAPTION>
Number of
Number of Treatments
Fiscal Year End Facilities Provided
--------------- ---------- ----------
<S> <C> <C>
1991 118 768,743
1992 134 911,979
1993 144 1,116,199
1994 156 1,289,200
1995 205 1,578,744
1996 251 1,959,067
</TABLE>
The above table includes total CAPD and CCPD treatments of 64,463, 83,579,
114,340, 136,092, 171,846 and 209,410 in fiscal 1991 through 1996, respectively.
As of November 30, 1996, VRC's facilities were located as follows:
California (44); Florida (42); Texas (21); Georgia and South Carolina (20 each);
Pennsylvania, Virginia and Alabama (15 each); North Carolina (7); Louisiana (6);
Maryland (5); District of Columbia and Michigan (4 each); Connecticut, Missouri,
New Jersey, New Mexico, Oklahoma and Oregon (3 each); Arizona, Kansas,
Massachusetts, Mississippi and Tennessee (2 each); Colorado, Illinois, Iowa,
Ohio and West Virginia (1 each).
As required by Medicare regulations, each of VRC's facilities is supervised
by a medical director ("Medical Directors"). VRC's Medical Directors are
licensed physicians in private practice who are directly responsible for
assuring the quality of patient care. A Unit Administrator, who is generally a
registered nurse, supervises the day-to-day operation of each facility and the
staff. The staff consists of registered nurses, medical technicians, nurses'
aides, a unit clerk, and certain part-time employees, including a social worker,
a registered dietitian and a machine repair technician. Each facility is staffed
in a manner that allows the number of personnel to be adjusted efficiently
according to the number of patients receiving treatment. VRC engages in
organized and systematic efforts to measure, maintain and improve the quality of
services it delivers. Each of VRC's facilities collects and analyzes quality
assurance data which is reviewed regularly by regional and corporate management
to continually monitor and improve the standard of care being provided.
Sources of Dialysis Revenues. VRC estimates that approximately 72% of its
dialysis revenues, including revenues for the reimbursement of the
administration of EPO, for each of the fiscal years 1995 and 1996, were
reimbursements from Medicare and Medicaid under the ESRD program administered by
HCFA and the states. Numerous congressional actions have resulted in changes in
the average Medicare reimbursement rate from a fixed fee of $138 per treatment
in 1983, to a current average rate of $126. The Medicaid programs are also
subject to statutory and regulatory changes that could affect the rate of
Medicaid reimbursement. VRC is not able to predict whether and to what extent
changes to Medicare and Medicaid reimbursement rates will be made in the future.
Any reduction in these reimbursement rates would have a material adverse effect
on VRC's revenues and net earnings.
New dialysis patients must wait 90 days after commencement of dialysis
treatment to qualify under the Medicare ESRD reimbursement program. Often
patients do not have the means or insurance to pay for treatment during this
90-
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day waiting period. If new patients do have private insurance or belong to an
employer group health plan, current regulations require such insurance to pay
for up to the first 21 months of dialysis treatment before Medicare
reimbursement begins. These regulations are scheduled to expire in October
1998, at which time private insurers' obligation to pay for dialysis treatment
will be reduced to up to the first 15 months of dialysis treatment. The budget
proposed by the Clinton administration would make the existing regulations
permanent, but there can be no assurance that the payment obligations of private
insurance will not change. If a secondary carrier such as Medicaid or a private
insurer cannot be found, the Company may not be reimbursed for treatment
provided during the initial waiting period or for the 20% copayment of the ESRD
rate which is not paid by Medicare. If possible, VRC seeks to assist patients
who may not initially have adequate sources of reimbursement or health insurance
to obtain coverage.
Since June 1, 1989, Medicare and Medicaid have provided reimbursement for
the administration of EPO to dialysis patients for the treatment of anemia.
During fiscal 1995 and 1996, approximately 87% and 89%, respectively, of VRC's
dialysis patients received EPO. Revenues from the administration of EPO were
approximately $54.4 million and $83.3 million, respectively, or 17% and 20%,
respectively, of dialysis revenues, for those periods. Effective January 1,
1994, Medicare and Medicaid reimbursement for the administration of EPO was
reduced from $11.00 to $10.00 per 1,000 units. Any further reduction in the
reimbursement rate for the administration of EPO would have a material adverse
effect on the Company's revenues and net earnings. In addition, EPO is produced
by a single manufacturer, and any interruption of supply could have a material
adverse effect on the Company's revenues and net earnings.
VRC estimates that approximately 28% of its dialysis revenues for fiscal
years 1995 and 1996 was derived from sources other than Medicare and Medicaid.
Of these revenues, the largest portion came from private insurance for chronic
dialysis treatments. In general, private insurance reimbursement and
reimbursement for treatments performed at acute care hospitals are at rates
significantly in excess of Medicare and Medicaid rates. The percentage of the
costs of dialysis care required to be assumed by private payers may change as
the existing federal ESRD program is reviewed by the United States Congress.
Notwithstanding any legislative action, the Company expects that private payers
will reduce dialysis payments as their overall dialysis costs increase. In
addition, as HMOs and other managed care providers expand, they will have a
strong incentive to further reduce the costs of specialty care and will
aggressively seek to reduce amounts paid for dialysis. VRC is unable to predict
to what extent decreases in these reimbursement rates will be made in the
future. Any reduction in the ability of VRC to charge rates that are in excess
of those paid by Medicare and Medicaid would have a significant negative effect
on the Company's revenues and net earnings.
Ancillary Services. In September 1991, the Company established Associated
Health Services ("AHS") to provide IDPN pharmacy and support services to its
dialysis patients. AHS operates a pharmacy in Southern California and provides
IDPN therapy services to dialysis patients in facilities owned by third parties,
in addition to VRC's patients.
In 1996, VRC began development of a dialysis laboratory and concurrently
entered into a management agreement with an independent third party to manage
the laboratory, which began operations in July 1996. Tests performed at the
laboratory include: (i) blood tests which are reimbursed as part of the dialysis
composite rate, (ii) blood tests ordered for co-morbidity ESRD conditions (i.e.,
diseases that are the result of or cause ESRD) and (iii) general symptom
testing.
Vivra Specialty Partners
VSP believes that, with the growth of managed care, substantial
opportunities may exist to provide network and practice management services
related to high-cost specialty care. VSP believes that its physician networks
have the ability to effectively manage expenses related to high cost diseases,
which account for a significant portion of total medical expenses. In addition,
VSP believes that it will have the opportunity to acquire a significant number
of specialty practices.
VSP's strategy is to contract for and manage the delivery of high quality,
cost-effective specialty care through organized physician networks. VSP's
networks are integrated groups of physicians within the same specialty who are
contractually linked to VSP for the purpose of delivering specialty care to
patient populations. The networks are typically arranged to provide
comprehensive geographic coverage in and across the service area of managed care
organizations. VSP networks provide operating and systems infrastructure, secure
managed care contracts and facilitate the care process, while providing
physicians significant autonomy and the ability to co-govern their financial
affairs and
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generate utilization and practice quality enhancements. VSP has acquired
and intends to continue to acquire specialty physician practices which are
complementary to its physician networks and where VSP has sub-capitated or
case-rate contracts, or where it expects to obtain such contracts. The Company
believes that these specialty practices may allow it to develop clinical and
management insights to enhance the provision of specialty care.
VSP currently owns networks and/or practices and provides services in the
following specialties:
- Asthma & Allergy - Neurology
- Cardiology - OB/GYN
- Diabetes - Orthopedics
- Dialysis/Nephrology - Urology
- ENT
In these specialties, VSP provides services for approximately 4.6 million
"Specialty Lives" through 44 contracts. Each health plan member is deemed to
have one Specialty Life for each specialty contracted.
VSP owns 32 specialty practices with 97 physicians and manages one
additional specialty practice with 15 physicians. To date, VSP's acquired
practices are primarily in asthma/allergy and cardiology. However, the Company
intends to acquire practices in the other specialties it serves.
VSP's network information processing company, Vivra Network Services
("VNS"), provides claims processing and management reporting to VSP's specialty
networks. In addition, VNS has contracts with nine third-party specialty
networks covering approximately 1.5 million Specialty Lives to provide claims
processing and management reporting services.
VSP intends to continue to expand aggressively through the acquisition and
development of related businesses, primarily physician network and practice
entities. Expansion of the VSP business will require significant capital
commitments by the Company and will require that physicians and payers accept
the Company's services. Accordingly, there can be no assurance that these new
businesses will ever become profitable or obtain financial viability. Further,
there can be no assurance that VSP will be able to successfully compete with
companies which provide services similar to VSP, some of which have greater
financial resources and longer operating histories.
Competition
VRC. It is estimated that the six largest dialysis providers constitute
approximately 48% of the estimated $4 billion outpatient dialysis treatment
market. The balance of the market is still fragmented into hospital-based
centers and facilities owned by individual nephrologists. Industry consolidation
has accelerated as large providers have increased the pace at which they are
making acquisitions. As a result, VRC faces competition for the acquisition and
development of new centers as well as competition for qualified physicians to
act as Medical Directors.
A primary consideration of a patient or a physician when selecting a
dialysis facility is convenience of location for the patient. Other competitive
factors include quality of care and service. On occasion, VRC has experienced
competition from the establishment of a facility by a former Medical Director.
VSP. Certain companies, some of which have longer operating histories and
greater financial resources than those of VSP, are providing network and
management services similar to those that VSP is providing or pursuing. VSP may
be forced to compete with these entities for acquisitions, network and
management contracts and, in some cases, the employment of practice physicians.
There can be no assurance that VSP will be able to compete effectively with such
competitors, that additional competitors will not enter VSP's markets, or that
such competition will not make it more difficult to expand in such markets on
terms beneficial to VSP.
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Governmental Regulation
General. The Company's operations are subject to extensive governmental
regulation at the federal, state and local levels.
Kennedy-Kassebaum Bill. The Health Insurance Portability and Accountability
Act of 1996, Public Law 104-191 (the "Kennedy-Kassebaum Bill" or the "Act"),
which became effective January 1, 1997, substantively changed federal fraud and
abuse laws related to health care by expanding their reach to all federal health
care programs, establishing new bases for exclusion from participation in
Medicare and Medicaid programs and mandating minimum exclusion terms for those
found to have violated the Act, creating an additional exception to the
anti-kickback penalties for risk-sharing arrangements, requiring the Secretary
of HHS to issue advisory opinions, increasing civil monetary penalties to
$10,000 (from $2,000) per item or service and assessments to three (from two)
times the amount claimed, creating a specific health care offense and related
health fraud crimes, and expanding investigative authority and sanctions
applicable to health care fraud.
In addition to establishing minimum periods of exclusion from government
health programs for an entity found to have violated the Act, the law also
authorizes exclusion of an individual with a direct or indirect ownership or
control interest in a sanctioned entity if the individual "knows or should know"
of the activity leading to the conviction or exclusion of the entity or where
the individual is an officer or managing employee of the entity. The Act adds a
number of offenses punishable by imposition of civil monetary penalties,
including: presenting a claim based on a medical procedure code that the person
knows or has reason to know will result in greater payments than appropriate;
submitting a claim that the person knows or has reason to know is for medical
services that are not medically necessary; and offering remuneration to an
individual eligible for Medicare or Medicaid benefits to induce that individual
to order or receive from a particular provider, practitioner or supplier any
item or service reimbursable under Medicare or Medicaid.
Although the Company believes that it is generally in compliance with all
provisions of the Kennedy-Kassebaum Bill, under certain circumstances the
Company's program of assisting dialysis patients in financial need by paying
their health insurance premiums could be construed as a violation of the Act.
The Company's program for payment of health insurance premiums is consistent
with what both independent and other chain dialysis companies were doing and are
continuing to do subsequent to the effective date of the Kennedy-Kassebaum Bill.
The Company believes that the Act was not intended to prohibit this type of
program, and the Company is working with other dialysis providers to obtain a
technical correction to the Act to eliminate any issues concerning the program
thereunder. However, there can be no assurance that the Company will not be
required to discontinue this program or be subject to sanctions or monetary
penalties with respect thereto. If the Company is precluded from assisting
patients through payment of health insurance premiums, this, along with any
sanctions or monetary penalties, would have an adverse effect on the Company's
revenues and net earnings.
Fraud and Abuse. The Company's operations are subject to the illegal
remuneration provisions of the Social Security Act (sometimes referred to as the
"anti-kickback" statute) and similar state laws that impose criminal and civil
sanctions on persons who knowingly and willfully solicit, offer, receive or pay
any remuneration, whether directly or indirectly, in return for, or to induce,
the referral of a patient for treatment, or, among other things, the ordering,
purchasing, or leasing, of items or services that are 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 and exclusion of the provider from future participation in
the Medicare and Medicaid programs. Federal enforcement officials also may
attempt to impose civil false claims liability with respect to claims resulting
from an anti-kickback violation. If successful, civil penalties could be
imposed, including assessments of $10,000 per improper claim for payment plus
three times the amount of such claim and suspension from future participation in
Medicare and Medicaid programs. Civil suspension for anti-kickback violations
also can be imposed through an administrative process, without the imposition of
civil monetary penalties. Some state statutes also include criminal penalties.
While the federal anti-kickback statute expressly prohibits transactions that
have traditionally had criminal implications, such as kickbacks, rebates or
bribes for patient referrals, its language has been construed broadly and has
not been limited to such obviously wrongful transactions. Court decisions state
that, under certain circumstances, the statute is also violated when one purpose
(as opposed to the "primary" or a "material" purpose) of a payment is to induce
referrals.
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Congress has frequently considered federal legislation that would expand
the federal anti-kickback statute to include the same broad prohibitions
regardless of payer source.
In July 1991 and in November 1992, the Secretary of HHS published
regulations that create exceptions or "safe harbors" for certain business
transactions. Transactions that satisfy the criteria under the 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 would be subject to
scrutiny by enforcement agencies. The Company seeks to structure its various
business arrangements to satisfy as many safe harbor elements as possible under
the circumstances, although many of the Company's arrangements satisfy all of
the elements of the relevant safe harbor. Although the Company has never been
challenged under the anti-kickback statute and believes it complies in all
material respects with this statute and all other applicable related laws and
regulations, there can be no assurance that the Company will not be required to
change its practices or that any such challenge or any sanction which might be
imposed will not have a material adverse effect on the Company's revenues and
net earnings.
On July 21, 1994, the Secretary of HHS proposed a rule that would modify
the original set of safe harbor provisions to give greater clarity to the
rulemaking's original intent. The proposed rule would make changes to the safe
harbors on personal services and management contracts, small entity investment
interests and space rentals, among others. The Company does not believe that the
application of these safe harbors to its current arrangements, as set forth
above, would change if the proposed rule were adopted in the form proposed.
However, the Company cannot predict the outcome of the rulemaking process or
whether changes in the safe harbors rule will affect the Company's position with
respect to the anti-kickback statute.
Stark II. Federal law, commonly referred to as 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 receive civil penalties of up to $15,000 per improper claim and can be
excluded from participation in the Medicare and Medicaid programs. Comparable
provisions applicable to clinical laboratory services became effective in 1992.
Stark II provisions which may be relevant to the Company became effective on
January 1, 1995.
A "financial relationship" under Stark II is defined as an ownership or
investment interest in, or a compensation arrangement between, the physician and
the entity. The Company has entered into compensation agreements with its
Medical Directors and other referring physicians and some Medical Directors own
stock in the Company. The Company is not aware of any family relationship
between a Medical Director and staff at its dialysis facilities.
Stark II includes certain exceptions for compensation arrangements and
ownership that satisfy certain criteria. With respect to compensation
arrangements, remuneration from an entity pursuant to a personal services
compensation arrangement is excepted from Stark II prohibitions if: (i) the
arrangement is set out in writing, signed by the parties, and specifies the
services covered by the arrangement; (ii) the arrangement covers all of the
services to be provided by the physician (or an immediate family member of such
physician) to the entity; (iii) the aggregate services contracted for do not
exceed those that are reasonable and necessary for the legitimate business
purposes of the arrangement; (iv) the term of the arrangement is for at least
one year; (v) the compensation to be paid over the term of the arrangement is
set in advance, does not exceed fair market value, and is not determined in a
manner that takes into account the volume or value of any referrals or other
business generated between the parties; (vi) the services to be performed do not
involve the counseling or promotion of a business arrangement or other activity
that violates any state or federal law; and (vii) the arrangement meets such
other requirements that may be imposed pursuant to regulations promulgated by
HHS.
