<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
TOTAL RENAL CARE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8092 51-0354549
(STATE OR OTHER (PRIMARY STANDARD (IRS
JURISDICTION OF INDUSTRIAL EMPLOYER
INCORPORATION OR CLASSIFICATION IDENTIFICATION
ORGANIZATION) CODE NUMBER) NO.)
21250 HAWTHORNE BOULEVARD, SUITE 800
TORRANCE, CALIFORNIA 90503-5517
(310) 792-2600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
JOHN E. KING
CHIEF FINANCIAL OFFICER
TOTAL RENAL CARE HOLDINGS, INC.
21250 HAWTHORNE BOULEVARD, SUITE 800
TORRANCE, CALIFORNIA 90503-5517
(310) 792-2600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
CYNTHIA M. DUNNETT NICHOLAS P. SAGGESE
RIORDAN & MCKINZIE SKADDEN, ARPS, SLATE, MEAGHER & FLOM
300 SOUTH GRAND AVENUE 300 SOUTH GRAND AVENUE
SUITE 2900 SUITE 3400
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90071
(213) 229-8526 (213) 687-5000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
PRACTICABLE after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share...... 3,450,000 shares $45.25 $156,112,500.00 $47,307
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, based on the average of the high and low sales
prices, $46.25 and $44.25, respectively, on October 15, 1996 as reported
on the New York Stock Exchange.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 18, 1996
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
, 1996
3,000,000 SHARES
[LOGO OF TOTAL RENAL CARE HOLDINGS, INC.]
Total Renal Care Holdings, Inc.
COMMON STOCK
Of the 3,000,000 shares of Common Stock being offered hereby (the
"Offering"), 500,000 are being issued and sold by Total Renal Care Holdings,
Inc. (the "Company") and 2,500,000 are being sold by the Selling Stockholders.
See "Principal and Selling Stockholders." The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholders.
The Common Stock is listed on the New York Stock Exchange under the symbol
"TRL." On October 17, 1996 the closing price for the Common Stock as reported
on the New York Stock Exchange was $41.125 per share. See "Price Range of
Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
Total (3).......... $ $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $ , all of which are payable
by the Company.
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to an additional 450,000 shares of Common Stock, at the Price
to the Public less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions and Proceeds to
the Selling Stockholders will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale when, as and if delivered to and accepted by the
Underwriters and subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of share
certificates will be made in New York, New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
UBS SECURITIES
<PAGE>
[LOGO OF TOTAL RENAL CARE HOLDINGS, INC.]
Total Renal Care Holdings, Inc.
Network of 127 Dialysis Facilities
[MAP APPEARS HERE]
---------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL, ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless the
context otherwise requires, the term "Company" refers to Total Renal Care
Holdings, Inc. and its subsidiaries. Unless otherwise indicated, all
information in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
THE COMPANY
Total Renal Care Holdings, Inc. is the third largest provider of integrated
dialysis services in the United States for patients suffering from chronic
kidney failure, also known as end stage renal disease ("ESRD"). The Company
provides dialysis and ancillary services to approximately 9,700 patients
through a network of 127 outpatient dialysis facilities in 16 states, the
District of Columbia and Guam. In addition, the Company provides inpatient
dialysis services at 82 hospitals. The Company has implemented an aggressive
growth strategy since the August 1994 Transaction, described below, adding 90
outpatient dialysis facilities to its network as well as 54 hospital inpatient
contracts. The Company has also expanded its in-house ancillary services to
include ESRD laboratory and pharmacy facilities, as well as vascular access
management and transplant services programs. The increase in the number of
facilities and hospital contracts, combined with the enhancement of the
Company's ancillary businesses, has resulted in an increase in net operating
revenues of 111% to $64.6 million in the quarter ended June 30, 1996 as
compared to the comparable period in the previous year. Since June 1, 1996 the
Company has acquired 15 facilities and, in addition, entered into a management
contract with Georgetown University, which together service over 1,700
patients. As such acquisitions were completed on or after June 1, 1996, the
full impact of the operations acquired are not reflected in the Company's
financial results for the quarter ended June 30, 1996. In addition, the Company
has recently signed letters of intent to acquire five facilities servicing
approximately 300 patients.
ESRD is the state of advanced renal impairment that is irreversible and
requires routine dialysis treatments or kidney transplantation to sustain life.
According to figures published by the Health Care Financing Administration
("HCFA"), the number of patients requiring chronic dialysis services in the
U.S. has increased at a 9% compounded annual growth rate ("CAGR") to 200,000
patients in 1995 from 66,000 patients in 1982. It is estimated that the ESRD
population will continue to grow at a CAGR of approximately 9% over the next
five years. The Company estimates that the U.S. market for outpatient and
inpatient dialysis services in 1995 exceeded $11.1 billion. The Company
believes that this market will continue to grow due to the aging of the general
population, improved dialysis technology and improved treatment and longer
survival of patients with hypertension, diabetes and other chronic illnesses
that lead to ESRD.
There were over 2,700 dialysis facilities in the United States in 1995, of
which approximately 30% were owned by independent physicians, 30% were
hospital-based facilities, and 40% were owned by seven major multi-facility
dialysis providers, including the Company. The dialysis services industry has
been undergoing rapid consolidation. The Company believes that this trend will
continue due to the changing health care environment which is motivating
independent physicians and hospitals to sell to, or form alliances with, major
multi-facility providers.
The Company's growth strategy is focused on establishing strong regional
networks of clustered facilities that provide comprehensive care for ESRD
patients. The Company believes that this approach enhances its operating
efficiency and positions the Company to be a leader in a health care
environment increasingly influenced by managed care. The Company strives to
continue its growth and margin improvement by
3
<PAGE>
(i) expanding its existing networks and by creating new regional facility
networks through acquisitions, the development of new facilities ("de novo"
developments) and the formation of hospital alliances, (ii) forming strategic
alliances with managed care organizations and physicians, (iii) expanding the
range of ancillary services it provides to patients, (iv) continuously
improving the quality of care provided through the Company's Quality Management
Program and (v) maximizing operating efficiencies and utilization. As part of
the Company's growth strategy, it has begun evaluating the development of
operations in various overseas markets.
The 90 outpatient dialysis facilities added since the August 1994 Transaction
are comprised of 78 acquisitions, ten de novo developments and management
contracts with Georgetown University and the University of Southern California.
The acquisition of a facility has an immediate impact on the Company's results
of operations by increasing revenues with minimal incremental general and
administrative cost. In reviewing a potential acquisition, the Company's
evaluation includes analyzing financial pro formas, reviewing the local
competitive market and assessing the target facility's reputation for providing
quality care. As a part of its growth strategy, the Company continually reviews
and evaluates potential acquisition candidates and seeks to identify locations
for de novo developments. The Company is currently developing eight new
facilities scheduled for completion by the end of first quarter 1997.
The Company's wholly-owned subsidiary, Total Renal Care, Inc. ("TRC"),
formerly known as Medical Ambulatory Care, Inc., was organized in 1979 by Tenet
Healthcare Corporation ("Tenet"), formerly known as National Medical
Enterprises, Inc., to own and operate Tenet's hospital-based dialysis services
business as freestanding dialysis facilities and to acquire and develop
additional dialysis facilities in Tenet's markets. The Company was organized to
facilitate the sale by Tenet of approximately 75% of its ownership interest
(the "August 1994 Transaction") to DLJ Merchant Banking Partners, L.P. and
certain of its affiliates ("DLJMB"), management of the Company and certain
holders of debt securities of the Company. In connection with the August 1994
Transaction, the Company, NME Properties Corporation, Tenet and DLJMB entered
into a number of agreements relating to, among other things, corporate
governance, the provision of certain services to the Company by Tenet, and
restrictions on stock transfers.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......... 500,000 shares
Common Stock offered by the Selling
Stockholders (1)........................... 2,500,000 shares
----------
Total (1)................................. 3,000,000 shares
Common Stock outstanding after the Offering
(2)........................................ 26,467,029 shares
Use of proceeds............................. To fund acquisitions, de novo
developments and other capital
expenditures, and for general
corporate purposes. Pending such
uses, net proceeds will be used to
reduce amounts outstanding (and
permitted to be reborrowed) under
the revolving portion of the
Company's credit facility.
New York Stock Exchange Symbol.............. TRL
</TABLE>
- -------------------
(1) Does not include up to 450,000 shares of Common Stock which may be sold by
the Selling Stockholders pursuant to the over-allotment option.
(2) As of September 30, 1996. Does not include 1,782,953 shares issuable upon
the exercise of options outstanding as of September 30, 1996.
RISK FACTORS
Prospective purchasers of Common Stock should carefully consider the matters
set forth herein under "Risk Factors" as well as the other information set
forth in this Prospectus.
----------------
The Company is a Delaware corporation. Its executive offices are located at
21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503-5517, and its
telephone number is (310) 792-2600.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS
ENDED ENDED
YEARS ENDED MAY 31, DECEMBER 31, (1) JUNE 30,
-------------------------------------------- -------------------- ----------------
1991 1992 1993 1994 1995 1994 1995 1995 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT AND
OPERATING DATA: (2)
Net operating revenues. $ 53,019 $ 63,888 $ 71,576 $ 80,470 $ 98,968 $ 53,593 $ 89,711 $56,093 $114,820
Facility operating
expenses.............. 37,016 45,599 49,440 56,828 65,583 36,012 57,406 36,420 76,647
General and
administrative
expenses (3).......... 4,209 4,819 5,292 7,457 9,115 4,916 7,645 5,200 8,701
Operating income ...... 7,327 8,185 11,360 10,883 17,159 8,716 18,466 10,534 21,107
Interest expense, net.. 208 110 9 13 7,203 3,300 5,584 4,547 2,537
Income before
extraordinary item ... 4,121 4,665 6,447 5,718 4,852 2,650 6,467(4) 2,899 10,002
Income per share before
extraordinary item ... -- -- -- -- $ 0.22(5) $ 0.08(5) $ 0.36(4) $ 0.19 $ 0.40
Outpatient facilities
(at period end)....... 32 35 36 37 57 42 68 60 116
Treatments (6)......... 308,029 349,736 379,397 423,353 481,537 268,820 390,806 260,044 491,708
Hospitals receiving
inpatient services (at
period end)........... 34 33 32 28 48 28 55 54 77
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED (1)
---------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TREATMENT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY INCOME STATE-
MENT AND OPERATING DA-
TA:
Outpatient facilities
(at period end)....... 42 42 45 60 62 68 108 116
Treatments (6)......... 112,407 120,443 123,107 136,937 163,633 179,807 217,451 274,257
Net operating revenues. $ 22,434 $ 24,244 $ 25,469 $ 30,624 $ 37,415 $ 41,335 $ 50,237 $ 64,583
Net operating revenue
per treatment......... 199.58 201.29 206.89 223.64 228.65 229.89 231.02 235.48
Operating income ...... 3,633 4,026 4,286 6,248 7,776 8,356 9,551 11,556
Income before
extraordinary item ... 1,053 705 1,001 1,898 2,485 3,285(4) 4,276 5,727
Income per share before
extraordinary item ... 0.01(5) 0.05 0.07 0.12 0.16 0.16(4) 0.18 0.22
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED (7)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $108,053 $ 91,781
Total assets......................................... 291,046 339,266
Long-term debt (including current portion)........... 58,816 91,099
Stockholders' equity................................. 203,515 216,836
</TABLE>
- -----------------
(1) In 1995, the Company changed its fiscal year end to December 31 from May
31.
(2) The August 1994 Transaction and subsequent acquisitions have had a
significant impact on the Company's results of operations. Consequently,
the Income Statement Data for the fiscal year ended May 31, 1995 and for
the seven months ended December 31, 1995 are not directly comparable to
corresponding information for prior periods.
(3) General and administrative expenses for the fiscal years ended May 31,
1991, 1992, 1993 and 1994 include overhead allocations by the Company's
former parent of $523,000, $662,000, $235,000 and $1,458,000, respectively.
The overhead allocations for the fiscal years ended May 31, 1991, 1992 and
1993 were made using a different methodology than that used for the fiscal
year ended May 31, 1994, and the substantial increase in that year reflects
this change in methodology rather than a change in the level of services
provided. No overhead allocation was made for the period from March 1, 1994
through the completion of the August 1994 Transaction, at which time the
Company began to record general and administrative expenses as incurred on
a stand-alone basis. General and administrative expenses for the fiscal
year ended May 31, 1994 reflects $458,000 in expenses relating to a
terminated equity offering.
(4) In December 1995, the Company recorded an extraordinary loss of $2,555,000,
or $0.14 per share, net of income tax effect, on the early extinguishment
of debt. See Note 6 of Notes to Consolidated Financial Statements.
(5) Income per share before extraordinary item for the year ended May 31, 1995,
for the seven months ended December 31, 1994 and for the calendar quarter
ended September 30, 1994 is presented on a pro forma basis to give effect
to the August 1994 Transaction as if it had occurred on June 1, 1994. See
Note 1 of Notes to Consolidated Financial Statements.
(6) Represents dialysis treatments provided in outpatient facilities, at home
and in acute care hospitals. Home dialysis treatments are stated in
hemodialysis equivalents. Only treatments rendered by the Company after the
acquisition of a facility are included.
(7) As Adjusted Balance Sheet Data reflects (i) acquisitions consummated after
June 30, 1996 and probable acquisitions as of October 18, 1996,
(ii) retirement of all outstanding Discount Notes (as defined below) and
(iii) the sale of 500,000 shares of Common Stock by the Company at an
assumed public offering price of $41.125 per share and the application of
the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
In evaluating the Company and its business, prospective investors should
carefully consider the following risk factors in addition to the other
information contained herein.
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 end stage renal disease ("ESRD") have been
entitled to Medicare benefits regardless of age or financial circumstances.
The Company estimates that approximately 62% of its net patient revenues
during its fiscal year ended May 31, 1995, approximately 60% during the seven
months ended December 31, 1995 and approximately 60% during 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. See "Business--Operations--Sources of Revenue Reimbursement"
and "Business--Operations--Medicare Reimbursement."
Since June 1, 1989, the Medicare ESRD program has provided reimbursement for
the administration to dialysis patients of erythropoietin ("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 operating revenues, in its fiscal year ended May 31,
1995 and were $18.0 million, or 20% of net operating revenues, during the
seven months ended December 31, 1995 and $21.9 million, or 19% of net
operating revenues during 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. See "Business--Operations--Medicare
Reimbursement."
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 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 some 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
therefor would have an adverse effect on the Company's net operating revenues
and net income.
7
<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, 7% of its net operating revenues during the seven months ended
December 31, 1995 and 6% of its net operating revenues during the six month
period ended June 30, 1996 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. See "Business--Operations--Medicaid Reimbursement."
Approximately 30% of the Company's net patient revenues during the fiscal
year ended May 31, 1995, 33% during the seven month period ended December 31,
1995 and 34% during the six month period ended June 30, 1996 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. See "Business--Operations--
Sources of Revenue Reimbursement."
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 from 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. A broad interpretation of Stark I would apply to
the Company's competitors as well.
8
<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 the provider from
future participation in Medicare and Medicaid programs and substantial fines.
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 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 California statute that became effective January 1, 1995 makes it unlawful
for a physician who has, or a member of whose immediate family has, a
financial interest with or in an entity to refer a person to that entity for,
among other services, laboratory services. The Company currently operates
centers in California, which accounted for a significant percentage of net
operating revenues for the fiscal year ended May 31, 1995 and the seven months
ended December 31, 1995. Although the Company does not believe that the
statute is intended to apply to laboratory services that are provided incident
to dialysis services, it is possible that the statute could be interpreted to
apply to such laboratory services. If the California statute were so
interpreted, the Company would be required to restructure some or all of its
relationships with referring physicians who serve as Medical Directors of the
Company's facilities and with the physicians who hold minority interests in
certain of the Company's facilities.
At present, ESRD patients eligible for California's Medicaid program,
MediCal, are reimbursed for their transportation costs relating to ESRD
treatments. From time to time, the Company pays Medicare supplemental
insurance premiums for patients with a financial need. If this practice is
deemed to violate applicable federal or state law, the Company may be forced
to halt this practice and the Company cannot predict the effect the foregoing
would have on the desire of such patients to use the Company's services.
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. See "Business--Operations--Medicare
Reimbursement" and "Business-- Governmental Regulation."
RISKS INHERENT IN GROWTH STRATEGY
Following the August 1994 Transaction, 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, 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. In recent years, acquisition prices and competition for facilities
has increased. To the extent the Company is unable to acquire or develop
facilities in a cost-effective manner, its ability to expand its business and
enhance results of operations would be adversely affected. In addition,
although the Company believes it has a demonstrable track record of
integrating the operations of acquired companies with its historic operations,
the process for integrating acquired
9
<PAGE>
operations, particularly for newly acquired regional clusters, presents a
significant challenge to the Company's management and may lead to
unanticipated costs or a diversion of management's attention from day-to-day
operations. 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. See "Business--
Business Strategy."
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. See "Business--
Competition."
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 will also
be significantly dependent on 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 the
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 21 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. See "Risk Factors--Operations
Subject to Government Regulation," "Business--Operations--Physician
Relationships" and "Business--Governmental Regulation."
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 and after
the Offering will own approximately % of the outstanding Common Stock of the
Company (approximately % if the Underwriters' over-allotment option is
exercised in full). Upon consummation of the Offering, DLJMB's right to
nominate four of the five members of the Company's Board of Directors pursuant
to a Shareholders Agreement (as defined herein) among certain of the Company's
stockholders will terminate. The four individuals previously nominated by
DLJMB (three of which are DLJMB employees) and elected as Company directors
will remain directors, however, until the next election or any earlier
resignation and to that extent and until such time continue to be able to
influence significantly the affairs of the Company, including corporate
transactions such as any "going private" transaction, merger, consolidation or
sale of all or substantially all of the Company's assets. The Company has been
informed that two of such DLJMB employees intend to resign as directors upon
consummation of the Offering. See "Principal and Selling Stockholders" and
"Certain Relationships and Related Transactions."
10
<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price and volume of the Common Stock historically has been and
could in the future be subject to significant fluctuations in response to many
factors, including quarter-to-quarter variations in operating results, changes
in earnings estimates by analysts, changes in federal or state regulation of
services provided by the Company or reimbursement rates for such services,
competition, general market conditions and other events or factors. See "Price
Range of Common Stock."
ANTITAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws include several
provisions which may have the effect of deterring hostile takeovers, delaying
or preventing changes in control or changes in management of the Company, or
limiting the ability of stockholders to approve transactions that they may
deem to be in their best interests, including (i) a provision requiring that
any action required or permitted to be taken by stockholders of the Company
must be effected at a duly called annual or special meeting of stockholders
and may not be effected by written consent, and (ii) a provision requiring at
least 60 days' advance notice by a stockholder of a proposal or director
nomination which such stockholder desires to present at any annual or special
meeting of stockholders. In addition, pursuant to the Company's Certificate of
Incorporation the Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the rights and
preferences of such Preferred Stock without the need for further stockholder
approval. The Company has no present plans to issue any shares of Preferred
Stock. See "Principal and Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Substantially all of the shares of Common Stock that will be outstanding
after the Offering will be available for immediate sale in the public market.
Sales of substantial amounts of Common Stock into the public market or the
perception that such sales could occur, could adversely affect the prevailing
market price for the Common Stock and the ability of the Company to raise
equity capital. The Company can make no prediction as to the effect, if any,
that sales of shares of its Common Stock, or the availability of shares for
future sale, will have on the market price of the Common Stock prevailing from
time to time. Such sales may also make it more difficult for the Company to
sell equity securities or equity-related securities at a time and price that
it deems appropriate. Certain stockholders of the Company are also entitled to
registration rights. See "Principal and Selling Stockholders."
11
<PAGE>
RECENT FACILITY NETWORK EXPANSION
The Company has implemented an aggressive growth strategy since the August
1994 Transaction through acquisitions, de novo developments and hospital
alliances. The Company's acquisition model has served as the foundation for
the Company's disciplined and rapid growth through acquisitions. The Company's
acquisition strategy is to leverage its operating infrastructure in existing
regions by acquiring centers where it already has a strong market presence and
to establish a strong presence in new markets by acquiring clusters of
facilities that can support new regional operating infrastructures. The
Company's comprehensive range of ESRD services, including laboratory, oral
pharmaceutical, vascular access management and transplant management services
programs, allows the Company to rapidly expand the range of ESRD services
offered to patients in the operations it acquires.
Since the implementation of the growth strategy in August 1994, the Company
has become the third largest provider of dialysis services in the United
States by adding 90 centers (comprised of 78 acquisitions, ten de novo
developments and management contracts with Georgetown University and the
University of Southern California) representing, at the time of acquisition or
commencement of operations, 1,272 dialysis stations and more than 6,700
patients.
Since June 1, 1996 the Company has acquired 15 facilities and, in addition,
entered into a management contract with Georgetown University, which together
service over 1,700 patients. As such acquisitions were completed on or after
June 1, 1996, the full impact of the operations acquired are not reflected in
the Company's financial results for the quarter ended June 30, 1996. In
addition, the Company has also recently signed letters of intent to acquire
five facilities, servicing approximately 300 patients.
On March 15, 1996, the Company completed the $49.0 million Caremark
Acquisition, which represents the Company's largest acquisition to date. The
acquired operations included over 1,400 ESRD patients and 32 outpatient
dialysis facilities (the "Caremark Facilities"), which are concentrated in the
Minneapolis/St. Paul area as well as in Northern California. The Caremark
Facilities generated $46.8 million of net revenue in 1995. Additional benefits
to the Company of the Caremark Acquisition include (i) establishing it as the
leading dialysis provider in the Minneapolis/St. Paul region; (ii)
significantly strengthening its presence in Northern California; (iii)
expanding its ESRD related ancillary services; (iv) broadening its
affiliations with nationally recognized nephrologists and academic medical
centers; (v) strengthening its managed care capabilities and experience; and
(vi) realizing significant cost savings.
During the second quarter of 1996 the Company successfully integrated the
operations of the Caremark Facilities into its overall network. At the time of
acquisition, the Caremark Facilities in aggregate were unprofitable and during
the second quarter the Company was able to improve operating results through
(i) a consolidation of corporate functions, including reimbursement
administration, human resources management and accounting, (ii) making
available to the Caremark Facilities the benefits of the Company's purchasing
contracts, (iii) personnel reductions and (iv) the implementation of the
Company's ancillary programs at or in association with the Caremark
Facilities.
12
<PAGE>
NETWORK EXPANSION SINCE THE INITIAL PUBLIC OFFERING
The following chart lists the 54 centers acquired, the seven de novo
facilities developed and the management contract established by the Company
since its initial public offering in October 1995 (the "Initial Public
Offering"):
CAREMARK ACQUISITION (MARCH 1996)
<TABLE>
<S> <C> <C> <C>
Chabot Dialysis Clinic,
Dublin CA Minneapolis Dialysis Unit MN
Chabot Dialysis Clinic,
Hayward CA Minnetonka Dialysis Unit MN
Chabot Dialysis Clinic, San
Leandro CA Montevideo Dialysis Unit MN
Chabot Dialysis Clinic,
Union City CA Morris Dialysis Unit MN
East Bay Peritoneal Dialysis CA Pine City Dialysis Unit MN
Alexandria Dialysis Unit MN Red Lake Dialysis Unit MN
Anoka-Good Samaritan
Dialysis Unit MN Red Wing Dialysis Unit MN
Arden Hills Dialysis Unit MN Redwood Falls Dialysis Unit MN
Burnsville Dialysis Unit MN Special Needs Dialysis Unit MN
Cass Lake Dialysis Unit MN St. Paul Dialysis Unit MN
Coon Rapids Dialysis Unit MN West St. Paul Dialysis Unit MN
Edina Dialysis Unit MN Mitchell Dialysis Unit SD
Fairmont Dialysis Unit MN Pine Ridge Dialysis Unit SD
Faribault Dialysis Unit MN Rosebud Dialysis Unit SD
Maplewood Dialysis Unit MN Sioux Falls Dialysis Unit SD
St. Croix Falls Dialysis
Marshall Dialysis Unit MN Unit WI
OTHER ACQUISITIONS AND MANAGEMENT CONTRACTS
Total Renal Care East TX November 1995
Total Renal Care West TX November 1995
Burbank Regional Dialysis
Center CA January 1996
Downtown Dialysis Center MD January 1996
Pacific Peritoneal Dialysis
Center Guam January 1996
Upstate Dialysis Center SC March 1996
Greer Kidney Center (1) SC March 1996
Eaton Canyon Dialysis Center CA June 1996
Georgetown Dialysis Center
(2) DC June 1996
St. Mary Medical Center PA July 1996
Piedmont Dialysis CA July 1996
Peralta Dialysis CA July 1996
Bertha Sirk Dialysis MD July 1996
Greenspring Dialysis MD July 1996
Houston Kidney Center TX August 1996
Houston Kidney Center
Southeast TX August 1996
North Houston Kidney Center TX August 1996
Northwest Kidney Center TX August 1996
Port Charlotte Artificial
Kidney FL August 1996
Gulf Coast Peritoneal FL August 1996
Paramount Dialysis CA September 1996
Doctors Dialysis East L.A.
(3) CA October 1996
Doctors Dialysis Montebello
(3) CA October 1996
DE NOVO FACILITIES
Shiprock Dialysis Facility NM December 1995
Kenner Dialysis Center LA February 1996
Potrero Hill Dialysis Center CA February 1996
Mission Dialysis Center CA March 1996
Guam Renal Center Guam May 1996
Loma Vista TX August 1996
Pine Island FL October 1996
</TABLE>
- --------------------
(1) On March 13, 1996, the Company entered into a definitive agreement to
manage the affiliated Greer Kidney Center, Inc. ("Greer") and to acquire
Greer upon receipt of a certificate of need from the State of South
Carolina. The Company has placed the funds for the acquisition of Greer
into escrow pending regulatory approval.
(2) Management contract.
(3) In October 1996 the Company entered into a definitive agreement to manage
the Doctors Dialysis Center of East Los Angeles and Doctors Dialysis
Center of Montebello and expects to complete the acquisition during the
first four months of 1997.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 500,000 shares of Common
Stock offered by the Company hereby are estimated to be approximately
$19,200,000, assuming a public offering price of $41.125 per share and after
deducting the underwriting discount and estimated offering expenses. The
Company intends to use such net proceeds for acquisitions, de novo
developments and other capital expenditures, and general corporate purposes.
Pending such uses, the Company intends to reduce amounts outstanding (and
permitted to be reborrowed) under the revolving portion of the Company's
credit facility (the "Senior Credit Facility"). The Company will not receive
any proceeds from the sale of Common Stock by the Selling Stockholders.
The Company continually reviews and evaluates acquisition candidates as part
of its growth strategy, and is at various stages of evaluation, discussion or
negotiation with a number of such candidates. As of the date of this
Prospectus, except for letters of intent to acquire five facilities servicing
approximately 300 patients, the Company has not reached a final binding
agreement with respect to any such potential acquisition.
Borrowings under the Senior Credit Facility (which are permitted to be made
up to $400 million) bear interest at one of two floating rates selected from
time to time by the Company. These borrowings currently bear interest at
6.125% per annum. At October 17, 1996, approximately $300 million was
available for borrowing under the Senior Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange. The
following table sets forth, for the periods indicated, the high and low sale
prices for the Common Stock as reported by the New York Stock Exchange since
the Initial Public Offering.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Transitional Fiscal Year Ended December 31, 1995
4th Quarter (beginning October 31, 1995)................ $30 $18
Fiscal Year Ending December 31, 1996
1st Quarter ............................................ 32 1/4 27
2nd Quarter ............................................ 45 1/2 31
3rd Quarter ............................................ 42 5/8 32
4th Quarter (through October 17, 1996) ................. 46 3/8 38 7/8
</TABLE>
The closing price of the Common Stock on October 17, 1996 was $41.125 per
share. As of September 30, 1996 there were 115 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
Since the August 1994 Transaction, the Company has not declared or paid cash
dividends to its holders of Common Stock. The Company currently anticipates
that all earnings will be retained for the development and expansion of its
business and, therefore, does not anticipate paying dividends on its Common
Stock in the foreseeable future. The Senior Credit Facility contains
provisions which prohibit the Company from paying dividends on its Common
Stock.
14
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
(i) as of June 30, 1996, (ii) as adjusted to reflect acquisitions consummated
after June 30, 1996, probable acquisitions as of October 18, 1996 and the
retirement of all outstanding Discount Notes in July and September 1996 and
(iii) as further adjusted to reflect the sale of 500,000 shares of Common
Stock offered hereby by the Company at an assumed public offering price of
$41.125 per share. See "Use of Proceeds" and the Company's Consolidated
Financial Statements and the notes thereto. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
AS
AS FURTHER ADJUSTED
ACTUAL ADJUSTED FOR THE OFFERING
-------- -------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash...................................... $ 39,969 $ -- $ 19,214
======== ======== ========
Long-term debt (including current
portion):
Senior Credit Facility................... $ -- $ 89,786 $ 89,786
Discount Notes........................... 57,503 -- --
Other.................................... 1,313 1,313 1,313
-------- -------- --------
Total long-term debt.................. 58,816 91,099 91,099
Minority interests........................ 4,541 5,472 5,472
Stockholders' equity:
Common Stock, $0.001 par value,
55,000,000 shares authorized; 25,889,905
shares outstanding, actual; 25,962,061
shares outstanding, as adjusted; and
26,462,061 shares outstanding as further
adjusted (1)............................ 26 26 26
Additional paid-in capital............... 234,369 236,199 255,413
Notes receivable from stockholders....... (2,727) (2,727) (2,727)
Retained earnings (deficit).............. (28,153) (35,876) (35,876)
-------- -------- --------
Total stockholders' equity............ 203,515 197,622 216,836
-------- -------- --------
Total capitalization...................... $266,872 $294,193 $313,407
======== ======== ========
</TABLE>
- --------------------
(1) Does not include 1,639,360 shares issuable upon the exercise of options
outstanding as of June 30, 1996.
15
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table presents selected consolidated financial and operating
data of the Company for the periods indicated. The consolidated financial data
as of May 31, 1991, 1992, 1993, 1994 and 1995 and as of December 31, 1995 and
for each of the years in the five year period ended May 31, 1995 and the seven
month period ended December 31, 1995 have been derived from the Company's
audited consolidated financial statements. The consolidated financial data for
the seven months ended December 31, 1994 and for the six month periods ended
June 30, 1995 and 1996 are unaudited and include all adjustments consisting
solely of normal recurring adjustments necessary to present fairly the
Company's results of operations for the period indicated. The results of
operations for the seven month periods ended December 31, 1994 and 1995 and
for the six month periods ended June 30, 1995 and 1996 are not necessarily
indicative of the results which may occur for the full fiscal year. The
following financial and operating data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Consolidated Financial Statements and the notes
thereto and the other information contained elsewhere in this Prospectus or
incorporated herein by reference.
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS
ENDED ENDED
YEARS ENDED MAY 31, DECEMBER 31, (1) JUNE 30,
--------------------------------------- -------------------- ----------------
1991 1992 1993 1994 1995 1994 1995 1995 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
(2)
Net operating revenues. $53,019 $63,888 $71,576 $80,470 $98,968 $ 53,593 $ 89,711 $56,093 $114,820
Facility operating
expenses.............. 37,016 45,599 49,440 56,828 65,583 36,012 57,406 36,420 76,647
General and
administrative
expenses (3).......... 4,209 4,819 5,292 7,457 9,115 4,916 7,645 5,200 8,701
Provision for doubtful
accounts.............. 1,846 2,118 2,050 1,550 2,371 1,363 1,811 1,266 2,333
Depreciation and
amortization.......... 2,621 3,167 3,434 3,752 4,740 2,586 4,383 2,673 6,032
------- ------- ------- ------- ------- -------- -------- ------- --------
Total operating
expenses.............. 45,692 55,703 60,216 69,587 81,809 44,877 71,245 45,559 93,713
------- ------- ------- ------- ------- -------- -------- ------- --------
Operating income....... 7,327 8,185 11,360 10,883 17,159 8,716 18,466 10,534 21,107
Interest expense, net.. 208 110 9 13 7,203 3,300 5,584 4,547 2,537
------- ------- ------- ------- ------- -------- -------- ------- --------
Income before income
taxes, minority
interests and
extraordinary item.... 7,119 8,075 11,351 10,870 9,956 5,416 12,882 5,987 18,570
Income taxes........... 2,519 2,875 4,129 4,106 3,511 1,933 4,631 2,078 7,151
------- ------- ------- ------- ------- -------- -------- ------- --------
Income before minority
interests and
extraordinary item.... 4,600 5,200 7,222 6,764 6,445 3,483 8,251 3,909 11,419
Minority interests in
income of consolidated
subsidiaries.......... 479 535 775 1,046 1,593 833 1,784 1,010 1,417
------- ------- ------- ------- ------- -------- -------- ------- --------
Income before
extraordinary item.... $ 4,121 $ 4,665 $ 6,447 $ 5,718 $ 4,852 $ 2,650 $ 6,467(4) $ 2,899 $ 10,002
======= ======= ======= ======= ======= ======== ======== ======= ========
Income per share before
extraordinary item.... $ 0.22(5) $ 0.08(5) $ 0.36(4) $ 0.19 $ 0.40
</TABLE>
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS
ENDED ENDED
YEARS ENDED MAY 31, DECEMBER 31, (1) JUNE 30,
--------------------------------------- ----------------- ---------------
1991 1992 1993 1994 1995 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Outpatient facilities
(at period end)....... 32 35 36 37 57 42 68 60 116
Treatments (6)......... 308,029 349,736 379,397 423,353 481,537 268,820 390,806 260,044 491,708
Hospitals receiving
inpatient services (at
period end)........... 34 33 32 28 48 28 55 54 77
</TABLE>
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31, JUNE 30,
------------------------------------- ------------ --------
1991 1992 1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $5,471 $8,508 $14,609 $20,064 $14,971 $ 54,691 $108,053
Total assets........... 26,876 32,509 36,003 43,621 77,558 163,998 291,046
Long-term debt
(including current
portion).............. 465 437 267 198 88,142 55,894 58,816
Mandatorily redeemable
Common Stock (7)...... -- -- -- -- 3,990 -- --
Stockholders' equity
(deficit)............. 17,903 22,568 29,015 34,733 (30,879)(8) 82,804 203,515
</TABLE>
(See Notes on following page)
16
<PAGE>
- --------------------
(1) In 1995, the Company changed its fiscal year to December 31 from May 31.
