<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
(_) 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 ____________
TOTAL RENAL CARE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
FOR THE QUARTER ENDED JUNE 30, 1996
Delaware 51-0354549
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
21250 Hawthorne Blvd.
Suite 800
Torrance, CA 90503-5517
(Address of principal executive offices) (Zip Code)
(310) 792-2600
(Registrant's telephone number, including area code)
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 and 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 ( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as the latest practicable date.
Class Outstanding at August 14, 1996
Common Stock, Par Value $.001 25,925,365 shares
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
Index
Part I. Financial Information
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 1
Condensed Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 1996 and June 30, 1995 3
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and June 30, 1995 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Risk Factors 16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Note: Items 1, 2, 3 and 5 of Part II are omitted because they are not applicable.
</TABLE>
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June 30, 1996 December 31 1995
-------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 39,969,000 $30,181,000
Accounts receivable, less allowance for
doubtful accounts of $9,752,000
and $5,668,000, respectively . . . . . . . . . . . 82,375,000 40,014,000
Receivable from Tenet, a related company . . . . . . 390,000 432,000
Other current assets . . . . . . . . . . . . . . . . 8,685,000 4,867,000
Total current assets . . . . . . . . . 131,419,000 75,494,000
Property and equipment, net . . . . . . . . . . . . . . . 44,456,000 25,505,000
Notes receivable from related parties. . . . . . . . . . . 1,678,000 1,379,000
Investment in affiliate, at equity. . . . . . . . . . . . 995,000 972,000
Other long term assets . . . . . . . . . . . . . . . . . . 887,000 885,000
Intangible assets, net of accumulated amortization
of $10,348,000 and $7,353,000, respectively . . . . . . 111,611,000 59,763,000
------------- -------------
$291,046,000 $163,998,000
============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June 30 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Total current liabilities................................... $23,366,000 $20,803,000
Deferred income taxes....................................... 523,000 510,000
Long term debt and other.................................... 59,101,000 56,538,000
Minority interests.......................................... 4,541,000 3,343,000
Stockholders' equity:
Common stock, Class A voting, ($.001 par value;
55,000,000 shares authorized; 25,889,905 and
22,308,207 issued and outstanding, respectively)..... 26,000 22,000
Preferred stock, ($.001 par value; 5,000,000 shares
authorized; none outstanding).......................... -- --
Additional paid-in capital............................... 234,369,000 123,710,000
Notes receivable from stockholders....................... (2,727,000) (2,773,000)
Retained earnings (deficit).............................. (28,153,000) (38,155,000)
--------------- -------------
Total stockholders' equity......................... 203,515,000 82,804,000
--------------- -------------
$291,046,000 $163,998,000
=============== =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations
2
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months and Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Six Months
------------------------ ------------------------
1996 1995 1996 1995
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net operating revenues . . . . . . . . . . . . $64,583,000 $30,624,000 $114,820,000 $56,093,000
Operating expenses:
Facilities . . . . . . . . . . . . . . . . 43,318,000 19,498,000 76,647,000 36,420,000
General and administrative . . . . . . . . 4,800,000 2,777,000 8,701,000 5,200,000
Provision for doubtful accounts. . . . . . 1,337,000 687,000 2,333,000 1,266,000
Depreciation and amortization . . . . . . 3,572,000 1,414,000 6,032,000 2,673,000
---------- ----------- ----------- -----------
Total operating expenses . . . . . 53,027,000 24,376,000 93,713,000 45,559,000
---------- ----------- ----------- -----------
Operating income . . . . . . . . . . . . . . . 11,556,000 6,248,000 21,107,000 10,534,000
Interest expense . . . . . . . . . . . . . . . . (2,238,000) (2,502,000) (4,150,000) (4,721,000)
Interest income . . . . . . . . . . . . . . . . 1,182,000 117,000 1,613,000 174,000
---------- ----------- ----------- -----------
Income before income taxes and minority
interests . . . . . . . . . . . . . . . . 10,500,000 3,863,000 18,570,000 5,987,000
Income taxes . . . . . . . . . . . . . . . . . . 4,110,000 1,352,000 7,151,000 2,078,000
---------- ----------- ---------- -----------
Income before minority interests . . . . . . . . 6,390,000 2,511,000 11,419,000 3,909,000
Minority interests in income of consolidated
subsidiaries . . . . . . . . . . . . . . . 664,000 613,000 1,417,000 1,010,000
---------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . $5,726,000 $1,898,000 $10,002,000 $2,899,000
=========== =========== ============ ==========
Net income per common share . . . . . . . . . . $0.22 $0.12 $0.40 $0.19
=========== =========== ============ ==========
Weighted average number of common shares and
equivalents outstanding . . . . . . . . . . 26,579,000 15,532,000 24,837,000 15,418,000
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $10,002,000 $2,899,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . 6,032,000 2,673,000
Noncash interest. . . . . . . . . . . . . . . . . . . . 3,228,000 4,420,000
Provision for doubtful accounts . . . . . . . . . . . . 2,333,000 1,266,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . (29,769,000) (5,107,000)
------------ -----------
Total adjustments. . . . . . . . . . . . . . . . . (18,176,000) 3,252,000
------------ -----------
Net cash (used) provided by operating activities (8,174,000) 6,151,000
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . (11,833,000) (3,736,000)
Cash paid for acquisitions, net of cash acquired. . . . . (77,867,000) (16,753,000)
Additions to intangible assets . . . . . . . . . . . . . . (1,966,000) (363,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 152,000 536,000
------------ ------------
Net cash used by investing activities (91,514,000) (20,316,000)
Cash flows from financing activities:
Borrowings from bank credit facility . . . . . . . . . . . 51,000,000 17,800,000
Payments on bank credit facility . . . . . . . . . . . . . (51,000,000) (4,000,000)
Net proceeds from sale of common stock . . . . . . . . . 110,051,000 54,000
Distributions to minority interests. . . . . . . . . . . . (747,000) (1,133,000)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 172,000 (621,000)
------------ ------------
Net cash provided by financing activities 109,476,000 12,100,000
Net increase (decrease) in cash . . . . . . . . . . . . . . . . 9,788,000 (2,065,000)
Cash at beginning of period . . . . . . . . . . . . . . . . . . 30,181,000 6,931,000
------------ ------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . $39,969,000 $4,866,000
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
4
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments which are necessary to state fairly the
consolidated financial position, results of operations, and cash flows of
Total Renal Care Holdings, Inc., ("TRCH" or the "Company") as of and for the
periods indicated. TRCH presumes that users of the interim financial
information herein have read or have access to the Company's audited
consolidated financial statements and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the preceding fiscal
year and that the adequacy of additional disclosure needed for a fair
presentation, except in regard to material contingencies or recent
significant events, may be determined in that context. Accordingly, footnote
and other disclosures which would substantially duplicate the disclosures
contained in Form 10-K for the transitional fiscal year ended December 31,
1995 filed on March 18, 1996 by the Company have been omitted. Certain other
reclassifications of prior period amounts have been made to conform to
current period classifications. The financial information herein is not
necessarily representative of a full year's operations.