Another Stark II exception for compensation arrangements applies to bona
fide employment relationships. This exception can apply to amounts paid by an
employer to a physician-employee if: (i) the employment is for identifiable
services; (ii) the amount of remuneration is consistent with the fair market
value of services and is not determined in a manner that takes into account,
directly or indirectly, the volume or value of any referrals by the referring
physician; (iii) the remuneration is provided pursuant to an agreement which
would be commercially reasonable even if no referrals were made to the employer;
and (iv) the employment meets such other standards that HHS may impose to
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protect against program or patient abuse. In addition, this exception would
permit certain types of productivity bonuses based on personal services
performed by the physician or an immediate family member.
Stark II also includes an exception for a physician's ownership or
investment interest in shares in an Investment Company or securities listed on
an exchange or quoted on the Nasdaq National Market which, in either case, meets
certain financial criteria.
State Referral Regulations. Various states have in place or are considering
anti-referral statutes which impose requirements on or prohibit certain
referrals. The Company could be subject to sanctions and could be required to
restructure some or all of its relationships with the referring physicians with
whom it contracts for Medical Director and similar services. The consequences of
such restructuring, if any, cannot be predicted.
State Laws Regarding Provision of Medicine and Insurance. The laws of many
states prohibit physicians from splitting fees with non-physicians and prohibit
non-physician entities from practicing medicine. These laws vary from state to
state and are enforced by the courts and by regulatory authorities with broad
discretion. Although the Company believes its operations as currently conducted
are in material compliance with existing applicable laws, many aspects of the
Company's business operations, including the structure of the relationships
between the Company and its medical providers, have not been the subject of
state or federal regulatory interpretation. There can be no assurance that
review of the Company's business by courts or regulatory authorities will not
result in determinations that could adversely affect the operations of the
Company or that the health care regulatory environment will not change so as to
restrict the Company's existing operations or their expansion.
Dialysis Segment. With respect to the Company's dialysis operations, the
Company must meet various standards relating to, among other things, the
management of facilities, personnel, maintenance of proper records, equipment
and quality assurance programs. The dialysis facilities are subject to periodic
inspection by state agencies and other governmental authorities to determine if
the premises, equipment, personnel and patient care meet applicable standards.
To receive Medicare reimbursement, the Company's dialysis facilities must be
certified by HCFA.
Any loss by the Company of its various federal certifications, its
authorization to participate in the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of its revenues is derived, or a change resulting from
health care reform reducing dialysis reimbursement or reducing or eliminating
coverage for dialysis services, would have a material adverse effect on the
Company's business. The health care services industry will continue to be
subject to intense regulation at the federal and state 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 or that health
care reform will not result in a material adverse change to the Company.
The conditions for coverage under the Medicare ESRD program mandate that
treatment at a dialysis facility be under the general supervision of a medical
director who is a physician. Generally, the medical director must be board
eligible or board certified in internal medicine or pediatrics and have had at
least 12 months of experience or training in the care of patients at ESRD
facilities. The Company has engaged Medical Directors at each of its facilities.
The compensation of the Medical Directors and other physicians under contract is
separately negotiated and generally depends upon competitive factors in the
local market, the physician's professional qualifications and responsibilities
and the size and utilization of the facility or relevant program. The aggregate
compensation of the Medical Directors and other physicians under contract is
generally fixed in advance for periods of one year or more by written agreement
and is set to reflect the fair market value of the services rendered. Because in
all cases the Company's Medical Directors and the other physicians under
contract refer patients to the Company's facilities, the federal anti-kickback
statute could apply. However, the Company believes its contractual arrangements
with these physicians are in material compliance with the anti-kickback statute.
Among the safe harbors promulgated by the Secretary of HHS is one relevant to
the Company's arrangements with its Medical Directors and the other physicians
under contract. The Company endeavors to enter into agreements with its Medical
Directors and other physicians under contracts which satisfy the requirements of
the personal services and management contract safe harbor.
The OIG has published warnings to the dialysis services industry generally
that it believes that the industry-wide practices of obtaining discounts on
certain laboratory charges and the payment of remuneration for services provided
for IDPN therapy at dialysis centers violate the anti-kickback statute in many,
if not most, circumstances. The
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Company believes that it has a reasonable basis for practices which the OIG
may regard as within the scope of the warnings and that, if challenged by the
OIG, it could defend these practices. However, there can be no assurance that
the Company will not be challenged under the statute or subject to sanctions.
Any such challenge, including any sanctions, would have an adverse effect on the
Company's revenues and net earnings.
Stark II may require the Company to restructure certain existing
compensation arrangements with its Medical Directors or, in the alternative, to
refuse to accept referrals for designated health services from such physicians.
Although there can be no assurance, the Company believes that if Stark II is
interpreted to apply to the Company's operations, the Company will be able to
bring its financial relationships with referring physicians into material
compliance with the provisions of Stark II, including relevant exceptions. If
the Company cannot achieve such material compliance, and Stark II is broadly
interpreted by HHS to apply to the Company, such application of Stark II could
have a material adverse effect on the Company.
For purposes of Stark II, "designated health services" include, among other
things: clinical laboratory services; parenteral and enteral nutrients, certain
equipment and supplies; prosthetics; orthotics; prosthetic devices; physical and
occupational therapy services; outpatient prescription drugs; and inpatient and
outpatient hospital services. Dialysis is not a designated health service, and
the Company believes that the language and legislative history of Stark II
indicate that Congress may not have intended to include the services and items
provided incident to dialysis services within the Stark II prohibitions.
However, the Company's provision of, or arrangement and assumption of financial
responsibility for, outpatient prescription drugs, including EPO and IDPN,
clinical laboratory services, facility dialysis services and supplies, home
dialysis supplies and equipment, and services to hospital inpatients and
outpatients, include services and items which could be construed as designated
health services within the meaning of Stark II. Although the Company does not
bill Medicare or Medicaid for hospital inpatient and outpatient services, the
Company's Medical Directors may request or establish a plan of care that
includes dialysis services for hospital inpatients and outpatients that may be
considered a referral to the Company within the meaning of Stark II.
Network and Practice Management Segment. Most states have laws regulating
insurance companies, HMOs and third-party administrators. The Company is not
licensed in any state to engage in the insurance, HMO or third-party
administrator businesses. As the managed care business evolves, state regulators
may begin to scrutinize the practices of, and relationships between, third-party
payers, medical service providers and entities providing management and other
services to medical service providers with respect to the application of
insurance, HMO and third-party administrator laws and regulations. The Company
does not believe that its practices in either VRC or VSP, which are consistent
with those of other health care companies, would subject it to such laws and
regulations. However, given the limited regulatory history with respect to such
practices, there can be no assurance that states will not attempt to assert
jurisdiction. The Company may be subject to prosecution by state regulatory
agencies, and accordingly may be required to change or discontinue certain
practices which could have a material adverse effect on the Company.
Certain of the Company's other operations also receive Medicare and
Medicaid reimbursement. While the Company believes that its other operations
comply in all material respects with applicable law, there can be no assurance
that the Company's other operations will not be subject to challenge or
sanctions. Any such challenge or sanctions could have a material adverse effect
on the Company's revenues and net earnings.
In recent years, increased attention has been focused on the application of
federal and state antitrust laws to physician networks and provider
arrangements. Federal law prohibits conduct that may result in price-fixing or
other anticompetitive conduct. Although management of the Company believes the
operations of the Company are in material compliance with existing law, there
can be no assurance that the Company's existing agreements with its physicians,
including service agreements or network agreements, will not be successfully
challenged.
Medicare and Healthcare Reform. Because the Medicare program represents a
substantial portion of the federal budget, Congress takes action in almost every
legislative session to modify the Medicare program for the purpose of reducing
the amounts otherwise payable by the program to health care providers in order
to achieve deficit reduction targets, among other reasons. Legislation or
regulations may be enacted in the future that may significantly modify the ESRD
program or substantially reduce the amount paid for the Company's dialysis or
other services. Further, statutes or regulations may be adopted which impose
additional requirements in order for the Company to be eligible to
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participate in the federal and state payment programs. Such new legislation
or regulations may adversely affect the Company's business operations.
Other Regulations. The Company's operations are subject to various state
hazardous waste disposal laws. Those laws as currently in effect do not classify
most of the waste produced during the provision of dialysis services to be
hazardous, although disposal of non-hazardous medical waste is also subject to
regulation. OSHA regulations require employers of workers who are occupationally
subject to blood or other potentially infectious materials to provide those
workers with certain prescribed protections against bloodborne pathogens. The
regulatory requirements apply to all health care facilities, including dialysis
facilities, and require employers to make a determination as to which employees
may be exposed to blood or other potentially infectious materials and to have in
effect a written exposure control plan. In addition, employers are required to
provide hepatitis B vaccinations, personal protective equipment, infection
control training, post-exposure evaluation and follow-up, waste disposal
techniques and procedures, and engineering and work practice controls. Employers
are also required to comply with certain record-keeping requirements. The
Company believes it is in material compliance with the foregoing laws and
regulations.
Some states have established certificate of need ("CON") programs
regulating the establishment or expansion of health care facilities, including
dialysis facilities. The CON laws formerly applicable to freestanding dialysis
facilities in seven states in which the Company operates dialysis facilities
(Arizona, California, Florida, Louisiana, New Mexico, Texas and Virginia) have
been repealed or have lapsed and have not been re-enacted.
The Company believes it is in material compliance with current applicable
laws and regulations. No assurance can be made that in the future the Company's
business arrangements, past or present, will not be the subject of further
investigation or prosecution by a federal or state governmental authority. Such
investigation could result in any, or any combination, of the penalties
discussed above depending upon the agency involved in such investigation and
prosecution. No assurance can be given that the Company's activities will not be
challenged by regulatory authorities. The Company monitors legislative
developments and would seek to restructure a business arrangement if the Company
determined that one or more of its business relationships placed it in material
noncompliance with such a statute. The health care service 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 revenues are derived would have a material adverse effect on its business.
Insurance
The Company carries insurance for property damage, public liability and
malpractice covering all of its businesses. The public liability and malpractice
coverage limits are $40 million for each loss occurrence. The all risk property
insurance coverage limit is $10 million based on replacement cost for each loss
occurrence. The loss occurrence limit includes separate annual aggregate
sublimits for earthquake and flood damage of $5 million for each state. The
Company believes that its insurance coverage is adequate.
Employees
As of November 30, 1996, the Company had approximately 5,600 employees.
Employees at one of the Company's dialysis facilities (representing less than 1%
of total employees) are covered by a union agreement. The Company considers its
labor relations to be satisfactory.
Item 2. Properties.
Dialysis properties: As of November 30, 1996, the Company owned the real
property for 24 of its dialysis facilities. The majority of these owned
facilities are one to two stories, comprising 1,800 to 16,900 square feet, with
the majority having 3,000 to 5,000 square feet. Sites range from one to one and
one-half acres. The remaining 227 of the Company's dialysis facilities are in
leased premises, either within general hospitals or in separate buildings. These
premises range in size from 2,000 to 8,400 square feet and are occupied under
leases, ranging from month-to-
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month to 60 months duration with varying renewal options. The Company
expects to renew these leases from time to time or to lease new space as
necessary. The Company leases approximately 55 facilities from Medical Directors
on terms comparable to those that would have been obtained from an unrelated
third party.
The Company leases approximately 19,000 square feet of office space for its
corporate headquarters in San Mateo, California, and leases a two-story office
building in Laguna Hills, California for administrative offices, with
approximately 34,000 square feet of space. The Company leases an aggregate of
approximately 50,000 square feet in numerous locations throughout the country,
including Nashville, Tennessee; Atlanta, Georgia; Miami and Clearwater, Florida;
and Metairie and Covington, Louisiana for office space, and in San Dimas,
California for its specialty pharmacy.
Item 3. Legal Proceedings.
On December 18, 1996, the Company received from the United States Attorney
for the District of Massachusetts a grand jury subpoena which calls for the
records pertaining to the operations of VRC from January 1, 1987 through July 1,
1996. The subpoena appears to focus on VRC's previous relationship with Damon
Clinical Laboratories and other affiliated entities, as well as utilization
patterns and procedures pertaining to clinical laboratory blood tests billed to
the Medicare and/or Medicaid programs. In connection with the receipt of this
subpoena, the Company has been advised that VRC is now a subject of the United
States Attorney's investigation. The investigation is in the preliminary stage
and, as a result, management currently is unable to predict the ultimate
resolution of such proceedings or its impact on the results of operations.
On May 20, 1992, in the Pennsylvania Court of Common Pleas in Delaware
County, a complaint was filed against the Company's subsidiary, VRC. In
September 1993, the court determined that the suit could proceed as a class
action on behalf of 93 patients, subsequently reduced to 70, who were treated at
one of the VRC facilities, some of whom are alleged to have died or been injured
during or as a result of the course of treatment. On January 23, 1997, the
Company was notified by outside counsel that the class representatives came to
an agreement to recommend to the class members that all claims of all of the
class members and their representatives be settled in exchange for payment of an
amount that is covered by the Company's insurance policies. Once the agreement
is formalized and put in writing, the class members will have the opportunity to
comment on the fairness of the settlement, after which the settlement will
become the subject of consideration by the court as to fairness thereof.
The Company is also subject to other claims and suits in the ordinary
course of business. Management believes that either insurance, which is
purchased from third parties, is adequate to cover any such claims or that such
claims lack merit and the outcome of all such claims should not have a material
adverse effect on the Company's results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
The Common Stock of Vivra Incorporated is listed for trading on the New
York Stock Exchange under the symbol "V." The following table sets forth for the
fiscal periods indicated the high and low sale prices for the Company's Common
Stock as reported by the New York Stock Exchange, giving effect to a 3-for-2
stock split effective as of November 22, 1995.
<TABLE>
<CAPTION>
Price Range
-------------------------------
High Low
---- ---
<S> <C> <C>
1995
----
First Quarter $21 7/8 $17 3/4
Second Quarter $23 7/8 $18 1/3
Third Quarter $22 1/8 $17 3/4
Fourth Quarter $23 3/8 $21 11/64
1996
----
First Quarter $30 7/8 $22 5/8
Second Quarter $35 3/8 $26 3/4
Third Quarter $35 1/16 $27 5/8
Fourth Quarter $36 1/8 $28
</TABLE>
Holders
There were approximately 1,669 stockholders of record of the Company's
Common Stock as of January 31, 1997.
Dividends
The Company has not declared or paid any cash dividends. The Board of
Directors does not presently intend to pay regular cash dividends on the Common
Stock. The payment of future dividends will be dependent upon the earnings,
capital requirements and financial condition of the Company and such other
business and economic factors as the Board of Directors considers relevant.
17
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
Vivra Incorporated and Subsidiaries
<CAPTION>
Year ended November 30
1996 1995 1994 1993 1992
------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data* Operating revenues:
Vivra Renal Care $411,294 $316,572 $265,262 $217,763 $168,779
Vivra Specialty Partners 95,296 40,226 17,742 15,401 11,744
Other Services - 24,028 27,113 6,227 2,103
------------------------------------------------------------------------
Operating revenues 506,590 380,826 310,117 239,391 182,626
Other income 10,719 5,221 1,891 1,235 1,508
------------------------------------------------------------------------
Total Revenues 517,309 386,047 312,008 240,626 184,134
Costs and expenses:
Operating 360,500 260,838 207,779 165,359 127,644
General and administrative 57,775 50,107 42,495 24,635 17,395
Depreciation 14,170 11,280 9,953 7,589 5,184
Interest 3,692 483 606 1,016 958
------------------------------------------------------------------------
Total costs and expenses 436,137 322,708 260,833 198,599 151,181
Earnings from continuing operations, before minority
interest and income taxes
81,172 63,338 51,175 42,027 32,953
Income taxes 30,765 24,645 20,978 17,651 13,511
------------------------------------------------------------------------
Net earnings from continuing operations 50,295 38,599 30,187 24,376 19,442
Earnings from discontinued operations, less applicable
taxes - - - 554 152
Gain on sale of discontinued operations, less applicable
taxes - - 697 - -
------------------------------------------------------------------------
Net earnings $ 50,295 $ 38,599 $ 30,884 $ 24,930 $ 19,594
========================================================================
Earnings per share from continuing operations $1.27 $1.03 $.92 $.76 $.62
========================================================================
Weighted average shares outstanding 39,708 37,350 32,987 32,133 31,336
========================================================================
Balance Sheet Data*
Cash and investments $ 228,976 $ 120,189 $ 80,681 $ 53,168 $ 40,235
Working capital 214,414 133,704 98,621 89,678 73,232
Total assets 655,218 411,423 283,190 213,781 175,382
Long-term obligations 163,143 4,047 13,182 8,901 9,341
Stockholders' equity 403,228 345,962 213,989 173,957 143,089
* Financial results for 1992-1995 have been restated to show the effect of
certain 1996 business combinations which were accounted for as a
pooling-of-interests.