(2) The August 1994 Transaction and subsequent acquisitions had a significant
impact on the Company's financial position and on the Company's results of
operations. Consequently, the Balance Sheet Data as of May 31, 1995,
December 31, 1995 and June 30, 1996 and the Income Statement Data for the
fiscal year ended May 31, 1995, the seven months ended December 31, 1995
and the six months ended June 30, 1995 and 1996 are not directly
comparable to corresponding information as of prior dates and for prior
periods, respectively.
(3) General and administrative expenses for the fiscal years ended May 31,
1991, 1992, 1993 and 1994 include overhead allocations by the Company's
former parent of $523,000, $662,000, $235,000 and $1,458,000,
respectively. The overhead allocations for the fiscal years ended May 31,
1991, 1992 and 1993 were made using a different methodology than that used
in the fiscal year ended May 31, 1994 and the substantial increase in that
year reflects this change in methodology rather than a change in the level
of services provided. No overhead allocation was made for the period from
March 1, 1994 through the closing of the August 1994 Transaction, at which
time the Company began to record general and administrative expenses as
incurred on a stand-alone basis. General and administrative expenses for
the fiscal year ended May 31, 1994 reflect $458,000 in expenses relating
to a terminated equity offering.
(4) In December 1995, the Company recorded an extraordinary loss of
$2,555,000, or $0.14 per share, net of tax, on the early extinguishment of
debt. See Note 6 of Notes to Consolidated Financial Statements.
(5) Income per share before extraordinary item for the year ended May 31, 1995
and for the seven months ended December 31, 1994 is presented on a pro
forma basis to give effect to the August 1994 Transaction as if it had
occurred on June 1, 1994. See Note 1 of Notes to Consolidated Financial
Statements.
(6) Represents dialysis treatments provided in outpatient facilities, at home
and in acute care hospitals. Home dialysis treatments are stated in
hemodialysis equivalents. Only treatments rendered by the Company after
the acquisition of a facility are included.
(7) Mandatorily redeemable Common Stock represents shares of Common Stock
issued in certain acquisitions subject to put options that terminated upon
the completion of the Initial Public Offering. See Note 8 to Notes to
Consolidated Financial Statements.
(8) In connection with the August 1994 Transaction, the Company paid a
dividend to Tenet of $75.5 million.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto contained elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in "Risk Factors."
BACKGROUND
The Company was formed in contemplation of the August 1994 Transaction as
the parent corporation of Total Renal Care, Inc. (formerly Medical Ambulatory
Care, Inc.). In the August 1994 Transaction, the Company paid a dividend of
$75.5 million to NME Properties out of the net proceeds from (i) the issuance
of units consisting of an aggregate of $100 million in principal amount at
maturity of 12% Senior Subordinated Discount Notes due 2004 (the "Discount
Notes"), which were issued at approximately 70% of par, and 600,000 shares of
Common Stock and (ii) borrowing under the Company's revolving credit facility
with the Bank of New York (the "Senior Credit Facility"). The Company raised
additional capital to fund the continuation of its growth strategy through the
Initial Public Offering on October 30, 1995 in which the Company issued and
sold 6,900,000 shares of its Common Stock and raised gross proceeds of $107
million. Concurrent with the Initial Public Offering, the Company listed its
Common Stock on the New York Stock Exchange under the symbol "TRL." Subsequent
to the Initial Public Offering the Company changed its fiscal year end from
May 31 to December 31. The Company raised additional capital through a
subsequent public offering on April 3, 1996 in which the Company issued and
sold 3,500,000 shares of its Common Stock and raised net proceeds of
$110.1 million. In July and September 1996 the Company retired all outstanding
Discount Notes for an aggregate payment of $40 million (including consent
payments of $1.1 million). In October 1996 the Company secured a seven year
$400 million bank credit facility to provide further financing for the
Company's growth strategy.
Following the August 1994 Transaction, the Company implemented a growth
strategy designed to enhance revenues and improve operating income. A major
part of the Company's growth strategy is to expand the Company's existing
facility network and to create new regional facility networks through
acquisitions, de novo developments and hospital alliances. The acquisition of
a facility has an immediate impact on the Company's results of operations by
increasing revenues with minimal incremental general and administrative cost
resulting in enhanced operating income. Since the August 1994 Transaction the
Company has added 90 centers to its network (comprised of 78 acquisitions and
ten de novo developments and management contracts with Georgetown University
and the University of Southern California) representing, at the time of
acquisition or commencement of operations, 1,272 dialysis stations and more
than 6,700 patients. Of these increases, additions since the Initial Public
Offering total 62 new centers (comprised of 54 acquisitions and seven de novo
developments and one management contract with Georgetown University)
representing, at the time of acquisition or commencement of operations, 885
dialysis stations and more than 4,600 patients.
Following the August 1994 Transaction, the Company implemented a focused
strategy to increase net operating revenues per treatment and improve
operating income margins. The Company has significantly increased per-
treatment revenues through the addition of in-house clinical laboratory
services, improved pricing, increased utilization of ancillary services and
the addition of in-house pharmacy services. To improve operating income, the
Company also began a systematic review of the Company's vendor relations
leading to the renegotiation of a number of supply contracts and insurance
arrangements that reduced operating expenses. In addition the Company has
focused on improving facility operating efficiencies and leveraging corporate
and regional management. These improvements have been offset in part by
increased amortization of goodwill and other intangible assets relating to the
Company's acquisitions (all of which have been accounted for as purchase
transactions) and start-up expenses related to de novo developments.
The Company incurred approximately $70.4 million of indebtedness as a result
of the August 1994 Transaction. The related interest expense has had a
significant impact on the Company's results of operations for
18
<PAGE>
the fiscal year ended May 31, 1995, the seven months ended December 31, 1995
and the six months ended June 30, 1995 and 1996. The Company's results of
operations for the year ended May 31, 1995, the seven months ended December
31, 1995 and the six months ended June 30, 1995 and 1996 have also been
materially affected by the implementation of the Company's growth strategy.
Consequently, the results of operations for the year ended May 31, 1995, the
seven months ended December 31, 1995 and the six months ended June 30, 1995
and 1996 are not directly comparable to the results of operations for
comparable prior periods.
NET OPERATING REVENUES
Net operating revenues are derived primarily from four sources: (i)
outpatient facility hemodialysis services, (ii) ancillary services, including
EPO administration, clinical laboratory services and intravenous and oral
pharmaceutical products and services, (iii) home dialysis services and related
products and (iv) inpatient dialysis services provided to hospitalized
patients pursuant to arrangements with hospitals. Additional revenues are
derived from the provision of dialysis facility management services to certain
subsidiaries and affiliated and unaffiliated dialysis centers. The Company's
dialysis and ancillary services are reimbursed primarily under the Medicare
ESRD program in accordance with rates established by HCFA. Payments are also
provided by other third party payors, generally at rates higher than those
reimbursed by Medicare for up to the first 21 months of treatment as mandated
by law. Rates paid for services provided to hospitalized patients are
negotiated with individual hospitals. For the year ended May 31, 1995,
approximately 62% and 8% of the Company's net patient revenues were derived
from reimbursement under Medicare and Medicaid, respectively. For the seven
months ended December 31, 1995, approximately 60% and 7% of the Company's net
patient revenues were derived from reimbursement under Medicare and Medicaid.
For the six months ended June 30, 1996, approximately 60% and 6% of the
Company's net patient revenues were derived from reimbursement under Medicare
and Medicaid, respectively. See "Business--Operations--Sources of Revenue
Reimbursement."
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited financial and operating
information for each of the eight calendar quarters ended after the August
1994 Transaction:
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TREATMENT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $22,434 $24,244 $25,469 $30,624 $37,415 $41,335 $50,237 $64,583
Facility operating
expenses............... 15,265 16,017 16,922 19,498 23,884 26,673 33,329 43,318
General and
administrative
expenses............... 1,930 2,346 2,423 2,777 3,107 3,537 3,901 4,800
Operating income........ 3,633 4,026 4,286 6,248 7,776 8,356 9,551 11,556
Income before
extraordinary item..... 1,053 705 1,001 1,898 2,485 3,285 4,276 5,726
Income per share before
extraordinary item..... $ 0.01 $0.05 $0.07 $0.12 $0.16 $0.16 $ 0.19 $ 0.22
Outpatient facilities... 42 42 45 60 62 68 108 116
Treatments.............. 112,407 120,443 123,107 136,937 163,633 179,807 217,451 274,256
Net operating revenues
per treatment.......... $199.58 $201.29 $206.89 $223.64 $228.65 $229.89 $231.03 $235.48
Operating income
margin ................ 16.2% 16.6% 16.8% 20.7% 20.8% 20.2% 19.0% 17.9%
</TABLE>
Utilization of the Company's services is generally not subject to material
seasonal fluctuations. The quarterly variations shown above reflect the
significant impact of the Company's growth strategy and margin improvement
programs.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
information expressed as a percentage of net operating revenues for such
periods.
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS
YEARS ENDED MAY ENDED ENDED
31, DECEMBER 31, JUNE 30,
------------------- -------------- ------------
1993 1994 1995 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Facility operating expenses. 69.1 70.6 66.3 67.2 64.0 64.9 66.8
General and administrative
expenses................... 7.4 9.3 9.2 9.2 8.5 9.3 7.6
Provision for doubtful
accounts................... 2.8 1.9 2.4 2.5 2.0 2.3 2.0
Depreciation and
amortization............... 4.8 4.7 4.8 4.8 4.9 4.8 5.3
Operating income............ 15.9 13.5 17.3 16.3 20.6 18.8 18.4
Interest expense, net of
interest income............ -- -- 7.3 6.2 6.2 8.1 2.2
Income taxes................ 5.8 5.1 3.5 3.6 5.2 3.7 6.2
Minority interests.......... 1.1 1.3 1.6 1.6 2.0 1.8 1.2
Income before extraordinary
item....................... 9.0 7.1 4.9 4.9 7.2 5.2 8.7
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE 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 program 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 acquisitions 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. 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.
20
<PAGE>
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 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 deceased 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.
Interest Expense. 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 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.
Provisions 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 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 Interest. 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.
SEVEN MONTHS ENDED DECEMBER 31, 1995 COMPARED TO SEVEN MONTHS ENDED DECEMBER
31, 1994
Net Operating Revenues. Net operating revenues increased $36,118,000 to
$89,711,000 for the seven months ended December 31, 1995 ("1995 Seven Month
Period") from $53,593,000 for the seven months ended December 31, 1994 ("1994
Seven Month Period") representing a 67.4% increase. Of this increase
$24,411,000 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 which was $229.55 in the 1995
Seven Month Period compared to $199.36 in the 1994 Seven Month Period, and an
increase in affiliated and unaffiliated facility management fees. The increase
in operating revenues per treatment was due to the addition of TRC's ESRD
laboratory, an overall increase in reimbursement rates, increased ancillary
services utilization primarily in the administration of EPO and the opening of
its oral pharmaceutical and IV therapy program.
Facility Operating Expenses. Facility operating expenses increased
$21,394,000 to $57,406,000 in the 1995 Seven Month Period from $36,012,000 in
the 1994 Seven Month Period and as a percentage of net operating revenue,
facility operating expenses declined to 64.0% in the 1995 Seven Month Period
from 67.2% in the 1994
21
<PAGE>
Seven Month Period. In the 1995 Seven Month Period the decrease in facility
operating expenses as a percentage of revenue was due to substantial
reductions achieved in the costs of providing services, including medical and
pharmaceutical supplies, and overall labor resource efficiencies.
General and Administrative Expenses. General and administrative expenses
increased $2,729,000 to $7,645,000 in the 1995 Seven Month Period from
$4,916,000 in the 1994 Seven Month Period, and as a percentage of net
operating revenue, general and administrative expenses declined to 8.5% in the
1995 Seven Month Period from 9.2% in the 1994 Seven Month Period. 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 $448,000 to $1,811,000 in the 1995 Seven Month Period from
$1,363,000 in the 1994 Seven Month Period, and as a percentage of net
operating revenue, provision for doubtful accounts decreased to 2.0% in the
1995 Seven Month Period from 2.5% in the 1994 Seven Month Period. The
provision for doubtful accounts is influenced by the amount of net operating
revenues generated from non-governmental payor sources. The decrease for the
1995 Seven Month Period reflects better management of accounts receivable,
including increased collection efforts, billing accuracy and improved
preauthorization procedures with payors.
Depreciation and Amortization. Depreciation and amortization increased
$1,797,000 to $4,383,000 in the 1995 Seven Month Period from $2,586,000 in the
1994 Seven Month Period, and as a percentage of net operating revenue,
depreciation and amortization increased to 4.9% in the 1995 Seven Month Period
from 4.8% in the 1994 Seven Month Period. This increase was attributable to
increased amortization due to acquisition activity and increased depreciation
from new center leaseholds and routine capital expenditures.
Operating Income. Operating income increased $9,750,000 to $18,466,000 in
the 1995 Seven Month Period from $8,716,000 in the 1994 Seven Month Period,
and as a percentage of net operating revenue, operating income increased to
20.6% in the 1995 Seven Month Period from 16.3% in the 1994 Seven Month
Period. This increase in operating income is primarily due to a decrease in
facility operating expenses as a percentage of net operating revenue.
Interest Expense. Interest expense, net of interest income, increased
$2,284,000 to $5,584,000 in the 1995 Seven Month Period from $3,300,000 in the
1994 Seven Month Period, and as a percentage of net operating revenues,
interest expense, net of interest income, was 6.2% in the 1995 Seven Month
Period and 6.2% in the 1994 Seven Month Period. Cash interest expense during
the 1995 Seven Month Period was $1,063,000 and non-cash interest during the
same period was $5,228,000 versus $26,000 and $3,274,000 in the 1994 Seven
Month Period, respectively. The increase in the 1995 Seven Month Period cash
interest expense was due primarily to increased borrowing under the Senior
Credit Facility and the increase in non cash interest expense was due to the
August 11, 1994 issuance of the Discount Notes ("Discount Notes"), which
resulted in four and a half months of interest expense recognized in the 1994
Seven Month Period as compared to a full seven months of interest expense
recognized in the 1995 Seven Month Period. In addition, interest accrued in
the 1995 Seven Month Period on a higher accreted principal amount through
December 7, 1995, on which date the Company redeemed 35% of the principal
amount of the Discount Notes at maturity. Cash interest will initially be
incurred on the Discount Notes on August 15, 1997.
Provision for Income Taxes. Provision for income taxes increased $2,698,000
to $4,631,000 in the 1995 Seven Month Period from $1,933,000 in the 1994 Seven
Month Period, and as a percentage of net operating revenue, provision for
income taxes increased to 5.2% in the 1995 Seven Month Period from 3.6% in the
1994 Seven Month Period. The increase was primarily due to the increased
profitability of the Company in the 1995 Seven Month Period versus the same
period in the prior year.
Minority Interests. Minority interests increased $951,000 to $1,784,000 in
the 1995 Seven Month Period from $833,000 in the 1994 Seven Month Period, and
as a percentage of net operating revenue, minority interest
22
<PAGE>
increased to 2.0% in the 1995 Seven Month Period from 1.6% in the 1994 Seven
Month Period. This increase in minority interest as a percentage of revenue is
a result of increased profitability at these partnership affiliates and
subsidiaries and an increase in the number of company facilities owned by such
partnership affiliates.
Extraordinary Loss. On December 7, 1995 the Company redeemed 35% of the
accreted value of the Discount Notes at a redemption premium of 111% for a
total redemption price of $31,912,000. In connection with this redemption, the
Company recorded an extraordinary loss of $2,555,000 (net of income tax
effect) in December 1995.
FISCAL 1995, 1994 AND 1993
Net Operating Revenues. Net operating revenues increased $18,498,000 to
$98,968,000 for the fiscal year ended May 31, 1995 from $80,470,000 for fiscal
year ended May 31, 1994 representing a 23.0% increase. In the fiscal year
ended May 31, 1994 net operating revenues increased $8,894,000 from
$71,576,000 for the fiscal year ended May 31, 1993 representing a 12.4%
increase. Of these increases, $11,412,000 and $8,293,000 were due to increased
treatments (including acquisitions) for the fiscal year ended May 31, 1995 and
the fiscal year ended May 31, 1994, respectively. In the fiscal year ended May
31, 1995, the fiscal year ended May 31, 1994, and the fiscal year ended May
31, 1993, net operating revenues on a per-treatment basis were $205.53,
$190.08, and $188.66, respectively. The increase in net operating revenues per
treatment in the fiscal year ended May 31, 1995 was primarily due to the
addition of a Company-owned laboratory, an overall increase in reimbursement
rates, and increases in administration of EPO per treatment. The increase in
net operating revenues per treatment for the fiscal year ended May 31, 1994
was due primarily to increases in administration of EPO. In the fiscal year
ended May 31, 1995 and the fiscal year ended May 31, 1994, the increases were
partially offset by the effect of decreases in Medicare and Medicaid
reimbursement rates for EPO beginning January 1, 1994.
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, direct labor, and supply and service costs relating to patient
care. In the fiscal year ended May 31, 1995, facility operating expenses
increased $8,755,000 to $65,583,000 from $56,828,000 in the fiscal year ended
May 31, 1994 and as a percentage of net operating revenues, facility operating
expenses declined to 66.3% in the fiscal year ended May 31, 1995 from 70.6% in
the fiscal year ended May 31, 1994. In the fiscal year ended May 31, 1995, the
decrease in facility operating expenses as a percentage of net operating
revenues was due to substantial reductions achieved in the costs of providing
services, including medical supplies, general and corporate insurance products
and overall labor resource efficiencies. In the fiscal year ended May 31,
1994, facility operating expenses increased $7,388,000 from $49,440,000 in the
fiscal year ended May 31, 1993, and, as a percentage of net operating
revenues, facility operating expenses increased to 70.6% in the fiscal year
ended May 31, 1994 from 69.1% in the fiscal year ended May 31, 1993. In the
fiscal year ended May 31, 1994, the increase in facility operating expenses as
a percentage of net operating revenues was a result of increases in the cost
of labor, supplies and services which were not completely offset by an
increase in net operating revenues.
General and Administrative Expenses. General and administrative expenses
include headquarters expense and administrative, legal, quality assurance,
information systems and centralized accounting support functions. In the
fiscal year ended May 31, 1995, general and administrative expenses increased
$1,658,000 to $9,115,000 from $7,457,000 in the fiscal year ended May 31,
1994, and as a percentage of net operating revenues, general and
administrative expenses declined to 9.2% in the fiscal year ended May 31, 1995
from 9.3% in the fiscal year ended May 31, 1994. This decline as a percentage
of net operating revenues is a result of revenue growth and includes the full
impact of stand-alone costs incurred since August 11, 1994 in place of
overhead allocations for services provided by Tenet. In the fiscal year ended
May 31, 1994, general and administrative expenses increased $2,165,000 from
$5,292,000 in the fiscal year ended May 31, 1993, and, as a percentage of net
operating revenues, general and administrative expenses increased to 9.3% from
7.4% in 1993. This increase as a percentage of net operating revenues is
primarily a result of a change in the overhead allocation methodology used by
Tenet. During the fiscal year ended May 31, 1994 and the fiscal year ended May
31, 1993, the Company
23
<PAGE>
was charged an overhead allocation by Tenet of $1,458,000 and $235,000,
respectively, which was included in general and administrative expenses.
Additionally, the Company absorbed $458,000 of expenses associated with a
terminated equity offering in the fiscal year ended May 31, 1994.
Provision for Doubtful Accounts. In the fiscal year ended May 31, 1995, the
provision for doubtful accounts increased $821,000 to $2,371,000 from
$1,550,000 in the fiscal year ended May 31, 1994, and as a percentage of net
operating revenues, the provision for doubtful accounts increased to 2.4% in
the fiscal year ended May 31, 1995 from 1.9% in the fiscal year ended May 31,
1994. This increase was attributable to an increase in reserves for IDPN
services rendered and increased amounts owed from private third party payors
and patients. In the fiscal year ended May 31, 1994, the provision for
doubtful accounts declined $500,000 from $2,050,000 in the fiscal year ended
May 31, 1993, and as a percentage of net operating revenues, the provision for
doubtful accounts declined to 1.9% in the fiscal year ended May 31, 1994 from
2.8% in the fiscal year ended May 31, 1993. The decline in the fiscal year
ended May 31, 1994 was attributable to better management of accounts
receivable, including increased collection efforts, billing accuracy and
improved preauthorization procedures with payors. Additionally, during the
fiscal year ended May 31, 1994 the Company experienced a decline in amounts
billed directly to patients (co-payments and deductibles) due to the growth of
its business with managed care organizations.
Depreciation and Amortization. In the fiscal year ended May 31, 1995,
depreciation and amortization increased $988,000 to $4,740,000 from $3,752,000
in the fiscal year ended May 31, 1994, and as a percentage of net operating
revenues, depreciation and amortization increased to 4.8% in the fiscal year
ended May 31, 1995 from 4.7% in the fiscal year ended May 31, 1994. This
increase was attributable to increased amortization due to acquisition
activity and increased depreciation from new center leaseholds and routine
capital expenditures. In the fiscal year ended May 31, 1994, depreciation and
amortization increased $318,000 from $3,434,000 in the fiscal year ended May
31, 1993, although as a percentage of net operating revenues, depreciation and
amortization decreased to 4.7% in the fiscal year ended May 31, 1994 from 4.8%
in the fiscal year ended May 31, 1993 due to a general increase in net
operating revenues at existing facilities.
Operating Income. In the fiscal year ended May 31, 1995, operating income
increased $6,276,000 to $17,159,000 from $10,883,000 in the fiscal year ended
May 31, 1994, and as a percentage of net operating revenues, operating income
increased to 17.3% in the fiscal year ended May 31, 1995 from 13.5% in the
fiscal year ended May 31, 1994. This increase in operating income is primarily
due to a decrease in facility operating expenses as a percentage of net
operating revenues. In the fiscal year ended May 31, 1994, operating income
decreased $477,000 from $11,360,000 in the fiscal year ended May 31, 1993 and
as a percentage of net operating revenues, operating income decreased to 13.5%
in the fiscal year ended May 31, 1994 from 15.9% in the fiscal year ended May
31, 1993. The decrease in the fiscal year ended May 31, 1994 resulted
primarily from the increase in general and administrative expenses,
specifically a $1,223,000 increase in the Tenet overhead allocation and
incurrence of $458,000 in expenses relating to a proposed equity offering of
the Company which was subsequently terminated.
Interest Expense. Prior to the fiscal year ended May 31, 1995, the Company
did not have any significant interest bearing debt. In connection with the
August 1994 Transaction 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. For the fiscal year ended May 31, 1995, total interest
expense, net of interest income, was $7,203,000, with non-cash interest
expense of $6,947,000 and cash interest expense, net of cash interest income,
of $256,000.
Provision for Income Taxes. In the fiscal year ended May 31, 1995, the
provision for income taxes decreased $595,000 to $3,511,000 from $4,106,000 in
the fiscal year ended May 31, 1994, and as a percentage of net operating
revenues, the provision for income taxes decreased to 3.5% in the fiscal year
ended May 31, 1995 from 5.1% in the fiscal year ended May 31, 1994. This
decrease was primarily due to the effects of the August 1994 Transaction, and
the associated resulting increase in deductible non-cash interest expense
causing a decline in income subject to income taxes of $914,000. In the fiscal
year ended May 31, 1994, the provision for
24
<PAGE>
income taxes decreased $23,000 from $4,129,000 in the fiscal year ended May
31, 1993, and, as a percentage of net operating revenues, provision for income
taxes decreased to 5.1% in the fiscal year ended May 31, 1994 from 5.8% in the
fiscal year ended May 31, 1993.
Minority Interests. Minority interests represent the pretax income earned by
individuals who directly or indirectly own minority interests in the Company's
partnership affiliates and the net income in two of the Company's corporate
subsidiaries. In the fiscal year ended May 31, 1995, minority interests
increased $547,000 to $1,593,000 from $1,046,000 in the fiscal year ended May
31, 1994, and as a percentage of net operating revenues, minority interests
increased to 1.6% in the fiscal year ended May 31, 1995 from 1.3% in the
fiscal year ended May 31, 1994. In the fiscal year ended May 31, 1994,
minority interests increased $271,000 from $775,000 in the fiscal year ended
May 31, 1993, and, as a percentage of net operating revenues, minority
interests increased to 1.3% in the fiscal year ended May 31, 1994 from 1.1% in
the fiscal year ended May 31, 1993. The increases for both periods resulted
from increased profitability at these partnership affiliates and subsidiaries,
relating primarily to increased treatments.
LIQUIDITY AND CAPITAL RESOURCES
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 deprecation,
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 $110,051,000 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.
In July 1996, the Company repurchased $27.4 million of the outstanding
Discount Notes, at maturity, for $28.4 million. In September 1996, the Company
completed a tender offer for its Discount Notes pursuant to which it purchased
all outstanding Discount Notes, with a principal amount of $37.6 million at
maturity, for $38.9 million and made aggregate consent payments of $1.1
million. The repurchase and tender offer resulted in an extraordinary loss of
$7.7 million during the third quarter of 1996.
Effective October 17, 1996, the Company refinanced its prior bank credit
facility with the Senior Credit Facility, which permits borrowings of up to
$400,000,000. Under the Senior Credit Facility, up to $50,000,000 may be used
in connection with letters of credit, and up to $15,000,000 in short-term
funds may be borrowed the same day notice is given to the banks under a "Swing
Line" facility. In general, borrowings under the Senior Credit Facility bear
interest at one of two floating rates selected by the Company: (i) the
Alternate Base Rate (defined as the higher of The Bank of New York's prime
rate or the federal funds rate plus 0.5%); and (ii) Adjusted LIBOR (defined as
the 30-, 60-, 90- or 180-day London Interbank Offered Rate, adjusted for
statutory reserves) plus a margin that ranges from 0.45% to 1.25% depending on
the Company's leverage ratio. Swing Line borrowings bear interest at either a
rate negotiated by the Company and the banks at the time of borrowing or, if
no rate is negotiated and agreed, the Alternate Base Rate. Maximum borrowings
under the Senior Credit Facility will be reduced by $50,000,000 on September
30, 2000, $75,000,000 on September 30, 2001, and another $75,000,000 on
September 30, 2002, and the Senior Credit Facility terminates on September 30,
2003. The Senior Credit Facility contains financial and operating covenants
including, among other things, requirements that the Company maintain certain
financial ratios and satisfy certain financial tests, and imposes limitations
on the Company's ability to make capital expenditures, to incur other
indebtedness and to pay dividends. As of the date hereof, the Company is in
compliance with all such covenants.
As of June 30, 1996, the Company had working capital of $108,053,000,
including cash of $39,969,000.
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The Company anticipates that its aggregate capital requirements for
purchases of equipment and leasehold improvements for outpatient facilities
after June 30, 1996 through December 31, 1996 will be approximately $12.0
million.
The Company's strategy is to continue to expand its operations both through
development of de novo centers and through acquisitions. The development of a
typical outpatient facility generally requires $700,000 for initial
construction and equipment and $200,000 for working capital. Based on the
Company's experience, a de novo facility typically achieves operating
profitability, before depreciation and amortization, by the 12th to 15th month
of operation. However, the period of time for a development facility to break
even is dependent on many factors which can vary significantly from facility
to facility, and, therefore, the Company's past experience may not be
indicative of the performance of future developed facilities. The Company is
currently developing eight new facilities.
During the period January 1, 1996 through June 30, 1996, the Company paid
approximately $81.5 million in consideration for acquisitions, including
approximately $49.0 million for the Caremark Acquisition. From
June 30, 1996 to October 17, 1996, the Company completed acquisitions of 13
facilities for consideration of $59.7 million of which $57.6 million was paid
in cash; the remainder in the issuance of common stock. See "Recent Facility
Network Expansion."
The Company believes that the net proceeds from this Offering, borrowings
under the Senior Credit Facility, cash generated from operations and other
current sources of financing will be sufficient to meet the Company's need for
capital for the foreseeable future, including working capital, purchases of
additional property and equipment for the operation of its existing
facilities, and interest on the Senior Credit Facility. 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.
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BUSINESS
The Company is a leading, high-quality provider of integrated dialysis
services for patients suffering from ESRD. As a result of the Caremark
Acquisition, the Company is now the third largest dialysis provider (based on
number of patients served) in the United States. The Company currently
provides dialysis and ancillary services to approximately 9,700 patients
through a network of 127 outpatient dialysis facilities in 16 states, the
District of Columbia and Guam. In addition, the Company provides inpatient
dialysis services at 82 hospitals. The Company has implemented an aggressive
growth strategy since the August 1994 Transaction, adding 90 outpatient
dialysis facilities to its network as well as 54 hospital inpatient contracts.
The Company has also expanded its in-house ancillary services to include ESRD
laboratory and pharmacy facilities, as well as vascular access management and
transplant services programs.
THE DIALYSIS INDUSTRY
END-STAGE RENAL DISEASE
ESRD is the state of advanced renal impairment that is irreversible and
requires routine dialysis treatments or kidney transplantation to sustain
life. Qualified patients in the United States with ESRD have been entitled
since 1972 to Medicare benefits regardless of age or financial circumstances.
According to figures published by HCFA, the number of patients requiring
chronic dialysis services in the U.S. has increased at a 9% CAGR to 200,000
patients in 1995 from 66,000 in 1982. It is estimated that the ESRD population
will continue to grow at a CAGR of approximately 9% over the next five years.
The Company estimates that the U.S. market for outpatient and inpatient
dialysis services in 1995 exceeded $11.1 billion.
The Company attributes the continuing growth in the number of domestic ESRD
patients principally to the aging of the general population and better
treatment and longer survival of patients with hypertension, diabetes and
other illnesses that lead to ESRD. Management also believes improved dialysis
technology has enabled older patients and those who previously could not
tolerate dialysis due to other illnesses to benefit from this life-prolonging
treatment.
There were over 2,700 dialysis facilities in the United States in 1995, of
which approximately 30% were owned by independent physicians (down from 37% in
1992), 30% were hospital-based facilities (down from 33% in 1992), and 40%
were owned by seven major multi-facility dialysis providers (up from 30% in
1992), including the Company. The dialysis services industry has been
undergoing rapid consolidation. The Company believes that many physician
owners are selling their facilities to obtain relief from changing government
regulation and administrative constraints, to enable them to focus on patient
care and to realize a return on their investment. Hospitals are also motivated
to sell or outsource management of their facilities as they refocus their
resources on their core business due to increasing competitive pressures
within the hospital industry. The Company believes that these changes in the
U.S. health care environment will continue to drive consolidation within the
dialysis services industry.
TREATMENT OPTIONS FOR END-STAGE RENAL DISEASE
Treatment options for ESRD include hemodialysis, peritoneal dialysis and
kidney transplantation. ESRD patients are treated predominantly in outpatient
treatment facilities. HCFA estimates that as of December 31, 1995, 83% of the
ESRD patients in the United States were receiving hemodialysis treatment in
outpatient facilities, with the remaining patients being treated in the home
either through peritoneal dialysis (16%) or home hemodialysis (1%).