2. On November 3, 1995, the Company completed an equity offering of 6.9 million
shares of its common stock, par value $0.001 (the "Common Stock"). In
connection with this offering the Company's directors redesignated the Class
A Common Stock as "Common Stock", authorized an increase in the number of
shares of Common Stock to 55,000,000, par value $0.001, authorized 5,000,000
new shares of preferred stock, par value $0.001, and approved a three-into-
two reverse stock split of the Company's Class A and Class B Common Stock.
Additionally, as of December 4, 1995, all Class B Common Stock was converted
to Common Stock. All information in these condensed consolidated financial
statements pertaining to shares of Common Stock and per share amounts have
been adjusted to give retroactive effect to these actions.
3. During the period from October 1, 1994 to November 2, 1995 the Company
issued approximately 2,190,000 shares of Common Stock and options at prices
significantly below the offering price of the Common Stock in the Company's
initial public offering. Such shares and common stock equivalents have been
included in the number of shares outstanding from June 1, 1994, (including
the quarter and six months ended June 30, 1995) until November 2, 1995 using
the Treasury Stock method using the actual offering price of $15.50 per
share.
4. Effective March 1, 1996, the Company purchased substantially all of the
assets and assumed certain specified liabilities of the Nephrology Services
Business of Caremark International, Inc. (The "Caremark Acquisition") and
one center located in South Carolina for cash consideration of $49 million
and $8.2 million, respectively.
The transactions were recorded under the purchase method of accounting and
the results of operations from March 1, 1996 have been recognized in the
accompanying financial statements. Goodwill of $21.5 million and $5.9
million, respectively, was recorded in connection with these transactions
and will be amortized over their estimated lives in accordance with the
Company's existing accounting policies.
During the quarter ended June 30, 1996, the Company purchased substantially
all of the assets and assumed certain specified liabilities of two unrelated
centers in Maryland for cash consideration of $8.0 million and $2.9 million,
respectively. Goodwill of $5.8 million and $2.6 million was recorded in
connection with these transactions in accordance with the Company's existing
accounting policies.
During the second quarter ended June 30, 1996 and the first quarter ended
March 31, 1996, the Company also purchased selected net assets of an
existing dialysis company for $6.4 million and two existing dialysis
companies for $2.6 million, respectively, and contributed those assets
during the formation of three unrelated general partnerships. Aggregate
goodwill associated with these transactions during the quarter ended June
30, 1996 and May 31, 1996 was $2.0 million and $5.3 million respectively.
The Company entered into management agreements with two additional
unaffiliated centers, one in each of the quarters ended June 30, 1996 and
March 31, 1996, respectively.
5
<PAGE>
The results of operations on a pro forma basis as though the above acquisitions
had been combined with the Company at the beginning of each period presented
for the six months ended June 30, are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Pro forma net operating revenues $127,800,000 $75,630,000
============ ===========
Pro forma net income $ 9,755,000 $ 2,355,000
============ ===========
Pro forma earnings per share $ 0.39 $ 0.14
============ ===========
</TABLE>
5. On April 3, 1996, the Company completed an equity offering of 8,050,000
shares, 3,500,000 of which were sold for the Company's account and 4,550,000
of which were sold by certain of the Company's stockholders. The net proceeds
to the Company of $110.1 million from the offering were used to repay
borrowings incurred under the Company's senior credit facility ("the Senior
Credit Facility") in connection with the Caremark Acquisition. The remaining
proceeds are invested in short-term, investment grade instruments and are to
be used for future acquisitions, de novo developments, routine capital
expenditures, and other general corporate purposes. Additionally, in July
1996, the Company purchased the Senior Subordinated Discount Notes (the
"Discount Notes").
6. Effective August 14, 1996, the Company received firm commitments to increase
its Senior Credit Facility to $130 million.
7. In July 1996, the Company purchased and retired $27.4 million of its
remaining outstanding Discount Notes for $28.4 million. Including the
writedown of related bond issuance costs of $800,000, the Company will
recognize an extraordinary loss, net of taxes, of approximately $3.0 million,
in the quarter ending September 30, 1996.
8. Subsequent to June 30, the Company completed acquisition of eight facilities
for consideration of $32.9 million of which $32.1 million was paid in cash;
the remainder in the issuance of common stock.
9. Effective January 1, 1996, the Company changed its year end to December 31
from May 31. The consolidated statements of income and cash flows included
herein have been restated from the Company's previous filings on Form 10-Q to
reflect the new calendar quarter format.
The Company's sole direct wholly-owned operating subsidiary, Total Renal
Care, Inc., a California corporation ("TRC"), and TRC's wholly-owned
subsidiaries have guaranteed the Company's obligations arising from the
Discount Notes. TRC's ability to pay dividends or otherwise distribute funds
to the Company is limited pursuant to the terms of the Company's Senior
Credit Facility with the exception of providing funds for: the payment of
taxes by the Company on a consolidated basis, interest and principal on the
Discount Notes as required, certain Company stock repurchases and providing
for general corporate overhead expenses of the Company. In addition, under
California law, TRC may pay dividends and make distributions only from
legally available sources of funds.
Separate financial statements and other disclosures concerning TRC's
subsidiaries are not presented as management has determined that they are not
material to investors.