</TABLE>
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
When used in this discussion, the words "estimate," "project" and similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements concerning capital and acquisition
expenditures, are subject to certain risks and uncertainties and those discussed
herein which could cause actual results to materially differ from those
projected. These forward-looking statements speak only as of the date hereof.
Results of Operations
The following is a comparative discussion of Vivra's financial condition
and the operating results by fiscal year, for the three years ended November 30,
1996. It should be read in conjunction with Vivra's Consolidated Financial
Statements and related Notes.
The Company provides services through two segments: Vivra Renal Care
("VRC") and Vivra Specialty Partners ("VSP"). VRC is the second largest provider
of dialysis services in the United States. VSP provides specialty physician
network and disease management services to managed care and provider
organizations. During 1995, the Company sold and discontinued its Other Services
segment, which consisted of the ambulatory surgery, rehabilitation therapy and
primary care physician practice management businesses.
1996 Compared with 1995
For fiscal 1996 as compared to fiscal 1995, revenues increased $131.3
million, or 34.0%; costs and expenses increased $113.4 million, or 35.1%; and
earnings from continuing operations before taxes increased $17.8 million, or
28.2%. In total, net earnings for the year increased $11.7 million to $50.3
million, or 30.3% compared to 1995.
Operating revenues increased $125.8 million, or 33.0%, to $506.6 million.
Revenues from VRC increased $94.7 million to $411.3 million, or 30.0%; VSP
revenues increased $55.1 million to $95.3 million; and Other Services revenues
decreased $24.0 million. The increase in revenues from VRC was attributable to
the growth in the number of treatments provided and growth in ancillary
services, principally from the administration of the drug Erythropoietin
("EPO"), prescribed for dialysis patients suffering from anemia. Treatments grew
24.1% from 1,578,744 to 1,959,067, primarily as a result of the net addition of
46 centers. Revenues from EPO were $83.3 million, compared to $54.4 million in
the prior year, a 53.1% increase. This growth was due to an increase in both the
number of patients receiving the drug and in the average dosage size. As of
November 30, 1996, approximately 89% of the Company's dialysis patients were
receiving EPO, compared to 87% in 1995. The increase in revenues from VSP was
due to the addition of cardiology, OB/GYN and orthopedics specialty physician
networks after the third quarter of 1995 and growth in the asthma/allergy
specialty. The decrease in Other Services revenues was a direct result of the
sale and discontinuation of the Company's ambulatory surgery center,
rehabilitation therapy and primary care physician practice management businesses
in 1995. Other income of $10.7 million included interest earned on marketable
securities and $4.7 million in gains from the sale of available-for-sale
marketable investments.
Operating costs increased $99.7 million, or 38.2%, to $360.5 million. VRC
operating costs increased $67.5 million to $282.1 million, or 31.5%; Vivra
Specialty Partners operating costs increased $47.5 million to $78.4 million; and
Other Services operating costs decreased $15.3 million. The increase in VRC
operating costs was due to the increased volume of dialysis business, increased
labor costs and expenses associated with the operation of de- novo dialysis
centers. VSP operating costs increased due to the addition and growth of the
cardiology, OB/GYN and orthopedics specialties after the third quarter of 1995
and growth in the asthma/allergy specialty. Operating costs of Other Services
decreased due to the sale and discontinuation of the ambulatory surgery,
rehabilitation therapy and primary care physician practice management businesses
in 1995. General and administrative expenses increased $7.7 million to $57.8
million, or 15.3%. These expenses include $4.4 million of non-recurring items
consisting of the establishment of a $1.95 million long-term bonus plan within
VSP, a $1.3 million reserve taken for relocation expenses and $1.1 million for
other charges. In total, general and administrative expenses decreased to 11.4%
of total operating revenues for 1996, as compared to 13.2% in 1995. Depreciation
increased $2.9 million, or 25.6%, to $14.2 million, due to fixed asset additions
in the dialysis and asthma/allergy businesses. Interest expense increased $3.2
million to $3.6 million, due to expense recorded from the Company's July 1996
issuance of $150
19
<PAGE>
million of 5% Convertible Subordinated Notes Due 2001 in a private
placement and the subsequent issuance of an additional $8.5 million of the Notes
in August 1996 upon exercise of the over-allotment option.
The effective tax rate for 1996 was 38.0% of earnings before income taxes,
compared with 39.0% a year earlier. This decrease was primarily due to a portion
of the Company's cash assets being invested in tax-free marketable securities,
which had the effect of lowering the overall tax rate.
1995 Compared with 1994
For fiscal 1995 as compared to fiscal 1994, revenues increased $74.0
million, or 23.7%; costs and expenses increased $61.9 million, or 23.7%; and
earnings from continuing operations before taxes increased $12.1 million, or
23.6%. In total, net earnings for the year increased $7.7 million to $38.6, or
25.0% compared to 1994.
Operating revenues increased $70.7 million, or 22.8%, to $380.8 million.
Revenues from VRC increased $51.3 million to $316.6 million, or 19.3%; VSP
revenues increased $22.5 million to $40.2 million; and Other Services revenues
decreased $3.1 million to $24.0 million, an 11.4% decrease. The increase in
revenues from VRC was attributable to the growth in the number of treatments
provided and growth in the administration of EPO. Treatments grew 19.9% from
1,316,479 to 1,578,744, primarily as a result of the net addition of 49 centers.
Revenues from EPO were $54.4 million, compared to $42.0 million in the prior
year, a 29.5% increase. This growth was due to an increase in both the number of
patients receiving the drug and in the average dosage size. As of November 30,
1995, approximately 87% of the Company's dialysis patients were receiving EPO,
compared to 84% in 1994. The increase in revenues from Vivra Specialty Partners
was due to the addition of the asthma/allergy specialty as of November 30, 1994,
the growth in diabetes services and the addition of various specialty physician
networks during the year. The decrease in Other Services revenues was a direct
result of the sale of the Company's ambulatory surgery center and rehabilitation
therapy businesses in May and July 1995, respectively. Other income of $5.2
million included a $2.2 million gain from the disposition of the Company's
ambulatory surgery center business, a $2.0 million gain from the sale of the
Company's rehabilitation therapy business, $2.3 million of charges related to
the wind-down, sale and discontinuation of the Company's primary care physician
practice management business and a $1.0 million write-down as a result of the
pending sale of the Vivra Renal Care corporate office building. In addition,
other income included $4.3 million of interest earned on tax-free marketable
securities.
Operating costs increased $53.0 million, or 25.5%, to $260.8 million. VRC
operating costs increased $37.9 million to $214.6 million, or 21.4%; VSP
operating costs increased $18.7 million to $30.9 million; and Other Services
operating costs decreased $3.6 million to $15.3 million, a 19.0% decrease. The
increase in VRC operating costs was due to the increased volume of dialysis
business, expenses associated with the operation of de-novo dialysis centers and
the costs of administering EPO. VSP operating costs increased due to the growth
in diabetes services and the additions of the ENT, asthma/allergy and cardiology
specialties. Operating costs of Other Services decreased due to the sale of the
ambulatory surgery and rehabilitation therapy businesses in 1995. General and
administrative expenses increased $7.6 million to $50.1 million, or 17.9%. These
expenses include $3.1 million of non-recurring items, consisting of a $1.1
million reserve taken for intradialytic parenteral nutrition therapy accounts
receivable, $1.6 million for severance and other compensation arrangements and
$450,000 for other charges. Furthermore, general and administrative expenses
increased as a result of the addition of the asthma/allergy specialty. In total,
general and administrative expenses decreased to 13.2% of total operating
revenues for 1995, as compared to 13.7% in 1994. Depreciation increased $1.3
million, or 13.3%, to $11.3 million, due to an increase in depreciable assets of
the dialysis business and the ambulatory surgery business prior to the sale of
the business in May 1995.
The effective tax rate for 1995 was 39.0% of earnings before income taxes,
compared with 41.0% a year earlier. This decrease was primarily due to the
Company's cash assets being invested in tax-free marketable securities, which
had the effect of lowering the overall tax rate.
20
<PAGE>
Liquidity and Capital Resources
The Company requires significant capital for the acquisition and
development of dialysis facilities and specialty physician network businesses
and on-going expenditures for property, plant and equipment. Acquisition
expenditures, including the value of shares issued for certain 1996 restated
business combinations accounted for as pooling-of-interests, were $159.9
million, consisting of $69.4 million in cash and 2,995,902 shares of the
Company's Common Stock and $84.6 million, consisting of $66.7 million in cash
and 848,391 shares of the Company's Common Stock, for fiscal years ended
November 30, 1996 and 1995, respectively. After giving effect to the
pooling-of-interests transactions, 1996 totals were $94.1 million, consisting of
$71.3 million in cash and 714,827 shares of the Company's Common Stock. Routine
capital expenditures were $33.4 million and $29.4 million for the same periods,
respectively.
Cash flow from operations was $52.2 million and $24.7 million for the years
ended November 30, 1996 and 1995, respectively. Cash flow from financing
activities increased by $87.9 million to $159.7 million in fiscal 1996. This
increase was primarily the result of the Company's July 1996 private placement
of $150 million of 5% Convertible Subordinated Notes Due 2001 and the additional
issuance of $8.5 million of Notes in August 1996 upon exercise of the
over-allotment option. The increase was affected by the Company's February 1995
follow-on public offering, in which the Company sold 2,992,500 shares of Common
Stock and received net proceeds of $59.6 million. The Company's working capital
increased by $81.3 million to $214.4 million at November 30, 1996, from $133.1
million at November 30, 1995.
In fiscal 1997, the Company currently plans to continue to acquire and
develop new dialysis facilities and expand its specialty physician network
businesses. To the extent the Company is able to identify significant attractive
investment opportunities, such expenditures could exceed $200 million. The
Company believes that the net proceeds from its private placement of Convertible
Subordinated Notes, together with cash generated from operations, available cash
and the ability to issue Common Stock for acquisitions will be adequate to meet
the Company's planned capital expenditure, acquisition and development and
liquidity needs for fiscal 1997.
Inflation and Changes in Prices
In 1996 and 1995, approximately 72% of the Company's dialysis revenues were
funded by Medicare and Medicaid, at an average rate of $126 per dialysis
treatment, before ancillary services. Despite periods of significant inflation,
the Medicare and Medicaid reimbursement rate has remained relatively constant
since 1983. The Company is unable to predict what, if any, future changes may
occur in the reimbursement rate and, if made, whether such changes will help
alleviate or increase inflationary pressures on the Company's margins.
In 1996 and 1995, the remaining 28% of dialysis revenues were reimbursed by
payers generally at rates significantly in excess of Medicare and Medicaid. Of
these revenues, the largest portion came from private insurance, including
managed care organizations. Reimbursement from hospitals for acute dialysis
treatments was also significant. The percentage of the costs of dialysis care
required to be assumed by private payers may change as the existing ESRD program
is reviewed by the United States Congress. Notwithstanding any legislative
action, the Company expects that non-governmental payers will reduce payment for
dialysis services because they have a strong incentive to further reduce the
costs of specialty care and will aggressively seek to reduce amounts paid for
dialysis treatments. If private payer rates are reduced significantly, this
would have a material adverse effect on the Company's revenues and net earnings.
The dialysis industry is highly competitive with respect to the acquisition
of existing dialysis facilities and the recruitment of medical directors for new
centers. In the past two years, acquisition prices and the competition for
medical directors and new facilities has increased. To the extent that the
Company is unable to acquire existing dialysis facilities economically, to
develop facilities profitably or to recruit Medical Directors to operate its
facilities, its ability to expand its dialysis business and maintain earnings
per share growth and return on total capital would be adversely impacted.
The Company intends to expand VSP significantly through the acquisition and
development of related businesses, primarily specialty physician networks and
practices. This expansion will require significant capital
21
<PAGE>
commitments. Additionally, the Company is incurring expenditures to develop
its infrastructure and systems for VSP in anticipation of significant growth. To
the extent VSP's operations do not expand as planned and the Company does not
realize revenues sufficient to offset such increased expenses, the Company's
operating margins will be adversely affected and VSP may experience delays in
attaining profitability or may never become financially viable. VSP may not
realize revenue and operating margins as predictable as those historically
provided by VRC.
Item 8. Financial Statements and Supplementary Data.
The information in response to this item is incorporated by reference from
pages F-1 through F-23 hereof.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the heading "Information Concerning
Nominees and Continuing Directors" and "Information Concerning Executive
Officers" in the definitive Proxy Statement for the Company's 1997 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 11. Executive Compensation.
The information contained under the heading "Compensation of Executive
Officers" in the definitive Proxy Statement for the Company's 1997 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the heading "Beneficial Ownership" in the
definitive Proxy Statement for the Company's 1997 Annual Meeting of Stockholders
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information contained under the heading "Certain Relationships and
Related Transactions" in the definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements. The Financial Statements listed in
response to Item 8 are filed herewith.
2. The following Financial Statement Schedule is filed herewith:
Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
(3) Articles of Incorporation and By-Laws of Registrant
(3.1)* Amended and Restated Certificate of Incorporation
(filed as Exhibit 3.1 to Registrant's Annual
Report on Form 10-K for the fiscal year ended
November 30, 1995, and incorporated herein by
reference).
22
<PAGE>
(3.2)* By-Laws (filed as Exhibit 3B to Registrant's
Registration Statement on Form 10, File No.
1-10261, and incorporated herein by reference).
(4) Instruments defining the Rights of Security Holders
(4.1)* Amended and Restated Rights Agreement dated as of
February 13, 1996 by and between Vivra
Incorporated and The First National Bank of
Boston, as Rights Agent (filed as Exhibit 4D to
Registrant's Form 10/A dated February 14, 1996,
and incorporated herein by reference).
(4.2)* Indenture by and between Vivra Incorporated and
State Street Bank and Trust Company, as Trustee,
dated as of July 8, 1996, regarding Registrant's
5% Convertible Subordinated Notes Due 2001 (filed
as Exhibit 4.2 to Registrant's Registration
Statement on Form S-3, File No. 333-13625, and
incorporated herein by reference).
(4.3)* Registration Rights Agreement dated as of July 8,
1996 by and among Vivra Incorporated, Alex. Brown
& Sons Incorporated, Montgomery Securities, Bear,
Stearns & Co. Inc., Smith Barney Inc. and UBS
Securities LLC, as the Initial Purchasers of
Registrant's 5% Convertible Subordinated Notes Due
2001, with respect to the registration of said
Notes under applicable securities laws (filed as
Exhibit 4.3 to Registrant's Registration Statement
on Form S-3, File No. 333-13625, and incorporated
herein by reference).
(10) Material Contracts
(10.1)* Debenture Payment Assumption Agreement between
Registrant and Community Psychiatric Centers
(filed as Exhibit 10.5A.6 to Registrant's
Registration Statement on Form 10, File No.
1-10261, filed May 26, 1989, and incorporated
herein by reference).
(10.2)* Registrant's Transition Consultants Stock Option
Plan (filed as Exhibit 10G to Registrant's
Registration Statement on Form 10, File No.
1-10261, and incorporated herein by reference).
(10.2.1)* Transition Consultants Stock Option Agreement
(filed as Exhibit 10.4.4 to Registrant's Annual
Report on Form 10-K for the fiscal year ended
November 30, 1989, and incorporated herein by
reference).
(10.3)*+ Registrant's Revised 1989 Stock Incentive Plan
(filed as Exhibit 10.3 to Registrant's Annual
Report on Form 10-K for the fiscal year ended
November 30, 1995, and incorporated herein by
reference).
23
<PAGE>
(10.4)*+ Registrant's Profit Sharing Plan (filed as Exhibit
10.11 to Registrant's Amendment on Form 8 to
Annual Report on Form 10-K for the fiscal year
ended November 30, 1992, and incorporated herein
by reference).
(10.5)* Form of Officer and Director Indemnification
Agreement (filed as Exhibit 10.5 to Registrant's
Annual Report on Form 10-K for the fiscal year
ended November 30, 1991, and incorporated herein
by reference).
(10.6)*+ Revised and Restated Employment Contract between
Registrant and Kent J. Thiry, dated as of November
1, 1996.
(10.7)*+ Form of Employment Agreement between Registrant
and certain executive officers of Registrant
(filed as Exhibit 10.7 to Registrant's Annual
Report on Form 10-K for the fiscal year ended
November 30, 1995, and incorporated herein by
reference).