Hemodialysis. Hemodialysis, the most common form of ESRD treatment, is
generally performed either in a freestanding facility or in a hospital-based
facility. Hemodialysis uses an artificial kidney, called a dialyzer, to remove
certain toxins, fluids and salt from the patient's blood combined with a
machine to control external blood flow and to monitor certain vital signs of
the patient. The dialysis process occurs across a semi-permeable
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membrane that divides the dialyzer into two distinct chambers. While blood is
circulated through one chamber, a pre-mixed dialyzer fluid is circulated
through the other chamber. The toxins and excess fluid from the blood
selectively cross the membrane into the dialysis fluid. A hemodialysis
treatment usually lasts approximately three hours and is performed three times
per week per patient.
Peritoneal Dialysis. Peritoneal dialysis is generally performed by the
patient at home. There are several variations of peritoneal dialysis. The most
common are continuous ambulatory peritoneal dialysis ("CAPD") and continuous
cycling peritoneal dialysis ("CCPD") or automated peritoneal dialysis ("APD").
All forms of peritoneal dialysis use the patient's peritoneal (abdominal)
cavity to eliminate fluid and toxins from the patient. CAPD utilizes a
sterile, pharmaceutical-grade dialysis solution which is introduced into the
patient's peritoneal cavity through a surgically placed catheter. Toxins in
the blood continuously cross the peritoneal membrane into the dialysis
solution. After several hours, the patient drains the used dialysis solution
and replaces it with fresh solution. CCPD and APD are performed in a manner
similar to CAPD, but use a mechanical device to cycle dialysis solution while
the patient is sleeping or at rest.
Other Treatment Options. An alternative treatment not provided by the
Company is kidney transplantation. While transplantation, when successful, is
generally the most desirable form of therapeutic intervention, the shortage of
suitable donors limits the availability of this treatment option.
BUSINESS STRATEGY
The Company has implemented an aggressive growth strategy since the August
1994 Transaction adding 90 outpatient dialysis facilities to its network as
well as 54 hospital inpatient contracts. The Company has also expanded its in-
house ancillary services to include ESRD laboratory and pharmacy facilities,
as well as vascular access management and transplant services programs. The
strong growth in the number of facilities and hospital contracts, combined
with the enhancement of the Company's ancillary businesses, has resulted in an
increase in net operating revenues of 111% to $64.6 million. Since June 1,
1996 the Company has acquired 15 facilities and a management contract with
Georgetown University, which service together over 1,700 patients. As such
acquisitions were completed on or after June 1, 1996, the full impact of the
operations acquired are not reflected in the Company's financial results for
the quarter ended June 30, 1996. As part of its growth strategy, the Company
continually reviews and evaluates potential acquisition candidates and seeks
to identify locations for de novo developments. The Company is currently
developing eight new facilities scheduled for completion by the end of first
quarter 1997.
The Company's growth strategy is focused on establishing strong regional
networks of clustered facilities that provide comprehensive care for ESRD
patients. The Company believes that this approach enhances its operating
efficiency and positions the Company to be a leader in a health care
environment increasingly influenced by managed care. The Company strives to
continue its growth and margin improvement by (i) expanding its existing
networks and by creating new regional facility networks through acquisitions,
de novo developments and the formation of hospital alliances, (ii) forming
strategic alliances with managed care organizations and physicians, (iii)
expanding the range of ancillary services it provides to patients,
(iv) continuously improving the quality of care provided through the Company's
Quality Management Program and (v) maximizing operating efficiencies and
utilization. As part of the Company's growth strategy, it has begun evaluating
the development of operations in various overseas markets.
CREATION AND EXPANSION OF THE FACILITY NETWORKS
Acquisitions. The Company's acquisition strategy is to leverage its
operating infrastructure in existing regions by acquiring centers where it
already has a strong market presence and to establish a strong presence in new
markets by acquiring clusters of facilities that can support new regional
operating infrastructures. In reviewing a potential acquisition, the Company's
evaluation includes analyzing financial pro formas, reviewing
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the local competitive market and assessing the target facility's reputation
for providing quality care. Since the August 1994 Transaction, the Company has
acquired 90 new facilities. The 90 new facilities have expanded the Company's
existing facility networks and provided significant entries into new markets
including the Minneapolis/St. Paul region, the Chicago metropolitan area,
South Florida and the Houston metropolitan area.
De Novo Developments. The Company develops new facilities to further enhance
its regional clusters and better serve the managed care market, to accommodate
the growing number of ESRD patients and to satisfy demand by local
nephrologists. The Company has established an expertise in the design and
construction of dialysis facilities, having developed ten of its dialysis
facilities, since the August 1994 Transaction. In addition, the Company is
currently developing eight new facilities.
Hospital Alliances. Management believes alliances with hospital-based
facilities represent a growth opportunity for the Company as hospitals refocus
on their core business due to the changing competitive environment in the
hospital industry. These alliances allow the Company to be a value-added
partner for hospitals through application of the Company's industry-specific
expertise to hospital-based dialysis facilities. Accordingly, the Company is
actively pursuing alliances with academic medical centers, as well as
community and county hospitals. In January 1995, the Company entered into an
agreement with the University of Southern California ("USC") and USC Internal
Medicine, Inc. ("IMI") pursuant to which the parties have established a long-
term cooperative relationship for the operation of dialysis facilities in the
area of the Los Angeles County/USC Medical Center. Under this cooperative
relationship, the Company manages USC's existing outpatient dialysis facility
and home dialysis program. The Company is currently developing, and will
operate, a new dialysis facility located near USC's existing facility
(expected to open in November 1996). IMI currently provides medical director
services at the existing facility and will also provide these services at the
new facility. In March 1995, the Company reached an agreement with Louisiana
State University ("LSU") to hire certain LSU faculty nephrologists to serve as
medical directors at certain dialysis facilities in the New Orleans
metropolitan area. The Company has opened two new dialysis facilities in New
Orleans since May 1995 in which LSU research nephrologists are currently
serving as Medical Directors. In June 1996 the Company signed definitive
agreements with Georgetown University to manage its existing facility and to
purchase 80% of such facility in 1997. The Company also expects to open new
dialysis facilities with Georgetown.
The Company has signed a letter of intent with a major west coast medical
center to develop a dialysis center for which medical directors services will
be provided by the medical center's nationally recognized nephrologists.
ALLIANCES WITH MANAGED CARE AND PHYSICIANS
Alliances with Managed Care. The Company is committed to forming innovative
alliances directly with managed care organizations by providing comprehensive,
integrated ESRD services that deliver high-quality care and reduce overall
healthcare costs. In July 1995, the Company was awarded the first long-term
ESRD contract to develop and manage a dialysis center for Kaiser Permanente
("Kaiser") in San Diego, California and in March 1996 the 25-station facility
was opened and currently serves over 80 dialysis patients. This contract is
also the first "partnership" of its type for Kaiser. Kaiser contracts services
for one of the largest dialysis and kidney transplant populations
(approximately 3,000 in California) in the country.
In August 1996, the Company entered into a contract with Aetna Health Plans
of Louisiana, Inc. in which all of Aetna's ESRD patients in the Greater New
Orleans area will be transfered to the Company's facilities from competitive
facilities. In September, the Company entered into a contract with Maxicare of
Louisiana, Inc. in which all of Maxicare's ESRD patients in the Greater New
Orleans area will be transferred to the Company's facilities from competitive
facilities. Both Aetna and Maxicare decided to transition their patients to
the Company's facilities for a variety of reasons including the Company's (i)
extensive geographic coverage of the area, (ii) Quality Management Program,
and (iii) Clinical Information System.
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The Company believes that its managed care efforts have been strengthened as
a result of the Caremark Acquisition, given the new affiliations established
with highly respected research nephrologists and leaders in the development of
nephrology networks and integrated delivery systems. Furthermore, the
clustering of the Company's acquired facilities, including the Caremark
Facilities, has allowed the Company to offer managed care payors broad
facility networks that can support a large segment of each managed care
payors' ESRD patient population within each of the Company's markets. As a
result of its managed care programs, the Company has signed over 111 contracts
with managed care payors.
Alliances With Physicians. The Company seeks to organize and manage networks
of nephrologists which further enhance the ability of these nephrologists and
the Company to provide integrated ESRD services. The Company entered into a
long-term management contract with Total Nephrology Care Network Medical
Associates, a Professional Corporation (the "Physician Network"), a network of
nephrologists in Southern California that works in conjunction with the
Company to provide high-quality, integrated ESRD services while reducing total
costs. The Physician Network markets the services of participating
nephrologists to preferred provider organizations, insurance companies, health
maintenance organizations and other third-party payors for ESRD services both
on a discounted fee-for-service basis and on a prepaid or capitated basis. The
Company is also responsible for providing billing, information systems and
other services to the Physician Network. The Company is paid a management fee
for all the services provided by the Company to the Physician Network. The
Company is in the process of developing Physician Networks in its other major
markets.
COMPREHENSIVE RENAL SERVICES
The Company is committed to broadening the range of services it provides to
its ESRD patients while adding additional sources of revenue and profits. The
Company acquired an ESRD laboratory in January 1995 that provides both routine
(those in the Medicare composite rate) and non-routine (those for which an
additional fee is charged) laboratory tests for its own and other ESRD
patients throughout the United States. As part of the Caremark Acquisition,
the Company also acquired an additional ESRD laboratory that provides the
Company with additional capacity to accommodate its rapidly expanding patient
base and allows the Company to perform an extended range of specialty tests.
The Company opened a pharmacy in February 1995 that provides intravenous
therapy for patients requiring nutritional support such as IDPN. The pharmacy
also provides a comprehensive prescription oral drug program to patients
receiving treatments at the Company's facilities. The Company's dialysis
facilities administer EPO to patients upon a physician's prescription.
In November 1995, the Company expanded its range of ESRD services by
entering into two separate joint ventures to provide vascular access
management services to ESRD patients. Clotting of the hemodialysis vascular
access, the physical entry point to the circulatory system for the dialysis
procedure, is one of the most common causes of hospitalization for ESRD
patients. The Company's vascular access management program uses diagnostic and
preventive procedures to help keep the access point functioning. The Caremark
Acquisition includes vascular access services that have added to the Company's
existing programs. The Caremark Acquisition also provided the Company with an
entry into pre- and post-kidney transplant services programs.
The Company is committed to expanding its home dialysis program. During the
six months ended June 30, 1996, the Company increased the percentage of its
patients receiving peritoneal dialysis to approximately 13% from 12% for the
six month period ended December 31, 1995. Management believes that it can
increase the proportion of its patients receiving peritoneal dialysis
services, as an estimated 17% of all patients in the federal ESRD program at
June 30, 1996 received such services.
QUALITY MANAGEMENT PROGRAM
The Company believes its reputation for quality care is a significant
competitive advantage in attracting patients and physicians and in pursuing
growth in the managed care environment. The Company engages in organized and
systematic efforts to measure, maintain and improve the quality of services it
delivers through its
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Quality Management Program. In response to current payor demands for cost-
effective health care treatments with measurable outcomes, the Company has
developed a proprietary PC-based, networked clinical information system that
provides managed care organizations with detailed patient outcome reports and
critical on-line clinical information. See "Operations--Quality Assurance."
MAXIMIZING OPERATING EFFICIENCIES
The Company believes it has adequate capacity within its existing facilities
network to accommodate greater patient volume and expects such operating
leverage to contribute to increasing margins. In addition, at certain of its
facilities, the Company is able to add dialysis stations to meet growing
demand. Since the Initial Public Offering, the Company has added over 20
dialysis stations to four existing facilities and is currently expanding
station capacity at several other facilities. The Company will continue to
focus on enhancing operating efficiencies, including staffing, purchasing and
financial reporting systems and controls.
OPERATIONS
LOCATION, CAPACITY AND USE OF FACILITIES
The Company currently operates 127 outpatient dialysis centers with 1,855
dialysis stations. The Company owns or operates, directly or through wholly-
owned subsidiary corporations, 103 of these facilities. The remaining 24
centers are partially-owned by physicians. The Company's facilities range in
size from eight to 52 dialysis stations. The facilities are located in the
following states in the following numbers: California (33); Minnesota (22);
Florida (16); Texas (8); Arizona (7); Illinois (7); Louisiana (6); Virginia
(6); Georgia (5); South Dakota (4); Maryland (3); Guam (2); New Mexico (2);
South Carolina (2); District of Columbia (1); Pennsylvania (1); Washington (1)
and Wisconsin (1). The Company also provides acute inpatient dialysis services
to 82 hospitals. System-wide, the Company provides training, supplies and on-
call support services to all of its CAPD and CCPD patients.
OPERATION OF FACILITIES
The Company's dialysis facilities are designed specifically for outpatient
hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room, a water
treatment space used to purify the water used in hemodialysis treatments, a
dialyzer reprocessing room (where, with both the patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work areas,
offices and a staff lounge and kitchen. Many of the Company's facilities also
have a designated area for training patients in home dialysis. Each facility
also offers amenities for the patients, such as a color television with
headsets at each dialysis station.
In accordance with conditions for participation in the Medicare ESRD
program, each facility has a qualified Medical Director. See "Physician
Relationships" below. Each facility also has an Administrator, typically a
registered nurse, who supervises the day-to-day operations of each facility
and the staff. The staff of each facility typically consists of registered
nurses, licensed practical or vocational nurses, patient care technicians, a
social worker, a registered dietician, a unit clerk and bio-medical
technicians.
All of the Company's facilities offer high-flux and high-efficiency
hemodialysis, which most physicians practicing at the Company's facilities
deem suitable for most of their patients. High-flux and high-efficiency
hemodialysis utilize machinery that allow patients to dialyze in a shorter
period of time per treatment because such methods cleanse the blood at a
faster rate than conventional hemodialysis. Many of the Company's facilities
also offer conventional hemodialysis. The Company considers the equipment
installed in its facilities to be among the most technologically advanced
equipment presently available to the dialysis industry.
Many of the Company's facilities also offer various forms of home dialysis,
primarily CAPD. Home dialysis services consist of providing equipment and
supplies, training, patient monitoring and follow-up assistance to patients
who prefer and are able to receive dialysis treatments in their homes.
Patients and their families or other patient helpers are trained by a
registered nurse to perform either CAPD or CCPD at home. Company training
programs for CAPD or CCPD generally encompass two to three weeks.
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INPATIENT DIALYSIS SERVICES
The Company provides inpatient dialysis services (excluding physician
professional services) to 82 hospitals. These services are required in
connection with the hospital's inpatient services for a per treatment fee
individually negotiated with the hospital. In most instances, the Company
transports the dialysis equipment and supplies to the hospital when requested
and administers the dialysis treatment. Examples of cases in which such
inpatient services are required include patients with acute kidney failure
resulting from trauma or similar causes, patients in the early stages of ESRD
and ESRD patients who require hospitalization for other reasons.
ANCILLARY SERVICES
Dialysis facilities provide a comprehensive range of ancillary services to
ESRD patients, the most significant of which is the administration of EPO upon
a physician's prescription. EPO is a bio-engineered protein which stimulates
the production of red blood cells and is used in connection with all forms of
dialysis to treat anemia, a medical complication frequently experienced by
ESRD patients. The Company also has a licensed pharmacy which provides ESRD
patients with oral medications and IDPN services upon a physician's
prescription. Other ancillary services include studies to test the degree of
bone deterioration; electrocardiograms ("EKGs"); nerve conduction studies to
test the degree of deterioration of nerves; doppler flow testing to test the
effectiveness of the patient's vascular access for dialysis; and blood
transfusions.
In February 1995, the Company acquired a licensed clinical laboratory
specializing in ESRD patient testing. Concurrently the Company entered into a
management agreement with an independent third-party to manage the laboratory.
With the Caremark Acquisition, the Company acquired an additional ESRD
laboratory that provides the Company with additional laboratory capacity and
further expands the range of specialty tests provided by the Company. These
ESRD laboratories provide various forms of laboratory tests, a large majority
of which are performed for the Company's outpatient dialysis facilities. The
types of laboratory tests performed at the ESRD laboratories consist of (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 of ESRD) and (iii) general symptom testing. In
addition, the laboratory acquired in the Caremark Acquisition provides
specialty tests, including therapeutic drug monitoring, bone deterioration and
renal stone disease monitoring and certain pre and post-kidney transplant
testing.
In November 1995, the Company expanded its range of ESRD services by
entering into two separate joint ventures to provide vascular access
management services to ESRD patients. Clotting of the hemodialysis vascular
access, the physical entry point to the circulatory system for the dialysis
procedure, is one of the most common causes of hospitalization for ESRD
patients. The vascular access management program uses diagnostic and
preventive procedures to help keep the access point functioning. The Caremark
Acquisition includes additional vascular access services that will add to the
Company's existing programs. The Caremark Acquisition also provided the
Company with an entry into pre- and post-kidney transplant services.
PHYSICIAN RELATIONSHIPS
A key factor in the success of a facility is its relationship with local
nephrologists. An ESRD patient generally seeks treatment at a facility near
such patient's home and where such patient's nephrologist has practice
privileges. Consequently, the Company relies on its ability to meet the needs
of referring physicians in order to continue to receive physician referrals of
ESRD patients.
The conditions of participation in the Medicare ESRD program mandate that
treatment at a dialysis facility be "under the general supervision of a
Director who is a physician." The Company has engaged qualified physicians or
groups of qualified physicians to serve as Medical Directors for each of its
facilities. 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. At some
facilities, the Company also contracts with one or more physicians to serve as
Assistant or Associate Medical Directors or to direct specific programs, such
as CAPD training.
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Medical Directors, Associate Medical Directors and Assistant Medical
Directors enter into written contracts with the Company which specify their
duties and establish their compensation (which is fixed for periods of one
year or more). The majority of such contracts are for a ten year period from
the date of signing. Such agreements are terminable under certain
circumstances by either party on advance written notice. The Company believes
that this allows the Company to evaluate frequently the quality of the Medical
Director's performance; however, the lack of long-term contracts with
physicians could result in the loss of certain key physicians at particular
facilities, which could have a material adverse effect on the operations of
such facilities. The compensation of the Medical Directors and other
physicians under contract is separately negotiated for each facility 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.
As is often true in the dialysis industry, one or a few physicians account
for all or a significant portion of a dialysis facility's patient referral
base. Therefore the Company's selection of a location for a dialysis facility
is determined in part by the location of the practice of physicians or
nephrologists whose practices include significant numbers of patients needing
dialysis. The loss of an important referring physician at a particular
facility could have a material adverse effect on the operations of that
facility.
Generally, the Company has non-competition agreements with its Medical
Directors or referring physicians. In all cases in which the Company acquired
a facility from one or more physicians, or where one or more physicians own
interests in facilities as partners or co-shareholders with the Company, such
physicians have agreed to refrain from owning interests in and serving as
Medical Directors of competing facilities for various periods. In other cases,
physicians who provide Medical Director services have executed non-competition
agreements. While not frequent, the Company has from time to time experienced
competition from a dialysis facility established by a former Medical Director
following the termination of his or her relationship with the Company.
QUALITY ASSURANCE
Quality Management Program. The Company engages in organized and systematic
efforts to measure, maintain and improve the quality of services it delivers
and believes that it has earned a favorable reputation for quality in the
dialysis community. The Company has implemented a Quality Management Program
designed to measure outcomes and improve the quality of its services. The
Company has also developed and has rolled-out a proprietary PC-based clinical
information system to support its Quality Management and Managed Care
Programs. The Company's Quality Management Program and clinical information
systems have been developed under the direction of the Company's Vice
President-Quality Management and Integrated Programs, who is a Clinical
Professor of Medicine at the University of California Medical Center in San
Francisco. The implementation of the Quality Management Program is being
coordinated by the Company's Corporate Director of Quality Management and
twelve regional Quality Management Coordinators. This corporate quality
management team works with each facility's multi-disciplinary quality
management team (including the Medical Director) at each facility to implement
the Program. The Quality Management Program involves all areas of the
Company's services, monitoring and evaluating all of the Company's activities
with a focus on continuous improvement. These objectives are accomplished
through measurable trend analysis based on specific statistical tools for
analysis and communication, and through continuing employee and patient
education.
Clinical Information Systems. To support the Quality Management Program and
in response to current payor demands for cost-effective health care treatments
with measurable outcomes, the Company has developed a proprietary PC-based,
networked clinical information system that will provide the facilities and
managed care organizations with detailed patient outcome reports and critical
clinical information. The clinical information system is being rolled-out to
all the Company's facilities. Furthermore, the Company has implemented
connectivity between Kaiser's mainframe and the Company's clinical information
system at the new Mission Dialysis Center in San Diego.
Physician Advisory Board. The Company has a Physicians Advisory Board
consisting of certain Medical Directors of facilities from different regions
of the country who advise management on the Company's Quality Management
Program. Members of the Physicians Advisory Board respond to specific
questions on quality
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issues and the Physicians Advisory Board meets semi-annually to discuss
Company quality and related operational issues. In addition, the Company has
formed an Academic Physicians Advisory Board in which leading researchers that
work with the Company meet to discuss and review recent research development
and clinic data with the Company's senior management. The Company believes its
reputation for quality care is a competitive advantage in attracting new
patients and new referring physicians.
Patient Satisfaction. Since 1991, the Company has retained an independent
consulting firm to conduct patient satisfaction surveys. These surveys track
and identify trends in resulting patient satisfaction indicators that are in
turn shared with management, Medical Directors and patients for discussion. In
conjunction with the patient satisfaction surveys, the Company is currently
developing a pilot program in cooperation with its laboratory to analyze
specific laboratory test data and related patient treatment outcome data to
evaluate patient treatment quality. The Company also compiles patient
hospitalization and related patient treatment outcomes data and is developing
standards to evaluate such data as part of the Company's national Quality
Management Program.
SOURCES OF REVENUE REIMBURSEMENT
The following table provides information for the periods indicated regarding
the percentage of Company net patient revenues provided by (i) the Medicare
ESRD program, (ii) Medicaid, (iii) private/alternative payors, such as private
insurance and private funds, and (iv) hospital inpatient dialysis services.
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS
YEARS ENDED MAY ENDED ENDED
31, DECEMBER 31, JUNE 30,
------------------- -------------- ----------
1993 1994 1995 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Medicare....................... 66.5% 65.6% 62.0% 59.4% 60.2% 60.3%
Medicaid....................... 8.4 9.0 8.1 9.3 6.7 6.1
Private/alternative payors..... 19.0 19.7 24.3 26.3 27.9 27.7
Hospital inpatient dialysis
services...................... 6.1 5.7 5.6 5.0 5.2 5.9
----- ----- ----- ------ ------ -----
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ====== ====== =====
</TABLE>
Under the Medicare ESRD program, Medicare reimburses dialysis providers for
the treatment of individuals who are diagnosed to have ESRD and are eligible
for participation in the Medicare program, regardless of age or financial
circumstances. For each treatment, Medicare pays 80% of the amount set by the
Medicare prospective reimbursement system, and a secondary payor (usually
Medicare supplemental insurance or the state Medicaid program) pays
approximately 20% of the amount set by the Medicare prospective reimbursement
system. From time to time the Company pays Medicare supplemental insurance
premiums for patients with financial need. All of the states in which the
Company operates dialysis facilities provide Medicaid benefits to qualified
recipients to supplement their Medicare entitlement. The Medicare and Medicaid
programs are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy and governmental funding restrictions, some
of which may have the effect of decreasing program payments, increasing costs
or modifying the way the Company operates its dialysis business. See "--
Medicare Reimbursement."
Assuming a patient is eligible for participation in the Medicare program,
the commencement date of Medicare benefits for ESRD patients electing
hemodialysis is dependent on several factors. For ESRD patients 65 years of
age or older who are not covered by an employer group health plan, Medicare
coverage commences immediately. For ESRD patients 65 years of age or older who
are covered by an employer group health plan, Medicare coverage commences
after an 18-month coordination period. ESRD patients under 65 years of age who
are not covered by an employer group health plan (for example, the uninsured,
those covered by Medicaid and those covered by an individual health insurance
policy) must wait 90 days after commencing dialysis treatments to be eligible
for Medicare benefits. During the first 90 days of treatment, the patient,
Medicaid or the private insurer is responsible for payment (and, in the case
of the individual covered by private insurance, such responsibility is limited
to the terms of the policy, with the patient being responsible for the
balance). ESRD
34
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patients under 65 years of age who are covered by an employer group health
plan must wait 21 months after commencing dialysis treatments before Medicare
becomes the primary payor. During the first 21 months of treatments, the
employer group health plan is responsible for payment at its negotiated rate
or, in the absence of such a rate, at the Company's usual and customary rates,
and the patient is responsible for deductibles and co-payments, if applicable,
under the terms of the employer group health plan.
If an ESRD patient with an employer group health plan elects home dialysis
training during the first 90 days of dialysis, Medicare becomes the primary
payor after 18 months. If an ESRD patient without an employer group health
plan begins home dialysis training during the first three months of dialysis,
Medicare immediately becomes the primary payor.
On August 10, 1993, the provisions of the Omnibus Budget Reconciliation Act
of 1993 ("OBRA 93") became effective. The OBRA 93 provisions were originally
interpreted by HCFA to require employer group health sponsored insurance plans
("EGHP") to be the primary payor for ESRD patients for the first 18 months of
service regardless of whether such patients were otherwise Medicare eligible.
In April 1995, HCFA issued instructions of clarification to the fiscal
intermediaries that Medicare would continue as the primary payor during such
period if such patients were originally Medicare eligible but not yet
suffering from ESRD. In June 1995, a preliminary injunction was issued by a
federal court preventing HCFA from retroactively applying its reinterpretation
of the OBRA 93 regulations as unlawful retroactive rulemaking. Accordingly,
the Company has recognized as revenue payments from private payors in excess
of the revenue previously recognized at lower rates which are attributable to
such patients. The Company intends to continue to recognize revenues as cash
is received in the future. The Company cannot estimate, at the present time,
the potential impact that any final ruling or interpretation or the timing of
the same may have upon earnings.
CERTAIN PAYOR ARRANGEMENTS
The Company has entered into contracts with third-party payors, including
many leading health maintenance organizations in the Company's service areas,
to provide dialysis services to their beneficiaries. The Company is a party to
non-exclusive agreements with certain of such third-party payors and
termination of such third-party agreements could have an adverse effect on the
Company. The Company has a contract with the Department of Health and Human
Services Navajo Area Indian Health Service to provide (i) chronic dialysis
services to Native Americans at the Company's facilities in Farmington and
Shiprock, New Mexico as well as at the Company's facilities in Chinle,
Kayenta, Tuba City and Ganado, Arizona and (ii) acute dialysis in Indian
Health Service Hospitals in Chinle and Tuba City (the "Indian Health Service
Contract"). The Company is providing dialysis services to a substantial number
of chronic dialysis patients pursuant to the Indian Health Service Contract.
MEDICARE REIMBURSEMENT
The Company is reimbursed by Medicare under a prospective reimbursement
system for chronic dialysis services provided to ESRD patients. Under this
system, the reimbursement rates are fixed in advance and have been adjusted
from time to time by Congress. Although this form of reimbursement limits the
allowable charge per treatment, it provides the Company with predictable and
recurring per-treatment revenues and allows the Company to retain any profit
earned. Medicare has established a composite rate set by HCFA that governs the
Medicare reimbursement available for a designated group of dialysis services,
including the dialysis treatment, supplies used for such treatment, certain
laboratory tests and certain medications. The Medicare composite rate is
subject to regional differences based upon certain factors, including regional
differences in wage earnings. Certain other services and items are eligible
for separate reimbursement under Medicare and are not part of the composite
rate, including certain drugs (including EPO), blood (for amounts in excess of
three units per patient per year), and certain physician-ordered tests
provided to dialysis patients. Claims for Medicare reimbursement must
generally be presented within 15 to 27 months of treatment depending on the
month in which the service was rendered and for Medicaid secondary
reimbursement, if applicable, within 60 to 90 days after payment of the
Medicare claim. The Company generally submits claims monthly and is usually
paid by Medicare within 30 days of the submission. If in the future Medicare
were to include in its composite reimbursement rate any of the
35
<PAGE>
ancillary services presently reimbursed separately, the Company would not be
able to seek separate reimbursement for these services and this would
adversely affect the Company's results of operations to the extent a
corresponding increase were not provided in the Medicare composite rate.
The Company receives reimbursement for outpatient dialysis services provided
to Medicare-eligible patients at rates that are currently between $118 and
$138 per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation and recommendations by
the Prospective Payment Assessment Commission ("PROPAC"). The Medicare ESRD
reimbursement rate was unchanged from commencement of the program in 1972
until 1983. From 1983 through December 1990 numerous Congressional actions
resulted in net reduction of the average reimbursement rate from a fixed fee
of $138 per treatment in 1983 to approximately $125 per treatment in 1990.
Congress increased the ESRD reimbursement rate, effective January 1, 1991,
resulting in an average ESRD reimbursement rate of $126 per treatment. In
1990, Congress required that the Department of Health and Human Services
("HHS") and PROPAC study dialysis costs and reimbursement and make findings as
to the appropriateness of ESRD reimbursement rates. In March 1995, PROPAC
recommended no changes be made in the reimbursement rate. However, Congress is
not required to implement this recommendation and could either raise or lower
the reimbursement rate. The Company is unable to predict what, if any, future
changes may occur in the rate of reimbursement, or, if made, whether any such
changes will have a material effect on the Company's revenues and net
earnings.
On June 1, 1989, the FDA approved the production and sale of EPO, and HCFA
approved Medicare reimbursement for EPO's use by dialysis patients. EPO
stimulates the production of red blood cells and is beneficial in the
treatment of anemia, with the effect of reducing or eliminating the need for
blood transfusions for dialysis patients. Physicians began prescribing EPO for
their patients in the Company's dialysis facilities in August 1989.
From June 1, 1989 through December 31, 1990, the Medicare ESRD program
reimbursed for EPO at the fixed rate of $40 per administration of EPO in
addition to the dialysis facility's allowable composite rate for dosages of up
to 9,999 units per administration. For higher dosages, an additional $30 per
EPO administration was allowed. Effective January 1, 1991, the Medicare
allowable prescribed rate for EPO was changed to $11 per 1,000 units, rounded
to the nearest 100 units. Subsequently, legislation was enacted to reduce the
Medicare prescribed rate for EPO by $1 per 1,000 units after December 31,
1993. There can be no assurance that the Company can maintain current
operating margins in the future for EPO administrations due to potential
reimbursement decreases, or to potential increases in product costs from its
sole manufacturer.
The Company provides certain of its patients with 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 DMERCs to process reimbursement claims for IDPN therapy. The
DMERCs 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 appeals and the
anticipated review is uncertain and may ultimately reduce the number of
patients eligible to receive reimbursement for IDPN therapy. 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
therefor would have an adverse effect on the Company's future net operating
revenues and net income.
MEDICAID REIMBURSEMENT
Medicaid programs are state administered programs partially funded by the
federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance
programs for the Medicare co-insurance portion and provide certain coverages
(e.g., oral medications) that are not covered by Medicare.
36
<PAGE>
State regulations generally follow Medicare reimbursement levels and coverages
without any co-insurance amounts. Certain states, however, require
beneficiaries to pay a monthly share of the cost based upon levels of income
or assets. Further, the State of Florida does not provide Medicaid benefits on
a primary insurance basis, but does provide benefits as a secondary insurer to
Medicare. Within the State of Florida, various governmental subdivision
agencies provide insurance coverage for the indigent who are otherwise
uninsured. The Company is a licensed ESRD Medicaid provider in all states in
which it does business.
GOVERNMENT REGULATION
GENERAL
The Company's dialysis operations are subject to extensive governmental
regulations at the federal, state and local levels. These regulations require
the Company to 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. All of the Company's dialysis
facilities are so certified.
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 healthcare reform reducing dialysis reimbursement or reducing or
eliminating coverage for dialysis services would have a material adverse
effect on the Company's business. To date, the Company has not had any
difficulty in maintaining its licenses or its Medicare and Medicaid
authorizations. The healthcare 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 healthcare reform will
not result in a material adverse change to the Company.
FRAUD AND ABUSE
The Company's dialysis 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 solicit, offer, receive or pay any remuneration,
whether directly or indirectly, in return for inducing the referral of a
patient for treatment or the ordering or purchasing 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 or exclusion of the provider
from future participation in the Medicare and Medicaid programs, and civil
penalties, including assessments of $2,000 per improper claim for payment plus
twice the amount of such claim and suspension from future participation in
Medicare and Medicaid. Some state statutes also include criminal penalties.
While the federal statute expressly prohibits transactions that have
traditionally had criminal implications, such as kickbacks, rebates or bribes
for patient referrals, its language 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.