Summary unaudited condensed consolidating financial information for the
Company, segregating guarantor and non-guarantor subsidiaries, follows:
6
<PAGE>
Supplemental Condensed Consolidating Balance Sheets
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
------------ ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Accounts receivable . . . . . . . $212,000 $33,974,000 $5,828,000 $40,014,000
Receivable from Tenet. . . . . . ------- 432,000 ------- 432,000
Other current assets . . . . . . 30,235,000 2,587,000 2,226,000 35,048,000
---------- ------------ ----------- -------------- ------------
Total current assets . . . . . 30,447,000 36,993,000 8,054,000 75,494,000
Property and equipment, net . . . . . 625,000 19,882,000 4,998,000 25,505,000
Deposits and other . . . . . . . . . 5,000 868,000 12,000 885,000
Investments in subsidiaries. . . . . 43,151,000 3,429,000 ------- ($46,580,000)(a) -------
Advances to subsidiaries . . . . . . 59,429,000 ------- ------- (59,429,000)(b) -------
Other assets, net . . . . . . . . . . 3,486,000 56,809,000 1,819,000 62,114,000
---------- ------------ ----------- -------------- ------------
$137,143,000 $117,981,000 $14,883,000 ($106,009,000) $163,998,000
=========== =========== ========== ============= ===========
Current liabilities . . . . . . . . . $519,000 $16,848,000 $3,436,000 $20,803,000
Payable to parent . . . . . . . . . ------- 54,886,000 4,543,000 ($59,429,000)(b) -------
Long-term obligations . . . . . . . . 53,820,000 2,586,000 132,000 56,538,000
Deferred income tax . . . . . . . . . ------- 510,000 ------- 510,000
Minority interests . . . . . . . . . ------- ------- ------- 3,343,000 (a) 3,343,000
Stockholders' equity . . . . . . . . 82,804,000 43,151,000 6,772,000 (49,923,000)(a) 82,804,000
------------ ------------ ----------- -------------- ------------
$137,143,000 $117,981,000 $14,883,000 ($106,009,000) $163,998,000
=========== =========== ========== ============= ===========
June 30, 1996
----------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
------------ ------------ ----------- -------------- ------------
Current Assets:
Accounts receivable . . . . . . . $744,000 $72,565,000 $9,066,000 $82,375,000
Receivable from Tenet. . . . . . ------- 390,000 ------- 390,000
Other current assets . . . . . . 37,769,000 7,474,000 3,411,000 48,654,000
------------ ------------ ----------- -------------- ------------
Total current assets . . . . . 38,513,000 80,429,000 12,477,000 131,419,000
Property and equipment, net . . . . . 870,000 35,788,000 7,798,000 44,456,000
Deposits and other . . . . . . . . . 5,000 862,000 20,000 887,000
Investments in subsidiaries. . . . . 51,485,000 4,992,000 ------- ($56,477,000)(a) -------
Advances to subsidiaries . . . . . . 166,514,000 ------- ------- (166,514,000)(b) -------
Other assets, net . . . . . . . . . . 4,067,000 108,239,000 1,978,000 114,284,000
------------ ------------ ----------- -------------- ------------
$261,454,000 $230,310,000 $22,273,000 ($222,991,000) $291,046,000
=========== =========== ========== ============= ===========
Current liabilities . . . . . . . . . $891,000 $15,595,000 $6,880,000 $23,366,000
Payable to parent . . . . . . . . . ------- 160,944,000 5,570,000 ($166,514,000)(b) -------
Long-term obligations . . . . . . . . 57,048,000 1,763,000 290,000 59,101,000
Deferred income tax . . . . . . . . . ------- 523,000 ------- 523,000
Minority interests . . . . . . . . . ------- ------- ------- 4,541,000 (a) 4,541,000
Stockholders' equity . . . . . . . . 203,515,000 51,485,000 9,533,000 (61,018,000)(a)203,515,000
------------ ------------ ----------- -------------- ------------
$261,454,000 $230,310,000 $22,273,000 ($222,991,000) $291,046,000
=========== =========== ========== ============= ===========
</TABLE>
7
<PAGE>
Supplemental Condensed Consolidating Statements of Income
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
---------------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net operating revenues................ $ 429,000 $43,646,000 $12,018,000 $ 56,093,000
Operating expenses.................... (2,827,000) 39,433,000 8,953,000 45,559,000
----------- ----------- ----------- ----------- ------------
Operating Income................. 3,256,000 4,213,000 3,065,000 10,534,000
Interest expense, net................. 4,328,000 247,000 (28,000) 4,547,000
Income taxes.......................... (428,000) 1,630,000 876,000 2,078,000
Equity in income of subsidiaries...... 3,543,000 1,207,000 ---- ($4,750,000)(a) ----
Minority interests.................... ---- ---- ---- (1,010,000)(b) 1,010,000
----------- ----------- ----------- ----------- ------------
Net Income....................... $ 2,899,000 $ 3,543,000 $ 2,217,000 ($5,760,000) $ 2,899,000
=========== =========== =========== =========== ============
Three Months Ended
June 30, 1995
---------------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net operating revenues................ $ 429,000 $23,551,000 $ 6,644,000 $ 30,624,000
Operating expenses.................... (2,950,000) 22,529,000 4,797,000 24,376,000
----------- ----------- ----------- ----------- ------------
Operating Income................. 3,379,000 1,022,000 1,847,000 6,248,000
Interest expense, net................. 2,150,000 247,000 (12,000) 2,385,000
Income taxes.......................... 491,000 317,000 544,000 1,352,000
Equity in income of subsidiaries...... 1,160,000 702,000 ---- ($1,862,000)(a) ----
Minority interests.................... ---- ---- ---- (613,000)(b) 613,000
----------- ----------- ----------- ----------- ------------
Net Income....................... $ 1,898,000 $ 1,160,000 $ 1,315,000 ($2,475,000) $ 1,898,000
=========== =========== =========== =========== ============
Six Months Ended
June 30, 1996
----------------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net operating revenues................ $ 780,000 $92,017,000 $22,023,000 $114,820,000
Operating expenses.................... (4,096,000) 79,901,000 17,908,000 93,713,000
----------- ----------- ----------- ------------ ------------
Operating Income................. 4,876,000 12,116,000 4,115,000 21,107,000
Interest expense, net................. 2,081,000 126,000 330,000 2,537,000
Income taxes.......................... 1,127,000 5,000,000 1,024,000 7,151,000
Equity in income of subsidiaries...... 8,334,000 1,344,000 ---- ($9,678,000)(a) ----
Minority interests.................... ---- ---- ---- (1,417,000)(b) 1,417,000
----------- ----------- ----------- ------------ ------------
Net Income....................... $10,002,000 $ 8,334,000 $ 2,761,000 ($11,095,000) $ 10,002,000
=========== =========== =========== ============ ============
Three Months Ended
June 30, 1996
--------------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net operating revenues................ $ 400,000 $52,790,000 $11,393,000 $ 64,583,000
Operating expenses.................... (2,401,000) 46,107,000 9,321,000 53,027,000
----------- ----------- ----------- ----------- ------------
Operating Income................. 2,801,000 6,683,000 2,072,000 11,556,000
Interest expense, net................. 893,000 (149,000) 312,000 1,056,000
Income taxes.......................... 772,000 2,854,000 484,000 4,110,000
Equity in income of subsidiaries...... 4,590,000 612,000 ---- ($5,202,000)(a) ----
Minority interests.................... ---- ---- ---- (664,000)(b) 664,000
----------- ----------- ----------- ----------- ------------
Net Income....................... $ 5,726,000 $ 4,590,000 $ 1,276,000 ($5,866,000) $ 5,726,000
=========== =========== =========== =========== ============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
----------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 2,899,000 $ 3,543,000 $ 2,217,000 ($ 5,760,000)(a) $ 2,899,000
Adjustments to net income:
Depreciation and amortization......... 178,000 2,079,000 416,000 2,673,000