(10.8)* Form of agreement between Registrant and the
Medical Directors of its dialysis facilities
(filed as Exhibit 10.6 to Registrant's
Registration Statement on Form S-1, File No.
33-34438, and incorporated herein by reference).
(10.9)* Agreement effective February 1, 1996 between Amgen
Inc. and Registrant (filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1995, and
incorporated herein by reference).
(10.10)* Agreement effective February 1, 1996 between
Bellco Drug Corp., Metro Health Corp. and
Registrant (filed as Exhibit 10.10 to Registrant's
Annual Report on Form 10-K for the fiscal year
ended November 30, 1995, and incorporated herein
by reference).
(11) Statement re Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Auditors.
(27) Financial Data Schedule.
(b) Reports on Form 8-K, filed in the fourth quarter of 1996:
1. Current Report of Registrant on Form 8-K (File No. 1-10261)
filed on September 24, 1996, reporting on Item 7, Financial
Statements and Exhibits.
* Previously filed.
+ Represents management contract or compensatory plan or arrangement.
24
<PAGE>
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
its behalf by the undersigned, thereunto duly authorized, on this 22nd day of
February, 1997.
VIVRA INCORPORATED
By /s/ Kent J. Thiry
-------------------------------------
Kent J. Thiry
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 in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Kent J. Thiry President, Chief Executive Officer February 22, 1997
- --------------------------------- and Director (Principal Executive Officer)
Kent J. Thiry
/s/ David G. Connor, MD Director February 24, 1997
- ---------------------------------
David G. Connor, MD
/s/ Richard B. Fontaine Director February 24, 1997
- ---------------------------------
Richard B. Fontaine
/s/ Alan R. Hoops Director February 22, 1997
- ---------------------------------
Alan R. Hoops
/s/ David L. Lowe Director February 25, 1997
- ---------------------------------
David L. Lowe
/s/ John M. Nehra Director February 22, 1997
- ---------------------------------
John M. Nehra
- --------------------------------- Director February __, 1997
Stephen G. Pagliuca
/s/ LeAnne M. Zumwalt Chief Financial Officer, Secretary, February 22, 1997
- --------------------------------- Treasurer and Director
LeAnne M. Zumwalt (Principal Accounting and Financial Officer)
</TABLE>
25
<PAGE>
Form 10-K--Item 14(a)(1) and (2)
Vivra Incorporated and Subsidiaries
List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Vivra Incorporated and
subsidiaries are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheet -- November 30, 1996 and 1995
Consolidated Statement of Earnings -- Years ended November 30, 1996, 1995
and 1994
Consolidated Statement of Stockholders' Equity -- Years ended November 30,
1996, 1995 and 1994
Consolidated Statement of Cash Flows -- Years ended November 30, 1996, 1995
and 1994
Notes to Consolidated Financial Statements -- November 30, 1996
The following consolidated financial statement schedule of Vivra Incorporated
and subsidiaries is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Vivra Incorporated
We have audited the accompanying consolidated balance sheets of Vivra
Incorporated and subsidiaries as of November 30, 1996 and 1995 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended November 30, 1996. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vivra
Incorporated and subsidiaries at November 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended November 30, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed further in Note 1 to the consolidated financial statements,
effective December 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
ERNST & YOUNG LLP
Los Angeles, California
January 24, 1997
F-2
<PAGE>
<TABLE>
Vivra Incorporated and Subsidiaries
Consolidated Balance Sheet
<CAPTION>
November 30,
1996 1995
--------------------------
(In thousands)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 78,039 $ 54,063
Short-term investments - held-to-maturity and available-for-sale (Note 4) 84,640 43,616
Accounts receivable, less allowance for doubtful accounts (1996- $18,707 and 1995- $13,429)
97,703 66,049
Inventories 13,238 9,113
Prepaid expenses and other current assets 4,272 2,070
Deferred income taxes (Note 6) 16,112 14,570
----------------------------
Total Current Assets 294,004 189,481
Marketable non-current investments - held-to-maturity (Note 4) 66,297 22,510
Property, buildings and equipment - at cost, less allowances for depreciation (Notes 5 and 7)
97,681 77,018
Other assets 12,648 8,479
Goodwill and other intangibles, less accumulated amortization
(1996 - $11,233 and 1995 - $6,727) 184,588 113,935
----------------------------
$ 655,218 $ 411,423
============================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 16,005 $ 11,194
Accrued payroll and related benefits 27,303 22,995
Provider claims reserve 11,487 2,671
Other accrued expenses 13,490 8,855
Income taxes (Note 6) 10,278 4,668
Current portion of deferred income taxes 418 3,532
Current maturities of long-term debt (Note 7) 609 1,862
----------------------------
Total Current Liabilities 79,590 55,777
Long-term debt - exclusive of current maturities (Note 7) 162,534 2,185
Deferred income taxes (Note 6) 7,192 7,737
Minority interest 2,674 (238)
Commitments and Contingencies (Notes 7 and 11)
Stockholders' Equity (Note 8):
Common stock, par value $.01 per share; authorized 80.0 million shares; issued
40.4 million shares in 1996 and 38.9 million in 1995 404 389
Additional paid-in capital 157,156 144,445
Retained earnings 245,164 196,058
Net unrealized gain on marketable securities, less applicable income taxes 504 5,070
----------------------------
Total Stockholders' Equity 403,228 345,962
----------------------------
$ 655,218 $ 411,423
============================
See Notes to Consolidated Financial Statements
</TABLE>
F-3
<PAGE>
<TABLE>
Vivra Incorporated and Subsidiaries
Consolidated Statement of Earnings
<CAPTION>
Year ended November 30
1996 1995 1994
------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues
Operating revenues $ 506,590 $ 380,826 $ 310,117
Other income 10,719 5,221 1,891
------------------------------------------------------------
Total Revenues 517,309 386,047 312,008
Costs and Expenses
Operating 360,500 260,838 207,779
General and administrative 57,775 50,107 42,495
Depreciation 14,170 11,280 9,953
Interest 3,692 483 606
------------------------------------------------------------
Total Costs and Expenses 436,137 322,708 260,833
------------------------------------------------------------
Earnings from continuing operations, before minority interest
and income taxes
81,172 63,339 51,175
Minority interest (112) (95) (10)
------------------------------------------------------------
Earnings from continuing operations, before income taxes 81,060 63,244 51,165
Income taxes (Note 6) 30,765 24,645 20,978
------------------------------------------------------------
Net earnings from continuing operations 50,295 38,599 30,187
Gain on sale of discontinued operations, less applicable taxes
(Note 3)
- - 697
------------------------------------------------------------
Net earnings $ 50,295 $ 38,599 $ 30,884
============================================================
Earnings per Share (Primary and Fully Diluted):
Net earnings from continuing operations $ 1.27 $ 1.03 $ .92
Gain on sale of discontinued operations - - .02
------------------------------------------------------------
Net earnings $ 1.27 $ 1.03 $ .94
============================================================
Average Number of Common Shares
(Primary and Fully Diluted): 39,708 37,350 32,987
See Notes to Consolidated Financial Statements
</TABLE>
F-4
<PAGE>
<TABLE>
Vivra Incorporated and Subsidiaries
Consolidated Statement of Stockholders' Equity
Net Unrealized
Additional Gain (Loss) on
Common Paid-In Retained Marketable
Stock Capital Earnings Securities
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at December 1, 1993 $223 $47,450 $126,284 -
Exercise of employees' stock options, net of
treasury stock transactions (Note 8)
6 4,163
Income tax benefits derived from employee
stock option transactions 3,514
Stock issued in connection with acquisitions
(Note 2) 2 1,432 31
Net earnings for year 30,884
---------------------------------------------------------------
Balance at November 30, 1994 231 56,559 157,199 -
Common stock split affected by three-for-two
distribution (Note 8) 103 (103)
Cash paid in lieu to issuance of fractional shares
(59)
Sale of Common Stock (Note 8) 30 59,562
Exercise of employees' stock options, net of
treasury stock transactions (Note 8)
14 13,800
Income tax benefits derived from employee
stock option transactions 5,162
Stock issued in connection with acquisitions
(Note 2) 11 9,524 260
Net earnings for year 38,599
Net unrealized gain on marketable securities.
less applicable income taxes (Note 6)
$5,070
---------------------------------------------------------------
Balance at November 30, 1995 389 144,445 196,058 5,070
Exercise of employees' stock options, net of
treasury stock transactions (Note 8)
6 6,990
Income tax benefits derived from employee
stock option transactions 4,287
Stock issued in connection with acquisitions
(Note 2) 9 1,434 (1,189)
Net earnings for year 50,295
Change in net unrealized gain on marketable
securities, less applicable income taxes
(Note 6) (4,566)
------------------------------------------------------------------
Balance at November 30, 1996 $404 $157,156 $245,164 $504
==================================================================
See Notes to Consolidated Financial Statements
</TABLE>
F-5
<PAGE>
<TABLE>
Vivra Incorporated and Subsidiaries
Consolidated Statement of Cash Flows
<CAPTION>
Year ended November 30
1996 1995 1994
--------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net earnings $50,295 $38,599 $30,884
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 20,623 14,396 12,035
Gain on sale of discontinued operations - - (1,229)
Loss (Gain) on sale of property and investments (1,026) (1,557) 1,061
Other (6,088) (5,998) (3,571)
Changes in assets and liabilities:
Accounts receivable (26,074) (16,863) (1,796)
Inventories (3,422) (2,514) (1,287)
Prepaid expenses and other current assets (2,077) (1,575) 251
Deferred income taxes (2,286) (3,801) (4,039)
Accounts payable 2,906 5,406 (818)
Accrued payroll and related benefits 4,246 (310) 6,388
Other accrued expenses 9,461 (3,214) 5,340
Income taxes 5,631 2,160 1,271
--------------------------------------------------------
Net cash flow from operations 52,189 24,729 44,490
Financing Activities
Payments on long-term debt (6,694) (8,371) (4,026)
Net proceeds from Common Stock offering - 59,592 -
Net proceeds from long-term borrowing 642 1,620 2,900
Net proceeds from Convertible Subordinated Notes placement 154,427 - -
Proceeds from exercise of stock options and related transactions 11,282 18,918 7,683
--------------------------------------------------------
Net cash flow from financing 159,657 71,759 6,557
Investing Activities
Purchase of property, buildings and equipment (33,353) (29,433) (20,932)
Purchase of held-to-maturity investments (169,851) (51,037) -
Purchase of available-for-sale investments (1,105) (4,985) -
Redemption of held-to-maturity investments 71,790 - -
Proceeds from sale of available-for-sale investments 11,435 - -
Proceeds from sale of property, buildings and equipment 595 29,158 193
Proceeds from sale of discontinued operations - - 6,238
Proceeds from investments in partnerships 3,923 841 1,627
Minority interest investment - (1,000) (1,500)
Payment for business acquisitions, net of cash acquired (71,304) (66,650) (9,160)
--------------------------------------------------------
Net cash flow used in investing (187,870) (123,106) (23,534)
--------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 23,976 (26,618) 27,513
Beginning cash and cash equivalents 54,063 80,681 53,168
--------------------------------------------------------
Ending cash and cash equivalents $78,039 $54,063 $80,681
========================================================
See Notes to Consolidated Financial Statements
</TABLE>
F-6
<PAGE>
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Additionally, the financial statements include the accounts of
certain physician controlled entities in states where the Company is not
permitted to own medical practices. For physician controlled entities, the
Company exercises unilateral control over the assets and operations of the
physician entities by virtue of a management services agreement ("MSA") and has
the right and ability to designate a successor to the physician owner under
succession agreements between the Company and the physician owner. Substantially
all of the MSA's have terms of not less than 40 years. Revenues under these
arrangements represented approximately 2% of consolidated total revenues in
1996.
In December 1993, the Company sold its home healthcare nursing business,
Personal Care Health Services. The related gain on the sale is shown separately
in 1994 under discontinued operations. All significant intercompany transactions
have been eliminated in the accompanying consolidated financial statements.
Certain amounts have been reclassified to conform with 1996 presentations.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Financial Instruments
Effective December 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("FAS 115"), which resulted in a change in the accounting for
debt and equity securities held for investment purposes. In accordance with FAS
115, the Company's debt and equity securities are now considered as either
held-to-maturity or available-for-sale. Held-to-maturity securities represent
those securities that the Company has both the positive intent and ability to
hold to maturity and are carried at amortized cost. Available-for-sale
securities represent those securities that do not meet the classification of
held-to-maturity or trading, and are carried at fair value. The Company
considers the unrealized gains and losses on these securities to be temporary,
and as such has recorded it as a separate component of Stockholders' Equity. The
adoption of FAS 115 had no effect on the Company's reported earnings in fiscal
1995 and 1996.
Inventories
Inventories of supplies are stated at the lower of cost or market, with cost
being determined on a first-in, first-out basis.
Property, Buildings and Equipment
Property, buildings and equipment are stated at cost. Repairs and maintenance
are charged to operations and replacements and significant improvements are
capitalized. Depreciation is computed on the straight-line method based on the
estimated useful lives of buildings or items of equipment.
Preopening Costs
Costs incurred prior to the opening of new facilities are deferred and amortized
on a straight-line basis over a one to three year period.
F-7
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Goodwill and Other Intangibles
Goodwill resulting from acquisitions is being amortized on a straight-line basis
over 15 to 40 years. The Company reviews the performance of its operating units
periodically to determine if an impairment has occurred. If events or changes in
circumstances indicate that an impairment exists, the Company writes-down the
corresponding goodwill to its recoverable value based upon undiscounted cash
flows. Other intangible assets are being amortized on a straight-line basis over
15 to 30 years.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Income Taxes
Effective December 1, 1993, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Statement No. 109, Accounting for Income
Taxes ("FAS 109"), which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed 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 rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets. The Company adopted
FAS 109 prospectively. There was no cumulative effect of the change in the
method of accounting for income taxes.
Operating Revenues
Operating revenues include amounts for services reimbursable by Medicare,
Medicaid, certain Blue Cross and other third-party payers under reimbursement
formulas in effect. Operating revenues are recorded net of any related
contractual allowances. Medicare and Medicaid provided approximately 64%, 63%
and 61% of the Company's operating revenues in fiscal year 1996, 1995 and 1994,
respectively. The balance of revenues from the corresponding periods,
approximately 36%, 37% and 39% was from insurance, private and other third-party
payers.
Stock Options
Proceeds from the exercise of stock options are credited to Common Stock to the
extent of par value, and the balance to additional paid-in capital. No charges
or credits are made to earnings with respect to options granted or exercised.
Income tax benefits derived from the exercise of non-incentive stock options and
from sales of stock obtained from incentive stock options before the minimum
holding period are credited to additional paid-in capital.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation ("FAS 123"). Compliance with FAS 123 is not required for the
Company until fiscal 1997. The Company has not yet determined the impact of the
new standard on its financial statements.
Earnings Per Share
Earnings per share have been computed based upon the weighted average number of
shares of Common Stock outstanding during each year after adjusting for stock
splits and giving effect for Common Stock equivalents ("CSE's") arising from
stock options. As the dilutive effect of the CSE's is less than 3% of the
weighted shares outstanding, they have not been included in the computation of
earnings per share.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
F-8
<PAGE>
2. Mergers, Acquisitions and Dispositions
The Company completed business combinations with Orthonet, Inc. on February 28,
1996, Brennan, Martell & Mirmelli, M.D.'s, P.A. and Allergy & Asthma Institute
of South Florida, P.A. on May 1, 1996, Kidney Centers of Charleston, Inc. on May
1, 1996, Portsmouth Medical Specialists, Inc. and Churchland Renal Center, Inc.
on June 1, 1996 and Cooper, Moody, Altschuler, Chizner, Dennis and Niederman,
P.A. d/b/a The Greater Ft. Lauderdale Heart Group on July 1, 1996 (the "Acquired
Companies") in stock for stock exchanges with the Company. These transactions
have been accounted for under pooling-of-interests accounting. Accordingly, the
financial statements for all periods presented have been restated as though the
companies had been combined. The restated financial statements have been
adjusted to conform with differing accounting policies of the separate
companies.
The calculation of net income per share for each period presented reflects the
issuance of 2,281,075 shares for the Acquired Companies combinations. Earnings
per share before the effect of the restatement was $1.08 and $.99 for the years
ended November 30, 1995 and 1994.