Proposed federal legislation would expand the federal illegal remuneration
laws to include referrals of any patients regardless of payor 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 are structured within the safe harbors will be
deemed not to violate the federal illegal remuneration statute. For a business
arrangement to receive the protection of a relevant safe harbor, each and
every element of the safe harbor must be satisfied. 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. The Company believes its arrangements with referring
physicians are in material compliance with applicable laws. The Company seeks
wherever practicable to structure its various business arrangements to satisfy
as many safe harbor elements as possible under the
37
<PAGE>
circumstances. Except with respect to the Company's lease arrangements with
referring physicians, which the Company believes materially satisfy all the
relevant safe harbor requirements, none of the Company's arrangements satisfy
all elements of a relevant safe harbor. 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 experience a material adverse effect as a result of any such challenge.
The conditions of participation in the Medicare ESRD program mandate that
treatment at a dialysis facility be "under the general supervision of a
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 by written agreement engaged qualified physicians
or groups of qualified physicians to serve as Medical Directors for its
facilities. At some facilities the Company also contracts with one or more
physicians to serve as Assistant or Associate Medical Directors, or to direct
specific programs, such as CAPD training, or to provide Medical Director
services for acute dialysis services provided to hospitals. The compensation
of the Medical Directors and other physicians under contract is separately
negotiated for each facility 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 fixed for periods of one year or more by written
agreement. 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 may apply. The Company believes it is in
material compliance with the anti-kickback statute with respect to its
arrangements with these physicians under contract. 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. That safe harbor, generally applicable to personal services and
management contracts, sets forth six requirements. None of the Company's
agreements with its Medical Directors or other physicians under contract
satisfy all of these elements. However, the Company believes that, except in
cases where a facility is in transition from one Medical Director to another,
or where the term of an agreement with a physician has expired and a new
agreement is in negotiation, the Company's agreements with its Medical
Directors and other physicians under contract satisfy five of the six safe
harbor requirements.
Eleven of the Company's dialysis facilities are owned by general
partnerships in which physicians who refer patients to the facilities hold
interests (four facilities are owned by general partnerships in which non-
referring physicians hold interests). In addition, four of the Company's
facilities are owned by Limited Liability Partnerships (LLP) in which
physicians who refer patients to the facility hold interests. Five of the
Company's dialysis facilities are owned by two majority-owned subsidiary
corporations in which physicians who refer patients to the facilities hold
shares of stock. Because these physicians refer patients to these facilities,
the anti-kickback statute may apply. The Company believes these business
arrangements are in material compliance with the anti-kickback statute. With
regard to the anti-kickback statute, there is a relevant safe harbor (the
"small entity investment interests" safe harbor) which, although none of these
arrangements satisfies all elements of that safe harbor, the Company believes
that each of the above-mentioned partnerships satisfies a majority of the safe
harbor's elements. While the Company believes there are good arguments to the
contrary, a majority of these elements may not be satisfied with respect to
the above-mentioned subsidiary corporations.
Sixteen of the Company's dialysis facilities are leased from entities in
which physicians who refer patients to the centers hold interests, and one
additional facility is leased from certain non-referring physicians with whom
the Company is in partnership at two facilities. In addition, a medical
facility at which the Company provides ESRD ancillary services is leased from
physicians who refer patients for the provision of such ancillary services.
Because of the referral of patients to the facilities by these physicians, the
anti-kickback statute may apply. The Secretary of HHS has promulgated a safe
harbor relevant to such arrangements, generally applicable to space rentals.
The Company believes that these leases are in material compliance with the
anti-kickback statute and that the leases satisfy in all material respects
each of the elements of the space rental safe harbor.
On July 21, 1994, the Secretary of HHS proposed a rule that the Secretary
said "would modify the original set of safe harbor provisions to give greater
clarity to the rulemaking's original intent." The proposed rule would,
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<PAGE>
among other things, make changes to the safe harbors on personal services and
management contracts, small entity investment interests and space rentals. The
Company does not believe that its conclusions with respect to 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.
Several states in which the Company operates dialysis facilities, including
California, Virginia, Georgia, Florida, Illinois, Minnesota and Maryland, have
enacted statutes prohibiting physicians from holding financial interests in
various types of medical facilities to which they refer patients.
A California statute makes it unlawful for a physician who has, or a member
of whose immediate family has, a financial interest with or in an entity to
refer a person to that entity for laboratory, diagnostic nuclear medicine,
radiation oncology, physical therapy, physical rehabilitation, psychometric
testing, home infusion therapy, or diagnostic imaging goods or services. Under
the statute, "financial interest" includes, among other things, any type of
ownership interest, debt, loan, lease, compensation, remuneration, discount,
rebate, refund, dividend, distribution, subsidy or other form of direct or
indirect payment, whether in money or otherwise, between a physician and the
entity to which the physician makes a referral for the items described above.
The statute also prohibits the entity to which the referral was made from
presenting a claim for payment to any payor for a service furnished pursuant
to a prohibited referral and prohibits a payor from paying for such a service.
Violation of the statute by a physician is a misdemeanor and subjects the
physician to civil fines. Violation of the prohibition on submitting a claim
in violation of the statute is a public offense, subjecting the offender to a
fine of up to $15,000 for each violation and possible action against
licensure. Some of the Company's facilities perform laboratory services
incidental to dialysis services pursuant to the orders of referring
physicians; certain laboratory services, which are performed by laboratories
independent of the Company for all outpatient dialysis patients, are
identified as included among the services for which the Company is financially
responsible under the composite rate under Medicare and under other payment
arrangements. Therefore, although the Company does not believe that the
statute is intended to apply to laboratory services that are provided incident
to dialysis services, it is possible that the statute could be interpreted to
apply to such laboratory services. The statute includes certain exemptions
from its prohibitions. However, the California statute includes no explicit
exemption for Medical Director services or other services for which the
Company contracts with and compensates referring physicians in California or
for partnership interests of the type held by the referring physicians in
eight of the Company's facilities in California. Thus, if the California
statute is interpreted to apply to referring physicians with whom the Company
contracts, by law, for Medical Director and similar services and with the
referring physicians with whom it is in partnership, the Company would be
required to restructure some or all of its relationships with such referring
physicians. The consequences of such restructuring, if any, cannot be
predicted.
A Virginia statute (the "Virginia Statute") generally prohibits a physician
from referring a patient for health services to an entity outside the
physician's office if the physician or any of the physician's immediate family
members is an investor in such entity unless the physician directly provides
health services within the entity and will be personally involved with the
provision of care to the referred patient or has been granted an exception by
the Virginia Board of Health Professions (the "Virginia Board"). Violation of
the Virginia Statute by the physician constitutes grounds for disciplinary
action as unprofessional conduct and subjects the entity to which a prohibited
referral is made to a monetary penalty of not more than $20,000 per referral,
bill or claim if the entity knows or has reason to know that the referral is
prohibited by the Virginia Statute. With respect to investment interests
acquired prior to February 1, 1993, compliance with the Virginia Statute is
required by July 1, 1996. Investment interests of the physicians holding
minority interests in the Company's Virginia facilities were acquired prior to
February 1, 1993. The Company believes it is reasonable to argue that
physicians who refer patients to dialysis facilities directly provide health
care within such facilities and are personally involved with the provision of
care to such referred patients within the meaning of the Virginia Statute.
However, the Company is unaware of any official interpretation of the Virginia
Statute by any agency charged with its enforcement that either supports or
rejects this interpretation of the Virginia Statute. The Company also believes
that, as a public
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<PAGE>
policy matter, it would be reasonable to argue that the Virginia Board should
grant an exception to a physician who is an investor in a dialysis facility to
which such physician refers his or her patients for care. However the Company
is not aware of the grant of any exception by the Board with respect to
ownership interests in dialysis facilities by physicians who refer patients to
such facilities. The Company believes that, if necessary, the ownership of its
Virginia facilities could be restructured to conform to the requirements of the
Virginia Statute.
A Georgia statute (the "Georgia Statute"), prohibits a health care provider
(defined to include physicians) from referring a patient for the provision of
designated health services to an entity in which the healthcare provider has an
investment interest, unless the provider satisfies certain disclosure
requirements. An "investment interest" is defined as an equity or debt security
issued by an entity, including shares of stock in a corporation, units or other
interests in a partnership, bonds, debentures, notes or other equity interest
or debt instruments, but excludes investments in a publicly held corporation
with total assets over $50 million whose shares are traded on a national
exchange or over-the-counter market if the investment interest constitutes
ownership of less than one percent of the corporation, there are no special
stock classes for health care provider investors, and no income from the
investment interest is tied to the volume of referrals. The term "entity" is
defined as any individual, partnership, firm, corporation or other business
entity. A "designated health service" is defined as clinical laboratory
services, physical therapy services, rehabilitation services, diagnostic
imaging services, pharmaceutical services and outpatient surgical services.
While dialysis is not itself a designated health service, a dialysis supplier
could be subject to the Georgia Statute to the extent that the dialysis service
involves the provision of clinical laboratory services, pharmaceutical services
or outpatient surgical services. To comply with the Georgia Statute, the health
care provider must furnish the patient with a written disclosure form approved
by the health care provider's respective board of licensure, informing the
patient of (i) the existence of the investment interest, (ii) the name and
address of each applicable entity in which the referring health care provider
is an investor, and (iii) the patient's right to obtain the items or services
at the location or from the health care provider or supplier of the patient's
choice. In addition, the provider must post a copy of the disclosure form in a
conspicuous public place in the provider's office. The Georgia Statute applies
to any consideration paid as compensation or in any manner which is a product
of, or incident to, or in any way related to any membership, proprietary
interest or co-ownership with an individual, group or organization to whom
patients, clients or customers are referred or to any employer-employee or
independent contractor relationship including those that may occur in a limited
partnership, profit-sharing arrangement, or other similar arrangement with any
licensed person to whom these patients are referred. The health care provider
or an entity may not present a claim for payment to any individual, third-party
payor, or other entity for services provided pursuant to a prohibited referral.
If the health care provider or entity improperly collects any amount, the
provider or entity must refund such amount to the payor or individual. Any
health care provider or other entity that enters into an arrangement or scheme
which the health care provider or entity knows or should know has a principal
purpose of assuring referrals by the health care provider to a particular
entity is subject to a civil penalty of not more than $50,000 for each such
circumvention, arrangement or scheme. Furthermore, any person who presents or
causes to be presented a bill for a claim for services that such person knows
or should know is for a service for which payment may not be made under the
Georgia Statute is subject to a civil penalty of up to $15,000 for each such
service. The Company believes that all physicians who have an investment
interest in the Company and who also refer patients to the Company's dialysis
facilities are in compliance with the disclosure requirements of the Georgia
statute and will be exempt from such statute.
A Florida statute (the "Florida Statute") prohibits health care providers
(defined to include physicians) from referring a patient for the provision of
designated health services to an entity in which the health care provider is an
investor or has an investment interest. The term "designated health services"
means clinical laboratory services, physical therapy services, comprehensive
rehabilitative services, diagnostic imagining services and
radiation therapy services. "Comprehensive rehabilitative services" includes
speech, occupational or physical therapy services on an outpatient or
ambulatory basis. The term "referral" includes any referral of a patient by a
physician for infusion therapy services to a patient of that physician or a
member of that physician's group practice. Further, a health care provider may
not refer a patient for the provision of any other health care item or service
(i.e., an item or service that is not a "designated health service") to an
entity in which the health care provider is an investor unless the entity is a
publicly traded corporation whose shares are traded on a national
40
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exchange or on the over-the-counter market with total assets over $50 million,
or certain disclosure requirements are met and (i) no more than 50 percent of
the value of the investment interests are held by investors who are in a
position to make referrals to the entity, (ii) the terms under which an
investment interest is offered to an investor who is in a position to make
referrals to the entity are no different from the terms offered to investors
who are not in a position to make such referrals, (iii) the terms offered to an
investor in a position to make referrals are not related to the previous or
expected volume of referrals from that investor to the entity, and (iv) there
is no requirement that an investor make referrals or be in a position to make
referrals to the entity as a condition for becoming or remaining an investor.
The Florida Statute carries with it penalties of up to $15,000 for each service
for any person who presents or causes to be presented a bill or claim for
services that such person knows or should know is prohibited. Furthermore, any
health care provider or other entity that enters into an arrangement or scheme
which the physician or entity knows or should know has a principal purpose of
assuring referrals by the physician to a particular entity may be subject to a
civil penalty of up to $100,000 for each such arrangement. With respect to
disclosure requirements for permissible referrals, a health care provider who
makes a permitted referral must provide the patient with a written disclosure
form informing the patient of extensive information, including the existence of
the investment interest, the names and addresses of at least two alternative
sources of such services and the name and address of each applicable entity in
which the referring provider is an investor. A violation of the disclosure
requirements constitutes a misdemeanor and may be grounds for disciplinary
action. The Company believes that all physicians with an investment interest in
the Company who also refer patients to the Company's dialysis facilities are in
compliance with the disclosure requirements of the Florida statute and continue
to be exempt from such statute.
An Illinois Statute (the "Illinois Statute") provides that a health care
provider (defined to include physicians) may not refer a patient for health
services to an entity outside the health care provider's office or group
practice in which the health care provider's office or group practice in which
the health care provider is an investor unless the health care provider
directly provides health services within the entity and will be personally
involved with the provision of care to the referred patient. The term "health
services" means health care procedures and services provided by or through a
health care provider. The term "investment interest" means an equity or debt
security issued by an entity including shares of stock in a corporation. The
Illinois Statute applies to referrals for health services made on or after
January 1, 1993; however, if a health care provider acquired an investment
interest before July 1, 1992, the Illinois Statute does not apply to referrals
made for health services before January 1, 1996. The Illinois Statute includes
two potential exceptions. First, it is not a violation for a health care
provider to refer a patient for health services to a publicly-traded entity in
which he or she has an investment interest provided that certain conditions are
met. Under the second exception, assuming that the Illinois Health Facilities
Planning Board determines that this exception is applicable, a health care
provider may invest in and refer to an entity if there is demonstrated need in
the community for the entity and alternative financing is not available. The
Illinois Statute may prohibit physicians who own stock in the Company from
referring patients to the Company, and may prohibit the Company from billing
for services rendered pursuant to such impermissible referrals. The Company
believes that it is reasonable to argue that physicians who refer patients to
dialysis facilities are directly providing health care within such facilities
and are personally involved with the provision of care to such referred
patients within the meaning of the Illinois Statute. The Company is unaware,
however, of any official interpretation of the Illinois Statute by any agency
charged with its enforcement that either supports or rejects this
interpretation of the Illinois Statute. The Company believes that all
physicians who have an investment interest in the Company and who also refer
patients to the Company's dialysis facilities are in compliance with the
disclosure requirements of the Illinois statute and may be exempt from such
statute.
A Minnesota statute (the "Minnesota Statute") prohibits physicians from
referring a patient to any health care provider in which the referring
physician has a significant financial interest unless the physician has
disclosed the physician's own financial interest. Violation of the Minnesota
Statute by the physician constitutes grounds for disciplinary action against
the physician. The term "health care provider" is defined to include certain
licensed individuals such as physicians, dentists and the like, physician
assistants and mental health practitioners and nursing homes. The term
"significant financial interest" is not defined by the Statute. It could
41
<PAGE>
be construed to include compensation received by physicians as medical
directors or consultants. However, the Statute does not on its face appear to
apply to the Company's facilities. The Company believes that it will be exempt
from such Statute.
A Maryland statute (the "Maryland Statute") prohibits health care
practitioners from referring patients to a health care entity in which the
health care practitioner or the health care practitioner's immediate family
owns a beneficial interest or has a compensation arrangement. The term
"compensation arrangement" does not include an arrangement between a health
care entity and a health care practitioner or the immediate family member of a
health care practitioner for the provision of any services, as an independent
contractor, if the arrangement is for identifiable services, the amount of the
remuneration under the arrangement is consistent with the fair market value of
the service and is not determined in a manner that takes into account,
directly or indirectly, the volume or value of any referrals by the referring
health care practitioner; and the compensation is provided in accordance with
an agreement that would be commercially reasonable even if no referrals were
made to the health care provider. The Company believes that it will be exempt
from such statute.
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
an investigation or prosecution by a federal or state governmental authority.
Such an investigation or prosecution could result in any, or any combination,
of the penalties discussed above depending upon the agency involved in such
investigation and prosecution. None of the Company's business arrangements
with physicians, vendors, patients or others have been the subject of
investigation by any governmental authority. No assurance can be given that
the Company's activities will not be reviewed or 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.
STARK I
Stark I restricts physician referrals for clinical laboratory services to
entities with which a physician or an immediate family member has a "financial
relationship." The entity is precluded from claiming payment for such services
under the Medicare or Medicaid programs, is liable for the refund of amounts
received pursuant to prohibited claims, can receive civil penalties of up to
$15,000 per service and can be excluded from participation in the Medicare and
Medicaid programs. Because of its broad language, Stark I may be interpreted
by HCFA to apply to the Company's operations. However, regulations
interpreting Stark I have created an exception to its applicability for
services furnished in a dialysis facility if payment for those services is
included in the ESRD composite rate. The Company believes that its
compensation arrangements with medical directors and other physicians under
contract are in material compliance with the provisions of Stark I.
STARK II
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 for
such services under the Medicare or Medicaid programs, is liable for the
refund of amounts received pursuant to prohibited claims, can receive civil
penalties of up to $15,000 per service 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.
Because of its broad language, Stark II may be interpreted by HCFA to apply
to the Company's operations. Consequently, Stark II may require the Company to
restructure certain existing compensation agreements with its Medical
Directors and to repurchase or to request the sale of ownership interests in
subsidiaries and partnerships held by referring physicians or, in the
alternative, to refuse to accept referrals for designated health services from
such physicians. The Company believes, but cannot assure, 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
42
<PAGE>
Company cannot achieve such material compliance, and Stark II is broadly
interpreted by HCFA to apply to the Company, such application of Stark II
could have a material adverse effect on the Company. 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 "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; some Medical Directors
either own stock in a Company subsidiary which operates a particular dialysis
facility or a partnership interest in a Company dialysis facility; and 16 of
the Company's dialysis facilities are leased from entities in which physicians
who refer patients to the facilities hold interests. In the case of five of
the Company's facilities, the spouse of the Medical Director is an employee of
the Company. Certain of the Medical Directors, as part of their compensation,
and certain of the physicians from whom the Company has acquired dialysis
facilities, as part of the consideration for such acquisitions, have acquired
stock or stock options in the Company. The Company believes that the granting
of the stock and stock options is in material compliance with the anti-
kickback statute, Stark II and the various state statutes.
Stark II includes certain exceptions. 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 or 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 HCFA. The Company believes that its compensation arrangements
with Medical Directors and other physicians under contract materially satisfy
the personal services exception to the Stark II prohibitions.
Payments made by a lessor to a lessee for the use of premises are excepted
from Stark II prohibitions if (i) the lease is set out in writing, signed by
the parties, and specifies the premises covered by the lease, (ii) the space
rented or leased does not exceed that which is reasonable and necessary for
the legitimate business purposes of the lease or rental and is used
exclusively by the lessee when being used by the lessee, subject to certain
permitted payments for common areas, (iii) the lease provides for a term of
rental or lease for at least one year, (iv) the rental charges over the term
of the lease are set in advance, are consistent with fair market value, and
are not determined in a manner that takes into account the volume or value of
any referrals or other business generated between the parties, (v) the lease
would be commercially reasonable even if no referrals were made between the
parties, and (vi) the lease meets such other requirements that may be imposed
pursuant to regulations promulgated by HCFA. The Company believes that its
leases with referring physicians materially satisfy the lease of premises
exception to the Stark II prohibitions. The Stark II exception provisions that
are applicable to physician ownership interests in entities to which they make
referrals do not encompass the kinds of ownership arrangements that referring
physicians own in Company subsidiaries that operate particular dialysis
facilities.
For purposes of Stark II, "designated health services" includes: clinical
laboratory services, radiology and other diagnostic services, durable medical
equipment, parenteral and enteral nutrients, equipment and supplies,
prosthetics and prosthetic devices, home health services, outpatient
prescription drugs, and inpatient and outpatient hospital services. 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, 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
43
<PAGE>
inpatients and outpatients under its dialysis services agreements with
hospitals, 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.
MEDICARE
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
from the program to health care providers. Legislation or regulations may be
enacted in the future that may significantly modify the ESRD program or
substantially reduce the amount paid for Company services. Further, statutes
or regulations may be adopted which impose additional requirements in order
for the Company to be eligible to 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. Occupational Safety and Health Administration 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 or employ 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 Company believes it is in material compliance with all state
CON laws, as applicable, in which it does business.
Although the Company believes it complies in all material respects with
current applicable laws and regulations, 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. No
assurance can be given that the Company's activities will not be reviewed or
challenged by regulatory authorities.
COMPETITION
The dialysis industry is fragmented and highly competitive, particularly in
terms of acquisition of existing dialysis facilities and developing
relationships with referring physicians. Competition for qualified physicians
to act as Medical Directors is also high. There were over 2,700 dialysis
facilities in the United States in 1995, of which approximately 30% were owned
by independent physicians (down from 37% in 1992), 30% were hospital-based
facilities (down from 33% in 1992), and 40% were owned by seven major multi-
facility dialysis providers (up from 30% in 1992), the largest of which is
National Medical Care, Inc. ("NMC"). NMC is a subsidiary of W. R. Grace & Co.,
which, in February 1996, announced its intention to spin-off NMC pursuant to
an agreement whereby NMC will subsequently be merged with Fresenius A.G. In
September 1996, the stockholders of W.R. Grace & Co. approved the spin-off.
There are also a number of health care providers that have entered or may
decide to enter the dialysis business. Certain of the Company's competitors
have substantially greater financial resources than the Company and may
compete with the Company for acquisitions and development of facilities
44
<PAGE>
in markets targeted by the Company. Competition for acquisitions has increased
the cost of acquiring existing dialysis facilities. While it occurs
infrequently, the Company has experienced competition from the establishment
of a facility by a former Medical Director or referring physician.
INSURANCE
The Company carries property and general liability insurance, professional
liability insurance and other insurance coverage in amounts deemed adequate by
management. However, there can be no assurance that any future claims will not
exceed applicable insurance coverage. Furthermore, no assurance can be given
that malpractice and other liability insurance will be available at a
reasonable cost or that the Company will be able to maintain adequate levels
of malpractice insurance and other liability insurance in the future.
Physicians practicing at the Company's facilities are required to maintain
their own malpractice insurance. However, the Company maintains coverage for
the activities of its Medical Directors (but not for their individual private
medical practices).
EMPLOYEES
As of October 11, 1996, the Company had over 2,900 employees, including a
professional staff of over 1,900 registered nurses and technicians, a
corporate and regional staff of approximately 285 employees and a facilities
support and maintenance staff of approximately 725 employees. Of the Company's
employees, approximately 2,150 are full time employees. With the exception of
Stan Lindenfeld, M.D., an officer of the Company, Medical Directors of the
Company's dialysis facilities are not employees of the Company.
PROPERTIES
The Company operates 127 outpatient dialysis facilities, of which six are
located in premises leased by the Company or its respective general
partnerships or subsidiary corporations. The Company leases 16 facilities from
entities in which referring physicians hold an interest. The Company's leases
generally cover periods from five to ten years and typically contain renewal
options of five to ten years at the fair rental value at the time of renewal
or at rates subject to consumer price index increases since the inception of
the lease. The Company's facilities range in size from approximately 2,000 to
10,000 square feet, with an approximate average size of 4,800 square feet. The
Company's headquarters are located in a 17,000 square foot facility in
Torrance, California. The Company's headquarters lease expires in 2000. The
Company's general accounting office in Tacoma, Washington, is also leased for
a term expiring in 2000. The Company owns one property that it is presently
leasing to a third party. The Company considers its physical properties to be
in good operating condition and suitable for the purposes for which they are
being used.
Certain of the Company's facilities are operating at or near capacity.
However, the Company believes it has adequate capacity within most of its
existing facilities to accommodate significantly greater patient volume
through increased hours and/or days of operation, or through the addition of
dialysis stations at a given facility upon obtaining appropriate governmental
approvals. With respect to other facilities, the Company believes that it can
lease space at economically reasonable rates in the area of each of these
facilities. Expansion or relocation of Company facilities would be subject to
review for compliance with conditions relating to participation in the
Medicare ESRD program. In states that require a CON, approval of a Company
application would be necessary for expansion.
LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatment, for which the
Company believes it will be covered by malpractice insurance. The Company does
not believe that the ultimate resolution of pending proceedings will have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<C> <C> <S>
Victor M.G. Chaltiel 55 Chairman of the Board, Chief Executive
Officer, President and Director
Leonard W. Frie 49 Executive Vice President and Chief Operating
Officer
Mary Ellen Chambers, R.N. 34 Vice President, Managed Care and Pharmacy
Services
Barry C. Cosgrove 39 Vice President, General Counsel and Secretary
Sidney J. Kernion 55 Vice President, Operations--Eastern Division
John E. King 35 Vice President, Finance and Chief Financial
Officer
Stan M. Lindenfeld, M.D. 49 Vice President, Quality Management and
Integrated Programs
Lois A. Mills, R.N. 57 Vice President, Operations--Western Division
Maris Andersons 59 Director
Peter T. Grauer 51 Director
Marsha M. Plotnitsky 41 Director
David B. Wilson 37 Director
</TABLE>
Victor M.G. Chaltiel has been the Chairman, CEO and President of the Company
and a Director of the Company since August 1994. Mr. Chaltiel served as
President and CEO of Abbey Healthcare Group, Inc. ("Abbey") from November 1993
to February 1994 and prior thereto as Chairman, CEO and President of Total
Pharmaceutical Care, Inc. ("TPC") from March 1989 to November 1993, when Abbey
completed its acquisition of TPC. From May 1985 to October 1988, Mr. Chaltiel
served as President, Chief Operating Officer and a Director of Salick Health
Care, Inc., a publicly-held company focusing on the development of outpatient
cancer and dialysis treatment centers. Mr. Chaltiel served in a consulting
capacity with Salick Health Care, Inc. from October 1988 until he joined TPC.
Prior to May 1985, Mr. Chaltiel was associated with Baxter International, Inc.
("Baxter") for 18 years in numerous corporate and divisional management
positions, including Corporate Group Vice President with responsibility for
the International Group and five domestic divisions with combined revenue in
excess of $1 billion, President of Baxter's Artificial Organs Division, Vice
President of its International Division, Area Managing Director for Europe,
and President of its French operations. While at Baxter, Mr. Chaltiel was
instrumental in the development and successful worldwide commercialization of
CAPD, currently the most common mode of home dialysis.
Leonard W. Frie has been Executive Vice President and Chief Operating
Officer of the Company since August 1994. Mr. Frie was President of the
Company from April 1994 through August 1994. Prior thereto, Mr. Frie served as
President of Medical Ambulatory Care, Inc. and its subsidiaries since 1984.
Mary Ellen Chambers, R.N., has been Vice President, Managed Care and
Pharmacy Services for the Company since August 1994. Ms. Chambers was Vice
President of Managed Care for TPC, with which she was associated from 1987
through July 1994. From 1984 to 1987, Ms. Chambers practiced oncology nursing
at Goleta Valley Community Hospital as a Registered Nurse.
Barry C. Cosgrove has been Vice President, General Counsel and Secretary of
the Company since August 1994. Prior to joining the Company, from May 1991 to
April 1994, he served as Vice President, General Counsel and Secretary of TPC.
From February 1988 to 1991, Mr. Cosgrove served as Vice President and General
Counsel of McGaw Laboratories, Inc. (a subsidiary of the Kendall Company).
Prior to February of 1988, Mr. Cosgrove was with the Kendall Company for seven
years in numerous corporate legal and management positions, including
Assistant to the General Counsel.
Sidney J. Kernion has served as Vice President, Operations--Eastern Division
of the Company since August 1994. Mr. Kernion served in the same capacity with
Medical Ambulatory Care, Inc., from April 1, 1992.
46
<PAGE>
Mr. Kernion was employed by Tenet for 20 years and performed various
operational functions for Medical Ambulatory Care, Inc. since July 1983.
John E. King has been the Vice President, Finance and Chief Financial
Officer for the Company since its inception in April 1994. Mr. King served in
the same capacity with Medical Ambulatory Care, Inc. from May 1, 1993. From
December 1990 to April 1993, he was the Chief Financial Officer for one of
Tenet's general acute hospitals.
Stan M. Lindenfeld, M.D., a nephrologist, has served as the Vice President,
Quality Management and Integrated Programs of the Company since January 1995
and has served as a Medical Director for the Company since 1981. Since 1988 he
has held the position of Clinical Professor of Medicine at the University of
California Medical Center in San Francisco. Dr. Lindenfeld developed the
Office of Clinical Resources Management at the University of California
Medical Center in San Francisco and has served as its Director since July,
1993.
Lois A. Mills, R.N., has been a Vice President, Operations--Western Division
of the Company since August 1994, and has been in charge of Operations for the
Western Region for the Company and Medical Ambulatory Care, Inc. since April
1992. Ms. Mills has a long and varied experience in nursing (patient care) and
as an administrator. Ms. Mills has been with the Company for 19 years serving
as Staff Nurse (1976), Head Nurse (1978), Hemodialysis Supervisor (1980),
Assistant Administrator (1983) and Regional Administrator for dialysis
centers.
Maris Andersons has been a Director of the Company since August 1994. Mr.
Andersons is a Senior Vice President and Treasurer of Tenet and has held
various senior executive offices with Tenet since 1976. Prior to joining
Tenet, Mr. Andersons served as a Vice President of Bank of America.
Peter T. Grauer has been a Director of the Company since August 1994. Mr.
Grauer has been a Managing Director of DLJMB since September 1992. From April
1989 to September 1992, he was a Co-Chairman of Grauer & Wheat, Inc., an
investment firm specializing in leveraged buyouts. Prior thereto Mr. Grauer
was a Senior Vice President of DLJ. Mr. Grauer is a Director of S.D. Warren
Holdings Corporation, Doane Products Co. and Jitney Jungle Stores Co.
Marsha M. Plotnitsky has been a Director of the Company since July 1995. Ms.
Plotnitsky is a Managing Director in Mergers and Acquisitions at DLJ. She
joined DLJ in 1984 and has been in her present position since 1991.
David B. Wilson has been a Director of the Company since August 1994. Mr.
Wilson has been a Senior Vice President of DLJMB since January 1993, and from
January 1992 to January 1993 he was a Vice President of DLJ. From April 1989
to December 1991 he was a Vice President at Grauer & Wheat, Inc. Mr. Wilson is
a director of several privately-held companies.
The Company intends to nominate additional independent directors as required
by the New York Stock Exchange.
47
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides information as of September 30, 1996 as to the
beneficial ownership, as defined by the regulations of the Securities and
Exchange Commission, of Common Stock by (i) each person known to the Company
to be the beneficial owner of 5% or more of the Common Stock and (ii) the
Selling Stockholders.
<TABLE>
<CAPTION>
SHARES OF COMMON
SHARES OF COMMON STOCK STOCK
BENEFICIALLY OWNED SHARES TO BE SOLD BENEFICIALLY OWNED
PRIOR TO THE OFFERING IN THE OFFERING(1) AFTER THE OFFERING
--------------------------------------------- --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER NUMBER PERCENTAGE
<S> <C> <C> <C> <C> <C>
Victor M.G. Chaltiel.... % %
DLJ Merchant Banking
Partners, L.P. and
related
stockholders (2)
DLJ Merchant Banking
Partners, L.P. ......
DLJ International
Partners, C.V. ......
DLJ Offshore Partners,
C.V. ................
DLJ First ESC, LLC....
DLJ Merchant Banking
Funding, Inc. .......
NME Properties Corp. ...
Putnam Fiduciary Trust
Company and Putnam
Investment Management,
Inc. (3)...............
Trust Company of the
West Investment
Management Company and
Trust Company of the
West Asset Management
Company (4)............
Other Selling
Stockholders (5).......
</TABLE>
- --------------------
*Less than 1%
(1) Does not include shares subject to the Underwriters' over-allotment option
granted by the Selling Stockholders.