Noncash interest...................... 4,420,000 ---- ---- 4,420,000
Provision for doubtful accounts....... ---- 1,249,000 17,000 1,266,000
Equity in earnings of subsidiaries.... (3,543,000) (1,207,000) ---- 4,750,000 (a) ----
Other................................. 119,000 (5,320,000) (916,000) 1,010,000 (a) (5,107,000)
----------- ----------- ----------- ----------- ------------
Net cash provided by
operating activities.............. 4,073,000 344,000 1,734,000 ---- 6,151,000
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment....... (219,000) (1,887,000) (1,630,000) (3,736,000)
Cash paid for acquisitions, net of
cash acquired........................... ---- (16,753,000) ---- (16,753,000)
Additions to intangible assets............ (54,000) (307,000) (2,000) (363,000)
Other..................................... ---- 289,000 247,000 536,000
----------- ----------- ----------- ----------- ------------
Net cash used by investing
activities....................... (273,000) (18,658,000) (1,385,000) (20,316,000)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Intercompany advances..................... (3,603,000) 1,230,000 2,373,000 ----
Proceeds from bank credit facility........ ---- 17,800,000 ---- 17,800,000
Payments on bank credit facility.......... ---- (4,000,000) ---- (4,000,000)
Net proceeds from sale of common stock.... 54,000 ---- ---- 54,000
Distributions to minority interests....... ---- 2,791,000 (3,924,000) (1,133,000)
Other..................................... (249,000) (367,000) (5,000) (621,000)
----------- ----------- ----------- ----------- ------------
Net cash provided (used) by
financing activities............. (3,798,000) 17,454,000 (1,556,000) 12,100,000
----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash........... 2,000 (860,000) (1,207,000) (2,065,000)
Cash at beginning of period............... ---- 3,852,000 3,079,000 6,931,000
----------- ----------- ----------- ----------- ------------
Cash at end of period..................... $ 2,000 $ 2,992,000 $ 1,872,000 $ 4,866,000
=========== =========== =========== =========== ============
Six Months Ended
June 30, 1996
----------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $10,002,000 $ 8,334,000 $ 2,761,000 ($11,095,000)(a) $ 10,002,000
Adjustments to net income:
Depreciation and amortization......... 172,000 5,324,000 536,000 6,032,000
Noncash interest...................... 3,228,000 ---- ---- 3,228,000
Provision for doubtful accounts....... ---- 1,816,000 517,000 2,333,000
Equity in earnings of subsidiaries.... (8,334,000) (1,344,000) ---- 9,678,000 (a) ----
Other................................. (349,000) (32,748,000) 1,911,000 1,417,000 (a) (29,769,000)
----------- ----------- ----------- ----------- ------------
Net cash provided (used) by
operating activities............. 4,719,000 (18,618,000) 5,725,000 ---- (8,174,000)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment....... (301,000) (8,071,000) (3,461,000) (11,833,000)
Cash paid for acquisitions, net of
cash acquired........................... ---- (77,867,000) ---- (77,867,000)
Additions to intangible assets............ (467,000) (1,346,000) (153,000) (1,966,000)
Other..................................... (232,000) 110,000 274,000 152,000
----------- ----------- ----------- ----------- ------------
Net cash used by investing
activities....................... (1,000,000) (87,174,000) (3,340,000) (91,514,000)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Intercompany advances..................... (107,085,000) 106,058,000 1,027,000 ----
Proceeds from bank credit facility........ ---- 51,000,000 ---- 51,000,000
Payments on bank credit facility.......... ---- (51,000,000) ---- (51,000,000)
Net proceeds from sale of common stock.... 110,051,000 ---- ---- 110,051,000
Distributions to minority interests....... ---- 1,687,000 (2,434,000) (747,000)
Other..................................... 753,000 (204,000) (377,000) 172,000
----------- ----------- ----------- ----------- ------------
Net cash provided (used) by
financing activities............. 3,719,000 107,541,000 (1,784,000) 109,476,000
----------- ----------- ----------- ----------- ------------
Net increase in cash...................... 7,438,000 1,749,000 601,000 9,788,000
Cash (overdraft) at beginning of period... 30,116,000 (1,682,000) 1,747,000 30,181,000
----------- ----------- ----------- ----------- ------------
Cash at end of period..................... $37,554,000 $ 67,000 $ 2,348,000 $ 39,969,000
=========== =========== =========== =========== ============
</TABLE>
9
<PAGE>
Investments in subsidiaries in the foregoing condensed consolidating financial
statements are accounted for under the equity method of accounting.
Consolidating adjustments to the condensed consolidating balance sheets
include the following:
(a) Elimination of investments in subsidiaries and recording of minority
interests, and
(b) Elimination of intercompany accounts.
Consolidating adjustments to the condensed consolidating statements of income
include the following:
(a) Elimination of equity in earnings of subsidiaries, and
(b) Recognition of minority interests in income of consolidated subsidiaries.
Consolidating adjustments to the condensed consolidating statements of cash
flows include the following:
(a) Elimination of equity in income of subsidiaries and recognition of
minority interests in income of consolidated subsidiaries.
10
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such statements relating to
future events and financial performance are forward-looking statements that
involve risks and uncertainties, detailed from time to time in the Company's
various Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 Compared to the Three Months Ended June 30,
1995.
Net Operating Revenues. Net operating revenues for the second quarter
ended June 30, 1996 increased $33,959,000 to $64,583,000 from $30,624,000 for
the second quarter ended June 30, 1995 representing a 110.9% increase. Of this
increase $29,126,000 was due to increased treatments from acquisitions, existing
facility growth and from de novo developments. The remainder was due to an
increase in net operating revenues per treatment, $235.48 in the second quarter
of 1996 compared to $223.64 in the second quarter of 1995, and an increase in
affiliated and unaffiliated facility management fees. The increase in operating
revenues per treatment was due to increased ancillary utilization primarily in
the administration of erythropoietin ("EPO"), the addition of Total Renal Care,
Inc.'s ("TRC") end stage renal disease ("ESRD") laboratory, an overall increase
in average reimbursement rates, and the opening of an intravenous therapy ("IV")
and oral pharmaceutical program and an access management program.
Facility Operating Expenses. Facility operating expenses consist of
costs and expenses specifically attributable to the operation of dialysis
facilities, including operating and maintenance costs of such facilities,
equipment and direct labor, and supplies and service costs relating to patient
care. Facility operating expenses increased $23,820,000 to $43,318,000 in the
second quarter of 1996 from $19,498,000 in the second quarter of 1995. As a
percentage of net operating revenues, facility operating expenses increased to
67.1% in the second quarter of 1996 from 63.7% in the second quarter of 1995 due
to the significant amount of recent acquisitions and de novo development
activity with an operating epense structure that is initially higher due to
integration costs incurred in the first few months of operations coupled with a
lower base of revenue generated until the Company's ancillary programs are
added, leading to an overall lower operating margin.
General and Administrative Expenses. General and administrative
expenses include headquarters expense and administrative, legal, quality
assurance, information systems and centralized accounting support functions.