<TABLE>
Separate and combined results from the above transactions are as follows and
reflect income tax adjustments related to the Company's effective tax rate for
each fiscal year:
<CAPTION>
Acquired
Vivra Companies Combined
----- --------- --------
<S> <C> <C> <C>
Year ended November 30,1996
Revenues................................. $503,718 $13,591 (1) $517,309
Net earnings.............................. 49,847 448 50,295
Year ended November 30,1995
Revenues................................. $355,647 $30,400 $386,047
Net earnings.............................. 37,940 659 38,599
Year ended November 30,1994
Revenues................................. $286,519 $25,489 $312,008
Net earnings.............................. 30,439 445 30,884
(1) The 1996 amounts represent the revenues and net income from
December 1, 1995 through the respective dates of acquisition.
</TABLE>
In 1996, the Company acquired twenty-two dialysis centers. Total consideration
paid was $61.1 million, consisting of cash of $56.1 million and 178,327 shares
of the Company's Common Stock, which exceeded the fair value of net assets
acquired by $57.3 million.
Also in 1996, the Company acquired fourteen physician practice and related
businesses. Total consideration paid was $33.0 million, consisting of cash of
$17.7 million and 536,500 shares of the Company's Common Stock, which exceeded
the fair value of net assets acquired by $17.8 million.
The purchase price of 1996 acquisitions was allocated to $85.2 million of assets
acquired, less $2.5 million of cash, and $11.4 million of liabilities assumed.
The consideration included the Company's Common Stock and $71.3 million of cash.
In April 1996, the Company purchased 100% of the stock of Promedco, Inc., which
managed and owned interests in five cardiology diagnostic centers and one cath
lab. The total purchase price paid at closing was $3.7 million in cash,
promissory notes for $164,147 and 1.0 million shares of Common Stock of the
Company's subsidiary, Vivra Heart Services, Inc. ("VHS"). An additional $1.6
million in cash and 2.6 million shares of VHS Common Stock were earned in
January 1997 based upon Promedco meeting certain practice acquisition and
operating performance goals. Additionally, $3.2 million in cash and 3.8 million
shares of VHS Common Stock are available as contingent
F-9
<PAGE>
consideration. Further, the purchase agreement entitles the selling shareholders
to receive further consideration of up to $3.0 million payable in cash or VHS
Common Stock based upon meeting predetermined earnings targets in the years 1996
through 1998. The 1996 target was not met, therefore no payment was earned.
In 1995, the Company acquired twenty-eight dialysis centers. Total consideration
paid was $76.0 million, consisting of cash of $58.0 million and 848,391 shares
of the Company's Common Stock, which exceeded the fair value of net assets
acquired by $59.7 million.
Also in 1995, the Company acquired seven physician businesses. Total cash
consideration was $9.9 million, which exceeded the fair value of net assets
acquired by $9.8 million.
The purchase price of 1995 acquisitions was allocated to $76.3 million of assets
acquired, less $1.2 million of cash, and $2.4 million of liabilities assumed.
The consideration included the Company's Common Stock and $66.7 million of cash.
During 1994, the Company acquired five dialysis centers. Total consideration
paid was $4.3 million, consisting of cash of $763,000 and 255,777 shares of the
Company's Common Stock, which exceeded the fair value of net assets acquired by
approximately $1.8 million.
Also during 1994, the Company acquired eight physician practice and related
businesses. Total consideration paid was $8.8 million, consisting of cash of
$6.6 million and 130,043 shares of the Company's Common Stock, which exceeded
the fair value of net assets acquired by approximately $6.2 million.
In November 1994, the Company purchased certain assets and liabilities in Asthma
and Allergy CareAmerica, Inc., a provider of outpatient asthma/allergy care.
Total consideration paid was $4.8 million, consisting of cash of $1.3 million
and 210,602 shares of the Company's Common Stock, which exceeded the fair value
of net assets acquired by approximately $2.1 million. The purchase agreement
entitles the selling shareholders to receive further consideration of up to
$14.3 million payable in cash or Common Stock of the Company, based upon meeting
predetermined earnings targets in the years 1995 through 1998. The 1995 and 1996
earnings target was not met, therefore no earnout payment was made.
The acquisitions of three dialysis centers and five physician practice and
related businesses in 1996, which were not accounted for in the aforementioned
restatement, four dialysis centers in 1995, and three dialysis centers in 1994
have been accounted for as pooling-of-interests. Consolidated Financial
Statements for the periods prior to these exchanges have not been restated as
the effect of the poolings was not material to the Company.
The acquisitions of the remaining dialysis centers and related specialty
businesses have all been accounted for as purchases and, accordingly, have been
included in the statement of earnings since their dates of acquisition.
<TABLE>
The following table presents the unaudited consolidated results of operations on
a pro forma basis as though the non-restated for acquisitions made in 1996 had
occurred on December 1, 1994.
<CAPTION>
Year ended November 30
1996 1995
--------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues $545,888 $448,661
Net earnings 51,682 41,671
Earnings per Share $1.30 $1.09
</TABLE>
F-10
<PAGE>
In June 1995, the Company completed the sale of the assets related to the
operation of its five ambulatory surgery centers. In connection with the sale,
the Company realized a pre-tax gain of $2.2 million.
In July 1995, the Company sold its 60% interest in South Coast Rehabilitation
Services ("SCRS"), a medical rehabilitation provider. In connection with the
sale, the Company realized a pre-tax gain of $2.0 million.
3. Discontinued Operations
In December 1993, the Company sold its home healthcare nursing business,
Personal Care Health Services. The cash proceeds net of retained assets,
liabilities and taxes were approximately $5.9 million. Accordingly, the home
healthcare nursing business has been classified as a discontinued operation in
the accompanying Supplemental Consolidated Statement of Earnings. The sale of
the home healthcare nursing business resulted in a gain on the sale of
discontinued operations in the accompanying Supplemental Consolidated Statement
of Earnings of $697,000 net of applicable income tax of $505,000 in 1994.
F-11
<PAGE>
4. Investments
<TABLE>
The amortized cost and estimated fair value of the Company's investments are as
follows:
<CAPTION>
November 30, 1996
----------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Value
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Short-term investments:
Debt securities due within 1 year:
Pre-refunded bonds $49,067 $48 $(2) $49,113
U.S. Treasury Notes 19,903 131 - 20,034
Commercial paper 13,827 2 - 13,829
----------------------------------------------------------------------
Subtotal debt securities 82,797 181 (2) 82,976
Marketable equity 826 1,017 - 1,843
----------------------------------------------------------------------
Subtotal short-term investments 83,623 1,198 (2) 84,819
Non-current investments:
Debt securities due after 1 year through 5 years:
Pre-refunded bonds 41,561 182 (20) 41,723
U.S. Treasury Notes 24,736 306 - 25,042
----------------------------------------------------------------------
Total Investments $149,920 $1,686 $(22) $151,584
======================================================================
<CAPTION>
November 30, 1995
----------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Value
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Short-term investments:
Debt securities due within 1 year:
Pre-refunded bonds $28,527 $ - $ - $28,527
Marketable equity 6,486 9,049 (446) 15,089
----------------------------------------------------------------------
Subtotal 35,013 9,049 (446) 43,616
Non-current investments:
Debt securities due after 1 year through 5 years:
Pre-refunded bonds 22,510 - - 22,510
----------------------------------------------------------------------
Total Investments $57,523 $9,049 $(446) $66,126
======================================================================
</TABLE>
During the year ended November 30, 1996, available-for-sale securities with a
fair value at the date of sale of $11.4 million were sold. The gross realized
gains on such sales totaled $4.7 million. The cost of the available-for-sale
securities sold was computed on the specific identification method.
The Company's debt securities are classified as held-to-maturity and marketable
equity securities are classified as available-for-sale.
F-12
<PAGE>
5. Property, Buildings and Equipment
<TABLE>
Property, buildings and equipment are summarized as follows:
<CAPTION>
November 30
1996 1995
------------------------------------
(In thousands)
<S> <C> <C>
Land $ 5,166 $ 4,734
Buildings and improvements 46,251 37,636
Furniture, fixtures and equipment 92,422 72,780
Construction in progress (estimated costs to complete at November
1996 - $2.7 million)
7,279 4,067
------------------------------------
151,118 119,217
Less accumulated depreciation (53,437) (42,199)
------------------------------------
$ 97,681 $ 77,018
====================================
</TABLE>
6. Income Taxes
<TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<CAPTION>
Year ended November 30
1996 1995
------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 6,538 $ 5,484
Accrued compensation and other benefits 3,595 3,147
Accrued workers compensation insurance 1,490 2,247
Accrued health care costs 1,065 577
Deferred income 3,970 2,882
Other assets (546) 233
------------------------------------
Total deferred tax assets 16,112 14,570
Deferred tax liabilities:
Net unrealized gain on marketable securities, classified as current 418 3,532
Amortization of intangibles 3,441 4,428
Depreciation 4,124 2,271
Other liabilities (373) 1,038
------------------------------------
Total deferred tax liabilities 7,610 11,269
------------------------------------
Net deferred tax assets $ 8,502 $ 3,301
====================================
</TABLE>
F-13
<PAGE>
6. Income Taxes (continued)
<TABLE>
Income tax expense from continuing operations consists of the following:
Year ended November 30
1996 1995 1994
----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $27,962 $21,109 $19,164
State 4,890 6,524 5,258
Deferred (credit) (2,087) (2,988) (3,444)
----------------------------------------------------------------
$30,765 $24,645 $20,978
================================================================
</TABLE>
<TABLE>
Deferred income taxes result from timing differences in the recognition of
certain revenues and expenses for tax and financial statement purposes. The tax
effects of these differences are:
<CAPTION>
Year ended November 30
1996 1995 1994
------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Amortization of intangibles $ (987) $ 455 $ 1,786
Provision for doubtful accounts in excess of amounts written
off (1,054) (1,081) (1,537)
Accrued compensation and other benefits (448) (612) (1,118)
Accrued workers compensation insurance 757 (640) (1,098)
Health insurance reserves in excess of claims paid
(488) 288 (129)
Deferred income (1,088) (2,509) -
Other 1,221 1,111 (1,348)
------------------------------------------------
$ 2,087) $ (2,988) $ (3,444)
================================================
</TABLE>
<TABLE>
The differences between federal income taxes computed at the statutory rate and
the total provision are:
<CAPTION>
Year ended November 30
1996 1995 1994
----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $28,371 $22,136 $17,907
State taxes on income, net of federal tax benefit
3,007 3,363 2,983
Miscellaneous items (613) (854) 88
----------------------------------------------------
$30,765 $24,645 $20,978
=====================================================
The Company made income tax payments, net of refunds received, of $21.2 million,
$19.7 million and $20.6 million in 1996, 1995 and 1994, respectively.
</TABLE>
F-14
<PAGE>
7. Long-Term Debt
<TABLE>
Long-term debt at November 30, 1996, consists of the following:
<CAPTION>
Principal Installments Due After
Due Within One Year One Year
-----------------------------------------------
(In thousands)
<S> <C> <C>
5% Convertible Subordinated Notes due 2001 $ - $158,545
Physician notes payable, collateralized by deeds of trust
on physician practice assets with a cost of
approximately $1,679,000, interest ranging from 5-1/2%
to 7%, due through 2000 390 526
Other notes payable, collateralized by deeds of trust on
land, buildings and equipment with a cost of
approximately $981,000, interest ranging from 5-1/2%
to 5-3/4%, due through 2001 219 3,463
-----------------------------------------------
$609 $162,534
===============================================
</TABLE>
In July 1996, the Company completed a $150 million issuance of 5% Convertible
Subordinated Notes due 2001 in a private placement and exercise of the related
over-allotment option of $8.5 million in August 1996. The net proceeds from this
private placement and over-allotment option were $154.4 million. The Notes are
convertible into Common Stock of the Company at a conversion price of $37.20 per
share subject to adjustment in certain circumstances. The Notes are not
redeemable prior to July 10, 1999. Thereafter, the Notes will be redeemable at
the option of the Company, in whole or in part, at any time at the redemption
prices set forth in the Indenture Agreement, plus accrued and unpaid interest.
Upon a Change of Control, as defined in the Indenture Agreement, each holder of
the Notes will have the right to require the Company to repurchase all or any
part of such holder's Notes at 100% of the principal amount thereof, plus
accrued and unpaid interest
Interest paid was $250,000, $623,000 and $507,000 in 1996, 1995 and 1994,
respectively.
<TABLE>
The approximate annual maturities of long-term debt at November 30, 1996, are as
follows:
<CAPTION>
Year ending November 30 (In thousands)
<S> <C>
1997 $ 609
1998 1,970
1999 1,892
2000 65
2001 158,607
</TABLE>
8. Capital Stock and Stock Options
The Company declared a three-for-two stock split, in the form of a stock
dividend, for shareholders of record on October 25, 1995 with shares distributed
on November 22, 1995. The number of shares and the earnings per share shown in
the Consolidated Financial Statements, as well as information in this Note, Note
2 and Note 12, have been restated to reflect the stock split.
In February 1995, the Company completed a registered public offering. In this
offering, the Company sold 2,992,500 shares of common stock and the Company
realized net proceeds of $59.6 million.
In 1989, the Company adopted a stockholders' rights plan designed to deter
takeover initiatives not in the best interests of the Company's stockholders. On
February 13, 1996, the Company amended and restated its stockholder rights plan
to reset the number of rights associated with each share of Common Stock to the
original level of one right per share of Common Stock, each right exercisable at
a price of $100 in exchange for 1/100th of a share of the
F-15
<PAGE>
Company's Series A Junior Participating Preferred Stock, and reduce the
threshold at which the rights are triggered to 15 percent from 20 percent of the
outstanding shares of the Company's common stock. The rights are redeemable by
action of the Company's Board of Directors at a price of $.001 per right at any
time prior to their becoming exercisable.
The Company has eight stock option plans under which stock options may be
granted.
The Company's 1989 Stock Incentive Plan provides for the granting of options to
purchase Common Stock to officers and other employees. Options may be granted at
not less than 100% of fair market value at the date of grant, are exercisable at
various dates and expire no more than 10 years after the date of grant. Options
may be paid for in cash or by the return of previously acquired shares of Common
Stock. Shares acquired by the Company through option exercises were 116,067 in
1994. These shares were included in treasury stock and were valued at market at
the date of exercise. Treasury shares issued in lieu of Common Stock to effect
stock option exercises were 116,067 in 1994.
As of November 30, 1996, 6,650,236 options had been granted, of which 1,146,566
are exercisable. Additionally, 190,778 options remain available for grant.
<TABLE>
A summary of activity under the plan during 1994, 1995 and 1996 is as follows:
<CAPTION>
Number Aggregate
of Shares Per Share Option Price
------------------------------------------------------------
(In thousands, except number of shares and per share amounts)
<S> <C> <C> <C>
Options outstanding at December 1, 1993 2,812,927 $ 4.00-15.50 $28,061
Options granted 680,210 13.33-18.92 11,757
Options canceled and expired (18,471) 4.00-11.72 (192)
Common Stock issued on exercise (675,522) 4.86-13.33 (4,384)
---------------------------------------------------------
Options outstanding at November 30, 1994 2,799,144 4.54-18.92 35,242
Options granted 892,210 17.92-23.25 19,218
Options canceled and expired (270,899) 4.86-18.83 (3,848)
Common Stock issued on exercise (1,018,397) 4.86-18.50 (11,725)
---------------------------------------------------------
Options outstanding at November 30, 1995 2,402,058 4.54-23.25 38,887
Options granted 563,047 22.75-30.00 16,279
Options canceled and expired (29,195) 11.17-24.13 (564)
Common Stock issued on exercise (543,474) 4.54-25.63 (6,636)
=========================================================
Options outstanding at November 30, 1996 2,392,436 $ 4.86-30.00 $47,966
=========================================================
</TABLE>
F-16
<PAGE>
8. Capital Stock and Stock Options (continued)
The market value of the Company's Common Stock at the date the options were
exercised was $25.20-$35.25 for 1996, $17.81-$23.63 for 1995, and $13.08-$19.17
or 1994.
The Company adopted the Transition Consultants Stock Option Plan in connection
with its spin-off from Community Psychiatric Centers on August 31, 1989. On that
date options were granted to purchase 1,316,250 shares of the Company's Common
Stock to four employees of Community Psychiatric Centers at $5.82, which was the
fair market value at that date. As of November 30, 1996, all outstanding options
are exercisable.