(2) Each of these stockholders is a related investor (collectively, the
"Related Investors") and is affiliated with Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"). The address of DLJ Merchant Banking
Partners, L.P. ("DLJMBP"), DLJ First ESC, LLC ("DLJESC") and DLJ Merchant
Banking Funding, Inc. ("DLJMBF") is 277 Park Avenue, New York, New York
10172. The address of each of DLJ International Partners, C.V. ("DLJIP")
and DLJ Offshore Partners, C.V. ("DLJOP") is John B. Gorsiraweg 6,
Willemstad, Curacao, Netherlands Antilles. As a general partner of each of
DLJMBP, DLJIP and DLJOP, DLJ Merchant Banking, Inc. may be deemed to
beneficially own indirectly all of the shares held directly by DLJMBP,
DLJIP and DLJOP, and as the parent of each of DLJ Merchant Banking, Inc.
and DLJMBF, DLJ, Inc. may be deemed to beneficially own indirectly all of
the shares held by DLJMBP, DLJIP, DLJOP, DLJ LBO Planned Management
Corporation ("DLJLBO"), the manager of DLJESC and DLJMBF. DLJ, Inc. is an
80.2% owned subsidiary of The Equitable Companies Incorporated
("Equitable"). Equitable is an approximately 61% owned subsidiary of The
Mutuelles AXA ("AXA"). The address of DLJ Merchant Banking, Inc., DLJLBO
and DLJ, Inc. is 277 Park Avenue, New York, New York 10172. Equitable and
AXA may be deemed to be beneficial owners of the Common Stock owned by the
Related Entities.
(3) Shares of Common Stock beneficially owned prior to the Offering and shares
to be sold in the Offering by the following investment funds that are
clients of Putnam Fiduciary Trust Company or Putnam Investment Management,
Inc., as investment advisors, consist of: Putnam Capital Manager Trust-
High Yield Fund ( shares owned; shares to be sold); Putnam
High Yield Management Trust ( shares owned; shares to be
sold); Putnam High Yield Trust ( shares owned; shares to be
sold); Putnam High Yield Advantage ( shares owned; shares to
be sold); Putnam Managed High Yield Trust ( shares owned;
shares to be sold); Putnam Master Income Trust ( shares owned;
shares to be sold); Putnam Premier Income Trust ( shares owned;
shares
48
<PAGE>
to be sold); Putnam Master Intermediate Income Trust ( shares owned;
shares to be sold); Putnam Diversified Income Trust ( shares
owned; shares to be sold); and Putnam Capital Manager-Diversified
Income Trust ( shares owned; shares to be sold).
(4) Shares of Common Stock beneficially owned prior to the Offering and shares
to be sold in the Offering by the following investment funds that are
clients of Trust Company of the West Investment Management Company and
Trust Company of the West Asset Management Company, as investment
advisors, consist of: Crescent/MACH I Partners, L.P. ( shares
owned; shares to be sold) and TCW Shared Opportunity Fund II, L.P.
( shares owned; shares to be sold).
(5) Certain other stockholders (the "Other Selling Stockholders") have the
right to sell shares in the Offering. No Other Selling Stockholder owns
more than 1% of the outstanding number of shares of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 26,467,029 shares of
Common Stock outstanding assuming no exercise of outstanding options under the
Company's employee stock plans. Of these shares, approximately
shares (including the shares registered in this Offering and the approximately
1,757,000 shares outstanding that are registered pursuant to registration
statements on Form S-8) will be freely tradeable without restriction under the
Securities Act (except any shares held by persons deemed to be "affiliates" of
the Company, which shares will be subject to certain resale limitations of
Rule 144 under the Securities Act). Approximately outstanding shares
of Common Stock which will be outstanding after this Offering are not
registered pursuant to the Securities Act and are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Such shares will
become freely tradeable without restriction under Rule 144 (subject to volume
limitations) between November 1996 and August 1998. Such shares, as well as
any Common Stock held by any person deemed to be an affiliate of the Company,
may be sold only if registered under the Securities Act or sold in accordance
with an available exemption from registration thereunder. For purposes of Rule
144 under the Securities Act, an "affiliate" of an issuer is a person who
directly, or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such issuer.
Persons holding shares of Common Stock that constitute restricted
securities, and any affiliates of the Company, may be able to sell shares of
Common Stock without registration in accordance with Rule 144 under the
Securities Act. In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated in accordance with the Rule) who has
beneficially owned his or her shares for a least two years, including any such
persons who are affiliates of the Company, would be entitled to sell, within
any three month period, a number of shares of Common Stock that does not
exceed the greater of (i) one percent of the then outstanding number of shares
or (ii) one percent of the average weekly trading volume of the shares during
the four calendar weeks preceding each such sale. In addition, sales under
Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. After shares are held for three years, a person who is not an
affiliate of the Company is entitled to sell such shares under Rule 144
without regard to such volume limitations, manner of sale, notice or public
information requirements under Rule 144. Sales of shares by affiliates will
continue to be subject to such volume limitations, manner of sale, notice and
public information requirements. The Commission has published a notice of
proposed rulemaking that, if adopted as proposed, would shorten the applicable
holding periods under Rule 144(d) and Rule 144(k) to one and two years,
respectively (from the current two and three-year periods). The Company cannot
predict whether such amendments will be adopted or the effect thereof on the
trading market for its Common Stock.
The Company has filed with the Commission registration statements on Form S-
8 covering 5,200,000 shares of Common Stock issued or reserved for issuance
pursuant to grants of stock awards and options to purchase Common Stock under
the Company's employee stock plans. Shares of Common Stock issued pursuant to
such plans may be resold by affiliates and non-affiliates into the public
market (subject, in the case of affiliates, to certain resale limitations of
Rule 144).
49
<PAGE>
The Company and its directors and executive officers, the Selling
Stockholders, stockholders with registration rights and certain other
stockholders have agreed pursuant to the Underwriting Agreement and other
agreements that they will not offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or file with the Commission a registration
statement under the Securities Act relating to any shares of their Common
Stock without the prior written consent of the Underwriters for a period of 90
days from the date of this Prospectus, except that the Company may, without
such consent, issue stock and options to purchase stock (i) pursuant to
certain employee stock plans of the Company and (ii) as consideration in
connection with acquisitions provided that the transferee of such options or
stock is bound by the same "lock-up" agreement with the Underwriters. See
"Underwriting."
Sales of substantial amounts of unregistered Common Stock into the public
market could adversely affect the prevailing market price for the Common Stock
and the ability of the Company to raise equity capital. The Company can make
no prediction as to the effect, if any, that sales of shares of its
unregistered Common Stock, or the availability of such shares for future sale,
will have on the market price of the Common Stock prevailing from time to
time. Such sales may also make it more difficult for the Company to sell
equity securities or equity-related securities at a time and price that it
deems appropriate.
REGISTRATION RIGHTS
The Shareholders Agreement (as defined below) provides that, giving effect
to consummation of this Offering, the holders of approximately
shares of Common Stock and options to purchase shares of Common Stock will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Subject to certain limitations, if the Company
registers any of its securities under the Securities Act, either for its own
account or the account of other security holders, such holders are entitled to
written notice of the registration and are entitled to include (at the
Company's expense) such shares therein; provided, among other conditions, that
the underwriters of any such offering have the right to limit the number of
such shares included in the registration. In addition, certain of such holders
can require the Company to file registration statements under the Securities
Act and the Company is required to use its best efforts to effect such
registrations, subject to certain conditions and limitations. All fees, costs
and expenses of such registrations (other than underwriting discounts,
commissions and transfer taxes and certain legal fees of selling stockholders)
will be borne by the Company.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company historically engaged in various intercompany transactions with
and was provided certain services by Tenet and its affiliates, for which Tenet
allocated overhead costs, as set forth in the Company's financial statements.
At the closing of the August 1994 Transaction, (a) the Company, NME
Properties, DLJMB, and certain members of management entered into the
Shareholders Agreement (the "Shareholders Agreement") and (b) the Company and
Tenet entered into a Non-Competition Agreement ("Non-Competition Agreement")
and a Services Agreement (the "Services Agreement"). These agreements
(together with the Company's existing agreements to provide dialysis services
to 11 Tenet hospitals on a set fee-per-treatment basis and existing leases for
three facilities owned by Tenet affiliates) govern their relationships. In
addition, in connection with the August 1994 Transaction, DLJMB was reimbursed
by the Company for DLJMB's reasonable expenses (including legal fees) and DLJ
was paid usual and customary fees for acting as financial advisor. DLJ was
also paid usual and customary fees for acting as underwriter in connection
with the sale of the Discount Notes and in connection with the Company's
public offerings on October 30, 1995 and April 3, 1996. At the closing of the
August 1994 Transaction, all items included in the intercompany receivable due
to TRC from Tenet were extinguished other than amounts payable relating to
dialysis services rendered by TRC to Tenet or its affiliates and laboratory
services rendered to TRC by Tenet or its affiliates.
Pursuant to the Shareholders Agreement, the Company's Board consists of five
members: four nominated by DLJMB and one nominated by NME Properties. Upon
consummation of the Offering, DLJMB's right to nominate directors will
terminate. The four individuals previously nominated by DLJMB (three of which
are DLJMB employees) and elected as Company directors will remain directors,
however, until the next election or any earlier resignation and to that extent
and until such time continue to be able to influence significantly the affairs
of the Company, including corporate transactions such as any "going private"
transaction, merger, consolidation or sale of all or substantially all of the
Company's assets. The Company has been informed that two of such DLJMB
employees intend to resign as directors upon consummation of the Offering. The
Shareholders Agreement also provides for restrictions on transfers of Common
Stock, certain rights of first refusal in favor of DLJMB in the event NME
Properties proposes to transfer shares of Common Stock and certain rights and
obligations on the part of NME Properties to participate in transfers of
shares by DLJMB.
The Shareholders Agreement restricts DLJMB from owning more than 50% of (or
controlling) other dialysis entities except as part of the process of
combining such entities with the Company. The Shareholders Agreement further
provides that DLJMB and NME Properties each have the right, subject to certain
conditions, to request that the Company register shares of the Common Stock
they own under the Securities Act of 1933, as amended (but not more than four
times each), and to participate in other registrations of the Company's
securities, in each case at the Company's expense.
Pursuant to the Non-Competition Agreement, Tenet may not own, operate or
manage a mobile or free-standing dialysis unit within the United States and
may not (subject to certain exceptions) seek to cause physicians who are
parties to arrangements with the Company to refer patients requiring services
provided by the Company to other providers of those services. The Company is
not permitted (subject to certain exceptions) to own, operate or manage any
mobile or free-standing healthcare unit or service, other than dialysis units,
within 30 miles (or ten miles in the case of a metropolitan area with a
population of at least two million) of a Tenet acute-care hospital or
outpatient facility offering the same healthcare services. If the Company
subsequently acquires, as part of a larger acquisition, an operation that
otherwise would violate the Non-Competition Agreement, the Company will have
one year to dispose of the operation (subject to rights of first refusal held
by Tenet). The Non-Competition Agreement automatically terminates in August
1999, or upon a sale or change of control of Tenet, whichever is the earlier.
In addition, upon such a sale or change of control, DLJMB and/or the Company
will be entitled to repurchase NME Properties' interest in the Company at the
fair market value thereof. The Non-Competition Agreement will also terminate
if DLJMB requires NME Properties to sell its Common Stock as part of a
transfer of shares by DLJMB.
51
<PAGE>
Pursuant to the Services Agreement, Tenet provided certain limited
administrative services to the Company through December 31, 1994, for which
Tenet was reimbursed its costs. In addition, to the extent permitted by
Tenet's and the Company's respective purchasing arrangements, until August 11,
1999 unless there is a sale or change in control of Tenet, both Tenet and the
Company will be entitled to participate in the other party's joint purchasing
arrangements.
In connection with the August 1994 Transaction, the Company and Tenet agreed
that the Company's contracts to provide acute dialysis services to 11 Tenet
hospitals would continue on their then current terms. The Company also has
certain rights of first refusal until August 11, 1999 to continue to provide
services to such Tenet hospitals.
DLJMB has arranged a procurement program designed to realize the benefits of
the combined purchasing power of the various companies within the DLJMB
portfolio as well as the other affiliates of DLJMB, including Donaldson,
Lufkin & Jenrette, Inc. ("DLJ Inc.") and The Equitable Companies Incorporated.
The program is focused on securing efficiencies in the procurement of property
and casualty insurance, telecommunication services and employee medical
benefits and insurance. DLJMB offers its purchasing program to all DLJMB
portfolio companies, regardless of the size of DLJMB's ownership interest. As
a DLJMB portfolio company, the Company has taken advantage of this purchasing
program, resulting in a reduction of property and casualty insurance premiums
of over 35%. The Company plans to explore opportunities for further savings
through the purchase of telecommunications services, employee medical benefits
and other insurance under the DLJMB purchasing program.
Certain of the Company's officers and employees have received loans from the
Company in connection with the purchase of shares of Common Stock. All of the
loans have similar terms. The loans bear interest at the lower of 8% or the
prime rate, and are secured by all of the borrower's interests in capital
stock of the Company, including all vested stock options. When made, the loans
had a four-year term and one quarter of the original principal amount thereof
plus all accrued interest thereon had to be paid annually, subject to the
limitation that the borrower was not required to make any payment that
exceeded 50% of the proceeds of such borrower's after-tax bonus from the
Company (based on maximum tax rates then in effect). In July 1995, the Board
approved a one-year deferral of all scheduled principal and accrued interest
payments under all such loans. No other terms of the loans have been changed.
As of September 30, 1996, Leonard W. Frie and Barry C. Cosgrove had loans
outstanding from the Company with principal amounts of $100,000 and $70,000,
respectively (with respect to Mr. Cosgrove, $50,000 was borrowed to purchase
shares of Common Stock and $20,000 was borrowed for relocation costs). Victor
M.G. Chaltiel had an outstanding loan of $835,000 prior to the addition on
September 18, 1995 of $2,678,447 pursuant to similar loans in connection with
Mr. Chaltiel's exercise of options for 886,667 shares of Common Stock. Mr.
Chaltiel received a similar loan from the Company on April 15, 1996, in the
amount of $173,073, in connection with additional taxes associated with the
exercise of such options. See "Management--Employment Agreements."
Maris Andersons, a Director of the Company, serves as a consultant to the
Company. He has been granted options, vesting over four years, to purchase an
aggregate of 46,183 shares of Common Stock, of which 8,000 of such options
have been exercised, in consideration for these services.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"). Such summary does not purport to be complete
and is subject to, and is qualified in its entirety by, all of the provisions
of the Certificate of Incorporation.
The Company's authorized capital stock consists of 55,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock,
$0.001 par value ("Preferred Stock").
COMMON STOCK
As of September 30, 1996, there were 25,967,029 shares of Common Stock
issued and outstanding. The Company does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future. The Company is
subject to certain restrictions on its ability to pay dividends on the Common
Stock under the Senior Credit Facility and under the indenture governing the
Discount Notes.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of Stockholders. There are no
cumulative voting rights applicable to the Common Stock.
Subject to the preferences applicable to shares of Preferred Stock
outstanding at any time, holders of shares of Common Stock are entitled to
dividends, if, when and as declared by the Board of Directors from funds
legally available therefor and are entitled, in the event of liquidation, to
share ratably in all assets remaining after payment of liabilities and
preferred stock preferences, if any.
The authorized but unissued shares of Common Stock are available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange on
which the Common Stock may be listed. Shares of Common Stock are not
redeemable and there are no sinking fund provisions.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Company's Board of Directors
to establish series of Preferred Stock and to determine, with respect to any
series of Preferred Stock, the voting powers, or no voting powers, and such
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof,
as are stated in the resolutions of the Board of Directors providing for such
series.
The authorized but unissued shares of Preferred Stock are available for
issuance without further action by the Company's stockholders. This will allow
the Company to issue shares of Preferred Stock without the expense and delay
of a special stockholders' meeting, unless such action is required by
applicable law or the rules of any stock exchange on which the Company's
securities may be listed. The Company believes that the Preferred Stock will
provide flexibility in structuring possible future financing and acquisitions,
and in meeting other corporate needs. Although the Company's Board of
Directors has no intention at the present time of doing so, it could issue a
series of Preferred Stock, the terms of which, subject to certain limitations
imposed by the securities laws, impede the completion of a merger, tender
offer or other takeover attempt. The Company's Board of Directors will make
any determination to issue such shares based on its judgment as to the best
interests of the Company and its stockholders at the time of issuance. The
Company's Board of Directors, in so acting, could issue Preferred Stock having
terms that could discourage an acquisition attempt or other transaction that
some, or a majority, of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock
over the then market price of such stock.
TRANSFER AGENT
The Company's registrar and transfer agent for the Common Stock is The Bank
of New York.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the Underwriters named below, for whom
Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and UBS Securities LLC are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company and the Selling Stockholders an aggregate of 3,000,000 shares of
Common Stock. The number of shares that each Underwriter has agreed to
purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................
UBS Securities LLC....................................................
---------
Total............................................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to accept delivery of the shares of Common Stock offered hereby
are subject to approval of certain legal matters by counsel and to certain
other conditions. If any shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such shares (other
than shares covered by the over-allotment option described below) must be
purchased.
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock in part
directly to the public initially at the Price to the Public set forth on the
cover page of this Prospectus and in part to certain dealers at such price
less a concession not in excess of $ per share; that the Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share on sales to other dealers; and that after the Offering, the Price to the
Public, concession and discount to dealers may be changed by the
Representatives.
The Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
additional 450,000 shares of Common Stock at the initial Price to the Public
less underwriting discounts and commissions. The Underwriters may exercise
such option only for the purpose of covering over-allotments, if any, incurred
in connection with the sale of shares of Common Stock offered hereby. To the
extent that the Underwriters exercise such option, each Underwriter will
become obligated, subject to certain conditions, to purchase the same
proportion of such additional shares as the number of other shares to be
purchased by that Underwriter bears to the total number of shares set forth on
the cover page of this Prospectus.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Subject to certain exceptions (including certain issuances by the Company of
Common Stock in connection with acquisitions), the Company, all of its
executive officers and directors and certain stockholders of the Company,
including all of the Selling Stockholders, each have agreed not to, directly
or indirectly, offer, sell,
54
<PAGE>
contract to sell, grant any option to purchase or otherwise dispose of any
Common Stock or any securities convertible into or exercisable or exchangeable
for such Common Stock or cause to be filed with the Securities and Exchange
Commission a registration statement under the Securities Act to register any
shares of the Common Stock or, in any manner, transfer all or a portion of the
economic consequences associated with the ownership of the Common Stock
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation for a period of 90 days after the date of this Prospectus.
The provisions of Schedule E ("Schedule E") to the By-laws of the National
Association of Securities Dealers, Inc. (the "NASD") apply to the Offering.
Under the By-laws of the NASD, when a NASD member such as DLJ distributes an
affiliated company's equity securities, one of the following two criteria must
be met: (1) the price of such equity security can be no higher than that
recommended by a "qualified independent underwriter" or (2) the offering is of
a class of equity securities for which a "bona fide independent market"
exists. Because the shares of Common Stock are traded on the New York Stock
Exchange, the aggregate trading volume for the twelve months immediately
preceding the filing of the registration statement of which this Prospectus
forms a part was at least 100,000 shares and the Company had outstanding for
the twelve month period immediately preceding the filing of such registration
statement a minimum of 250,000 publicly held shares, a" bona fide independent
market" exists. Accordingly, the price of the Common Stock will not be passed
upon by a "qualified independent underwriter."
Pursuant to the provisions of Schedule E, NASD members may not execute
transactions in the Shares in discretionary accounts without the prior written
approval of the customer.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Shares offered
hereby will be passed upon for the Company by Riordan & McKinzie, a
Professional Corporation, Orange County, California. Certain legal matters
will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher &
Flom, Los Angeles, California.
EXPERTS
The consolidated financial statements of Total Renal Care Holdings, Inc. as
of December 31, 1995 and the seven months then ended and May 31, 1995 and the
year then ended included in this Prospectus have been so included in reliance
on the reports of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting. The historical
audited combined financial statements of Center for Kidney Disease, Inc.,
Venture Dialysis Center, Inc. and Miami Beach Kidney Center, Inc. for the year
ended December 31, 1994 incorporated in this Prospectus by reference to the
Company's Form 8-K/A dated September 29, 1995; the historical audited combined
financial statements of Southwest Renal Care, Ltd. and Dialysis Medical
Supplies, Inc. for the year ended October 31, 1995 incorporated in this
Prospectus by reference to the Company's Form 8-K/A dated February 13, 1996;
the historical audited financial statements of Downtown Dialysis Center, Inc.
for the year ended December 31, 1995 incorporated in this Prospectus by
reference to the Company's Form 8-K dated March 18, 1996; the financial
statements of the Nephrology Business of Caremark International Inc. as of
December 31, 1995 and 1994 and for the years ended December 31, 1995 and 1994
and for the one month ended December 31, 1993 incorporated in this Prospectus
by reference to the Company's Form 8-K dated March 18, 1996; and the financial
statements of Pasadena Dialysis Center, Inc. for the year ended December 31,
1995, the financial statements of Burbank Dialysis Group, Inc. for the year
ended December 31, 1995, the combined financial statements of Piedmont
Dialysis, Inc. and Peralta Renal Center for the year ended December 31, 1995,
the combined financial statements of Bertha Sirk Dialysis Center, Inc. and
Greenspring Dialysis Center, Inc. for the year ended December 31, 1995, and
the combined financial statements of Houston Kidney Center, Northwest Kidney
Center, LLP, North Houston Kidney Center, LLP, and Houston Kidney Center--
Southeast, LLP for the year ended December 31, 1995 incorporated by reference
in this Prospectus by reference to the Company's Form 8-K dated October 18,
1996 have been so incorporated in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
55
<PAGE>
The consolidated balance sheet of Total Renal Care Holdings, Inc. and
subsidiaries as of May 31, 1994 and the related consolidated statements of
income, stockholders' equity (deficit) and cash flows for each of the years in
the two-year period ended May 31, 1994 and the related financial statement
schedule have been included herein and in the Registration Statement in
reliance on the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing. KPMG Peat Marwick LLP's report on the
consolidated financial statements of Total Renal Care Holdings, Inc. refers to
a change in the method of accounting for income taxes by adopting Statement of
Financial Accounting Standards No. 109, Accounting For Income Taxes, effective
June 1, 1993.
The financial statements of Greer Kidney Center, Inc. and Upstate Dialysis
Center, Inc. as of December 31, 1994 and 1995 and for the years then ended
incorporated in this Prospectus by reference to the Company's Form 8-K dated
March 18, 1996 have been so incorporated in reliance on the reports of Meeks,
Roberts, Ashley, Sumner & Sirmans, independent certified public accountants,
given upon the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith files reports and other
information with the Commission. A copy of the reports and other information
filed by the Company with the Commission may be inspected without charge at
the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following Regional Offices of the
Commission: the Midwest Regional Office at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and the Northeast Regional
Office at 13th Floor, 7 World Trade Center, New York, New York 10048. Copies
of such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. Such reports and other information concerning the Company
are also available for inspection at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. In addition the
Commission maintains an Internet site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants, including the Company, that file electronically with the
Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement.
56
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for its fiscal year ended
May 31, 1995;
(2) The Company's Annual Report on Form 10-K for the transitional fiscal
year ended December 31, 1995;
(3) The Company's Quarterly Reports on Form 10-Q for the periods ended
August 31, 1995; November 30, 1995; March 30, 1996 and June 30, 1996;
(4) The Company's Current Reports on Form 8-K dated May 15, 1995; May 22,
1995; August 1, 1995; December 14, 1995; December 20, 1995, March 18, 1996,
August 29, 1996 and October 18, 1996 and the Company's Current Reports on
Form 8-K/A-1 dated July 15, 1995; September 29, 1995; and February 13,
1996;
(5) The description of the Common Stock contained in the Company's
Form 8-A dated October 23, 1995; and
(6) All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), (c), 14 or 15(d) of the Exchange Act and prior
to the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein, modified or supersedes such
statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered, upon written or oral request. Copies of this
Prospectus, as amended or supplemented from time to time, and any other
documents (or parts of documents) that constitute part of the Prospectus under
Section 10(a) of the Securities Act will also be provided without charge to
each such person, upon written or oral request. Requests should be directed to
Total Renal Care Holdings, Inc., Attention: John E. King, 21250 Hawthorne
Boulevard, Suite 800, Torrance, California 90503, telephone number (310) 792-
2600.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TOTAL RENAL CARE HOLDINGS, INC.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants of Price Waterhouse LLP.................. F-2
Independent Auditors' Report of KPMG Peat Marwick LLP...................... F-3
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Income.......................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit).................. F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Total Renal Care Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity (deficit), and of
cash flows present fairly, in all material respects, the financial position of
Total Renal Care Holdings, Inc. and its subsidiaries at December 31, 1995 and
May 31, 1995, and the results of their operations and their cash flows for the
periods then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Seattle, Washington
March 15, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Total Renal Care Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Total Renal
Care Holdings, Inc. (formerly Total Renal Care, Inc.) and subsidiaries as of
May 31, 1994, and the related consolidated statements of income, stockholders'
equity (deficit), and cash flows for each of the years in the two-year period
ended May 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Total
Renal Care Holdings, Inc. and subsidiaries as of May 31, 1994, and the results
of their operations and their cash flows for each of the years in the two-year
period ended May 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, effective
June 1, 1993 the Company changed its method of providing for income taxes by
adopting Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes.
KPMG Peat Marwick LLP
Seattle, Washington
July 8, 1994
F-3
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
------------------------
DECEMBER 31, JUNE 30,
1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equiva-
lents................... $ 1,449,000 $ 2,046,000 $ 30,181,000 $ 39,969,000
Accounts receivable, less
allowance for doubtful
accounts of $1,927,000,
$4,434,000, $5,668,000
and $9,752,000
(unaudited),
respectively............ 13,538,000 23,652,000 40,014,000 82,375,000
Receivable from Tenet.... 9,427,000 401,000 432,000 390,000
Inventories.............. 1,223,000 1,731,000 2,482,000 4,339,000
Deferred income taxes.... 1,133,000 1,283,000 1,542,000 1,925,000
Prepaid expenses and
other current assets.... 330,000 693,000 843,000 2,421,000
----------- ------------ ------------ ------------
Total current assets. 27,100,000 29,806,000 75,494,000 131,419,000
Property and equipment,
net..................... 14,128,000 18,051,000 25,505,000 44,456,000
Notes receivable from
stockholder............. 1,379,000 1,678,000
Investment in affiliate,
at equity............... 972,000 995,000
Other long-term assets... 14,000 552,000 885,000 887,000
Intangible assets, net... 2,379,000 29,149,000 59,763,000 111,611,000
----------- ------------ ------------ ------------
$43,621,000 $ 77,558,000 $163,998,000 $291,046,000
=========== ============ ============ ============
LIABILITIES, MANDATORILY
REDEEMABLE COMMON STOCK
AND STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable......... $ 3,250,000 $ 4,849,000 $ 7,901,000 $ 6,245,000
Employee compensation and
benefits................ 2,430,000 4,914,000 5,012,000 7,469,000
Other accrued liabili-
ties.................... 1,345,000 4,750,000 7,006,000 9,131,000
Income taxes payable..... 314,000 --
Current portion of long-
term obligations........ 11,000 322,000 570,000 521,000
----------- ------------ ------------ ------------
Total current liabil-
ities............... 7,036,000 14,835,000 20,803,000 23,366,000
----------- ------------ ------------ ------------
Long-term debt........... 187,000 87,820,000 55,324,000 58,295,000
----------- ------------ ------------ ------------
Deferred income taxes.... 611,000 518,000 510,000 523,000
----------- ------------ ------------ ------------
Other long-term liabili-
ties.................... -- -- 1,214,000 806,000
----------- ------------ ------------ ------------
Minority interests....... 1,054,000 1,274,000 3,343,000 4,541,000
----------- ------------ ------------ ------------
Mandatorily redeemable
common stock............ -- 3,990,000 -- --
----------- ------------ ------------ ------------
Commitments and contin-
gencies (Notes 7 and 12)
Stockholders' equity
(deficit)
Common stock, voting
($.001 par value,
1,000,000, 50,000,000,
55,000,000 and
55,000,000 (unaudited)
shares authorized;
66,667, 12,309,384,
22,308,207 and
25,889,905 (unaudited)
shares issued and
outstanding).......... 12,000 22,000 26,000
Common stock, Class B
nonvoting ($.001 par
value; 0, 5,000,000,
5,000,000 and
5,000,000 (unaudited)
shares authorized; 0,
600,000, 0 and 0
(unaudited) shares
issued and
outstanding).......... 1,000
Additional paid-in cap-
ital.................. 12,683,000 123,710,000 234,369,000
Notes receivable from
stockholders.......... (1,508,000) (2,773,000) (2,727,000)
Retained earnings (def-
icit)................. 34,733,000 (42,067,000) (38,155,000) (28,153,000)
----------- ------------ ------------ ------------
Total stockholders'
equity (deficit).... 34,733,000 (30,879,000) 82,804,000 203,515,000
----------- ------------ ------------ ------------
$43,621,000 $ 77,558,000 $163,998,000 $291,046,000
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS
YEAR ENDED MAY 31, ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ------------------------ -------------------------
1993 1994 1995 1994 1995 1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $71,576,000 $80,470,000 $98,968,000 $53,593,000 $89,711,000 $56,093,000 $114,820,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Operating expenses
Facilities.............. 49,440,000 56,828,000 65,583,000 36,012,000 57,406,000 36,420,000 76,647,000
General and
administrative......... 5,292,000 7,457,000 9,115,000 4,916,000 7,645,000 5,200,000 8,701,000
Provision for doubtful
accounts............... 2,050,000 1,550,000 2,371,000 1,363,000 1,811,000 1,266,000 2,333,000
Depreciation and
amortization........... 3,434,000 3,752,000 4,740,000 2,586,000 4,383,000 2,673,000 6,032,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total operating
expenses............... 60,216,000 69,587,000 81,809,000 44,877,000 71,245,000 45,559,000 93,713,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Operating income........ 11,360,000 10,883,000 17,159,000 8,716,000 18,466,000 10,534,000 21,107,000
Interest expense........ (49,000) (56,000) (7,447,000) (3,378,000) (6,291,000) (4,721,000) (4,150,000)
Interest income......... 40,000 43,000 244,000 78,000 707,000 174,000 1,613,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Income before income
taxes, minority
interests and
extraordinary item..... 11,351,000 10,870,000 9,956,000 5,416,000 12,882,000 5,987,000 18,570,000
Income taxes............ 4,129,000 4,106,000 3,511,000 1,933,000 4,631,000 2,078,000 7,151,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Income before minority
interests and
extraordinary item..... 7,222,000 6,764,000 6,445,000 3,483,000 8,251,000 3,909,000 11,419,000
Minority interests in
income of consolidated
subsidiaries........... 775,000 1,046,000 1,593,000 833,000 1,784,000 1,010,000 1,417,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Income before
extraordinary item..... 6,447,000 5,718,000 4,852,000 2,650,000 6,467,000 2,899,000 10,002,000
Extraordinary loss
related to early
extinguishment of debt,
net of tax............. 2,555,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net income.............. $ 6,447,000 $ 5,718,000 $ 4,852,000 $ 2,650,000 $ 3,912,000 $ 2,899,000 $ 10,002,000
=========== =========== =========== =========== =========== =========== ============
Earnings (loss) per
common share:
Income before
extraordinary item..... $ 0.36 $ 0.19 $ 0.40
Extraordinary items..... (0.14)
----------- ----------- ------------
Net income.............. $ 0.22 $ 0.19 $ 0.40
=========== =========== ============
Weighted average number
of common shares and
equivalents
outstanding............ 17,824,000 15,418,000 24,837,000
=========== =========== ============
Pro forma data
(unaudited)
Net income per common
share.................. $ 0.22 $ 0.08
=========== ===========
Weighted average number
of common shares and
equivalents
outstanding............ 15,316,000 14,381,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE RETAINED
------------------ PAID-IN FROM EARNINGS
SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1992. 66,667 $ 22,568,000 $ 22,568,000
Net income.............. 6,447,000 6,447,000
---------- ------------ ------------
Balance at May 31, 1993. 66,667 29,015,000 29,015,000
Net income.............. 5,718,000 5,718,000
---------- ------------ ------------
Balance at May 31, 1994. 66,667 34,733,000 34,733,000
Shares issued to Tenet.. 2,933,334 $ 3,000 $ 1,000 4,000
Shares issued in change
of control:
DLJMB.................. 7,000,000 7,000 10,493,000 10,500,000
Employees.............. 1,246,667 1,000 1,869,000 $ (995,000) 875,000
Shares issued in offer-
ing.................... 600,000 1,000 899,000 900,000
Stock issuance costs.... (2,172,000) (2,172,000)
Dividend paid to Tenet:
Cash................... (75,500,000) (75,500,000)
Intercompany receiv-
able.................. (6,152,000) (6,152,000)
Shares issued to employ-
ees and others......... 765,252 1,000 1,147,000 (513,000) 635,000
Shares issued in acqui-
sitions................ 297,464 446,000 446,000
Net income.............. 4,852,000 4,852,000
---------- ------- ------------ ----------- ------------ ------------
Balance at May 31, 1995. 12,909,384 13,000 12,683,000 (1,508,000) (42,067,000) (30,879,000)
Net proceeds from ini-
tial public offering... 6,900,000 6,000 98,288,000 98,294,000
Shares and options is-
sued in acquisitions... 742,820 1,000 5,334,000 5,335,000
Shares issued to employ-
ees and others......... 27,670 59,000 (13,000) 46,000
Options exercised....... 1,046,666 1,000 1,565,000 (1,330,000) 236,000
Conversion of
mandatorily redeemable
common stock........... 681,667 1,000 3,989,000 3,990,000
Payments on notes
receivable, net of
interest accrued....... 78,000 78,000
Income tax benefit
related to stock
options exercised...... 1,792,000 1,792,000
Net income.............. 3,912,000 3,912,000
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31,
1995................... 22,308,207 22,000 123,710,000 (2,773,000) (38,155,000) 82,804,000
Net proceeds from public
offering (unaudited)... 3,500,000 4,000 109,965,000 109,969,000
Shares issued to
employees and others
(unaudited)............ 998 10,000 10,000
Options exercised (unau-
dited)................. 80,700 71,000 71,000
Payments on notes
receivable, net of
interest
accrued (unaudited).... 46,000 46,000
Income tax benefit
related to stock
options
exercised (unaudited).. 613,000 613,000
Net income (unaudited).. 10,002,000 10,002,000
---------- ------- ------------ ----------- ------------ ------------
Balance at June 30, 1996
(unaudited)............ 25,889,905 $26,000 $234,369,000 $(2,727,000) $(28,153,000) $203,515,000
========== ======= ============ =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS
YEAR ENDED MAY 31, ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------- -------------------------- --------------------------
1993 1994 1995 1994 1995 1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income............ $ 6,447,000 $ 5,718,000 $ 4,852,000 $ 2,650,000 $ 3,912,000 $ 2,899,000 $ 10,002,000
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 3,434,000 3,752,000 4,740,000 2,586,000 4,383,000 2,673,000 6,032,000
Extraordinary item.... 4,258,000
Noncash interest...... 6,947,000 3,274,000 5,228,000 4,420,000 3,228,000
Deferred income taxes. (316,000) 213,000 (716,000) 16,000 (469,000) (256,000) (369,000)
Provision for doubtful
accounts............. 2,050,000 1,550,000 2,371,000 1,363,000 1,811,000 1,266,000 2,333,000
Loss (gain) on
disposition of
property and
equipment............ (137,000) 98,000 (34,000) (144,000) (52,000) 4,000
Minority interests in
income of
consolidated
subsidiaries......... 775,000 1,046,000 1,593,000 833,000 1,784,000 1,010,000 1,417,000
Changes in operating
assets and
liabilities, net of
effect of
acquisitions:
Accounts receivable.. (2,037,000) (1,957,000) (9,547,000) (4,023,000) (15,256,000) (7,026,000) (25,791,000)
Inventories.......... (83,000) (108,000) (122,000) (303,000) (331,000) (9,000) (762,000)
Prepaid expenses and
other current
assets.............. (1,000) 109,000 (856,000) (261,000) (134,000) (315,000) (1,436,000)
Other long-term
assets.............. (300,000)
Accounts payable..... (2,076,000) 272,000 (536,000) 728,000 205,000 870,000 (4,056,000)
Employee compensation
and benefits........ (447,000) 445,000 1,994,000 2,000 (622,000) 1,525,000 457,000
Other accrued
liabilities......... (6,000) 924,000 4,383,000 544,000 461,000 (243,000) 1,610,000
Income taxes payable. 465,000 277,000 (770,000) (433,000)
Other long-term
liabilities......... 107,000 1,214,000 56,000 (410,000)
----------- ----------- ------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities......... 7,603,000 12,062,000 15,069,000 7,981,000 6,277,000 6,048,000 (8,174,000)
----------- ----------- ------------ ------------ ------------ ------------ ------------
Cash flows from
investing activities
Purchases of property
and equipment........ (4,140,000) (4,380,000) (3,835,000) (860,000) (3,748,000) (3,444,000) (11,833,000)
Additions to
intangible assets.... (7,000) (161,000) (358,000) (159,000) (972,000) (363,000) (1,966,000)
Cash paid for
acquisitions, net of
cash acquired........ (22,476,000) (5,722,000) (28,303,000) (16,753,000) (77,867,000)
Investment in
affiliate............ (972,000) (24,000)
Issuance of long-term
note receivable...... (1,379,000) (299,000)
Proceeds from
disposition of
property and
equipment............ 493,000 82,000 62,000 28,000 244,000 244,000 139,000
Proceeds from
collection of notes
receivables.......... 60,000 95,000
Contributions from
minority interests... 336,000
----------- ----------- ------------ ------------ ------------ ------------ ------------
Net cash used in
investing
activities......... (3,594,000) (4,364,000) (26,607,000) (6,713,000) (35,130,000) (20,316,000) (91,514,000)
----------- ----------- ------------ ------------ ------------ ------------ ------------
Cash flows from
financing activities
Advances (to) from
Tenet................ (4,330,000) (5,604,000) 2,874,000 3,499,000
Proceeds from issuance
of note payable...... 258,000 3,000
Principal payments on
long-term
obligations.......... (39,000) (39,000) (367,000) (11,000) (880,000) (518,000) (584,000)
Cash dividends paid to
Tenet................ (75,500,000) (75,500,000)
Net proceeds from debt
offering............. 66,841,000 66,140,000
Cash paid to retire
bonds................ (31,912,000)
Proceeds from bank
credit facility...... 13,253,000 21,341,000 17,800,000 51,000,000
Payment of bank credit
facility............. (4,000,000) (31,625,000) (4,000,000) (51,000,000)
Net proceeds from
issuance of common
stock................ 10,742,000 10,810,000 98,941,000 54,000 110,051,000
Income tax benefit
related to stock
options exercised.... 1,792,000 613,000
Cash received on notes
receivable from
stockholders......... 175,000 140,000
Distributions to
minority interests... (610,000) (819,000) (1,708,000) (723,000) (1,102,000) (1,133,000) (747,000)
----------- ----------- ------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities......... (4,979,000) (6,462,000) 12,135,000 4,215,000 56,988,000 12,203,000 109,476,000
----------- ----------- ------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in cash............... (970,000) 1,236,000 597,000 5,483,000 28,135,000 (2,065,000) 9,788,000
Cash and cash
equivalents at
beginning of period... 1,183,000 213,000 1,449,000 1,449,000 2,046,000 6,931,000 30,181,000
----------- ----------- ------------ ------------ ------------ ------------ ------------
Cash and cash
equivalents at end of
period................ $ 213,000 $ 1,449,000 $ 2,046,000 $ 6,932,000 $ 30,181,000 $ 4,866,000 $ 39,969,000
=========== =========== ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Total Renal Care Holdings, Inc. (the Company) operates kidney dialysis
facilities and provides related medical services in Medicare certified
dialysis facilities in various geographic sectors in the United States and in
Guam.