General and administrative expenses increased $2,023,000 to $4,800,000 in the
second quarter of 1996 from $2,777,000 in the second quarter of 1995. As a
percentage of net operating revenues, general and administrative expenses
declined to 7.4% in the second quarter of 1996 from 9.1% in the second quarter
of 1995. This decline as a percentage of net revenue is a result of revenue
growth and economies of scale achieved through the leveraging of corporate staff
across a higher revenue base.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $650,000 to $1,337,000 in the second quarter of 1996 from $687,000 in
the second quarter of 1995. As a percentage of net operating revenues, the
provision for doubtful accounts decreased to 2.1% in the second quarter of 1996
from 2.2% in the second quarter of 1995. The provision for doubtful accounts is
influenced by the amount of net operating revenues generated from non-
governmental payor sources in addition to the relative percentage of accounts
receivable by aging category. Due to the significant acquisition activity since
the second quarter of 1995, the percentage of accounts receivable, for which the
Company provision methodology will be applied, in the more recent aging
categories has increased, causing a corresponding decrease in the provision as a
percentage of revenues.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Depreciation and Amortization. Depreciation and amortization increased
$2,158,000 to $3,572,000 in the second quarter of 1996 from $1,414,000 in the
second quarter of 1995. As a percentage of net operating revenues, depreciation
and amortization increased to 5.5% in the second quarter of 1996 from 4.6% in
the second quarter of 1995. The increase was attributable to goodwill, other
intangibles and fixed assets recorded through significant acquisition activity
and increased depreciation from new center leaseholds and routine capital
expenditures.
Operating Income. Operating income increased $5,308,000 to $11,556,000
in the second quarter of 1996 from $6,248,000 in the second quarter of 1995. As
a percentage of net operating revenues, operating income decreased to 17.9% in
the second quarter of 1996 from 20.4% in the second quarter of 1995. This
decrease in operating income is primarily due to an increase in facilities
expense and depreciation and amortization as a percentage of net operating
revenue partially offset by a decrease in general and administrative expenses as
a percentage of net operating revenues.
Interest Expense/Interest Income. In connection with the Total Renal
Care Holdings, Inc.'s ("TRCH" or the "Company") reorganization in 1994 and the
implementation of the Company's growth strategy, the Company incurred
substantial debt, some of which requires interest to be paid in cash and most of
which is recognized as non-cash interest expense. Interest expense, net of
interest income, decreased $1,329,000 in the second quarter of 1996 from
$2,385,000 in the second quarter of 1995. As a percentage of net operating
revenues, interest expense, net of interest income, decreased to 1.6% in the
second quarter of 1996 from 7.8% in the second quarter of 1995. Cash interest
expense during the second quarter of 1996 was $601,000 and non-cash interest
during the same period was $1,637,000 versus $260,000 and $2,242,000 in the
second quarter of 1995, respectively. The decrease in the second quarter of 1996
non-cash interest expense was due primarily to a scheduled accretion offset by
the redemption of 35% of the accreted value of the Company's senior subordinated
discount notes (the "Discount Notes") in December 1995. The increase in cash
interest expense was due primarily to ae under the Company's senior credit
facility (the "Senior Credit Facility") to fund the Company's acquisition of the
Nephrology Services Business of Caremark International, Inc. (the "Caremark
Acquisition"). The increase in interest income was due to investments of excess
cash generated from the Company's equity public offering, completed April 3,
1996, placed in short-term high-grade instruments.
Provision for Income Taxes. Provision for income taxes increased
$2,758,000 to $4,110,000 in the second quarter of 1996 from $1,352,000 in the
second quarter of 1995. As a percentage of net operating revenues, provision for
income taxes increased to 6.4% in the second quarter of 1996 from 4.4% in the
second quarter of 1995 and the effective tax rate increased slightly to 41.8%
from 41.6% over the same period. The effective tax rate is influenced by the mix
of operations in states with varying tax rates and the taxable income earned by
minority interests recognized in two subsidiary corporations. The increase as a
percentage of net operating revenues was primarily due to the increased
profitability of the Company in the second quarter of 1996 versus the same
period in the prior year.
Minority Interests. Minority interests represent the pretax net income
earned by physicians who directly or indirectly own minority interests in all of
the Company's partnership affiliates and the net income in two of the Company's
corporate subsidiaries. Minority interests increased $51,000 to $664,000 in the
second quarter of 1996 from $613,000 in the second quarter of 1995. As a
percentage of net operating revenues, minority interest decreased to 1.0% in the
second quarter of 1996 from 2.0% in the second quarter of 1995. This decrease in
minority interest as a percentage of net operating revenues is a result of a
relative proportionate decrease in the formation of partnership affiliates and
subsidiaries as a percentage of total new acquisitions.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net Operating Revenues. Net operating revenues for the six months
ended June 30, 1996 increased $58,727,000 to $114,820,000 from $56,093,000 for
the six months ended June 30, 1995 representing a 104.7% increase. Of this
increase $46,470,000 was due to increased treatments from acquisitions, existing
facility growth and from de novo developments. The remainder was due to an
increase in net operating revenues per treatment, $233.51 in the first six
months of 1996 compared to $215.70 in the first six months of 1995, and an
increase in affiliated and unaffiliated facility management fees. The increase
in operating revenues per treatment was due to the addition of the Company's
ESRD laboratory, increased ancillary utilization primarily in the administration
of EPO, an overall increase in average reimbursement rates,and the opening of an
IV and oral pharmaceutical programs and an access management program.
Facility Operating Expenses. Facility operating expenses increased
$40,227,000 to $76,647,000 in the first six months of 1996 from $36,420,000 in
the first six months of 1995. As a percentage of net operating revenues,
facility operating expenses increased to 66.8% in the first six months of 1996
from 64.9% in the first six months of 1995 due to the significant amount of
recent acquisition and de novo development activity with an operating expense
structure that is initially higher due to integration costs incurred in the
first few months of operations coupled with a lower base of revenue generated
until the Company's ancillary programs are added, leading to an overall lower
operating margin.
General and administrative expenses increased $3,501,000 to $8,701,000
in the first six months of 1996 from $5,200,000 in the first six months of 1995.
As a percentage of net operating revenues, general and administrative expenses
declined to 7.6% in the first six months of 1996 from 9.3% in the first six
months of 1995. This decline as a percentage of net revenue is a result of
revenue growth and economies of scale achieved through the leveraging of
corporate staff across a higher revenue base.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $1,067,000 to $2,333,000 in the first six months of 1996 from
$1,266,000 in the first six months of 1995. As a percentage of net operating
revenues, the provision for doubtful accounts decreased to 2.0% in the first six
months of 1996 from 2.3% in the first six months of 1995. Due to the significant
acquisition activity since the first six months of 1995, the percentage of
accounts receivable, for which the Company provision methodology will be
applied, in the more recent aging categories has increased, causing a
corresponding decrease in the provision as a percentage of revenues .
Depreciation and Amortization. Depreciation and amortization increased
$3,359,000 to $6,032,000 in the first six months of 1996 from $2,673,000 in the
first six months of 1995. As a percentage of net operating revenues,
depreciation and amortization increased to 5.3% in the first six months of 1996
from 4.8% in the first six months of 1995. The increase was attributable to
goodwill, other intangibles and fixed assets recorded through significant
acquisition activity and increased depreciation from new center leaseholds and
routine capital expenditures.