<TABLE>
A summary of activity under the plan during 1994, 1995 and 1996 is as follows:
<CAPTION>
Number Aggregate
of Shares Per Share Option Price
-----------------------------------------------------------------
(In thousands, except number of shares and per share amounts)
<S> <C> <C> <C>
Options outstanding at December 1, 1993 787,500 $ 5.82 4,583
Common Stock issued on exercise (278,400) 5.82 (1,620)
----------------------------------------------------------------
Options outstanding at November 30, 1994 509,100 5.82 2,963
Common Stock issued on exercise (359,100) 5.82 (2,090)
----------------------------------------------------------------
Options outstanding at November 30, 1995 150,000 5.82 873
Common Stock issued on exercise (75,000) 5.82 (436)
----------------------------------------------------------------
Options outstanding at November 30, 1996 75,000 $ 5.82 $ 437
================================================================
</TABLE>
The market value of the Company's Common Stock at the date the options were
exercised was $25.95-$30.50 for 1996, $20.33-$22.30 for 1995 and $14.67-$19.33
for 1994.
During 1995, the Company established Stock Option Plans for the following
subsidiaries: Vivra Specialty Partners, Inc. (the "VSP Plan"), Vivra Heart
Services, Inc. (the "VHS Plan"), Vivra Asthma & Allergy CareAmerica, Inc. (the
"VAC Plan"), Vivra Health Advantage, Inc. (the "VHA Plan"), Vivra Orthopedic
Services, Inc. (the "VOR Plan") and Vivra OB-GYN Services, Inc. (the "VOG
Plan"), (collectively, the "1995 Stock Option Plans"). Each of the 1995 Stock
Option Plans has similar terms. The plans provide for the granting of options to
purchase common stock of the respective company to officers, employees, advisors
and certain related entities of the company or Vivra. Options may be granted at
not less than 100% of the fair market value at the date of grant, are
exercisable at various dates and expire no more than 10 years after the date of
grant. Options may be paid for in cash or by the return of previously acquired
shares. Subject to certain conditions, stockholders in these companies are
permitted to put shares at a defined date in the future to the company at a
price equal to the then fair market value of the stock. If the employment or
consulting agreement of any equity holder shall terminate, then the companies
have the right to repurchase such stockholder's shares at the then fair market
value. Additionally, the companies retain the right of first refusal regarding
the sale or transfer of any acquired shares.
F-17
<PAGE>
8. Capital Stock and Stock Options (continued)
<TABLE>
Information regarding activity in the other 1995 Stock Option Plans is
summarized in the tables below:
<CAPTION>
VSP Plan VHS Plan
-----------------------------------------
<S> <C> <C>
Options outstanding at December 1, 1994 -- --
Options granted 770,000 747,500
-----------------------------------------
Options outstanding at November 30, 1995 770,000 747,500
Options granted 3,243,609 1,992,201
Options canceled and expired (20,000) (22,500)
-----------------------------------------
Options outstanding at November 30, 1996 3,993,609 2,717,201
=========================================
Options exercisable at November 30, 1996 274,950 263,750
Number of subsidiary's fully diluted common shares 39,631,541 36,666,529
=========================================
Average option price per share at November 30, 1996 $1.82 $0.97
=========================================
<CAPTION>
VHA Plan VOR Plan
-----------------------------------------
<S> <C> <C>
Options outstanding at December 1, 1994 -- --
Options granted 600,000 207,000
-----------------------------------------
Options outstanding at November 30, 1995 600,000 207,000
Options granted 602,186 563,000
Options canceled and expired (50,000) --
-----------------------------------------
Options outstanding at November 30, 1996 1,152,186 770,000
=========================================
Options exercisable at November 30, 1996 110,000 201,150
Number of subsidiary's fully diluted common shares 9,829,006 11,944,667
=========================================
Average option price per share at November 30, 1996 $0.79 $1.26
=========================================
<CAPTION>
VOG Plan VAC Plan
-----------------------------------------
<S> <C> <C>
Options outstanding at December 1, 1995 -- --
Options granted 1,050,508 7,060,717
Options canceled and expired -- (330,000)
-----------------------------------------
Options outstanding at November 30, 1996 1,050,508 6,730,717
=========================================
Options exercisable at November 30, 1996 -- 125,000
Number of subsidiary's fully diluted common shares 14,328,393 67,489,314
=========================================
Average option price per share at November 30, 1996 $0.96 $0.51
=========================================
</TABLE>
During 1995, the Company sold the assets related to the operations of its
subsidiary, Surgical Partners of America, Inc. ("SPA"). All personnel formerly
employed by SPA were either transferred to another subsidiary or terminated.
Accordingly, there are no longer any participants in the SPA 1992 Stock Option
Plan. In 1995, there were 178,823 options which were exercised and 551,503
options were forfeited and canceled.
9. Profit Sharing and 401(k) Plan
The Company's Profit Sharing Plan ("the Plan") is a noncontributory, trusteed
profit sharing plan. All regular non-union employees in the United States (union
employees are eligible if the collective bargaining agreement so specifies) with
at least 1,000 hours of service per annum, over 21 years of age, and employed at
fiscal year-end are eligible for participation in the Plan after one year of
employment. Contributions to the Plan are discretionary and are determined
annually by the Board of Directors. Effective February 1, 1993, the Plan was
amended to add a 401(k) provision. Employees may make voluntary contributions of
up to 10% of their before tax compensation under the 401(k) provision of the
Plan and may also contribute up to an additional 10% of their after tax
compensation in accordance with the original Plan provisions.
F-18
<PAGE>
9. Profit Sharing and 401(k) Plan (continued)
Contributions to the Plan by the Company were $2.1 million, $940,000 and $3.0
million for 1996, 1995 and 1994, respectively.
10. Business Segment Information
The Company has three principal business segments, Vivra Renal Care, Vivra
Specialty Partners and Other Services. Vivra Renal Care provides dialysis
services. Vivra Specialty Partners provides physician network and disease
management services to managed care and provider organizations. Other Services
consists of the ambulatory surgery, rehabilitation therapy and primary care
physician practice management businesses which were sold in 1995.
<TABLE>
The following tables have been prepared in accordance with the requirements of
FASB Statement No. 14. This information has been derived from the Company's
accounting records and represents the Company's estimates as to proper
allocation of certain expenses.
<CAPTION>
Year ended November 30
1996 1995 1994
-------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating revenues:
Vivra Renal Care $411,294 $316,572 $265,262
Vivra Specialty Partners 95,296 40,226 17,742
Other Services - 24,028 27,113
=======================================================
Total operating revenues $506,590 $380,826 $310,117
=======================================================
Operating profits:
Vivra Renal Care $85,618 $64,658 $54,406
Vivra Specialty Partners (4,919) (994) 787
Other Services - (16) (550)
-------------------------------------------------------
Total operating profits 80,699 63,648 54,643
Other income 10,719 5,221 1,891
Corporate expenses (6,554) (5,047) (4,753)
Interest expense (3,692) (483) (606)
=======================================================
Earnings from continuing operations, before minority
interest and income taxes $81,172 $63,339 $51,175
=======================================================
F-19
<PAGE>
10. Business Segment Information (continued)
Year ended November 30
1996 1995 1994
------------------------------------------------------
(In thousands)
Identifiable assets:
Vivra Renal Care $344,388 $253,681 $149,058
Vivra Specialty Partners 67,054 28,703 17,529
Other Services - 4,402 25,423
Corporate 243,776 124,637 91,180
======================================================
$655,218 $411,423 $283,190
======================================================
Depreciation expense:
Vivra Renal Care $13,139 $9,951 $8,913
Vivra Specialty Partners 907 496 199
Other Services - 711 716
Corporate 124 122 125
======================================================
$14,170 $11,280 $9,953
======================================================
Capitalized expenditures for property, buildings
and equipment: (1)
Vivra Renal Care $30,976 $27,185 $14,980
Vivra Specialty Partners 1,205 1,184 382
Other Services - 1,000 5,514
Corporate 1,172 64 56
======================================================
$33,353 $29,433 $20,932
======================================================
(1) Excludes assets acquired in business acquisitions of $10.5 million, $4.3
million and $2.1 million in 1996, 1995 and 1994, respectively.
</TABLE>
11. Commitments and Contingencies
The Company rents office facilities under lease arrangements which are
classified for financial statement purposes as operating leases. The future
minimum rental commitments under noncancellable operating leases at November 30,
1996, are summarized below:
(In thousands)
1997 $15,212
1998 13,696
1999 12,310
2000 9,625
2001 6,773
Total rent expense amounted to $15.6 million, $11.8 million and $8.9 million in
1996, 1995 and 1994, respectively.
Contingencies
On December 18, 1996, the Company received from the United States Attorney for
the District of Massachusetts a grand jury subpoena which calls for records
pertaining to the operations of VRC. The subpoena appears to focus on VRC's
previous relationship with Damon Clinical Laboratories and other affiliated
entities, as well as utilization patterns and procedures pertaining to clinical
laboratory blood tests billed to the Medicare and/or Medicaid programs. In
connection with the receipt of this subpoena, the Company has been advised that
VRC is now a subject of the United States Attorney's investigation. As the
investigation is in the preliminary stage, management
F-20
<PAGE>
is unable to make an informed judgment as to the ultimate resolution of such
proceedings and its impact on the results of operations.
On May 20, 1992, in the Pennsylvania Court of Common Pleas in Delaware County, a
complaint was filed against VRC. In September 1993, the court determined that
the suit could proceed as a class action on behalf of 93 patients, subsequently
reduced to 70, who were treated at one of the VRC facilities, some of whom are
alleged to have died or been injured during or as a result of the course of
treatment. On January 23, 1997, the Company was notified by outside counsel that
the class representatives came to an agreement to recommend to the class members
that all claims of all of the class members and their representatives be settled
in exchange for payment of an amount that is covered by the Company's insurance
policies. Once the agreement is formalized and put in writing, the class members
will have the opportunity to comment on the fairness of the settlement, after
which the settlement will become the subject of consideration by the court as to
fairness thereof.
The Company is also subject to other claims and suits in the ordinary course of
business. Management believes that either insurance, which is purchased from
third parties, is adequate to cover any such claims or that such claims lack
merit and the outcome of all such claims should not have a material adverse
effect on the Company's results of operations or financial condition.
F-21
<PAGE>
12. Quarterly Results of Operations (Unaudited)
<TABLE>
The following is a tabulation of the unaudited quarterly data for the three
years ended November 30, 1996.
<CAPTION>
Three months ended
---------------------------------------------------------------------
February 28/29 May August November
31 31 30
---------------------------------------------------------------------
(In thousands, except per share and price data)
<S> <C> <C> <C> <C>
1996
Total operating revenues $110,075 $123,326 $130,987 $142,202
Net earnings 11,287 12,465 13,071 13,472
Earnings per share (primary and fully diluted):
Net earnings .29 .31 .33 .34
Stock prices:
High 30-7/8 35-3/8 35-1/16 36-1/8
Low 22-5/8 26-3/4 27-5/8 28
1995
Total operating revenues $90,791 $96,114 $95,238 $98,683
Net earnings 8,704 10,001 10,613 9,281
Earnings per share (primary and fully diluted):
Net earnings .25 .26 .28 .24
Stock prices:
High 21-7/8 23-7/8 22-1/8 23-3/8
Low 17-3/4 18-1/3 17-3/4 21-11/64
1994
Total operating revenues $69,838 $75,903 $80,319 $84,057
Earnings from continuing operations 6,940 7,502 7,801 7,944
Gain on sale of discontinued operations 697 -- -- --
---------------------------------------------------------------------
Net earnings 7,637 7,502 7,801 7,944
Earnings per share (primary and fully diluted):
Continuing operations .22 .23 .23 .24
Gain on sale of discontinued operations .02 -- -- --
---------------------------------------------------------------------
Net earnings .24 .23 .23 .24
Stock prices:
High 17-1/3 17-3/4 17-1/8 19-2/3
Low 13-1/8 15-1/8 15-1/8 17
</TABLE>
F-22
<PAGE>
13. Fair Values of Financial Instruments
The FASB issued Statement No. 107, Disclosures about Fair Value of Financial
Instruments, which requires disclosure of fair value information about financial
instruments for which it is practicable to estimate fair value. The following
methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Debt and Available-for-sale securities: The fair values for debt and
available-for-sale securities are based on quoted market prices.
Long and short-term debt: Since the Company recently completed its
placement of convertible subordinated notes in August 1996, the Company
believes that the fair value of the long-term debt is properly reflected at
the current carrying amount. Also, the Company also believes that the
remaining long and short-term debt approximates its fair value.
14. Subsequent Events
For the two months ended January 31, 1997, the Company completed nine
acquisitions which were treated either as purchases or poolings-of-interests.
Total consideration paid was $50.6 million, consisting of cash of $45.2 million
and 188,230 shares of the Company's Common Stock.
F-23
<PAGE>
<TABLE>
Schedule II - Valuation and Qualifying Accounts
<CAPTION>
Vivra Incorporated and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to
Beginning Charged to Costs Other Accounts - Deductions - Balance at
of Period and Expenses Describe Describe End of Period
Description
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended November 30, 1994 $ 7,897,000 $2,228,000 $1,350,000 (2) $(685,000) (1) $ 10,790,000
Year ended November 30, 1995 10,790,000 4,383,000 604,000 (3) (2,348,000) (1) 13,429,000
Year ended November 30, 1996 13,429,000 5,726,000 2,376,000 (2) (2,824,000) (1) 18,707,000
(1) Write-offs, net of recoveries.
(2) Allowance purchased as part of 1994 acquisitions and $2.3 million purchased as part of 1996 acquisitions.
(3) Contingent rate adjustments charged to operating revenues.
</TABLE>
F-24
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Page No.
- ----------- ---------------------------------------------------- --------
3 Articles of Incorporation and By-Laws of Registrant:
3.1* Amended and Restated Certificate of
Incorporation (filed as Exhibit 3.1 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1995, and
incorporated herein by reference).
3.2* By-Laws (filed as Exhibit 3B to Registrant's
Registration Statement on Form 10, File No.
1-10261, and incorporated herein by reference).
4 Instruments defining the Rights of Security Holders
4.1* Amended and Restated Rights Agreement dated as
of February 13, 1996 by and between Vivra
Incorporated and The First National Bank of
Boston, as Rights Agent (filed as Exhibit 4D to
Registrant's Form 10/A dated February 14, 1996,
and incorporated herein by reference).
4.2* Indenture by and between Vivra Incorporated and
State Street Bank and Trust Company, as Trustee,
dated as of July 8, 1996, regarding Registrant's
5% Convertible Subordinated Notes Due 2001
(filed as Exhibit 4.2 to Registrant's
Registration Statement on Form S-3, File No.
333-13625, and incorporated herein by
reference).
4.3* Registration Rights Agreement dated as of July
8, 1996 by and among Vivra Incorporated, Alex.
Brown & Sons Incorporated, Montgomery
Securities, Bear, Stearns & Co. Inc., Smith
Barney Inc. and UBS Securities LLC, as the
Initial Purchasers of Registrant's 5%
Convertible Subordinated Notes Due 2001, with
respect to the registration of said Notes under
applicable securities laws (filed as Exhibit 4.3
to Registrant's Registration Statement on Form
S-3, File No. 333-13625, and incorporated herein
by reference).
10 Material Contracts
10.1* Debenture Payment Assumption Agreement between
Registrant and Community Psychiatric Centers
(filed as Exhibit 10.5A.6 to Registrant's
Registration Statement on Form 10, File No.
1-10261, filed May 26, 1989, and incorporated
herein by reference).
10.2* Registrant's Transition Consultants Stock Option
Plan (filed as Exhibit 10G to Registrant's
Registration Statement on Form 10, File No.
1-10261, and incorporated herein by reference).
10.2.1* Transition Consultants Stock Option Plan (filed
as Exhibit 10.4.4 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
November 30, 1989, and incorporated herein by
reference).
<PAGE>
10.3*+ Registrant's Revised 1989 Stock Incentive Plan.
(filed as Exhibit 10.3 to Registrant's Annual
Report on Form 10-K for the fiscal year ended
November 30, 1995, and incorporated herein by
reference).
10.4*+ Registrant's Profit Sharing Plan (filed as
Exhibit 10.11 to Registrant's Amendment on Form
8 to Annual Report on Form 10-K for the fiscal
year ended November 30, 1992, and incorporated
herein by reference.)
10.5* Form of Officer and Director Indemnification
Agreement (filed as Exhibit 10.5 to Registrant's
Annual Report on Form 10-K for the fiscal year
ended November 30, 1991, and incorporated herein
by reference).
10.6+ Revised and Restated Employment Contract between
Registrant and Kent J. Thiry, dated as of
November 1, 1996.
10.7*+ Form of Employment Agreement between Registrant
and certain executive officers of Registrant
(filed as Exhibit 10.7 to Registrant's Annual
Report on Form 10-K for the fiscal year ended
November 30, 1995, and incorporated herein by
reference).