The Company was a wholly owned subsidiary of Tenet Healthcare Corporation
(Tenet, formerly National Medical Enterprises, Inc.) until August 1994. In
August 1994, the Company completed a public offering of senior subordinated
notes and Class B common stock, the proceeds of which were used to partially
fund a dividend to Tenet. Immediately after payment of the dividend,
Donaldson, Lufkin, Jenrette Merchant Banking Funding, Inc. and certain of its
affiliates (DLJMB) and certain members of management acquired newly issued
Class A common stock of the Company to effect a change in control of the
Company. Following these transactions DLJMB owned 59% of the Company's
outstanding common stock. Although there was a change in control, the
Company's accounts were not adjusted from their historical bases due to the
significant continuing ownership interest of Tenet.
Basis of presentation
The consolidated financial statements include the accounts of Total Renal
Care Holdings, Inc. and its wholly-owned and majority-owned corporate
subsidiaries and partnership investments. All significant intercompany
transactions and balances have been eliminated in consolidation.
Net operating revenues
Revenues are recognized when services and related products are provided to
patients in need of ongoing life sustaining kidney dialysis treatments.
Operating revenues consist primarily of dialysis and ancillary fees from
patient treatments. These amounts are reported at the amounts expected to be
realized from governmental and third-party payors, patients and others for
services provided. Receivables which are deemed uncollectible are reflected in
the provision for doubtful accounts as a component of operating expenses in
the consolidated statements of income.
During the years ended May 31, 1993, 1994 and 1995 and the seven months
ended December 31, 1995, the Company received approximately 75%, 75%, 70% and
67%, respectively, of its dialysis revenues from Medicare and Medicaid
programs. Accounts receivable from Medicare and Medicaid amounted to
$8,783,000, $15,855,000 and $21,862,000 as of May 31, 1994 and 1995 and
December 31, 1995, respectively. Medicare historically pays approximately 80%
of government established rates for services provided by the Company. The
remaining 20% is typically paid by state Medicaid programs, private insurance
companies or directly by the patients receiving the services.
Medicare and Medicaid programs funded by the U.S. government generally
reimburse the Company under prospective payment systems at amounts different
from the Company's established private rates. Revenues under these programs
are generally recognized at prospective rates which are subject to periodic
adjustment by federal and state agencies. The Company bills non-governmental
third-party payors at established private rates. The Company has contracts for
the provision of dialysis services to members of certain managed care
organizations which generally include rate provisions at less than the
established private rates.
F-8
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In August 1993, the provisions of the Omnibus Budget Reconciliation Act of
1993 ("OBRA 93") became effective. The OBRA 93 provisions were originally
interpreted by the Health Care Financing Administration (HCFA) to modify the
requirements that employer group health sponsored insurance plans (private
payors) be the primary payor for end-stage renal disease (ESRD) patients who
subsequently become dually entitled to Medicare benefits because of ESRD
following initial eligibility under age or disability provisions. In July
1994, HCFA instructed the Medicare fiscal intermediaries to retroactively
apply the provisions of OBRA 93 to August 10, 1993. In April 1995, HCFA issued
instructions of clarification to the fiscal intermediaries that it had
misinterpreted the OBRA regulations and that Medicare would continue as the
primary payor after dual eligibility was achieved under the ESRD provision. In
June 1995, a preliminary injunction was issued by a federal court preventing
HCFA from retroactively applying its reinterpretation of the OBRA 93
regulations as unlawful retroactive rulemaking. The Company has recognized
revenue related to payments which have been received from private payors in
excess of the revenue previously recognized at lower rates. For the seven
months ended December 31, 1995, the Company recognized approximately $800,000
of such payments. The Company intends to continue to recognize revenues in the
future as cash is received. The Company believes that there are additional
amounts that may be recoverable under the OBRA 93 provisions.
Cash and cash equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist principally of drugs and dialysis related supplies.
Property and equipment
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation and amortization expense are
computed using the straight-line method over the useful lives of the assets
estimated as follows: buildings, 20 to 40 years; leaseholds and improvements,
over the shorter of their estimated useful life or the lease term; and
equipment, 3 to 15 years.
Intangible assets
Business acquisition costs allocated to patient lists are amortized over
five years using the straight-line method. Business acquisition costs
allocated to covenants not to compete are amortized over the terms of the
agreements, typically seven to ten years, using the straight-line method.
Deferred debt issuance costs are amortized over the term of the debt using the
effective interest method.
The excess of aggregate purchase price over the fair value of net assets of
businesses acquired is recorded as goodwill. Goodwill is amortized over 15 to
25 years using the straight-line method.
The carrying value of intangible assets is assessed for any permanent
impairment by evaluating the operating performance and future undiscounted
cash flows of the underlying businesses. Adjustments are made if the sum of
the expected future net cash flows is less than book value. Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121), requires
that long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of assets may not be
recoverable. SFAS 121 is required to be implemented by the Company for the
fiscal year beginning January 1, 1996 and is not expected to have a
significant impact on the Company's financial statements.
F-9
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). The
statement requires recognition of deferred income taxes for all temporary
differences between the tax and financial reporting bases of the Company's
assets and liabilities based on enacted tax rates applicable to the periods in
which the differences are expected to be recovered or settled. Adoption of
SFAS 109 did not have a material impact on the Company's financial statements.
Following the change in control described above, the Company's results of
operations were no longer included in Tenet's consolidated federal and
applicable unitary state income tax returns. For financial reporting purposes,
the provision for income taxes for fiscal year 1994 and through August 11 of
the first quarter of fiscal year 1995 was calculated as if the Company filed
separate federal and state income tax returns.
Minority interest
Minority interest represents the proportionate equity interest of other
partners and stockholders in the Company's consolidated entities which are not
wholly owned. As of December 31, 1995, this comprised nine limited
partnerships and two corporations.
Earnings per share and unaudited pro forma net income per share
Earnings per share are calculated by dividing net income before
extraordinary item, the extraordinary loss and net income by the weighted
average number of shares of common stock outstanding. When dilutive, stock
options and warrants are included as share equivalents using the treasury
stock method.
Pro forma net income per share for the seven months ended December 31, 1994
and the year ended May 31, 1995 has been computed as if the August 11, 1994
recapitalization transaction described above occurred on June 1, 1994 (see
Notes 6 and 8). Specifically, net income has been decreased $1,551,000 to
reflect an increase in general and administrative expenses ($625,000) for
estimated incremental costs of the Company as a stand-alone entity, increases
in interest expense ($1,811,000), amortization expense ($105,000) and bank
fees ($42,000) for the issuance of the 12% senior subordinated debt, and a
corresponding decrease to the provision for income taxes ($1,032,000) for the
tax effect of the pro forma adjustments. Shares issued as part of the
recapitalization were also assumed to have been outstanding from June 1, 1994.
During the period from October 1, 1994 to November 2, 1995, the Company
issued approximately 2,190,000 shares and options at prices significantly
below the assumed offering price of the Company's initial public offering (see
Note 8). Such shares and common stock equivalents have been included in the
number of shares outstanding from June 1, 1994 using the treasury stock method
and an offering price of $15.50 per share.
Earnings per share amounts are not presented for fiscal years 1993 and 1994
as the historical equity structure is not considered meaningful.
Financial instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, employee compensation and benefits, and other
accrued liabilities. These balances, as presented in the financial statements
at December 31, 1995, approximate their fair value.
The Company has long-term debt, which is also a financial instrument. The
fair market value of the long-term debt is approximately $64,180,000, which is
greater than its carrying value of $55,894,000. The fair value has been
estimated based upon market quotations of the 12% Senior Subordinate Discount
Notes which are publicly traded.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-10
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited interim financial statements
In December 1995, the Company changed its year-end to December 31 from May
31. The information presented as of June 30, 1996 and for the seven months
ended December 31, 1994 and the six month periods ended June 30, 1995 and 1996
has not been audited. In the opinion of management, the unaudited interim
consolidated balance sheet, statements of income, of stockholders' equity
(deficit) and of cash flows include all adjustments consisting solely of
normal recurring adjustments necessary to present fairly the Company's
consolidated results of operations and cash flows as of and for the periods
indicated.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment comprise the following:
<TABLE>
<CAPTION>
MAY 31,
-------------------------- DECEMBER 31,
1994 1995 1995
<S> <C> <C> <C>
Land.............................. $ 262,000 $ 267,000 $ 309,000
Buildings......................... 3,018,000 3,054,000 4,072,000
Leaseholds and improvements....... 9,891,000 10,934,000 12,211,000
Equipment......................... 16,545,000 22,742,000 26,737,000
Construction in progress.......... 411,000 37,000 2,097,000
------------ ------------ ------------
30,127,000 37,034,000 45,426,000
Less accumulated depreciation and
amortization..................... (15,999,000) (18,983,000) (19,921,000)
------------ ------------ ------------
Net property and equipment........ $ 14,128,000 $ 18,051,000 $ 25,505,000
============ ============ ============
</TABLE>
Depreciation and amortization expense on property and equipment was
$2,630,000, $2,961,000, $3,163,000 and $2,326,000 for the years ended May 31,
1993, 1994 and 1995 and the seven months ended December 31, 1995,
respectively.
3. INTANGIBLE ASSETS
A summary of intangible assets is as follows:
<TABLE>
<CAPTION>
MAY 31,
----------------------- DECEMBER 31,
1994 1995 1995
<S> <C> <C> <C>
Goodwill.............................. $2,865,000 $21,647,000 $46,791,000
Patient lists......................... 2,751,000 4,055,000 6,505,000
Noncompete agreements................. 398,000 3,856,000 10,005,000
Deferred debt issuance costs.......... 4,400,000 3,324,000
Other................................. 254,000 653,000 491,000
---------- ----------- -----------
6,268,000 34,611,000 67,116,000
Less accumulated amortization......... (3,889,000) (5,462,000) (7,353,000)
---------- ----------- -----------
$2,379,000 $29,149,000 $59,763,000
========== =========== ===========
</TABLE>
F-11
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amortization expense applicable to intangible assets was $804,000, $791,000,
$1,577,000 and $2,057,000 for the years ended May 31, 1993, 1994 and 1995 and
the seven months ended December 31, 1995, respectively.
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities comprise the following:
<TABLE>
<CAPTION>
MAY 31,
--------------------- DECEMBER 31,
1994 1995 1995
<S> <C> <C> <C>
Customer refunds......................... $ 978,000 $3,908,000 $4,981,000
Payable to former owners of acquired
facility (Note 13)...................... 1,243,000
Other.................................... 367,000 842,000 782,000
---------- ---------- ----------
$1,345,000 $4,750,000 $7,006,000
========== ========== ==========
</TABLE>
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED MAY 31, ENDED
--------------------------------- DECEMBER 31,
1993 1994 1995 1995
<S> <C> <C> <C> <C>
Current
Federal.................... $3,630,000 $3,084,000 $3,275,000 $3,708,000
State...................... 815,000 809,000 952,000 954,000
Deferred
Federal.................... (268,000) 170,000 (555,000) 9,000
State...................... (48,000) 43,000 (161,000) (40,000)
---------- ---------- ---------- ----------
$4,129,000 $4,106,000 $3,511,000 $4,631,000
========== ========== ========== ==========
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
MAY 31,
---------------------- DECEMBER 31,
1994 1995 1995
<S> <C> <C> <C>
Receivables, primarily allowance for
doubtful accounts.................... $ 844,000 $ 1,521,000 $ 1,653,000
Accrued vacation...................... 289,000 347,000 459,000
Intangible assets..................... 325,000
Deferred compensation................. 78,000 117,000 117,000
--------- ----------- -----------
Gross deferred tax assets........... 1,211,000 1,985,000 2,554,000
--------- ----------- -----------
Depreciation and amortization......... (549,000) (547,000) (952,000)
Intangible assets..................... (88,000) (88,000)
Change in tax accounting method....... (585,000) (570,000)
Other................................. (52,000)
--------- ----------- -----------
Gross deferred tax liabilities...... (689,000) (1,220,000) (1,522,000)
--------- ----------- -----------
Net deferred tax assets............. $ 522,000 $ 765,000 $ 1,032,000
========= =========== ===========
</TABLE>
F-12
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation between the Company's effective tax rate and the U.S.
federal income tax rate on income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY SEVEN MONTHS
31, ENDED
------------------ DECEMBER 31,
1993 1994 1995 1995
<S> <C> <C> <C> <C>
Federal income tax rate................... 34.0% 34.0% 34.0% 35.0%
State taxes, net of federal benefit....... 4.5% 5.2% 5.2% 3.6%
Minority interests........................ (2.0%) (3.0%) (5.0%) (4.7%)
Nondeductible amortization of intangible
assets................................... 0.2% 0.6% 0.9% 2.9%
Other..................................... (0.3%) 1.0% 0.2% (0.8%)
---- ---- ---- ----
36.4% 37.8% 35.3% 36.0%
==== ==== ==== ====
</TABLE>
6. LONG-TERM DEBT AND OTHER
Long-term debt and other comprises:
<TABLE>
<CAPTION>
MAY 31,
--------------------- DECEMBER 31,
1994 1995 1995
<S> <C> <C> <C>
12% Senior Subordinated Discount Notes
(net of unamortized discount of
$22,659,000 and $11,180,000
respectively)......................... $77,341,000 $53,820,000
Senior Credit Facility................. 10,100,000
Capital lease obligations (Note 7)..... 591,000 1,680,000
Other.................................. $198,000 110,000 394,000
-------- ----------- -----------
198,000 88,142,000 55,894,000
Less current portion................... (11,000) (322,000) (570,000)
-------- ----------- -----------
$187,000 $87,820,000 $55,324,000
======== =========== ===========
</TABLE>
12% Senior Subordinated Discount Notes
In August 1994, the Company completed a public offering of 100,000 units,
each consisting of $1,000 of 12% Senior Subordinated Discount Notes (the
Notes) and six shares of nonvoting Class B common stock. Aggregate proceeds
from the offering were $71,294,000, of which $900,000 was allocated to the
Class B common stock, based upon the estimated value of the stock, and the
remaining $70,394,000 to the Notes. The Notes mature on August 15, 2004.
Interest does not accrue on the Notes until August 15, 1997. Commencing on
February 15, 1998, cash interest on the Notes will be payable semiannually at
a rate of 12% per annum. Prior to February 15, 1998, interest will be paid in
kind through amortization of the discount. The discount is amortized using the
effective interest rate of 12.39%.
The Company has certain rights to redeem the Notes at specified percentages
in various circumstances as specified in the agreement. Upon a change of
control, as defined and other than the change of control discussed in Note 1,
the Company is required to offer to repurchase all of the Notes at 101% of the
accreted value through August 15, 1997 and at 101% of face value thereafter.
Additionally, the Company has the right to redeem the Notes beginning August
15, 1999 at the accreted value plus a defined premium.
On December 7, 1995, the Company redeemed 35% of the accreted value of the
Notes equaling $28,749,000 at a redemption premium of 111% for a total
redemption price of $31,912,000. An extraordinary loss on the early
extinguishment of debt of $4,258,000, net of income tax effect of $1,703,000,
was recorded during the seven months ended December 31, 1995.
F-13
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Notes are subordinated to all senior debt and are guaranteed on a senior
subordinated basis by certain of the Company's wholly owned subsidiaries (the
Guarantor Subsidiaries) subject to certain specified limitations (see Note
16).
The Notes contain certain restrictive and financial covenants including
limitations on additional indebtedness, limitations on payment of dividends
other than the dividend discussed in Note 8, and redemption of capital stock,
limitations on the sales of assets and capital stock of certain subsidiaries
and limitations on the Company's ability to consolidate, merge or transfer
assets to another entity. The Company is in compliance with all covenants.
Senior Credit Facility
Effective August 11, 1994, the Company's wholly owned subsidiary, Total
Renal Care, Inc. (TRC, formerly Medical Ambulatory Care, Inc.), entered into a
credit agreement providing for a senior secured revolving credit facility.
This credit agreement, as amended and restated on March 15, 1996, provides a
$100,000,000 senior secured revolving credit facility (the Senior Credit
Facility). Borrowings under the Senior Credit Facility may be used to purchase
certain domestic companies engaged in the treatment of end-stage renal disease
with up to $10,000,000 available for general corporate and working capital
purposes. The Senior Credit Facility expires on February 15, 2002 and may be
extended for one year upon prior written notice to and consent of the lenders.
The amount available under the Senior Credit Facility will be reduced by
$10,000,000, $15,000,000 and $15,000,000 at February 15, 1999, 2000 and 2001,
respectively. Additionally, mandatory prepayments are required under certain
circumstances including certain equity and debt issuances or the sale of
certain assets.
Loans under the Senior Credit Facility will bear interest at either (1) the
higher of the bank's prime rate or the federal funds rate plus .5% per annum
or (2) adjusted LIBOR, as defined, plus an applicable margin, at the Company's
option, payable at least quarterly. The applicable margin will vary between
.625% and 1.5% based on the Company's leverage ratio, as defined. The Senior
Credit Facility includes a commitment fee of between .25% and .5% of the
unused portion based on the Company's leverage ratio, as defined.
The Company and TRC's wholly owned subsidiaries have guaranteed TRC's
obligations under the Senior Credit Facility on a senior basis and have
pledged their assets (including the stock of their subsidiaries) in support of
such guarantees. Additionally, the Senior Credit Facility is secured by all of
the tangible and intangible assets of TRC and certain subsidiaries.
The Senior Credit Facility contains certain restrictive and financial
covenants including a limitation on the sale of assets, limitations on
investments and limitations on the incurrence of additional indebtedness. The
Company is in compliance with all covenants.
Maturities of long-term debt for the years ending December 31 are as
follows:
<TABLE>
<S> <C>
1996......................................... $ 570,000
1997......................................... 482,000
1998......................................... 392,000
1999......................................... 362,000
2000......................................... 268,000
Thereafter................................... 65,000,000
</TABLE>
F-14
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASES
The Company leases the majority of its facilities under noncancelable
operating leases expiring in various years through 2006. Certain of these
facilities leases are with Tenet (Note 10). Most lease agreements cover
periods from five to ten years and contain renewal options of five to ten
years at the fair rental value at the time of renewal or at rates subject to
consumer price index increases since the inception of the lease. In the normal
course of business, operating leases are generally renewed or replaced by
other similar leases.
Future minimum lease payments under noncancelable operating leases for the
years ending December 31 are as follows:
<TABLE>
<S> <C>
1996......................................... $ 5,175,000
1997......................................... 4,805,000
1998......................................... 4,083,000
1999......................................... 3,532,000
2000......................................... 2,222,000
Thereafter................................... 4,330,000
-----------
Total minimum lease payments................. $24,147,000
===========
</TABLE>
Rental expense under all operating leases for the years ended May 31, 1993,
1994 and 1995 and the seven months ended December 31, 1995 amounted to
$2,713,000, $3,016,000, $3,323,000 and $2,644,000, respectively.
The Company also leases certain equipment under capital lease agreements.
Future minimum lease payments under capital leases for the years ending
December 31 are as follows:
<TABLE>
<S> <C>
1996.......................................... $ 499,000
1997.......................................... 437,000
1998.......................................... 402,000
1999.......................................... 392,000
2000.......................................... 278,000
----------
2,008,000
Less--Portion representing interest........... (328,000)
----------
Total capital lease obligation, including
current
portion of $489,000.......................... $1,680,000
==========
</TABLE>
The net book value of fixed assets under capital lease was $1,652,000 at
December 31, 1995. Capital lease obligations are included in long-term debt
and other.
8. STOCKHOLDERS' EQUITY
Initial public offering of common stock
On November 3, 1995, the Company completed an initial public offering of its
common stock at an offering price of $15.50 per share. The Company received
net proceeds of $98.3 million after the deduction of underwriting discounts
and commissions and other expenses. The Company used net proceeds of $31.9
million to redeem 35% of the Notes and $31 million to repay all then
outstanding borrowings on the Senior Credit Facility (Note 6). The remainder
of the proceeds will be used for general corporate purposes, acquisitions, de
novo facility developments and other capital expenditures.
F-15
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Change in shares and stock split
In July 1994, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock from 1,000 shares to
35,000,000 shares and to reduce the par value of such stock from $1.00 per
share to $.001 per share. Concurrent with this change, the Board of Directors
approved a 1,000-for-1 stock split. Shares held by Tenet were the only shares
affected by this action. Following the split, Tenet purchased an additional
2,933,334 shares of common stock for $4,400.
During October 1995 and in anticipation of the initial public offering, the
Company's directors redesignated the Class A common stock as "common stock",
authorized an increase in the authorized number of shares of common stock to
55,000,000, authorized 5,000,000 new shares of $.001 par value preferred
stock, and approved a three-into-two reverse stock split of the Company's
Class A and Class B common stock. Additionally, during the seven months ended
December 31, 1995, all Class B common stock was converted to common stock. All
information in these consolidated financial statements pertaining to shares of
common stock and per share amounts have been restated to retroactively reflect
the stock splits.
Debt offering
In August 1994, the Company completed a public offering of 100,000 units,
each consisting of a $1,000 Senior Subordinated Discount Note (see Note 6),
and six shares of Class B common stock. The shares became separately
transferrable from the Notes in February 1995 and were valued at $1.50 per
share which represented the stock's estimated fair value at the date of
issuance as determined by the Company.
Dividends
Immediately following the public debt offering in August 1994, the Company
paid Tenet a dividend totaling $81,652,000. The dividend comprised $75,500,000
in cash and $6,152,000 in the forgiveness of Tenet's intercompany balance due
the Company.
1994 Stock Plan
In August 1994, the Company established the Total Renal Care Holdings, Inc.
1994 Equity Compensation Plan (the 1994 Stock Plan) which provides for awards
of nonqualified stock options to purchase common stock and other rights to
purchase shares of common stock to certain employees, directors and facility
medical directors of the Company.
Under terms of the 1994 Stock Plan, options granted generally vest on the
ninth anniversary of the date of grant, subject to accelerated vesting in the
event the Company meets certain performance criteria.
Purchase rights to acquire 788,670 Class A common shares for $1.50-$6.00 per
share have been awarded to certain employees under the 1994 Stock Plan, the
majority of which were granted in connection with the change in control. All
such rights were exercised and the Company received notes for the uncollected
portion of the purchase proceeds. The notes bear interest at the lesser of the
Bank of New York's prime rate or 8%, are full recourse to the employees, and
are secured by the employees' stock. The notes are repayable four years from
the date of issuance, subject to certain prepayment requirements. At December
31, 1995, the outstanding notes plus accrued interest totaled $378,000.
During the year ended May 31, 1995, 886,667 of the options issued to
purchase common stock were issued to the Company's President. These options
originally vested 50% over four years and 50% in the same manner as other
options granted under the 1994 Stock Plan.
In September 1995, the Board of Directors and stockholders agreed to
accelerate the Company's President's vesting period and all of the options
became 100% vested. Pursuant to this action, the Company's President exercised
all of the stock options through issuance of a full recourse note of
$1,330,000 bearing interest at the lesser of prime or 8%. Additionally, the
Company's President executed a full recourse note for $1,379,000
F-16
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
bearing interest at the lesser of prime or 8% per annum to meet his tax
liability in connection with the stock option exercise. These notes are
secured by other shares of company stock and mature in September 1999 or upon
disposition of the common stock by the Company's President.
Activity with respect to the 1994 Stock Plan is as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS EXERCISE
AVAILABLE OUTSTANDING PRICE
<S> <C> <C> <C>
Authorization of the plan............. 4,000,000
Purchase rights granted............... (761,000)
Options granted....................... (1,718,334) 1,718,334 $1.50
---------- ----------
Balance at May 31, 1995............... 1,520,666 1,718,334 $1.50
Purchase rights granted............... (27,670)
Options granted....................... (193,343) 193,343 $1.50-$26.88
Options exercised..................... (1,046,666) $1.50
---------- ----------
Balance at December 31, 1995.......... 1,299,653 865,011 $1.50-$26.88
========== ==========
</TABLE>
As of December 31, 1995, 211,113 options were vested under the 1994 Stock
Plan.
1995 Stock Plan
In November 1995, the Company established the Total Renal Care Holdings,
Inc. 1995 Equity Incentive Plan (1995 Stock Plan) which provides awards of
stock options and the issuance of common shares subject to certain
restrictions to certain employees, directors and other individuals providing
services to the Company. There are 1,000,000 common shares reserved for
issuance under the 1995 Stock Plan. No shares or options have been issued as
of December 31, 1995.
Stock Purchase Plan
In November 1995, the Company established the Total Renal Care Holdings,
Inc. Employees Stock Purchase Plan (the Stock Purchase Plan) which entitles
each employee to purchase up to $25,000 of common stock during each calendar
year. The amounts used to purchase stock are typically accumulated through
payroll withholdings. The Stock Purchase Plan allows employees to purchase
stock for the lesser of 100% of the fair market value on the first day of the
purchase right period or 85% of the fair market value on the last day of the
purchase right period. Except for the initial purchase right period which
begins on November 3, 1995, the date of completion of the initial public
offering, and will end on December 31, 1996, each purchase right period begins
on January 1 or July 1, as selected by the employee and ends on December 31.
At December 31, 1995, $411,000 in payroll withholdings related to the Stock
Purchase Plan was included in accrued employee compensation and benefits.
Stock issued outside of plans
In connection with the change in control, the Company awarded its President
and Chief Operating Officer purchase rights to acquire 1,113,333 and 133,333
Class A common shares, respectively, at a purchase price of $1.50 per share.
These rights were awarded outside of the 1994 Stock Plan in connection with
the respective employment agreements. All such rights were exercised and the
Company received notes totaling $995,000 for the uncollected portion of the
purchase proceeds. The notes bear terms similar to those issued in connection
with the 1994 Stock Plan.
New accounting pronouncement
In December 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). This pronouncement requires the
F-17
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company to elect to account for stock-based compensation on a fair value based
model or an intrinsic value based model. The intrinsic value based model is
currently used by the Company and is the accounting principle prescribed by
Accounting Principles Board No. 25, Accounting for Stock Issued to Employees
(APB 25). Under this model, compensation cost is the excess, if any, of the
quoted market price of the stock at the date of grant or other measurement
date over the amount an employee must pay to acquire the stock. The fair value
based model prescribed by SFAS 123 would require the Company to value stock-
based compensation using an accepted valuation model. Compensation cost would
be measured at the grant date based on the value of the award and would be
recognized over the service period which is usually the vesting period.