Operating Income. Operating income increased $10,573,000 to
$21,107,000 in the first six months of 1996 from $10,534,000 in the first six
months of 1995. As a percentage of net operating revenues, operating income
decreased slightly to 18.4% in the first six months of 1996 from 18.8% in the
first six months of 1995. This decrease in operating income is primarily due to
an increase in depreciation and amortization as a percentage of net operating
revenue.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Interest Expense/Interest Income. Interest expense, net of interest
income, decreased $2,010,000 in the first six months of 1996 from $4,547,000 in
the first six months of 1995. As a percentage of net operating revenues,
interest expense, net of interest income, decreased to 2.2% in the first six
months of 1996 from 8.1% in the first six months of 1995. Cash interest expense
during the first six months of 1996 was $922,000 and non-cash interest expense
during the same period was $3,228,000 versus $301,000 and $4,420,000 in the
first six months of 1995, respectively. The decrease in the first six months of
1996 non-cash interest expense was due primarily to the redemption of 35% of the
accreted value of the Company's Discount Notes in December 1995. The increase in
cash interest expense was due primarily to borrowings made under the Company's
Senior Credit Facility to fund the Company's Caremark Acquisition. The increase
in interest income was due to investments of excess cash generated from the
Company's initial public offering and secondary equity offering placed in short-
term high-grade instruments.
Provision for Income Taxes. Provision for income taxes increased
$5,073,000 to $7,151,000 in the first six months of 1996 from $2,078,000 in the
first six months of 1995. As a percentage of net operating revenues, provision
for income taxes increased to 6.2% in the first six months of 1996 from 3.7% in
the first six months of 1995 and the effective tax rate decreased to 41.7% from
41.8% over the same period. The effective tax rate is influenced by the mix of
operations in states with varying tax rates and the taxable income earned by
minority interests recognized in two subsidiary corporations. The increase as a
percentage of net operating revenues was primarily due to the increased
profitability of the Company in the first six months of 1996 versus the same
period in the prior year.
Minority Interests. Minority interests increased $407,000 to
$1,417,000 in the first six months of 1996 from $1,010,000 in the first six
months of 1995. As a percentage of net operating revenues, minority interest
decreased to 1.2% in the first six months of 1996 from 1.8% in the first six
months of 1995. This decrease in minority interest as a percentage of net
operating revenues is a result of a relative proportionate decrease in the
formation of partnership affiliates and subsidiaries as a percentage of total
new acquisitions.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had working capital of $108,053,000,
including cash of $39,969,000. The Company intends to finance its working
capital needs, as well as purchases of additional property and equipment for the
operation of its existing facilities, from cash generated by operations and
borrowings under the Senior Credit Facility.
Net cash used by operating activities was $8,174,000 for the first six
months of 1996. Net cash used by operating activities consists of the Company's
net income, increased by non-cash expenses such as depreciation, amortization,
non-cash interest, and the provision for doubtful accounts, and adjusted by
changes in components of working capital, primarily accounts receivable, in the
first six months of 1996. Net cash used in investing activities was $91,514,000
for the first six months of 1996. The Company's principal uses of cash in
investing activities have been related to acquisitions, purchases of new
equipment and leasehold improvements for the Company's outpatient facilities, as
well as the development of new outpatient facilities. Net cash provided by
financing activities was $109,476,000 of which the primary source of financing
were net proceeds from sale of common stock used to finance the Caremark
Acquisition and the development of new facilities. The remaining cash required
for other acquisitions, de novo developments and working capital needs were
funded by the Company's available cash. As a result, cash increased by
$9,788,000 in the first six months of 1996.
On April 3, 1996 the Company completed an equity offering providing
$110.1 million of net proceeds to the Company. On August 14, 1996 the Company
received firm commitments to increase its Senior Credit Facility to $100
million. On December 7, 1995 the Company redeemed 35% of the then accreted value
of its Discount Notes.
Subsequent to June 30, 1996, the Company completed acquisitions of
eight facilities for consideration of $32.9 million of which $32.1 million was
paid in cash; the remainder in the issuance of common stock. Also in July 1996,
the Company repurchased an additional $27.4 million of the outstanding Discount
Notes, at maturity, for $28.4 million. The remaining Discount Notes after the
transaction will accrete to $37.6 million on August 15, 1997 at which point cash
interest will begin to accrue. The outstanding Discount Notes are due August 15,
2004.
The Company believes that it will be able to fund all capital
requirements, including interest on the remaining Discount Notes and the Senior
Credit Facility, with cash generated from operations and other current sources
of financing. To continue its growth strategy, however, the Company may need to
issue additional debt or equity securities. There can be no assurance that
additional financing and capital, if and when required, will be available on
terms acceptable to the Company or at all.
15
<PAGE>
RISK FACTORS
In evaluating the Company, its business and its financial position the
following risk factors should be carefully considered in addition to the other
information contained herein. The following factors could affect the Company's
actual future results and could cause them to differ from any forward-looking
statements made by or on behalf of the Company.
DEPENDENCE ON MEDICARE, MEDICAID AND OTHER SOURCES OF REIMBURSEMENT
The Company is reimbursed for dialysis services primarily at fixed
rates established in advance under the Medicare End Stage Renal Disease program.
Under this program, once a patient becomes eligible for Medicare reimbursement,
Medicare is responsible for payment of 80% of the composite rates determined by
the Health Care Financing Administration ("HCFA") for dialysis treatments. Since
1972, qualified patients suffering from chronic kidney failure, also known as
ESRD, have been entitled to Medicare benefits regardless of age or financial
circumstances. The Company estimates that approximately 62% of it net patient
revenues during its fiscal year ended May 31, 1995 and approximately 60% during
the seven months ended December 31, 1995 and the six months ended June 30, 1996
were funded by Medicare. Since 1983, numerous Congressional actions have
resulted in changes in the Medicare composite reimbursement rate from a national
average of $138 per treatment in 1983 to a low of $125 per treatment on average
in 1986 and to approximately $126 per treatment on average at present. The
Company is not able to predict whether future rate changes will be made.
Reductions in composite rates could have a material adverse effect on the
Company's revenues and net earnings. Furthermore, increases in operating costs
that are subject to inflation, such as labor and supply costs, without a
compensating increase in prescribed rates, may adversely affect the Company's
earnings in the future. The Company is also unable to predict whether certain
services, as to which the Company is currently separately reimbursed, may in the
future be included in the Medicare composite rate.