10.8* Form of agreement between Registrant and the
Medical Directors of its dialysis facilities
(filed as Exhibit 10.6 to Registrant's
Registration Statement on Form S-1, File No.
33-34438, and incorporated herein by reference).
10.9* Agreement effective February 1, 1996 between
Amgen Inc. and Registrant (filed as Exhibit 10.9
to the Registrant's Annual Report on Form 10-K
for the fiscal year ended November 30, 1995, and
incorporated herein by reference).
10.10* Agreement effective February 1, 1996 between
Bellco Drug Corp., Metro Health Corp. and
Registrant (filed as Exhibit 10.10 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1995, and
incorporated herein by reference).
11 Statement re Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
* Previously filed.
+ Represents management contract or compensatory plan or arrangement.
Exhibit 10.6
REVISED AND RESTATED EMPLOYMENT CONTRACT
----------------------------------------
THIS REVISED AND RESTATED EMPLOYMENT CONTRACT (the "Contract") is made as
of November 1, 1996, between VIVRA INCORPORATED, a Delaware corporation
------------------
("VIVRA") and KENT J. THIRY, an individual ("Thiry").
-------------
RECITALS:
A. VIVRA has employed Thiry in an executive capacity pursuant to a Contract
dated as of December 1, 1992.
B. VIVRA desires to revise the terms of Thiry's employment and restate his
contract, and Thiry desires to continue in VIVRA's employment.
NOW, THEREFORE, Thiry and VIVRA agree:
1. Definitions. As used in this Contract, the following terms have the
-----------
following meanings:
1.1 Beneficiary. "Beneficiary" means any Person or Persons designated from
-----------
time to time by Thiry as beneficiary pursuant to paragraph 6.5.1.
1.2 Board. "Board" means the Board of Directors of VIVRA.
-----
1.3 Change of Control. "Change of Control" means a change of control that
-----------------
would be required to be reported pursuant to Item 6(e) of Schedule 14A of Rule
14 under the Exchange Act. Without limitation of the foregoing sentence, such a
change of control shall be deemed to have occurred if (i) any Person is or
becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act),
directly or indirectly, of securities of VIVRA representing 30% or more of the
combined voting power of VIVRA's then outstanding securities, or (ii) during any
period of two (2) consecutive years during the term of this Contract,
individuals who at the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the election of
each director who was not a director at the beginning of such period has been
approved in advance by directors representing at least two-thirds of the
directors then in office who were directors at the beginning of such period,
(iii) substantially all (80% or more) of Vivra's assets are sold or (iv) if
Vivra merges or consolidates with or into another entity where the stockholders
of Vivra immediately before such event own less than 50% of the surviving entity
immediately
-1-
<PAGE>
after such event. For purposes of this Agreement, a Change of Control does
not include a distribution to VIVRA's shareholders of stock of any subsidiary or
a purchase of securities or assets by a management-led purchasing group, which
includes Thiry.
1.4 Code. "Code" means the Internal Revenue Code of 1986, as amended.
----
1.5 Commission. "Commission" means the Securities and Exchange Commission.
----------
1.6 Compete. "Compete" means either directly or indirectly to own,
-------
initiate, manage, operate, join, control, advise, or participate in the
ownership, operation, management or control (other than as a shareholder owning
less than five percent (5%) of the capital stock of any entity, the shares of
which are traded on a national exchange) of any business in the U.S. similar to
the Existing or Other Businesses or to lease or sell real or personal property
to any such business.
1.7 Confidential Information. "Confidential Information" means all company
------------------------
information which would constitute proprietary information or protectable trade
secrets under the laws of the State of California, including without limitation,
(i) market surveys, studies and analyses (ii) medical and personnel records,
(iii) statistical, financial, cost and accounting data, (iv) existing and
prospective patient and customer lists; and (v) other written materials
proprietary to VIVRA.
1.8 Contingent Bonus. A bonus described in paragraph 3.1.3.
----------------
1.9 Discretionary Bonus. A bonus described in paragraph 3.1.2.
-------------------
1.10 Employment Term. "Employment Term" means the period commencing
---------------
November 1, 1996 and continuing for the shorter of (i) a period of four (4)
years ending October 31, 2000, or (ii) a period ending on the date of any
termination pursuant to paragraph 5 or any wrongful termination by either VIVRA
or Thiry.
1.11 Exchange Act. "Exchange Act" means the Securities Exchange Act of
------------
1934, as amended.
1.12 Existing or Other Businesses. "Existing or Other Businesses" means
----------------------------
dialysis services, diabetes management, and any other business (a) in which
VIVRA is actively engaged during or at the end of the Employment Term and (b)
which, during the preceding twelve (12) months, represented at least ten percent
(10%) of Vivra's consolidated revenue.
-2-
<PAGE>
1.13 Fiscal Year. "Fiscal Year" means VIVRA's annual accounting period for
-----------
financial accounting and reporting purposes, which currently is the period from
each December 1 to and including the next following November 30.
1.14 GAAP. "GAAP" means generally accepted accounting principles in the
----
United States as in effect from time to time.
1.15 Permanent Disability. "Permanent Disability" means any mental or
--------------------
physical illness, disease or condition which results in Thiry's inability to
perform his duties during normal working hours for a period of not less than six
(6) consecutive months.
1.16 Person. "Person" means any individual, corporation, partnership,
------
business trust, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency, or political subdivision
thereof.
1.17 Prior Contract. "Prior Contract" means the Employment Agreement
--------------
between Thiry and VIVRA dated as of December 1, 1992.
1.18 Salary. "Salary" means Thiry's annual base compensation of a minimum
------
of $275,000 per Fiscal Year, except when "Salary" is used in paragraphs 5.2.2,
5.2.3. and 5.2.4, in which contexts "Salary" means annual base compensation to
Thiry of a minimum of $300,000 per Fiscal Year.
2. Employment and Duties.
---------------------
2.1 Position. During the Employment Term, VIVRA shall employ Thiry and
--------
Thiry shall serve VIVRA as its President and Chief Executive Officer.
2.1.1 Directorship. Thiry is a Director of VIVRA for a term ending at the
------------
annual meeting of VIVRA's shareholders in 1998. VIVRA shall use its best efforts
to cause Thiry to be re-elected to the Board for further terms as long as he
serves as VIVRA's Chief Executive Officer. If he ceases to be employed by VIVRA
at any time Thiry agrees to offer to resign from the Board as of the date of his
termination of employment.
2.2 Time and Effort. During the Employment Term, Thiry shall devote his
---------------
full productive business time, efforts, energies and abilities to VIVRA and
shall not render services to any other person or entity without the written
consent of the Board. Thiry, however, shall not be precluded from engaging in
civic, charitable or religious activities.
-3-
<PAGE>
2.3 Place of Business. During the Employment Term, Thiry's principal place
-----------------
of business shall be in San Mateo County, California, and VIVRA shall not
require him to maintain his principal place of business elsewhere.
3. Compensation, Reimbursement and Benefits.
----------------------------------------
3.1 Compensation.
------------
3.1.1 Salary. During the Employment Term, VIVRA shall pay the Salary to
------
Thiry, in equal monthly or more frequent installments, in accordance with
VIVRA's general practice and subject to legally required withholdings.
3.1.2 Discretionary Bonuses. VIVRA may award Discretion-ary Bonuses to
---------------------
Thiry in the future as determined by the Board in its sole discretion, but VIVRA
shall be under no obligation, express or implied, to grant any future
Discretionary Bonuses.
3.1.3 Contingent Bonus. If VIVRA's earnings per share are $1.25 or more for
----------------
the fiscal year ended November 30, 1996 and if he is employed as its Chief
Executive Officer throughout the period ending November 30, 1996, VIVRA shall
then pay Thiry a bonus of $300,000 which was granted and accrued in previous
years.
3.2 Expense Reimbursement and Benefits.
----------------------------------
3.2.1 Expense Reimbursement. During the Employment Term, VIVRA shall
---------------------
promptly reimburse Thiry, upon submission to VIVRA by Thiry of adequate
documentation, for all reasonable out-of-pocket expenses respecting
entertainment, travel, meals, hotel accommodations and other like-kind expenses,
in each case incurred by Thiry in the interest of VIVRA's business.
3.2.2 Insurance. During the Employment Term, VIVRA shall provide life,
---------
medical, dental and hospital insurance to Thiry in the amount and on the terms
such insurance is provided from time to time to other executive officers of
VIVRA.
3.2.3 Automobile Allowance. VIVRA shall provide Thiry with an automobile
--------------------
allowance of Five Hundred Dollars ($500) per month, and shall reimburse him for
all reasonable parking and cellular phone expenses incurred in connection with
his duties hereunder.
3.2.4 Vacation and Sick Leave. Thiry shall be entitled to paid vacation and
-----------------------
sick leave each year of the same duration and under the same conditions as other
executive officers of VIVRA.
-4-
<PAGE>
3.2.5 YPO. During the Employment Term, VIVRA shall pay for, or promptly
---
reimburse Thiry for, all reasonable out of pocket expenses related to monthly
meetings and Chapter and Forum events of the Young Presidents Organization.
3.3 Other Benefits. During the Employment Term, Thiry may participate in
--------------
employment benefit plans and fringe benefit programs made available to other
executive officers of VIVRA subject to the generally applicable terms and
conditions of each such plan or program.
3.4 Vesting on Change of Control. Whether or not Thiry terminates this
----------------------------
Contract pursuant to paragraph 5.1.2(b), all stock options and related stock
appreciation rights held by Thiry shall vest and become exercisable immediately
upon a Change of Control, and any plan or company restrictions on shares of
stock of VIVRA or on stock units that were awarded to Thiry under any plan or
arrangement maintained by VIVRA for the benefit of Thiry shall lapse upon the
occurrence of such an event.
4. Protection of Business Information; Noncompetition; Nonsolicitation.
-------------------------------------------------------------------
4.1 Nondisclosure.
-------------
4.1.1 Confidential Information. In the operation, planning development and
------------------------
expansion of the Existing or Other Businesses, VIVRA has generated and will
generate Confidential Information which is and will be proprietary and
confidential and the disclosure of which would be extremely detrimental to VIVRA
and of great assistance to its competitors.
4.1.2 Information Held as a Fiduciary. All of the Confidential Information
-------------------------------
which is acquired by, communicated to or in any way comes into the possession or
control of Thiry shall be held by Thiry in a fiduciary capacity for the
exclusive benefit of VIVRA.
4.1.3 Nondisclosure Covenant. During the employment term and for a period
----------------------
of two (2) years thereafter, Thiry shall not disclose any Confidential
Information to any person, without the consent of VIVRA.
4.1.4 Exemptions. The restrictions set forth in this paragraph 4.1 shall
----------
not apply to any part of the Confidential Information which: (i) is or becomes
generally available to the public or publicly known other than as a result of
disclosure in breach of any obligation of confidentiality; (ii) becomes
available to Thiry on a nonconfidential basis from a source other than VIVRA or
its agents or affiliates; (iii) is disclosed
-5-
<PAGE>
pursuant to the requirement of a governmental agency or court of competent
jurisdiction or as otherwise required under applicable law; or (iv) was
otherwise known or available to Thiry without any obligation of confidentiality.
4.1.5 Following Employment. Upon termination of this Agreement, Thiry shall
--------------------
promptly relinquish and return to VIVRA all Confidential Information and all
files, correspondence, memoranda, diaries and other records, minutes, notes,
manuals, papers and other documents and data, however prepared or memorialized,
and all copies thereof, belonging to or relating to the business of VIVRA, that
are in Thiry's custody or control and that contain Confidential Information.
4.2 Noncompetition Covenant. Except as provided in paragraphs 5.2.3 and
-----------------------
5.2.4, during the Employment Term and for a period of two (2) years thereafter,
Thiry shall not Compete or plan or prepare to Compete with VIVRA.
4.3 Nonsolicitation Covenant. Except as provided in paragraphs 5.2.3 and
------------------------
5.2.4, for a period of two (2) years after the Employment Term, Thiry shall not
solicit employees of VIVRA for employment.
4.4 Scope and Duration; Severability. VIVRA and Thiry understand and agree
--------------------------------
that the scope and duration of the covenants contained in this paragraph 4 are
reasonable both in time and area and are fairly necessary to protect the
business of VIVRA. Nevertheless, it is further agreed that such covenants shall
be regarded as divisible and shall be operative as to time and area to the
extent that they may be made so operative and, if any part of them is declared
invalid or unenforceable, the validity and enforceability of the remainder shall
not be affected.
4.5 Injunction. Thiry understands and agrees that, due to the highly
----------
competitive nature of the health care industry, the breach of any of the
covenants set out in paragraphs 4.1.3, 4.1.5, 4.2 and 4.3 will cause irreparable
injury to VIVRA for which it will have no adequate monetary or other remedy at
law. Therefore, VIVRA shall be entitled, in addition to such other remedies as
it may have hereunder, to a temporary restraining order and to preliminary and
permanent injunctive relief for any breach or threatened breach of the covenants
without proof of actual damages that have been or may be caused hereby. In
addition, VIVRA shall have available all remedies provided under state and
federal statutes, rules and regulations as well as any and all other remedies as
may otherwise be contractually or equitably available.
-6-
<PAGE>
4.6 Assignment. Except as provided in paragraphs 5.2.3 and 5.2.4, Thiry
----------
agrees that the covenants contained in paragraph 4 shall inure to the benefit of
any successor or assign of VIVRA with the same force and effect as if such
covenants had been made by Thiry directly to such successor or assign.
5. Termination. This Contrast may be terminated for any of the reasons set
-----------
forth in paragraph 5.1, in each case with the consequences set out in paragraph
5.2.
5.1 Grounds for Termination.
-----------------------
5.1.1 By VIVRA. This Contract may be terminated by VIVRA at any time, upon
--------
thirty (30) days written notice to Thiry, for any of the following reasons;
provided, however, that VIVRA shall have the burden of proving the causes
described in subparagraphs (a) and (b) by clear and convincing evidence:
(a) Breach or Neglect. Breach of any material provision of this Contract by
-----------------
Thiry, which is not remedied within 30 days after written notice specifying such
breaches in reasonable detail, or breach or habitual neglect by Thiry of his
duties as director, officer or employee of VIVRA; or
(b) Cause. For cause which shall consist of defalcation, fraud, breach of
-----
trust, gross negligence, willful misconduct, chronic substance abuse which
interferes with essential functions of his duties, or conviction of a felony
involving moral turpitude, in each case in connection with performance of his
duties as director, officer or employee of VIVRA or which materially and
adversely affects VIVRA.
5.1.2 By Thiry. This Contract may be terminated by Thiry at any time, upon
--------
thirty (30) days written notice to VIVRA, for any of the following reasons:
(a) Breach. Breach of any material provision of this Contract by VIVRA
------
which is not remedied within thirty (30) days after written notice specifying
such breach in reasonable detail; or
(b) Change of Control. A Change of Control; provided, however, that
-----------------
termination pursuant to this paragraph 5.1.2(b) shall be effective if and only
if Thiry gives VIVRA written notice of such termination within one (1) year
after a Change of Control.
5.1.3 Permanent Disability. Either VIVRA or Thiry may terminate this
--------------------
Contract upon thirty (30) days written notice upon Thiry's Permanent Disability.
-7-
<PAGE>
5.1.4 Death. This Contract shall terminate immediately upon the death of
-----
Thiry.
5.2 Effect of Termination. If this Contract is terminated pursuant to
---------------------
paragraph 5.1, the parties shall have the following rights and obligations:
5.2.1 By VIVRA for Breach. If this Contract is terminated by VIVRA pursuant
-------------------
to paragraph 5.1.1 or wrongfully terminated by Thiry, Thiry shall not have the
right or obligation to perform the services described in paragraph 2, he shall
resign as a Director of VIVRA and he shall not have any right to receive the
Salary or any other compensation, bonuses or benefits described in paragraph 3
after the date of termination, but Thiry shall be obligated to VIVRA as provided
in paragraph 4, and VIVRA shall have all remedies available at law or in equity.
5.2.2 By VIVRA or Thiry upon Permanent Disability; Death. If this Contract
--------------------------------------------------
is terminated by VIVRA or Thiry pursuant to paragraph 5.1.3 or if it terminates
pursuant to paragraph 5.1.4:
(a) Permanent Disability. After his Permanent Disability, Thiry shall have
--------------------
the obligations described in paragraph 4; and
(b) Payments. Upon termination of this Contract pursuant to paragraph 5.1.3
--------
or 5.1.4, VIVRA shall pay to Thiry or his Beneficiary, within seven (7) days
after the date of termination, (i) an amount equal to one (1) year's Salary plus
(ii) the Contingent Bonus whether or not, in this instance, the contingency
shall have occurred by the date of such termination.