The Company has elected to continue to apply the provisions of APB 25 to
their employee stock-based compensation plans. SFAS 123 requires disclosure in
the footnotes of the pro forma impact on net income and earnings per share of
the difference between compensation expense using the intrinsic value method
and the fair value method. The adoption of SFAS 123 is required for the fiscal
year ending December 31, 1996, and will not have an impact on the Company's
financial position or results of operations.
9. MANDATORILY REDEEMABLE COMMON STOCK
Of the shares of common stock issued in connection with the acquisitions
(Note 13), 1,215,000 included a put option to require the Company to
repurchase the shares in May 2000 at stipulated amounts. The put options
expired upon completion of the Company's initial public offering of common
stock. As of May 31, 1995, 681,667 of these shares were outstanding and
presented as mandatorily redeemable common stock on the consolidated balance
sheet. All of these shares were converted into common stock during the seven
months ended December 31, 1995.
10. TRANSACTIONS WITH RELATED PARTIES
Tenet
Prior to August 1994, the Company maintained an intercompany
payable/receivable account with Tenet to fund operating cash requirements or
to concentrate excess cash at Tenet for investment purposes. The Company was
charged interest on balances payable to Tenet; however, interest was not
earned on receivable balances. No interest was incurred during the years ended
May 31, 1993, 1994 and 1995 and the seven months ended December 31, 1995.
The Company was charged an overhead allocation for services rendered on its
behalf by Tenet. For the year ended May 31, 1993, Tenet charged the Company
$235,000 primarily based on an estimation of services directly provided to the
Company and secondarily on a ratio of the Company's gross revenues to total
Tenet consolidated gross revenues. For the year ended May 31, 1994, the charge
of $1,458,000 was based on a ratio of the Company's operating costs to total
Tenet consolidated operating costs through February 28, 1994. There were no
overhead costs charged after February 28, 1994. These amounts have been
included in general and administrative expenses.
The Company also provides dialysis services to Tenet hospital patients under
agreements with terms of one to three years. The contract terms are comparable
to contracts with unrelated third parties. Included in the receivable from
Tenet are amounts related to these services of $385,000, $401,000 and $432,000
at May 31, 1994 and 1995 and December 31, 1995, respectively. Net operating
revenues received from Tenet for these services were $2,084,000, $2,248,000,
$2,130,000 and $1,332,000 for the years ended May 31, 1993, 1994 and 1995 and
the seven months ended December 31, 1995, respectively.
Prior to October 1994, company employees were eligible to participate in the
Tenet Retirement Savings Plan, a defined contribution retirement plan,
covering substantially all full-time employees, whereby employees'
contributions to the plan were matched by the Company up to certain limits.
Defined contributions made by the Company for the years ended May 31, 1993,
1994 and 1995 amounted to $376,000, $411,000 and $152,000, respectively.
F-18
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to December 1994, the Company was insured for employee health coverage
and a substantial portion of workers' compensation through self-insurance
programs administered by Tenet. Additionally, all professional and general
liability risks were insured by a wholly owned subsidiary of Tenet. The
Company has no liability for employee health coverage claims incurred prior to
December 31, 1994 or workers' compensation claims prior to August 11, 1994.
Insurance expense under these programs amounted to $2,263,000, $2,962,000 and
$1,409,000 for years ended May 31, 1993, 1994 and 1995, respectively.
DLJMB
An affiliate of DLJMB was the underwriter for the initial public offering of
common stock, the public debt offering of units comprising Senior Subordinated
Discount Notes and Class B common stock and DLJMB participated in the change
in control transaction in which DLJMB and certain employees acquired 74% of
the Company. Fees for these transactions were $7,245,000, $2,496,000 and
$1,160,000, respectively.
11. EMPLOYEE BENEFIT PLAN
The Company has a savings plan (the Plan) for substantially all employees,
which has been established pursuant to the provisions of Section 401(k) of the
Internal Revenue Code (IRC). The Plan provides for employees to contribute
from 1% to 15% of their base annual salaries on a tax-deferred basis not to
exceed IRC limitations. The Company, in its sole discretion, may make a
contribution under the Plan each fiscal year as determined by the Board of
Directors. This contribution will be allocated for the year ended May 31, 1995
to each participant not eligible for participation in the 1994 Stock Plan
(Note 8) in proportion to the compensation paid during the year and the length
of employment for each of the participants. For the year ended May 31, 1995
and the seven months ended December 31, 1995, the Company accrued
contributions under the Plan in the amount of $224,000 and $268,000,
respectively.
12. CONTINGENCIES
The Company is subject to various claims and lawsuits in the ordinary course
of business. In the opinion of management, the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
13. ACQUISITIONS
Beginning in August 1994, the Company implemented an acquisition strategy
which resulted in the acquisition of twenty-six facilities providing services
to ESRD patients, three programs providing acute hospital in-patient dialysis
services and one laboratory. In addition, during this period the Company
developed six de novo facilities and entered into a management contract
covering an additional facility.
The following is a summary of acquisitions activity:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
MAY 31, DECEMBER 31,
1995 1995
<S> <C> <C>
Number of facilities............................... 18 12
Number of common shares issued..................... 297,464 742,820
Numbers of mandatorily redeemable shares issued.... 681,667
Number of common stock options issued.............. 40,000
Estimated fair value of common shares issued....... $ 446,000 $ 5,284,000
Estimated fair value of mandatorily redeemable
shares issued..................................... 3,990,000
Estimated fair value of common stock options
issued............................................ 51,000
Payable to former owners of acquired facility...... 1,243,000
Cash paid.......................................... 23,007,000 28,303,000
----------- -----------
Aggregate purchase price........................... $27,443,000 $34,881,000
=========== ===========
</TABLE>
F-19
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the acquisitions were accounted for as purchases and, accordingly,
the assets and liabilities of the acquired entities were recorded at their
estimated fair market values at the dates of acquisition. These initial
allocations resulted in other intangible assets of approximately $4,807,000
and $8,063,000 and goodwill of approximately $18,782,000 and $24,700,000
during the year ended May 31, 1995 and the seven months ended December 31,
1995, respectively. The results of operations of the facilities and laboratory
have been included in the Company's financial statements from their respective
acquisition dates.
The Company committed to issue 35,000 shares of common stock and $263,000 of
cash in connection with an acquisition that closed during December 1995. The
shares were not issued until February 1996 and, accordingly, are not reported
as outstanding at December 31, 1995. A liability of $1,243,000 for these
shares and cash is reflected in other liabilities at December 31, 1995.
The following summary, prepared on a pro forma basis, combines the results
of operations as if the acquisitions had been consummated as of the beginning
of each of the periods presented, after including the impact of certain
adjustments such as amortization of intangibles, interest expense on
acquisition financing and income tax effects.
Pro forma net income per share also gives effect to the August 11, 1994
recapitalization transaction as if it had occurred on June 1, 1994 as further
described in Note 1:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
MAY 31, DECEMBER 31,
1995 1995
(UNAUDITED)
<S> <C> <C>
Net revenues...................................... $120,503,000 $96,552,000
Net income before extraordinary items............. 4,685,000 5,624,000
Pro forma net income per share before
extraordinary items.............................. 0.29 0.31
</TABLE>
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been completed prior to
the beginning of the periods presented. In addition, they are not intended to
be a projection of future results and do not reflect any of the synergies,
additional revenue-generating services or direct facility operating expense
reduction that might be achieved from combined operations.
During the period from January 1 to March 15, 1996, the Company entered into
five agreements to acquire additional facilities which have either been
consummated or which are expected to close imminently. The aggregate purchase
price is $71,100,000. The composition of the final purchase price is expected
to be cash and proceeds from the Senior Credit Facility, however, a portion of
the purchase price may consist of issuance of the Company's common stock.
F-20
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION
The table below provides supplemental cash flow information:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED MAY 31, ENDED
-------------------------------- DECEMBER 31,
1993 1994 1995 1995
<S> <C> <C> <C> <C>
Cash paid for:
Income taxes................. $4,175,000 $4,821,000 $4,112,000 $ 957,000
Interest..................... 143,000 32,000 256,000 1,063,000
Noncash investing and
financing activities:
Notes receivable for issuance
of common stock............. 1,508,000 1,330,000
Dividend of Tenet
intercompany receivable..... 6,152,000
Estimated value of stock and
options issued in
acquisitions................ 4,436,000 5,335,000
Fixed assets acquired under
capital lease obligations... 1,483,000
Contribution to partnerships. 1,111,000
</TABLE>
The Company has implemented a growth strategy which includes acquisitions.
In conjunction with these acquisitions, the purchase price consisted of the
following:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
MAY 31, DECEMBER 31,
1995 1995
<S> <C> <C>
Fair value of assets acquired................... $ 30,434,000 $ 39,561,000
Cash paid....................................... (23,007,000) (28,303,000)
Estimated value of common stock issued.......... (446,000) (5,284,000)
Estimated value of mandatorily redeemable common
stock issued................................... (3,990,000)
Estimated value of common stock options issued.. (51,000)
Payable to former owners of acquired facilities. (1,243,000)
------------ ------------
Liabilities assumed............................. $ 2,991,000 $ 4,680,000
============ ============
</TABLE>
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary unaudited quarterly financial data has been restated from the
Company's filings on Form 10-Q to reflect the calendar quarters due to the
change in fiscal year-end and is summarized as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
<S> <C> <C> <C> <C>
Net operating revenues........ $25,469 $30,732 $37,415 $41,335
Operating income.............. 4,286 6,356 7,776 8,356
Income before extraordinary
item......................... 1,001 1,898 2,485 3,285
Net income (see Note 6)....... 1,001 1,898 2,485 730
Income before extraordinary
item per share............... 0.07 0.12 0.16 0.16
Net income per share.......... 0.07 0.12 0.16 0.04
</TABLE>
F-21
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information
for the Company, segregating Guarantor Subsidiaries (Note 6) and Non-Guarantor
Subsidiaries. In August 1994, five additional subsidiaries were included as
Guarantor Subsidiaries under the revolving credit facility. The accompanying
financial information in the "Guarantor Subsidiaries" column are those
subsidiaries which were guarantors for that period. The guarantor subsidiaries
are wholly-owned subsidiaries of the Company and guarantees are full,
unconditional, and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management believes that
these financial statements would not be material to investors.
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, 1994
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
Current assets
Accounts receivable.... $ 6,558,000 $ 6,980,000 $13,538,000
Receivable from NME.... 9,427,000 9,427,000
Other current assets... 1,152,000 2,983,000 4,135,000
----------- ----------- -----------
Total current assets. 17,137,000 9,963,000 27,100,000
Property and equipment,
net.................... 8,681,000 5,447,000 14,128,000
Investments in
subsidiaries........... $34,733,000 26,889,000 $(61,622,000)(a)
Advances to parent...... 18,603,000 (18,603,000)(b)
Other assets, net....... 1,723,000 670,000 2,393,000
----------- ----------- ----------- ------------ -----------
$34,733,000 $54,430,000 $34,683,000 $(80,225,000) $43,621,000
=========== =========== =========== ============ ===========
Current liabilities..... $ 483,000 $ 6,553,000 $ 7,036,000
Payable to subsidiaries. 18,603,000 $(18,603,000)(b)
Long-term obligations... 611,000 187,000 798,000
Minority interests...... 1,054,000 (a) 1,054,000
Stockholders' equity.... $34,733,000 34,733,000 27,943,000 (62,676,000)(a) 34,733,000
----------- ----------- ----------- ------------ -----------
$34,733,000 $54,430,000 $34,683,000 $(80,225,000) $43,621,000
=========== =========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1995
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
Current assets
Accounts receivable.... $ 291,000 $19,660,000 $3,701,000 $ 23,652,000
Receivable from Tenet.. 401,000 401,000
Other current assets... 89,000 3,844,000 1,820,000 5,753,000
------------ ----------- ---------- ------------
Total current assets. 380,000 23,905,000 5,521,000 29,806,000
Property and equipment,
net.................... 326,000 14,999,000 2,726,000 18,051,000
Investments in
subsidiaries........... 35,970,000 1,512,000 $(37,482,000)(a)
Advance to subsidiaries. 10,815,000 (10,815,000)(b)
Other assets, net....... 3,287,000 26,188,000 226,000 29,701,000
------------ ----------- ---------- ------------ ------------
$ 50,778,000 $66,604,000 $8,473,000 $(48,297,000) $ 77,558,000
============ =========== ========== ============ ============
Current liabilities..... $ 326,000 $12,321,000 $2,188,000 $ 14,835,000
Payable to parent....... 7,316,000 3,499,000 $(10,815,000)(b)
Long-term obligations... 77,341,000 10,997,000 88,338,000
Minority interests...... 1,274,000 (a) 1,274,000
Mandatorily redeemable
common stock........... 3,990,000 3,990,000
Stockholders' equity
(deficit).............. (30,879,000) 35,970,000 2,786,000 (38,756,000)(a) (30,879,000)
------------ ----------- ---------- ------------ ------------
$ 50,778,000 $66,604,000 $8,473,000 $(48,297,000) $ 77,558,000
============ =========== ========== ============ ============
</TABLE>
F-22
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-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 3,096,000 132,000 57,048,000
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
============ ============ =========== ============= ============
<CAPTION>
JUNE 30, 1996 (UNAUDITED)
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
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 5,570,00 $(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>
F-23
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1993
-----------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
Net operating revenues.. $ -- $39,604,000 $31,972,000 $71,576,000
Operating expenses...... 33,791,000 26,425,000 60,216,000
----- ----------- ----------- -----------
Operating income..... -- 5,813,000 5,547,000 11,360,000
Interest expense........ 9,000 9,000
Income taxes............ 2,141,000 1,988,000 4,129,000
Equity in earnings of
subsidiaries........... 2,775,000 $(2,775,000)(a)
Minority interests...... (775,000)(b) 775,000
----- ----------- ----------- ----------- -----------
Net income........... $ -- $ 6,447,000 $ 3,550,000 $(3,550,000) $ 6,447,000
===== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1994
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
Net operating revenues.. $43,707,000 $36,763,000 $80,470,000
Operating expenses...... 39,850,000 29,737,000 69,587,000
----------- ----------- -----------
Operating income..... 3,857,000 7,026,000 10,883,000
Interest expense........ 13,000 13,000
Income taxes............ 1,632,000 2,474,000 4,106,000
Equity in earnings of
subsidiaries........... $5,718,000 3,493,000 $ (9,211,000)(a)
Minority interests...... (1,046,000)(b) 1,046,000
---------- ----------- ----------- ------------ -----------
Net income........... $5,718,000 $ 5,718,000 $ 4,539,000 $(10,257,000) $ 5,718,000
========== =========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1995
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
Net operating revenues.. $ 453,000 $76,894,000 $21,621,000 $98,968,000
Operating expenses...... (2,270,000) 67,537,000 16,542,000 81,809,000
----------- ----------- ----------- -----------
Operating income..... 2,723,000 9,357,000 5,079,000 17,159,000
Interest expense........ 6,947,000 255,000 1,000 7,203,000
Income taxes............ (1,687,000) 3,740,000 1,458,000 3,511,000
Equity in earnings of
subsidiaries........... 7,389,000 2,027,000 $ (9,416,000)(a)
Minority interests...... (1,593,000)(b) 1,593,000
----------- ----------- ----------- ------------ -----------
Net income........... $ 4,852,000 $ 7,389,000 $ 3,620,000 $(11,009,000) $ 4,852,000
=========== =========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED DECEMBER 31, 1995
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
Net operating revenues.. $ 612,000 $67,815,000 $21,284,000 $89,711,000
Operating expenses...... (2,823,000) 58,313,000 15,755,000 71,245,000
----------- ----------- ----------- -----------
Operating income..... 3,435,000 9,502,000 5,529,000 18,466,000
Interest expense........ 4,623,000 992,000 (31,000) 5,584,000
Income taxes............ (475,000) 3,532,000 1,574,000 4,631,000
Equity in earnings of
subsidiaries........... 7,180,000 2,202,000 $ (9,382,000)(a)
Minority interests...... (1,784,000)(b) 1,784,000
----------- ----------- ----------- ------------ -----------
Income before
extraordinary item..... 6,467,000 7,180,000 3,986,000 (11,166,000) 6,467,000
Extraordinary item...... 2,555,000 2,555,000
----------- ----------- ----------- ------------ -----------
Net income........... $ 3,912,000 $ 7,180,000 $ 3,986,000 $(11,166,000) $ 3,912,000
=========== =========== =========== ============ ===========
</TABLE>
F-24
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Table continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
-----------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-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
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-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
=========== =========== =========== ============ ============
</TABLE>
F-25
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1993
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES
Net income............ $ -- $ 6,447,000 $ 3,550,000 $(3,550,000)(a) $ 6,447,000
Adjustments to net
income:
Depreciation and
amortization........ 1,813,000 1,621,000 3,434,000
Provision for
doubtful accounts... 1,310,000 740,000 2,050,000
Equity in earnings of
subsidiaries........ (2,775,000) 2,775,000 (a)
Other items.......... (3,770,000) (866,000) 775,000 (a) (4,328,000)
(467,000)(b)
------ ----------- ----------- ----------- -----------
Net cash provided by
operating
activities......... -- 3,025,000 5,045,000 (467,000) 7,603,000
------ ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchases of property
and equipment........ (3,213,000) (927,000) (4,140,000)
Other items........... 5,000 541,000 546,000
------ ----------- ----------- ----------- -----------
Net cash used in
investing
activities......... -- (3,208,000) (386,000) -- (3,594,000)
------ ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Advances to Tenet..... (4,330,000) (4,330,000)
Advances to parent.... (4,048,000) 4,048,000 (c)
Payable to
subsidiaries......... 4,048,000 (4,048,000)(c)
Other items........... (649,000) (649,000)
------ ----------- ----------- ----------- -----------
Net cash used in
financing
activities......... -- (282,000) (4,697,000) -- (4,979,000)
------ ----------- ----------- ----------- -----------
Net decrease in cash... (465,000) (38,000) (467,000) (970,000)
Cash at beginning of
year.................. 465,000 718,000 1,183,000
------ ----------- ----------- ----------- -----------
Cash at end of year.... $ -- $ -- $ 680,000 $ (467,000)(b) $ 213,000
====== =========== =========== =========== ===========
</TABLE>
F-26
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Table continued from previous page)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1994
-------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES
Net income............ $ 5,718,000 $ 5,718,000 $ 4,539,000 $(10,257,000)(a) $ 5,718,000
Adjustments to net
income:
Depreciation and
amortization........ 2,076,000 1,676,000 3,752,000
Provision for
doubtful accounts... 1,302,000 248,000 1,550,000
Equity in earnings of
subsidiaries........ (5,718,000) (3,493,000) 9,211,000 (a)
Other items.......... (1,534,000) 1,413,000 1,046,000 (a) 1,042,000
467,000 (b)
(350,000)(b)
----------- ----------- ----------- ------------ -----------
Net cash provided by
operating
activities......... -- 4,069,000 7,876,000 117,000 12,062,000
----------- ----------- ----------- ------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchases of property
and equipment........ (2,877,000) (1,503,000) (4,380,000)
Other items........... (114,000) 130,000 16,000
----------- ----------- ----------- ------------ -----------
Net cash used in
investing
activities......... -- (2,991,000) (1,373,000) -- (4,364,000)
----------- ----------- ----------- ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Advances to Tenet..... (5,604,000) (5,604,000)
Advances to parent.... (4,526,000) 4,526,000 (c)
Advances from
subsidiaries......... 4,526,000 (4,526,000)(c)
Other items........... (858,000) (858,000)
----------- ----------- ----------- ------------ -----------
Net cash used in
financing
activities......... -- (1,078,000) (5,384,000) -- (6,462,000)
----------- ----------- ----------- ------------ -----------
Net increase in cash... 1,119,000 117,000 1,236,000
Cash at beginning of
year.................. 680,000 (467,000)(b) 213,000
----------- ----------- ----------- ------------ -----------
Cash at end of year.... $ -- $ -- $ 1,799,000 $ (350,000)(b) $ 1,449,000
=========== =========== =========== ============ ===========
</TABLE>
F-27
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Table continued from previous page)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1995
-------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES
Net income............ $ 4,852,000 $ 7,389,000 $ 3,620,000 $(11,009,000) $ 4,852,000
Adjustments to net
income:
Depreciation and
amortization........ 289,000 3,517,000 934,000 4,740,000
Provision for
doubtful accounts... 2,089,000 282,000 2,371,000
Equity in earnings of
subsidiaries........ (7,389,000) (2,027,000) 9,416,000 (a)
Noncash interest..... 6,947,000 6,947,000
Other items.......... (57,000) (3,221,000) (2,156,000) 1,593,000 (3,841,000)
------------ ------------ ----------- ------------ ------------
Net cash provided by
operating
activities......... 4,642,000 7,747,000 2,680,000 -- 15,069,000
------------ ------------ ----------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchases of property
and equipment........ (337,000) (3,109,000) (389,000) (3,835,000)
Cash paid for
acquisitions......... (22,476,000) (22,476,000)
Other items........... (7,000) (292,000) 3,000 (296,000)
------------ ------------ ----------- ------------ ------------
Net cash used in
investing
activities......... (344,000) (25,877,000) (386,000) -- (26,607,000)
------------ ------------ ----------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Advances from Tenet... 2,874,000 2,874,000
Intercompany advances. (6,379,000) 2,880,000 3,499,000
Net proceeds from debt
offering............. 66,841,000 66,841,000
Net proceeds from bank
credit facility...... 9,253,000 9,253,000
Net proceeds from
issuance of common
stock................ 10,742,000 10,742,000
Cash dividends to
Tenet................ (75,500,000) (75,500,000)
Non-guarantor
distributions........ 4,359,000 (6,067,000) (1,708,000)
Principal payments on
long-term
obligations.......... (351,000) (16,000) (367,000)
------------ ------------ ----------- ------------ ------------
Net cash (used in)
provided by
financing
activities......... (4,296,000) 19,015,000 (2,584,000) -- 12,135,000
------------ ------------ ----------- ------------ ------------
Net increase (decrease)
in cash............... 2,000 885,000 (290,000) 597,000
Cash at beginning of
year.................. (312,000) 1,761,000 1,449,000
------------ ------------ ----------- ------------ ------------
Cash at end of year.... $ 2,000 $ 573,000 $ 1,471,000 $ -- $ 2,046,000
============ ============ =========== ============ ============
</TABLE>
F-28
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Table continued from previous page)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED DECEMBER 31, 1995
----------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
(USED IN) OPERATING
ACTIVITIES
Net income............ $ 3,912,000 $ 7,180,000 $3,986,000 $(11,166,000) $ 3,912,000
Adjustments to net
income:
Depreciation and
amortization........ 236,000 3,653,000 494,000 4,383,000
Extraordinary item... 4,258,000 4,258,000
Provision for
doubtful accounts... 1,301,000 510,000 1,811,000
Equity in earnings of
subsidiaries........ (7,180,000) (2,202,000) 9,382,000
Noncash interest..... 5,228,000 5,228,000
Other items.......... (125,000) (13,568,000) (1,406,000) 1,784,000 (13,315,000)
----------- ----------- ---------- ------------ -----------
Net cash provided by
(used in) operating
activities......... 6,329,000 (3,636,000) 3,584,000 -- 6,277,000
----------- ----------- ---------- ------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of property
and equipment........ (366,000) (1,811,000) (1,571,000) (3,748,000)
Cash paid for
acquisitions......... (28,303,000) (28,303,000)
Issuance of long-term
note receivable...... (1,379,000) (1,379,000)
Investment in
affiliate............ (972,000) (972,000)
Other items........... (76,000) (852,000) 200,000 (728,000)
----------- ----------- ---------- ------------ -----------
Net cash used in
investing
activities......... (1,821,000) (31,938,000) (1,371,000) -- (35,130,000)
----------- ----------- ---------- ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Intercompany advances. (43,390,000) 42,346,000 1,044,000
Cash paid to retire
debt................. (31,912,000) (31,912,000)
Payment of bank credit
facility, net........ (10,284,000) (10,284,000)
Net proceeds from
issuance of common
stock................ 98,941,000 98,941,000
Income tax benefit
related to stock
options exercised.... 1,792,000 1,792,000
Distributions to
minority interest.... 2,100,000 (3,202,000) (1,102,000)
Cash received on notes
receivable from
shareholders......... 175,000 175,000
Other items........... (843,000) 221,000 (622,000)
----------- ----------- ---------- ------------ -----------
Net cash provided by
(used in) financing
activities......... 25,606,000 33,319,000 (1,937,000) -- 56,988,000
----------- ----------- ---------- ------------ -----------
Net increase (decrease)
in cash............... 30,114,000 (2,255,000) 276,000 28,135,000
Cash at beginning of
year.................. 2,000 573,000 1,471,000 2,046,000
----------- ----------- ---------- ------------ -----------
Cash at end of year.... $30,116,000 $(1,682,000) $1,747,000 $ -- $30,181,000
=========== =========== ========== ============ ===========
</TABLE>
F-29
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Table continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-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 in
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
=========== ============ =========== =========== ============
</TABLE>
F-30
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Table continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
--------------------------------------------------------------------------
TOTAL
RENAL CARE GUARANTOR NON-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 in
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>
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 sheet
include the following:
(a) Elimination of investments in subsidiaries and recording of minority
interest
(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
(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 earnings of subsidiaries and recognition of
minority interests in income of consolidated subsidiaries
(b) Reclassification of bank overdrafts
(c) Elimination of intercompany accounts
F-31
<PAGE>
17. SUBSEQUENT EVENTS (UNAUDITED)
A. 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
two centers located in South Carolina for each 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 period January 1, 1996 through June 30, 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 and
contributed those assets during the formation of three unrelated general
partnerships. Aggregate goodwill associated with these transactions was
$7.3 million.
The Company entered into two management agreements with two additional
unaffiliated centers, one in each of the quarters ended June 30, 1996 and
March 31, 1996, respectively.
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>
1995 1996
----------- ------------
<S> <C> <C>
Pro forma net operating revenues................ $75,630,000 $127,800,000
=========== ============
Pro forma net income............................ $ 2,355,000 $ 9,755,000
=========== ============
Pro forma earnings per share.................... $ 0.14 $ 0.39
=========== ============
</TABLE>
B. On April 3, 1996, the Company completed an equity offering of 8,050,000
shares of common stock, 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 were used
to repay borrowings incurred under the Company's senior credit facility in
connection with the Caremark Acquisition or were invested in short-term,
investment grade instruments to be used for future acquisitions, de novo
developments, routine capital expenditures, and other general corporate
purposes.
C. Effective October 17, 1996, the Company refinanced its prior bank credit
facility with the senior credit facility which permits borrowings of up to
$400,000,000 (the "Senior Credit Facility"). Under the Senior Credit
Facility, up to $50,000,000 may be used in connection with letters of
credit, and up to $15,000,000 in short-term funds may be borrowed the same
day notice is given to the banks under a "Swing Line" facility. In general,
borrowings under the Senior Credit Facility bear interest at one of two
floating rates selected by the Company: (i) the Alternate Base Rate
(defined as the higher of The Bank of New York's prime rate or the federal
funds rate plus 0.5%); and (ii) Adjusted LIBOR (defined as the 30-, 60-,
90- or 180-day London Interbank Offered Rate, adjusted for statutory
reserves) plus a margin that ranges from 0.45% to 1.25% depending on the
Company's leverage ratio. Swing Line borrowings bear interest at either a
rate negotiated by the Company and the banks at the time of borrowing or,
if no rate is negotiated and agreed, the Alternate Base Rate. Maximum
borrowings under the Senior Credit Facility will be reduced by
F-32
<PAGE>
$50,000,000 on September 30, 2000, $75,000,000 on September 30, 2001, and
another $75,000,000 on September 30, 2002, and the Senior Credit Facility
terminates on September 30, 2003. The Senior Credit Facility contains
financial and operating covenants including, among other things,
requirements that the Company maintain certain financial ratios and satisfy
certain financial tests, and imposes limitations on the Company's ability
to make capital expenditures, to incur other indebtedness and to pay
dividends. As of the date hereof, the Company is in compliance with all
such covenants.
D. In July and September 1996, the Company irrevocably purchased and
subsequently retired its remaining outstanding Discount Notes for $68.4
million. Including the writedown of related bond issuance costs of $1.9
million, the Company will recognize an extraordinary loss, net of taxes, of
approximately $7.7 million, in the quarter ending September 30, 1996.
E. Subsequent to June 30, 1996, the Company completed acquisitions of eleven
facilities for consideration of $46.8 million, of which $45.0 million was
paid in cash and the remainder in the issuance of common stock.
F-33
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Recent Facility Network Expansion......................................... 12
Use of Proceeds........................................................... 14
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Selected Financial and Operating Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 27
Management................................................................ 46
Principal and Selling Stockholders........................................ 48
Certain Relationships and Related Transactions............................ 51
Description of Capital Stock.............................................. 53
Underwriting.............................................................. 54
Legal Matters............................................................. 55
Experts................................................................... 55
Available Information..................................................... 56
Documents Incorporated by Reference....................................... 57
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO OF TOTAL RENAL CARE HOLDINGS, INC.]
TOTAL RENAL CARE
HOLDINGS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
UBS SECURITIES
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses to be paid by the
Registrant in connection with the issuance and distribution of the securities
being registered.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 47,307
NASD filing fee................................................. 16,112
NYSE listing fee................................................ 25,000
Printing and engraving.......................................... 175,000
Legal fees...................................................... 150,000
Accountants' fees............................................... 75,000
Transfer Agent's fee............................................ 5,000
Blue Sky qualification fees and expenses........................ 5,000
Miscellaneous................................................... 1,581
--------
Total......................................................... $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware Corporation Law provides that a Delaware
corporation may indemnify any person against expenses, judgments, fines and
settlements actually and reasonably incurred by any such person in connection
with a threatened, pending or completed action, suit or proceeding in which he
is involved by reason of the fact that he is or was director, officer,
employee or agent of such corporation, provided that (i) he acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation and (ii) with respect to any criminal action or
proceeding, he had no reasonable cause to believe his conduct was unlawful. If
the action or suit is by or in the name of the corporation, the corporation
may indemnify any such person against expense actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no
indemnification may be made in respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation for
negligence or misconduct in the performance of his duty to the corporation,
unless and only to the extent that the Delaware Court of Chancery or the court
in which the action or suit is brought determines upon application that,
despite the adjudication of liability but in view of all of the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expense as the court deems proper.
Article XI, Section 1 of the Company's By-Laws provides for indemnification
of its directors and officers to the fullest extent permitted by the Delaware
Corporation Law. In accordance with the Delaware Corporation Law, the
Company's Certificate of Incorporation, as amended, limits the personal
liability of its directors for violations of their fiduciary duty. The
Certificate of Incorporation eliminates each director's liability to the
Company or its stockholders for monetary damages except (i) for any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under the section of the Delaware law
providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions, or (iv) for any transaction from
which a director derived any improper personal benefit. The effect of this
provision is to eliminate the personal liability of directors for monetary
damages for actions involving a breach of their fiduciary duty of care,
including any such actions involving gross negligence. This provision will
not, however, limit in any way the liability of directors for violations of
the Federal securities laws. The Company has entered into indemnification
agreements with each of its directors and officers to indemnify them to the
maximum extent permitted by Delaware law.
II-1
<PAGE>
The form of Underwriting Agreement, filed as Exhibit 1 hereto, provides for
the indemnification of the Company, its control persons, its directors and
certain of its officers by the Underwriters against certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
1 Form of Underwriting Agreement.
5 Opinion of Riordan & McKinzie, a Professional Corporation.
11 Computation of Per Share Earnings.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of Meeks, Roberts, Ashley, Sumner & Sirmans.
23.4 Consent of Riordan & McKinzie (included in Exhibit 5).
24 Powers of Attorney with respect to the Company (included on page
II-3).
27 Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules.
See Index to Financial Statement Schedules (page S-1).
All other schedules have been omitted because the information is not
applicable or is not material or because the information required is set forth
in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(2) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue;
(3) That for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(4) That for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Torrance, State of California on the 18th day of
October 1996.
TOTAL RENAL CARE HOLDINGS, INC.