Since June 1, 1989, the Medicare ESRD program has provided
reimbursement for the administration to dialysis patients of EPO. EPO is
beneficial in the treatment of anemia, a medical complication frequently
experienced by dialysis patients. Many of the Company's dialysis patients
receive EPO. Revenues from EPO (the substantial majority of which are reimbursed
through Medicare and Medicaid programs) were approximately $18.2 million, or 18%
of net patient revenues, in its fiscal year ended May 31, 1995; $18.0 million or
20% of net patient revenues, during the seven months ended December 31, 1995;
and approximately $21.9 million, or 19% of net patient revenues for the six
months ended June 30, 1996. EPO reimbursement significantly affects the
Company's net income. Medicare reimbursement for EPO was reduced from $11 to $10
per 1,000 units for services rendered after December 31, 1993. EPO is produced
by a single manufacturer, and any interruption of supply or product cost
increases could adversely affect the Company's operations.
The Company provides certain of its patients with intradialytic
parenteral nutrition ("IDPN"), a nutritional supplement administered during
dialysis to patients suffering from nutritional deficiencies. The Company has
historically been reimbursed by the Medicare program for the administration of
IDPN therapy. Beginning in 1993, HCFA designated four durable medical equipment
regional carriers ("DMERCs") to process reimbursement claims for IDPN therapy.
The DMERCs recently established new, more stringent medical policies for
reimbursement of IDPN therapy, and many dialysis providers' claims have
subsequently been denied or delayed. Where appropriate, the Company has
appealed and continues to appeal such denials. In addition, the DMERCs are
reportedly reviewing the existing IDPN medical policies. The final outcome of
the appeals and the anticipated review is uncertain and may ultimately reduce
the number of patients eligible to receive reimbursement for IDPN therapy. The
Company's allowance for doubtful accounts reflects a reserve that the Company
believes is adequate against the possibility of an adverse outcome. The Company
has continued to provide IDPN therapy to its patients pending clarification of
this policy. A significant reduction in the number of patients eligible to
receive reimbursement for IDPN therapy or the amount of Medicare reimbursement
therefore would have an adverse effect on the Company's net operating revenues
and net income.
16
<PAGE>
All of the states in which the Company currently operates dialysis
facilities provide Medicaid (or comparable) benefits to qualified recipients to
supplement their Medicare entitlement. The Company estimates that approximately
8% of its net patient revenues during the fiscal year ended May 31, 1995 and 7%
of its net patient revenues during the seven months ended December 31, 1995 were
funded by Medicaid or comparable state programs. The Medicaid programs are
subject to statutory and regulatory changes, administrative rulings,
interpretations of policy and governmental funding restrictions, all of which
may have the effect of decreasing program payments, increasing costs or
modifying the way the Company operates its dialysis business.
Approximately 30% of the Company's net patient revenues during the
fiscal year ended May 31, 1995 and 33% during the seven month period ended
December 31, 1995 were from sources other than Medicare and Medicaid. These
sources include payments from third-party, non-government payors, at rates that
generally exceed the Medicare and Medicaid rates, and payments from hospitals
with which the Company has contracts for the provision of acute dialysis
treatments. Any restriction or reduction of the Company's ability to charge for
such services at rates in excess of those paid by Medicare would adversely
affect the Company's net operating revenues and net income. The Company is
unable to quantify or predict the degree, if any, of the risk of reductions in
payments under these various payment plans. The Company is a party to non-
exclusive agreements with certain third-party payors and termination of such
third-party agreements could have an adverse effect on the Company.
OPERATIONS SUBJECT TO GOVERNMENT REGULATION
The Company is subject to extensive regulation by both the federal
government and the states in which the Company conducts its business. The
Company is subject to the illegal remuneration provisions of the Social Security
Act and similar state laws, which impose civil and criminal sanctions on persons
who solicit, offer, receive or pay any remuneration, directly or indirectly, for
referring a patient for treatment that is paid for in whole or in part by
Medicare, Medicaid or similar state programs. In July 1991 and November 1992,
the federal government published regulations that provide exceptions or "safe
harbors" for certain business transactions. Transactions that are structured
within the safe harbors are deemed not to violate the illegal remuneration
provisions. Transactions that do not satisfy all elements of a relevant safe
harbor do not necessarily violate the illegal remuneration statute, but may be
subject to greater scrutiny by enforcement agencies. Neither the arrangements
between the Company and the physician directors of its facilities ("Medical
Directors") nor the minority ownership interests of referring physicians in
certain of the Company's dialysis facilities fall within the protection afforded
by these safe harbors. Although the Company has never been challenged under
these statutes and believes it complies in all material respects with these and
all other applicable laws and regulations, there can be no assurance that the
Company will not be required to change its practices or relationships with its
Medical Directors or with referring physicians holding minority ownership
interests or that the Company will not experience material adverse effects as a
result of any such challenge.
The Omnibus Budget Reconciliation Act of 1989 includes certain
provisions ("Stark I") that restrict physician referrals for clinical laboratory
services to entities with which a physician or an immediate family member has a
"financial relationship." In August 1995, HCFA published regulations
interpreting Stark I. The regulations specifically provide that services
furnished in an ESRD facility that are included in the composite billing rate
are excluded form the coverage of Stark I. The Company believes that the
language and legislative history of Stark I indicate that Congress did not
intend to include laboratory services provided incidental to dialysis services
within the Stark I prohibition; however, laboratory services not included in the
Medicare composite rate could be included within the coverage of Stark I.
Violations of Stark I are punishable by civil penalties which may include
exclusion or suspension of a provider from future participation in Medicare and
Medicaid programs and substantial fines. Due to the breadth of the statutory
provisions, it is possible that the Company's practices might be challenged
under this law. Any such interpretation of Stark I would apply to the Company's
competitors as well.
17
<PAGE>
The Omnibus Budget Reconciliation Act of 1993 includes certain
provisions ("Stark II") that restrict physician referrals for certain
"designated health services" to entities with which a physician or an immediate
family member has a "financial relationship." The Company believes that the
language and legislative history of Stark II indicate that Congress did not
intend to include dialysis services and the services and items provided incident
to dialysis services within the Stark II prohibitions; however, certain
services, including the provision of, or arrangement and assumption of financial
responsibility for, outpatient prescription drugs, including EPO, and clinical
laboratory services, could be construed as designated health services within the
meaning of Stark II. Violations of Stark II are punishable by civil penalties
which may include exclusion or suspension of a provider from future
participation in Medicare and Medicaid programs and substantial fines. Due 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 the Company's practices might be challenged under
these laws. A broad interpretation of Stark II to include dialysis services and
items provided incident to dialysis services would apply to the Company's
competitors as well.
A number of proposals for health care reform have been made in recent
years, some of which have included radical changes in the health care system.
Health care reform could result in material changes in the financing and
regulation of the health care business, and the Company is unable to predict the
effect of such changes on its future operations. It is uncertain what
legislation on health care reform, if any, will ultimately be implemented or
whether other changes in the administration or interpretation of governmental
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
results of operations of the Company.