5.2.3 By Thiry for Breach. If this Contract is terminated by Thiry pursuant
-------------------
to paragraph 5.1.2(a) or wrongfully terminated by VIVRA, he shall not have any
further obligation to VIVRA under paragraph 2 and under paragraph 4 (except as
to the Confidential Information provisions of paragraphs 4.1.2, 4.1.3, and
4.1.5) and VIVRA shall pay him within thirty (30) days after termination, an
amount equal to (i) one and one-half (1(OMEGA)) times the sum of his yearly
Salary plus the Discretionary Bonus actually paid to Thiry for the prior Fiscal
Year and (ii) the Contingent Bonus whether or not, in this instance, the
contin-gencies shall have occurred by the date of such termination. This
paragraph does not apply in the event of a Change of Control.
5.2.4 Change of Control. If this Contract is terminated by Thiry pursuant
-----------------
to paragraph 5.1.2(b) or is terminated by VIVRA or any successor entity within
one (1) year after a Change of Control and paragraph 5.1.1 does not apply, Thiry
shall not have any duty to mitigate his damage or any further obligation to
VIVRA under paragraphs 2 and under paragraph 4 (except as to
-8-
<PAGE>
the Confidential Information provisions of paragraphs 4.1.2, 4.1.3 and
4.1.5) and he shall be entitled to receive the follow- ing payments and benefits
from VIVRA or the successor entity:
(a) Termination Payments. A cash payment to be made within thirty (30) days
--------------------
after termination equal to the sum of: (i) 2.99 times the Salary plus any
Discretionary Bonus actually paid to Thiry for the Fiscal Year ended immediately
prior to the Change of Control termination and (ii) the Contingent Bonus whether
or not, in this instance, the contingencies shall have occurred by the date of
such termination.
(b) Insurance Coverage. During the period commencing on the date of a
------------------
Change of Control termination and ending on the third anniversary thereof, Thiry
(and, where applicable, his dependents) shall be entitled to participate in any
insurance or similar plans maintained by VIVRA. Where applicable, Thiry's Salary
for purposes of such plans shall be deemed to be equal to the Salary he was
receiving at the time of the Change of Control termination. To the extent that
VIVRA finds it impractical to cover Thiry under its group insurance policies
during such three (3) year period, VIVRA shall provide him with the same level
of coverage under individual policies. The entire cost of insurance coverage
under this paragraph 5.2.4(b) shall be borne by VIVRA.
(c) Outplacement Services. VIVRA shall provide Thiry with the use of a
---------------------
furnished office, secretary and telephone and access to facsimile and
photocopying machines for a one (1) year period following the Change of Control
termination. The cost of these services and facilities shall be borne entirely
by VIVRA.
5.2.5 Payment and Computation of Salary upon Termination. Upon any
--------------------------------------------------
termination of this Contract pursuant to paragraph 5.1:
(a) Salary to Date of Termination. VIVRA shall pay Thiry the Salary to the
-----------------------------
date of termination, and
(b) Computation. As to terminations pursuant to subparagraphs 5.1.1, the
-----------
Salary shall be that in effect on the day before the date of termination. As to
all other terminations, the Salary shall be that in effect on the day before the
date of termination calculated with a minimum annual base compensation of
$300,000.
5.3 Withholding. Anything in this Contract to the contrary notwithstanding,
-----------
all payments required to be made to Thiry or the Beneficiary under this Contract
shall be subject to the withholding of such amounts, if any, for income and
other payroll taxes and deductions as VIVRA may reasonably determine
-9-
<PAGE>
should be withheld pursuant to any applicable law or regulation.
5.4 Examples. The following are examples of the payments to be made to
--------
Thiry pursuant to paragraph 5.2 based on the assumptions that (i) Thiry's
employment terminates on April 30, 1997 and (ii) the Salary is $275,000 for
Fiscal Year 1997 and (iii) Thiry has received a Discretionary Bonus of $200,000
for Fiscal Year 1996. Under the foregoing assumptions, if:
5.4.1 Paragraph 5.1.1. VIVRA terminates this Contract pursuant to paragraph
---------------
5.1.1, Thiry shall be paid only through April 30, 1997 at the Salary rate of
$275,000 per year (plus an amount equal to the Contingent Bonus but only if the
Contingent Bonus has been earned but not yet paid).
5.4.2 Permanent Disability; Death. Thiry dies or if this Contract is
---------------------------
terminated pursuant to paragraph 5.1.3, VIVRA shall pay Thiry or his beneficiary
one (1) year's Salary at the rate of $300,000 plus an amount equal to the
Contingent Bonus ($300,000) (if the Contingent Bonus has been earned but not yet
paid), a total of either $300,000 or $600,000.
5.4.3 Paragraph 5.1.2(a). Thiry terminates this Contract pursuant to
------------------
paragraph 5.1.2(a), VIVRA shall pay Thiry (i) one and one-half (1(OMEGA)) times
the sum of the Salary plus the Discretionary Bonus given to him for Fiscal Year
1996 (1.5 x ($300,000 + $200,000)) which totals $750,000, and (ii) the
Contingent Bonus ($300,000) (if the Contingent Bonus has been earned but not yet
paid), all of which would total $1,050,000.
5.4.4 Paragraph 5.1.2(b). Thiry terminates this Contract pursuant to
------------------
paragraph 5.1.2(b), VIVRA or the successor entity shall pay Thiry (i) 2.99 times
the sum of the Salary plus the Discretionary Bonus given to him for Fiscal Year
1996 (2.99 x ($300,000 + $200,000)) which totals $1,495,000, and (ii) the
Contingent Bonus ($300,000) (if the Contingent Bonus has been earned but not yet
paid), all of which would total $1,795,000.
6. Miscellaneous.
-------------
6.1 Prior Contracts Null and Void. VIVRA and Thiry agree that upon
-----------------------------
execution and delivery of this Contract by each of them, the Prior Contract
shall terminate and be deemed null and void, and shall have no further force or
effect.
6.2 Assignment by VIVRA. This Contract shall be binding upon and shall
-------------------
inure to the benefit of any successors or assigns of VIVRA. As used in this
Contract, the term "successor" includes any Person or combination of Persons
acting in concert which at any time in any form or manner acquires all or
-10-
<PAGE>
substantially all of the assets or business or more than thirty percent (30%) of
the voting stock of VIVRA.
6.3 Nonassignability by Thiry. Neither Thiry nor any Beneficiary shall
-------------------------
assign, transfer, pledge or hypothecate any rights, interests or benefits
created hereunder or hereby. Any attempt to do so contrary to the provisions of
this Contract, and any levy of any attachment, execution or similar process
created thereby, shall be null and void and without effect.
6.4 Spendthrift Provision. Prior to actual receipt by Thiry or the
---------------------
Beneficiary, as the case may be, no right or benefit under this Contract and,
without limitation, no interest in any payment hereunder shall be:
6.4.1 Anticipation. Anticipated, assigned or encumbered or subject to any
------------
creditor's claim or subject to execution, attachment or similar legal process,
or
6.4.2 Liability for Debts: Claims. Applied on behalf of or subject to the
---------------------------
debts, contracts, liabilities or torts of the Person entitled or who might
become entitled to such benefits, or subject to the claims of any creditor of
any such Person.
6.5 Beneficiary; Recipients of Payments; Designation of Beneficiary. The
---------------------------------------------------------------
Salary and other compensation and benefits payable by VIVRA pursuant to this
Contract shall be made only to Thiry during his lifetime or, in the event of his
death, to the Thiry-O'Leary Living Trust ("Beneficiary").
6.5.1 Designation of Beneficiary. Thiry may from time to time change the
--------------------------
Beneficiary by filing a new designation in writing with VIVRA's Corporate
Secretary. If no designation is in effect, any sums payable under this Contract
shall be paid to Thiry's estate.
6.5.2 Elections. Whenever this Contract provides for any option or election
---------
by Thiry or the Beneficiary, the option shall be exercised or the election made
solely by the person or persons receiving payments pursuant to this Contract at
that time, and shall be made in that Person's sole discretion and without regard
to the effect of the decision on subsequent recipients of payments. Such
decision by such Person shall be final and binding on all subsequent recipients
of payments.
6.6 Limitation on Payments. In the event that it is determined by counsel
----------------------
(or any other tax advisor) approved by Thiry and VIVRA that any compensation
payable hereunder, alone or when aggregated with other compensation payable to
Thiry, would constitute an "excess parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as
-11-
<PAGE>
amended, and the net, after-tax amount that Thiry would realize from the
compensation hereunder and from all other sources, considering Thiry's federal
and state income tax brackets and the effect of any nondeductible excise tax,
would be greater if the compensation payable hereunder were reduced, then the
compensation payable hereunder shall be reduced until Thiry's after-tax
compensation (taking into account state and federal income taxes, excise taxes
and all other applicable taxes) is maximized.
6.7 Arbitration. If any controversy, question or dispute arises out of or
-----------
relating to the construction, application or enforcement of this Contract, it
shall be settled by arbitration as follows:
6.7.1 Appointment of Arbitrators. Within fifteen (15) days after the
--------------------------
delivery of written notice of any such dispute from one to the other, VIVRA and
Thiry shall each appoint one person to hear and determine the dispute, and, if
the two (2) persons so selected are unable to agree on its resolution within ten
(10) days after their appointment, they shall select a third impartial
arbitrator, and the three arbitrators so selected shall hear and determine the
dispute within sixty (60) days thereafter.
6.7.2 Finality. The determination of a majority of the arbitrators shall be
--------
final and conclusive on Thiry and VIVRA.
6.7.3 Rules. The arbitration shall be conducted in accordance with the
-----
rules of the American Arbitration Association, and judgment on any award
rendered by the arbitrators may be entered in any court having jurisdiction.
6.7.4 Discovery. The parties shall be entitled to avail themselves of all
---------
discovery procedures available in civil actions in the State of California, and,
without limitation, Thiry and VIVRA hereby incorporate section 1283.05 of the
California Code of Civil Procedure into this Contract pursuant to section 1283.1
of that Code.
6.8 Notices. Any notice provided for by this Contract and any other notice,
-------
demand or communication which either party may wish to send to the other (the
"Notices") shall be in writing and shall be deemed to have been properly given
if served by (a) personal delivery, or (b) registered or certified mail, return
receipt requested, in a sealed envelope, postage prepaid, addressed to the party
for which such notice is intended as follows:
-12-
<PAGE>
If to VIVRA: VIVRA Incorporated
Board of Directors
400 Primrose, Suite 200
Burlingame, CA 94010
If to Thiry: Kent J. Thiry
124 Warren Avenue
San Mateo, CA 94401
6.8.1 Change of Address. Any address or name specified in this paragraph
-----------------
6.8 may be changed by a Notice given by one party to the other party in
accordance with paragraph 6.8.
6.8.2 Effective Date of Notice. All notices shall be given and effective as
------------------------
of the date of Personal delivery thereof or the date of receipt set forth on the
return receipt. The inability to deliver because of a changed address of which
no Notice was given, or rejection or other refusal to accept any Notice shall be
deemed to be the receipt of the Notice as of the date of Such inability to
deliver or rejection or refusal to accept.
6.9 Governing Law: Jurisdiction. This Contract shall be construed in
---------------------------
accordance with and governed by the laws of the State of California. VIVRA
hereby consents and submits to the jurisdiction of the state and federal courts
in California in any suit for the enforcement or construction of or otherwise
arising out of this Contract.
-13-
<PAGE>
6.10 Counterparts. This Contract may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Contract has been executed and delivered by the
parties on the date set forth opposite their names.
Dated: December 15, 1996
/s/ Kent J. Thiry
----------------------------------
Kent J. Thiry
Dated: December 11, 1996
VIVRA INCORPORATED
By /s/ LeAnne M. Zumwalt
-------------------------------
LeAnne M. Zumwalt
Its Chief Financial Officer
-------------------------------
Exhibit 11
<TABLE>
Statement Re: Computation of Per Share Earnings*
Vivra Incorporated and Subsidiaries
Three Years Ended November 30, 1996
<CAPTION>
Year ended November 30
1996 1995 1994
--------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding 39,708 37,350 32,987
(a) Stock options granted to employees, based
on the treasury-stock
method using average market price 736(1) 678(1) 816(1)
--------------------------------------------------
Total 40,444 38,028 33,803
==================================================
Net earnings from continuing operations $50,295 $38,599 $30,187
Gain on sale of discontinued operations, less applicable taxes - - 697
--------------------------------------------------
Net earnings $50,295 $38,599 $30,884
==================================================
Earnings per Share:
Net earnings from continuing operations $1.27 $1.03 $.92
Gain on sale of discontinued operations - - .02
--------------------------------------------------
Net earnings $1.27 $1.03 $.94
==================================================
Fully diluted:
Weighted average shares outstanding 39,708 37,350 32,987
(a) Stock options granted to employees, based on
the treasury-stock method using the year-end
market price, if higher than average
market price 742(1) 696(1) 843(1)
--------------------------------------------------
Total 40,450 38,046 33,830
==================================================
Net earnings from continuing operations $50,295 $38,599 $30,187
Gain on sale of discontinued operations, less applicable taxes - - 697
--------------------------------------------------
Net earnings $50,295 $38,599 $30,884
==================================================
Earnings per Share:
Net earnings from continuing operations $1.27 $1.03 $.92
Gain on sale of discontinued operations - - .02
--------------------------------------------------
Net earnings $1.27 $1.03 $.94
==================================================
* Adjusted to reflect a three-for-two stock split payable to shareholders
of record on November 22, 1995.
(1) As the dilutive Common Stock equivalents are less than 3% of the
weighted average outstanding shares, they have not been included in the
computation of earnings per share as shown in the Consolidated Financial
Statements. There was no dilutive impact in 1996 with respect to the
placement of the Company's Convertible Subordinated Notes.
</TABLE>
<TABLE>
Exhibit 21 - Subsidiaries of the Registrant
The Company's subsidiaries, fictitious business names (if any) under which
they do business, percentage of ownership, and the state or other jurisdiction
of incorporation or organization of each are set forth below. All are included
in the Consolidated Financial Statement.
<CAPTION>
Subsidiary Percentage of Ownership State or Country of Incorporation
Fictitious Business Name (if any)
<S> <C> <C>
Associated Health Services, Inc. 100% Delaware
Associated Medication Services, Inc. 100% Delaware
Community Dialysis Supply Corp. 100% Florida
Specialty Care America, Inc. 100% Delaware
Nephrology Services Group
Vivra Asthma & Allergy CareAmerica, Inc. 100% Nevada
Vivra ENT, Inc. 100% Nevada
Vivra Health Advantage, Inc. 100% Nevada
Vivra Heart Imaging, Inc. 68% Nevada
Vivra Heart Services, Inc. 88% Nevada
Vivra Laboratory Services, Inc. 100% Nevada
Vivra Nephrology Partners, Inc. 100% Nevada
Vivra Network Services, Inc. 81% Florida
Vivra OB-GYN Services, Inc. 100% Nevada
Vivra Orthopedics, Inc. 100% Delaware
Vivra Renal Care, Inc. 100% Nevada
Vivra Specialty Partners, Inc. 100% Nevada
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
333-13625 on Form S-3 dated November 20, 1996; No. 333-06495 on Form S-4 dated
June 21, 1996; No. 33-60513 on Form S-8 dated July 23, 1995; No. 33-98246 on
Form S-8 dated August 17, 1994; and No. 33-80030 on Form S-3 dated June 20, 1994
of our report dated January 24, 1997, with respect to the consolidated financial
statements and schedule of Vivra Incorporated included in the Annual Report on
Form 10-K for the year ended November 30, 1996.
ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 78,039
<SECURITIES> 84,640
<RECEIVABLES> 116,410
<ALLOWANCES> 18,707
<INVENTORY> 13,238
<CURRENT-ASSETS> 294,004
<PP&E> 151,118
<DEPRECIATION> 53,437
<TOTAL-ASSETS> 655,218
<CURRENT-LIABILITIES> 79,590
<BONDS> 163,143
0
0
<COMMON> 404
<OTHER-SE> 402,824
<TOTAL-LIABILITY-AND-EQUITY> 655,218
<SALES> 506,590
<TOTAL-REVENUES> 517,309
<CGS> 360,500
<TOTAL-COSTS> 360,500
<OTHER-EXPENSES> 71,945
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,692
<INCOME-PRETAX> 81,172
<INCOME-TAX> 30,765
<INCOME-CONTINUING> 50,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,295
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
</TABLE>