RISKS INHERENT IN GROWTH STRATEGY
Following the Company's reorganization in August 1994, the Company
began an aggressive growth strategy. This growth strategy is dependent on the
continued availability of suitable acquisition candidates and subjects the
Company to the risks inherent in assessing the value, strengths and weaknesses
of acquisition candidates, integrating and managing the operations of acquired
companies and identifying suitable locations for additional facilities. The
Company's growth is expected to place significant demands on the Company's
financial and management resources. There can be no assurance that the Company
will be able to continue its growth strategy or that this strategy will
ultimately prove successful. A failure to successfully continue its growth
strategy could have an adverse effect on the Company's results of operations.
COMPETITION
The dialysis industry is fragmented and highly competitive,
particularly in terms of acquisitions of existing dialysis facilities and
developing relationships with referring physicians. Certain of the Company's
competitors have substantially greater financial resources than the Company and
may compete with the Company for acquisitions of facilities in markets targeted
by the Company. Competition for acquisitions has increased the cost of
acquiring existing dialysis facilities. The Company has from time to time
experienced competition from referring physicians who have opened their own
dialysis facilities. A portion of the Company's business consists of monitoring
and providing supplies for ESRD treatments in patients' homes. Certain
physicians also provide similar services and, if the number of such physicians
were to increase, the Company could be adversely affected.
18
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the services and management experience
of the Company's executive officers, and accordingly has entered into employment
agreements with, and provided a variety of equity incentives to, each of these
executives. The Company's continued growth depends upon its ability to attract
and retain skilled employees, in particular highly skilled nurses, for whom
competition is intense. The Company believes that its future success also will
be significantly dependent upon its ability to attract and retain qualified
physicians to serve as Medical Directors of its dialysis facilities. The
Company does not carry key-man life insurance on any of its officers.
DEPENDENCE ON PHYSICIAN REFERRALS
The Company's facilities are dependent upon referrals of ESRD patients
for treatment by physicians specializing in nephrology and practicing in
communities served by the Company's dialysis facilities. As is generally true in
the dialysis industry, at each facility one or a few physicians account for all
or a significant portion of the patient referral base. The loss of one or more
key referring physicians at a particular facility could have a material adverse
effect on the operations of that facility and could adversely affect the
Company's overall operations. Referring physicians own minority interests in 12
of the Company's dialysis facilities. If such interests are deemed to violate
applicable federal or state law, such physicians may be forced to dispose of
their ownership interests. The Company cannot predict the effect such
dispositions would have on its business.
SIGNIFICANT INFLUENCE BY DLJMB
DLJ Merchant Banking Partners, L.P. and certain of its affiliates
("DLJMB") own approximately 10% of the outstanding Common Stock of the Company.
In addition, pursuant to a Shareholders Agreement, DLJMB has the right to
nominate four of the five members of the Company's Board of Directors. As a
result of its significant stock ownership and its rights under such Shareholders
Agreement, DLJMB will be able to influence significantly the outcome of certain
corporate transactions, including any "going private" transaction, merger,
consolidation or sale of all or substantially all of the Company's assets.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1,2,3 AND 5 ARE NOT APPLICABLE.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders of the Company was held on
June 6, 1996. Proposal I submitted to a vote of security holders at the
meeting was the election of Directors. The following Directors, being
all of the Directors of the Corporation, were elected at the meeting,
with the number of votes cast for each Director or withheld from each
Director being set forth after Director's respective name:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
<S> <C> <C>
Victor M.G. Chaltiel 19,006,151 75,750
Maris Andersons 19,004,751 77,150
Peter T. Grauer 18,943,851 138,050
Marsha M. Plotnitsky 18,943,851 138,050
David B. Wilson 19,004,751 77,150
</TABLE>
Proposal II submitted to a vote of security holders at the meeting was
the ratification of the 1994 Equity Compensation Plan. Votes were cast
as follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
13,637,608 5,440,243 4,050
</TABLE>
Proposal III submitted to a vote of security holders at the meeting
was the ratification of the 1995 Equity Compensation Plan. The votes
were cast as follows:
<TABLE>
<CAPTION>
For Against Abstain No Vote
<S> <C> <C> <C>
13,759,477 5,306,388 6,450 9,586
</TABLE>
Proposal IV submitted to a vote of security holders at the meeting was
the ratification of the Employee Stock Purchase Plan. The votes were
cast as follows:
<TABLE>
<CAPTION>
For Against Abstain No Vote
<S> <C> <C> <C>
19,020,001 44,564 7,750 9,586
</TABLE>
Proposal V submitted to a vote of security holders at the meeting was
the ratification of the Appointment of Price Waterhouse LLP as
Independent Accountants. The votes were cast as follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
19,077,751 950 3,200
</TABLE>
20
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of per share earnings for the three months and six
months ended June 30, 1996 and June 30, 1995.
27. Financial Data Schedule (filed via Edgar on August 14, 1996).
21
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS 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.
TOTAL RENAL CARE HOLDINGS, INC.
(REGISTRANT)
/s/ John E. King
------------------------------
John E. King
Vice President and Chief Financial Officer
Date: August 14, 1996
John E. King is signing in the dual capacities as i) Chief Financial Officer,
and ii) a duly authorized officer of the Company.
22
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
During the period from October 1, 1994 to November 2, 1995 the Company
issued approximately 2,190,000 shares of Common Stock and options at prices
significantly below the offering price of the Company's initial public offering.
Such shares and common stock equivalents have been included in the number of
shares outstanding from June 1, 1994 (including the quarter and six months ended
June 30, 1995) until November 2, 1995 using the Treasury Stock method using the
actual offering price of $15.50 per share.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------------- -------------------------
1996 1995 1996 1995
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Applicable Common Shares
Average outstanding during the period 25,802,000 13,927,000 24,077,000 13,863,000
Outstanding stock options 841,000 1,656,000 825,000 1,605,000
Reduction in shares in connection with notes
receivable from employees (64,000) (51,000) (65,000) (50,000)
----------- ----------- ----------- ----------
Weighted average number of shares outstanding 26,579,000 15,532,000 24,837,000 15,418,000
=========== =========== =========== ===========
Net income $ 5,726,000 $ 1,898,000 10,002,000 2,899,000
=========== =========== =========== ===========
Net earnings per share $ 0.22 $ 0.12 $ 0.40 $ 0.19
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 39,969,000
<SECURITIES> 0
<RECEIVABLES> 82,375,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 131,419,000
<PP&E> 44,456,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 291,046,000
<CURRENT-LIABILITIES> 23,366,000
<BONDS> 57,503,000
0
0
<COMMON> 26,000
<OTHER-SE> 203,489,000
<TOTAL-LIABILITY-AND-EQUITY> 291,046,000
<SALES> 0
<TOTAL-REVENUES> 64,583,000
<CGS> 0
<TOTAL-COSTS> 53,027,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,337,000
<INTEREST-EXPENSE> 2,238,000
<INCOME-PRETAX> 10,500,000
<INCOME-TAX> 4,110,000
<INCOME-CONTINUING> 6,390,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,726,000
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