/s/ Victor M.G. Chaltiel
By___________________________________
Victor M.G. Chaltiel
Chairman of the Board, Chief
Executive Officer, President and
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Victor M.G. Chaltiel, Barry C. Cosgrove and
John E. King, and each of them his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, including any post-effective
amendments as well as any related registration statement (or amendment
thereto) filed in reliance upon Rule 462(b) under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Victor M.G. Chaltiel Chairman of the Board, Chief October 18, 1996
____________________________________ Executive Officer, President
Victor M.G. Chaltiel and Director (Principal
Executive Officer)
/s/ John E. King Vice President and Chief October 18, 1996
____________________________________ Financial Officer (Principal
John E. King Financial Officer and
Principal Accounting
Officer)
/s/ Maris Andersons Director October 18, 1996
____________________________________
Maris Andersons
/s/ Peter T. Grauer Director October 18, 1996
____________________________________
Peter T. Grauer
/s/ Marsha Plotnitsky Director October 18, 1996
____________________________________
Marsha Plotnitsky
/s/ David B. Wilson Director October 18, 1996
____________________________________
David B. Wilson
</TABLE>
II-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Total Renal Care Holdings, Inc.:
Under the date of July 8, 1994, we reported on the consolidated balance
sheet of Total Renal Care Holdings, Inc. (formerly Total Renal Care, Inc.) and
subsidiaries as of May 31, 1994 and the related consolidated statements of
income, stockholders' equity (deficit), and cash flows for each of the years
in the two-year period ended May 31, 1994, which are included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule for each of the years in the two-year period ended May 31, 1994,
included herein. The consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statement schedule based on our
audits.
In our opinion, such consolidated financial statement schedule when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
Our report refers to a change in the method of accounting for income taxes
by adopting Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, effective June 1, 1993.
KPMG Peat Marwick llp
Seattle, Washington
July 8, 1994
S-1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
--------------------- ----------
BALANCES
BALANCE AT AMOUNTS OF AMOUNTS BALANCE AT
BEGINNING CHARGED TO COMPANIES WRITTEN END
DESCRIPTION OF YEAR INCOME ACQUIRED OFF OF YEAR
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended May 31, 1993. $2,112,000 $2,050,000 $1,810,000 $2,352,000
Year ended May 31, 1994. 2,352,000 1,550,000 1,975,000 1,927,000
Year ended May 31, 1995. 1,927,000 2,371,000 $1,203,000 1,067,000 4,434,000
Seven months ended
December 31, 1995...... 4,434,000 1,811,000 541,000 1,118,000 5,668,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1 Form of Underwriting Agreement.
5 Opinion of Riordan & McKinzie, a Professional Corporation.
11 Computation of Per Share Earnings.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of Meeks, Roberts, Ashley, Sumner & Sirmans.
23.4 Consent of Riordan & McKinzie (included in Exhibit 5).
24 Powers of Attorney with respect to the Company (included on page
II-3).
27 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 1
3,000,000 Shares
TOTAL RENAL CARE HOLDINGS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
__________, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
UBS SECURITIES LLC
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Total Renal Care Holdings, Inc., a Delaware corporation (the
"Company"), and the stockholders of the Company named in Schedule II hereto
(collectively, the "Selling Stockholders"), severally propose to sell an
aggregate of 3,000,000 shares of Common Stock, par value $0.001 per share, of
the Company (the "Firm Shares"), to the several underwriters named in Schedule I
hereto (the "Underwriters"). The Firm Shares consist of 500,000 shares to be
issued and sold by the Company and 2,500,000 outstanding shares to be sold by
the Selling Stockholders.
Certain of the Selling Stockholders (as indicated in Schedule II
hereto) also propose to sell to the Underwriters not more than 450,000
additional shares of Common stock, par value $0.001 per share, of the Company
(the "Additional Shares"), if requested by the Underwriters as provided in
Section 2 hereof. The Firm Shares and the Additional Shares are herein
collectively referred to
<PAGE>
as the "Shares." The shares of common stock of the Company to be outstanding
after giving effect to the sales contemplated hereby are hereinafter referred to
as the "Common Stock." The Company and the Selling Stockholders are hereinafter
collectively called the "Sellers."
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
-------------------------------------
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"Act"), a registration statement on Form S-3 (File no. 333- ) including a
prospectus relating to the Shares, which may be amended. The registration
statement as amended at the time when it becomes effective, including a
registration statement (if any) filed pursuant to Rule 462(b) under the Act
increasing the size of the offering registered under the Act and information (if
any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Act, is hereinafter
referred to as the "Registration Statement"; and the prospectus (including any
prospectus subject to completion meeting the requirements of Rule 434(b), under
the Act provided by the Company with any term sheet meeting the requirements of
Rule 434(b) as the prospectus provided to meet the requirements of Section 10(a)
of the Act) in the form first used to confirm sales of Shares is hereinafter
referred to as the "Prospectus." As used herein, the terms Registration
Statement and Prospectus shall be deemed to include documents incorporated by
reference therein.
2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the
-------------------------------
representations and warranties contained in this Agreement, and subject to its
terms and conditions, (i) the Company agrees to issue and sell 500,000 Firm
Shares, (ii) each Selling Stockholder agrees, severally and not jointly, to sell
the number of Firm Shares set forth opposite such Selling Stockholder's name in
Schedule II hereto and (iii) each Underwriter agrees, severally and not jointly,
to purchase from each Seller at a price per share of $____ (the "Purchase
Price") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares, as you may determine) which bears the same proportion to the
total number of Firm
2
<PAGE>
Shares to be sold by such Seller as the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I hereto bears to the total number of
Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Selling Stockholders
indicated in Schedule II hereto agree to sell up to 450,000 Additional Shares at
the Purchase Price and (ii) the Underwriters shall have the right to purchase,
severally and not jointly, up to an aggregate of 450,000 Additional Shares from
the Selling Stockholders at the Purchase Price. Additional Shares may be
purchased solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. The Underwriters may exercise their right
to purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to the Selling Stockholders within 30 days after the date
of this Agreement. You shall give any such notice on behalf of the Underwriters
and such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof. The date specified in any such notice shall be a business day (i) no
earlier than the Closing Date (as hereinafter defined), (ii) no later than ten
business days after such notice has been given and (iii) no earlier than two
business days after such notice has been given. If any Additional Shares are to
be purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Selling Stockholders indicated in Schedule II hereto the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from such Selling Stockholders as the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto bears to the total number of Firm Shares set forth opposite the name of
such Selling Stockholder in Schedule II hereto.
The Sellers hereby agree, severally and not jointly, and the Company
shall, concurrently with the execution of this Agreement, deliver an agreement
executed by (i) each of the directors and officers of the Company and (ii) each
person listed on Annex I hereto, pursuant to which each such person agrees, not
to offer,
3
<PAGE>
sell, contract to sell, grant any option to purchase, or otherwise dispose of
any common stock of the Company or any securities convertible into or
exercisable or exchangeable for such common stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such common stock, except to the Underwriters pursuant to this
Agreement, for a period of 120 days (which, to the extent applicable, shall also
be the "lock-up" period for purposes of Section 5.3 of the Shareholders
Agreement (the "Shareholders Agreement") dated as of August 11, 1994, as amended
on June 30, 1994) after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period the Company may (i) grant stock options or
securities pursuant to equity incentive plans approved by the Company's Board of
Directors, (ii) issue options or stock as consideration in connection with
acquisitions provided that the transferee of such options or stock is bound by
the provisions of this sentence and (iii) issue shares of its common stock upon
the exercise of an option or warrant or the conversion of a security outstanding
on the date hereof or issued in accordance with clause (i) or (ii) above.
3. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that
------------------------
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
4. DELIVERY AND PAYMENT. Delivery to the Underwriters of and
--------------------
payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on
the third or fourth business day (the "Closing Date") unless otherwise permitted
by the Commission pursuant to Rule 15c6-1 under the Securities Exchange Act of
1934, as amended (the "Exchange Act") following the date of the initial public
offering, at the offices of Riordan & McKinzie, 300 South Grand Avenue, Los
Angeles, California. The Closing Date and the location of delivery of and the
form of payment for the Firm Shares may be varied by agreement between you and
the Sellers.
4
<PAGE>
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at such place as you shall
designate at 10:00 A.M., New York City time, on the date specified in the
applicable exercise notice given by you pursuant to Section 2 (an "Option
Closing Date"). Any such Option Closing Date and the location of delivery of
and the form of payment for such Additional Shares may be varied by agreement
between you and the Selling Stockholders indicated in Schedule II hereto.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection
not later than 9:30 A.M., New York City time, on the business day next preceding
the Closing Date or an Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or an Option Closing Date, as the case may be, with any transfer taxes
thereon duly paid by the respective Sellers, for the respective accounts of the
several Underwriters, against payment of the Purchase Price therefor by wire
transfer of federal or other immediately available funds to the respective
accounts of the Company and the Custodian (as hereafter defined) as shall be
specified in writing by the Company and the Custodian, as the case may be, no
later than the Business Day immediately preceding the Closing Date or Option
Closing Date, as the case may be.
5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
-------------------------
(a) To use its best efforts to cause the Registration Statement
to become effective at the earliest possible time.
(b) To advise you promptly and, if requested by you, to confirm
such advice in writing, (i) when the Registration Statement has become effective
and when any post-effective amendment to it becomes effective, (ii) of any
request by the Commission for amendments to the Registration Statement or
amendments or supplements to the Prospectus or for additional informa-
5
<PAGE>
tion, (iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, and (iv) of the happening of any
event during the period referred to in paragraph (e) below which makes any
statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires the making of any additions to or changes in
the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, the Company
will make every reasonable effort to obtain the withdrawal or lifting of such
order at the earliest possible time.
(c) To furnish to you, without charge, four signed copies of the
Registration Statement as first filed with the Commission and of each amendment
to it, including all exhibits and documents incorporated by reference, and to
furnish to you and each Underwriter designated by you such number of conformed
copies of the Registration Statement as so filed and of each amendment to it,
without exhibits, as you may reasonably request. The terms "supplement" and
"amendment" or "amend" as used in this Agreement shall include all documents
subsequently filed by the Company with the Commission pursuant to the Exchange
Act that are deemed to be incorporated by reference in the Prospectus.
(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or to
make any amendment or supplement to the Prospectus (including the issuance or
filing of any term sheet within the meaning of Rule 434) of which you shall not
previously have been advised or to which you shall reasonably object; and to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or supplement to the Prospectus
(including the issuance or filing of any term sheet within the meaning of Rule
434) which may be necessary or advisable in connection with the distribution of
the Shares by you, and to use its best efforts to cause the same to become
promptly effective.
6
<PAGE>
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period as in the opinion of counsel for
the Underwriters a prospectus is required by law to be delivered in connection
with sales by an Underwriter or a dealer, to furnish to each Underwriter and
dealer as many copies of the Prospectus (and of any amendment or supplement to
the Prospectus) as such Underwriter or dealer may reasonably request.
(f) If during the period specified in paragraph (e) any event shall
occur as a result of which, in the opinion of counsel for the Underwriters it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with any law, forthwith to prepare and file
with the Commission an appropriate amendment or supplement to the Prospectus so
that the statements in the Prospectus, as so amended or supplemented, will not
in the light of the circumstances when it is so delivered, be misleading, or so
that the Prospectus will comply with law, and to furnish to each Underwriter and
to such dealers as you shall specify, such number of copies thereof as such
Underwriter or dealers may reasonably request.
(g) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such qualification in effect so long as required
for distribution of the Shares and to file such consents to service of process
or other documents as may be necessary in order to effect such registration or
qualification; provided, however, that the Company shall not be obligated to
-------- -------
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not already subject generally to
service of process or so qualified.
(h) To mail and make generally available to its stockholders as soon
as reasonably practicable an earnings statement covering a period of at least
twelve
7
<PAGE>
months after the effective date of the Registration Statement (but in no event
commencing later than 90 days after such date) which shall satisfy the
provisions of Section 11(a) of the Act, and to advise you in writing when such
statement has been so made available.
(i) During the period of five years after the date of this Agreement,
(i) to mail as soon as reasonably practicable after the end of each fiscal year
to the record holders of its Common Stock a financial report of the Company and
its subsidiaries on a consolidated basis (and a similar financial report of all
unconsolidated subsidiaries, if any), all such financial reports to include a
consolidated balance sheet, a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated statement of
shareholders' equity as of the end of and for such fiscal year, together with
comparable information as of the end of and for the preceding year, certified by
independent certified public accountants, and (ii) to mail and make generally
available as soon as practicable after the end of each quarterly period (except
for the last quarterly period of each fiscal year) to such holders, a
consolidated balance sheet, a consolidated statement of operations and a
consolidated statement of cash flows (and similar financial reports of all
unconsolidated subsidiaries, if any) as of the end of and for such period, and
for the period from the beginning of such year to the close of such quarterly
period, together with comparable information for the corresponding periods of
the preceding year.
(j) During the period referred to in paragraph (i), to furnish to you
as soon as available a copy of each report or other publicly available
information of the Company mailed to the holders of Common Stock or filed with
the Commission and such other publicly available information concerning the
Company and its subsidiaries as you may reasonably request.
(k) To pay all costs, expenses, fees and taxes incident to (i) the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including financial statements and exhibits), each preliminary
prospectus and all amendments and supplements to any of them prior to or during
the period specified in paragraph (e), (ii) the printing and delivery of the
8
<PAGE>
Prospectus and all amendments or supplements to it during the period specified
in paragraph (e), (iii) the printing and delivery of this Agreement, the
Preliminary and Supplemental Blue Sky Memoranda and all other agreements,
memoranda, correspondence and other documents printed and delivered to third
parties in connection with the offering of the Shares (including in each case
any reasonable disbursements of counsel for the Underwriters relating to such
printing and delivery), (iv) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states
(including in each case the reasonable fees and disbursements of counsel for the
Underwriters relating to such registration or qualification and memoranda
relating thereto), (v) filings and clearance with the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the offering, (vi) the
listing of the Shares on the Nasdaq Stock Market ("Nasdaq") National Market
System, (vii) furnishing such copies of the Registration Statement, the
Prospectus and all amendments and supplements thereto as may be requested for
use in connection with the offering or sale of the Shares by the Underwriters or
by dealers to whom Shares may be sold, (viii) any "qualified independent
underwriters" pursuant to Schedule E of the Bylaws of the NASD (including the
fees and disbursements of counsel to such qualified independent underwriters)
and (ix) the performance by the Sellers of their other obligations under this
Agreement.
(l) To use its best efforts to maintain the listing of the Common
Stock on the New York Stock Exchange (or on another national securities exchange
or included in the Nasdaq National Market) for a period of five years after the
effective date of the Registration Statement.
(m) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
---------------------------------------------
represents and warrants to each Underwriter that:
9
<PAGE>
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or will
comply when so filed in all material respects with the Exchange Act and the
applicable rules and regulations of the Commission thereunder, (ii) each part of
the Registration Statement, when such part became effective, did not contain and
each such part, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(iii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act
and (iv) the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph (b) do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Any term sheet and prospectus subject to completion provided by
the Company to the Underwriters for use in connection with the offering and
sale of the Shares pursuant to Rule 434 under the Act together are not
materially different from the prospectus included in the Registration Statement
(exclusive of any information deemed a part thereof pursuant to Rule 434(d)).
(d) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, and each registration statement filed
pursuant to Rule 462(b) under the Act, if any, complied when so filed in all
material respects with the
10
<PAGE>
Act; and did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(e) Each of the Company and its subsidiaries as defined in Rule 405 of
Regulation C under the Act (each a "Subsidiary") has been duly incorporated or
formed, is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation or as a partnership duly formed and has the
corporate or partnership power and authority, as the case may be, to carry on
its business as it is currently being conducted and to own, lease and operate
its properties as described in the Registration Statement and Prospectus, and
each corporate Subsidiary is duly qualified and is in good standing as a foreign
corporation and each Subsidiary is authorized to do business in each
jurisdiction in which the nature of its business or its ownership or leasing of
property requires such qualification or authorization, except here the failure
to be so qualified and be in good standing could not, in the aggregate,
reasonably be expected to have a material adverse effect on the business,
operations, properties, or financial or other condition of the Company and its
Subsidiaries, considered as a whole.
(f) Except as disclosed in the Prospectus, (i) all of the outstanding
shares of capital stock of each the Company's corporate Subsidiaries have been
duly authorized and validly issued and are fully paid and non-assessable and, in
the case of Total Renal Care, Inc., a California corporation ("TRC"), are wholly
owned by the Company or are otherwise owned directly indirectly by the Company,
free and clear of any security interest, claim, lien, encumbrance or adverse
interest of any nature ("Liens") and (ii) all of the outstanding partnership
interests in each of the Company's partnership Subsidiaries have been duly
authorized by its respective partnership agreement and validly issued and the
partnership interests in such partnerships that are not owned by unaffiliated
third parties are owned directly or indirectly by the Company, free and clear of
any Liens, and any partnership capital contribution obligations of the Company
in each partnership Subsidiary have been satisfied.
11
<PAGE>
(g) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company hereunder have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(h) The authorized capital stock of the Company, including the Common
Stock, conforms as to legal matters to the description thereof contained in the
Prospectus.
(i) Neither the Company nor any of its Subsidiaries is in violation of
its respective charter, by-laws or partnership agreement, as the case may be, or
in default in any material respect, and no condition exists that with notice or
lapse of time or both would constitute a material default in the performance of
any material obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any other material
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party or by which it or any of is Subsidiaries or their
respective property is bound except to the extent such violation or default, if
any, could not reasonably be expected to have a material adverse effect on the
business, operations, properties or financial or other condition of the Company
and its Subsidiaries, considered as a whole.
(j) The execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the consummation of
the transactions contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body (except as such may be required under the
securities or Blue Sky laws of the various states) and will not conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
agreement, indenture or other instrument to
12
<PAGE>
which it or any of its subsidiaries is party or by which it or any of its
subsidiaries or their respective property is bound, or violate or conflict with
any laws, administrative regulations or rulings or court decrees applicable to
the Company, any of its subsidiaries or their respective property.
(k) Except as otherwise set forth in the Prospectus, there are no
material legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any of their respective property is
the subject, and, to the best of the Company's knowledge, no such proceedings
are threatened or contemplated. No contract or document of a character required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement is not so described or filed as
required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection
of human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), nor any federal or
state law relating to discrimination in the hiring, promotion or pay of
employees nor any applicable federal or state wages and hours laws, nor any
provisions of the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder, which in each case might result in any
material adverse change in the business, prospects, financial condition or
results of operation of the Company and its subsidiaries, taken as a whole.
(m) The Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease and operate its respective
properties and to conduct its business; the Company and each of its subsidiaries
has fulfilled and performed all of its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such permit; and, except as
described in
13
<PAGE>
the Prospectus, such permits contain no restrictions that are materially
burdensome to the Company or any of its subsidiaries.
(n) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company and its subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(o) Except as otherwise set forth in the prospectus or such as are not
material to the business, prospectus, financial condition or results of
operation of the Company and its Subsidiaries, taken as a whole, the Company
and each of its Subsidiaries has good and marketable title, free and clear of
all Liens, claims, encumbrances and restrictions except Liens for taxes not yet
due and payable, to all property and assets described in the Registration
Statement as being owned by it. All leases to which the Company or any of its
subsidiaries is a party are valid and binding and no default has occurred or is
continuing thereunder, which might result in any material adverse change in the
business, prospects, financial condition or results of operation of the Company
and its Subsidiaries taken as a whole, and the Company and its Subsidiaries
enjoy a peaceful and undisturbed possession under all such leases to which any
of them is a party as lessee with such exceptions as do not materially interfere
with the use made by the Company or such Subsidiary.
(p) The Company and each of its Subsidiaries maintains reasonably
adequate insurance.
(q) Price Waterhouse LLP is, and during the fiscal years ending May
31, 1994 and 1993, KPMG Peat
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Marwick, LLP was, an independent public accountant with respect to the Company
as required by the Act.
(r) The financial statements, together with related schedules and
notes forming part of the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial and
statistical information and data set forth in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) is, in all material
respects, accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
(s) The Company and each of its Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own, lease and operate its
respective properties and to conduct its business in the manner described in the
Prospectus, subject to such qualifications as may be set forth in the
Prospectus; the Company and each of its Subsidiaries has fulfilled and performed
all of its material obligations with respect to such permits and no event has
occurred which allows, or after notice or lapse of time would allow, revocation
or termination thereof or results in any other material impairment of the rights
of the holder of any such permit, subject in each case to such qualification as
may be set forth in the Prospectus; and, except as described in the Prospectus,
such permits contain no restrictions that are materially burdensome to the
Company or any of its Subsidiaries.
(t) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
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(u) Except as disclosed in the Prospectus or the Shareholders
Agreement, no holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company and
with respect to the offer of the Shares all such rights have been satisfied or
waived.
(v) The Company has filed a registration statement pursuant to Section
12(b) of the Exchange Act to register the Common Stock, has filed an application
to list the Shares on the New York Stock Exchange and has received notification
that the listing has been approved subject to notice of issuance of the Shares.
(w) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
7. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
----------------------------------------------------------
Selling Stockholder severally represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date (and any Option Closing Date, if applicable) will have, good and
clear title to such Shares, free of all restrictions on transfer, Liens,
encumbrances, security interests and claims whatsoever.
(b) Upon delivery of and payment for such Shares pursuant to this
Agreement, good and clear title to such Shares will pass to the Underwriters,
free of all restrictions on transfer, Liens, encumbrances, security interests
and claims whatsoever.
(c) Such Selling Stockholder has, and on the Closing Date (and any
Option Closing Date, if applicable) will have, full legal right, power and
authority to enter into this Agreement and the Custody Agreement, if any,
between such Selling Stockholder and The Bank of New York, as Custodian (the
"Custody Agreement")and to sell, assign, transfer and deliver which Shares in
the manner provided herein and therein, and this Agreement and the Custody
Agreement, if any, have been duly authorized, executed and delivered by such
Selling Stockholder and each of this Agreement and the Custody Agreement is a
16
<PAGE>
valid and binding agreement such Selling Stockholder enforceable in accordance
with its terms, except as rights to indemnity and contribution hereunder may be
limited by applicable law.
(d) The power of attorney signed by such Selling Stockholder
appointing Leonard W. Frie, Barry C. Cosgrove and John E. King, or any one of
them, as his attorney-in-fact to the extent set forth therein with regard to the
transactions contemplated hereby and by the Registration Statement and the
Custody Agreement, if any, has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder and is a valid and binding instrument
of such Selling Stockholder enforceable in accordance with its terms, and,
pursuant to such power of attorney, such Selling Stockholder has authorized
Leonard W. Frie, Barry C. Cosgrove and John. E. King, or any one of them, to
execute and deliver on his behalf this Agreement and any other document
necessary or desirable in connection with transactions contemplated hereby and
to deliver the Shares to be sold by such Selling Stockholder pursuant to this
Agreement.
(e) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably be
expected to, cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares
pursuant to the distribution contemplated by this Agreement, and other than as
permitted by the Act, such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(f) The execution, delivery and performance of this Agreement by such
Selling Stockholder, compliance by such Selling Stockholder with all the
provisions thereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body (except
as such may be required under the Act, state securities laws or Blue Sky laws)
and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, organizational documents of such Selling
Stockholder, if not an individ-
17
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ual, or any agreement, indenture or other instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder or property of such
Selling Stockholder is bound, or violate or conflict with any laws,
administrative regulation or ruling or court decree applicable to such Selling
Stockholder or property of such Selling Stockholder.
(g) Such parts of the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relate to such Selling
Stockholder do not, and will not on the Closing Date (and any Option Closing
Date, if applicable), contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein in light of circumstances under which they were made, not
misleading.
(h) At any time during the period described in paragraph 5(e) hereof,
if there is any change in the information referred to in paragraph 7(g) above,
the Selling Stockholders will immediately notify you of such change.
8. INDEMNIFICATION. (a) The Company hereby agrees to indemnify and
---------------
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages, liabilities
and judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriters furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use therein.
(b) The Selling Shareholders hereby severally and not jointly agree to
indemnify and hold
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<PAGE>
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, liabilities and judgments
caused by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
-------- -------
such agreement of each Selling Stockholder to indemnify and hold harmless shall
be limited to losses, claims, damages, liabilities or judgments caused by any
untrue statement or omission or alleged untrue statement or omission based upon
information furnished in writing to the Company by or on behalf of such Selling
Stockholder expressly for use in the Registration Statement; provided, further,
-------- -------
that the aggregate liability of any Selling Stockholder pursuant to the
provisions of this paragraph shall be limited to an amount equal to the
aggregate purchase price received by such Selling Stockholder from the sale of
such Selling Stockholder's Shares hereunder.
(c) In case any action shall be brought against any Underwriter or any
person controlling such Underwriter, based upon any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
and with respect to which indemnity may be sought against the Company or the
Selling Stockholders, such Underwriter shall promptly notify the Company and the
Selling Stockholders in writing and the Company and/or the Selling Stockholders
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to such indemnified party and payment of all fees and expenses.
Any Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Underwriter or such controlling person unless (i) the employment of such counsel
shall have been specifically authorized in writing by the Company, (ii) the
Company and/or the Selling Stockholders shall have failed to assume the defense
and employ counsel or (iii) the named parties to any such
19
<PAGE>
action (including any impleaded parties) include both such Underwriter or such
controlling person and the Company or any Selling Stockholder, as the case may
be, and such Underwriter or such controlling person shall have been advised by
such counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the Company or the
Selling Stockholders, as the case may be (in which case the Company and the
Selling Stockholders shall not have the right to assume the defense of such
action on behalf of such Underwriter or such controlling person, it being
understood, however, that the Company and the Selling Stockholders shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all such
Underwriters and controlling persons, which firm shall be designated in writing
by Donaldson, Lufkin & Jenrette Securities Corporation and that all such fees
and expenses shall be reimbursed as they are incurred). A Seller shall not be
liable for any settlement of any such action effected without the written
consent of such Seller but if settled with the written consent of such Seller,
such Seller agrees to indemnify and hold harmless any Underwriter and any such
controlling person from and against any loss or liability by reason of such
settlement subject in the case of the Selling Stockholders to the limits set
forth in subsection (b) above. Notwithstanding the immediately preceding
sentence, if in any case where the fees and expenses of counsel are at the
expense of the indemnifying party and an indemnified party shall have requested
the indemnifying party to reimburse the indemnified party for such fees and
expenses of counsel as incurred, such indemnifying party agrees that it shall be
liable for any settlement of any action effected without a written consent if
(i) such settlement is entered into more than ten business days after the
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall have failed to reimburse the indemnified party in
accordance with such request for reimbursement prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have
20
<PAGE>
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
(d) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person controlling the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, controlling such Selling Stockholder within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the
same extent as the foregoing indemnity from the Sellers to each Underwriter but
only with reference to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus. In case
any action shall be brought against the Company, any of its directors, any such
officer or and person controlling the Company or any Selling Stockholder or any
person controlling such Selling Stockholder based on the Registration Statement,
the Prospectus or any preliminary prospectus and in respect of which indemnity
may be sought against any Underwriter, such Underwriter shall have the rights
and duties given to the Sellers (except that if any Seller shall have assumed
the defense thereof, such Underwriter shall not be required to do so, but may
employ separate counsel therein and participate in the defense thereof but the
fees and expenses of such counsel shall be at the expense of such Underwriter),
and the Company, its directors, any such officers and any person controlling the
Company and the Selling Stockholders and any person controlling such Selling
Stockholders shall have the rights and duties given to the Underwriter, by
Section 8(c) hereof.
(e) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion
21
<PAGE>
as is appropriate to reflect the relative benefits received by the Sellers on
the one hand and the Underwriters on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Sellers and the Underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or judgments, as
well as any other relevant equitable considerations. The relative benefits
received by the Sellers and the Underwriters shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Sellers, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Sellers and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(e) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, (a) no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount
22
<PAGE>
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission and (b) no Selling Stockholder shall be required to contribute any
amount in excess of the amount of the aggregate purchase price received by such
Selling Stockholder for the sale of such Selling Stockholder's Shares hereunder.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(e) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint. The Selling Stockholders' obligations to contribute pursuant to this
Section 8(e) are several in proportion to the respective number of such Selling
Stockholder's Shares sold hereunder.
(f) Each Seller hereby designates the Company as its authorized agent,
upon which process may be served in any action, suit or proceeding which may be
instituted in any state or federal court in the State of New York by any
Underwriter or person controlling an Underwriter asserting a claim for
indemnification or contribution under or pursuant to this Section 8, and each
Seller will accept the jurisdiction of such court in such action, and waives, to
the fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to such Seller, at the address for notices specified in Section 13 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations
---------------------------------------
of the Underwriters to purchase the Firm Shares under this Agreement are subject
to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective not later
than 5:00 P.M. (and in the case of any registration statement filed pursuant to
Rule 162(b) of the Act, not later than 10 P.M.), New York City
23
<PAGE>
time, on the date of this Agreement or at such later date and time as you may
approve in writing, and at the Closing Date no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c)(i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the earnings,
affairs or business prospects, whether or not arising in the ordinary course of
business, of the Company, (ii) since the date of the latest balance sheet
included in the Registration Statement and the Prospectus there shall not have
been any change, or any development involving a prospective material adverse
change, in the capital stock or in the long-term debt of the Company from that
set forth in the Registration Statement and Prospectus, (iii) the Company and
its subsidiaries shall have no liability or obligation, direct or contingent,
which is material to the Company and its subsidiaries, taken as a whole, other
than those reflected in the Registration Statement and the Prospectus and (iv)
on the Closing Date you shall have received a certificate dated the Closing
Date, signed by Victor Chaltiel and John E. King, in their capacities as the
Chief Executive Officer and Chief Financial Officer of the Company, confirming
the matters set forth in paragraphs (a), (b), and (c) of this Section 8.
(d) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on the Closing Date (and
any Option Closing Date) with the same force and effect as if made on and as of
the Closing Date (or any Option Closing Date).
(e) You shall have received on the Closing Data an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Riordan & McKinzie, outside counsel for the Company, to the effect that:
24
<PAGE>
i) the Shares to be sold by the Company hereunder have been
duly authorized, and when issued and delivered to the Underwriters against
payment therefor as provided by this Agreement, will have been validly issued
and will be fully paid and non-assessable, and to such counsel's knowledge after
due inquiry the issuance of such Shares is not subject to any preemptive or
similar rights;
ii) this Agreement has been duly authorized, executed and
delivered by the Company;
iii) the authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof contained
in the Prospectus;
iv) such counsel has been advised by the Commission by telephone
that the Registration Statement has become effective under the Act, and to such
counsel's knowledge after due inquiry no stop order suspending its effectiveness
has been issued and no proceedings for that purpose are pending before or
contemplated by the Commission;
v) the statements under the caption "Description of Capital
Stock" in the Prospectus and Item 15 of Part II of the Registration Statement
insofar as such statements constitute a summary of legal matters, documents or
proceedings referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
vi) the execution, delivery and performance of this Agreement by
the Company, compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require any
consent, approval, authorization or other order of any California or Federal
court, regulatory body, administrative agency or other governmental body (except
as such may be required under the Act or other securities or Blue Sky laws) and
will not conflict with or constitute a breach of any of the terms or provisions
of, or a default under, the charter or by-laws, as the case may be, of the
Company or TRC;
25
<PAGE>
vii) the Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended; and
viii)(1) Each document which was filed pursuant to the Exchange Act
and is incorporated by reference in the Registration Statement and the
Prospectus (except for financial statements, schedules and other financial data
as to which no opinion need be expressed) complied when so filed as to form in
all material respects with the Exchange Act and the applicable rules and
regulations of the Commission thereunder, (2) the Registration Statement and the
Prospectus and any supplement or amendment thereto (except for financial data,
as aforesaid) comply as to form in all material respects with the Act, and (3)
such counsel believes that (except for financial data, as aforesaid) the
Registration Statement (including the documents incorporated by reference
therein) and the prospectus included therein at the time the Registration
Statement became effective did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, and that the Prospectus
(including the documents incorporated by reference therein), as amended or
supplemented, if applicable (except for financial statements, as aforesaid) does
not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In giving the opinion specified in (vi) above, such counsel may rely
upon an opinion or opinions of McDermott, Will & Emery, regulatory counsel for
the Company rendered pursuant to paragraph (h) below. In giving such opinion
with respect to the matters covered by clause (viii) such counsel may state that
their opinion and belief are based upon their participation in the preparation
of the Registration Statement and Prospectus and any amendments or supplements
thereto and documents incorporated therein by reference and review and
discussion of the contents thereof, but are without independent check or
verification except as specified.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for
26
<PAGE>
the Underwriters), dated the Closing Date, of counsels to each of the Selling
Stockholders named in Schedule II hereto, to the effect that:
i) this Agreement has been duly authorized, executed and
delivered by such Selling Stockholder;
ii) the execution, delivery and performance of this Agreement by
such Selling Stockholder, compliance by such Selling Stockholder with all the
provisions hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of any
California or Federal court, regulatory body, administrative agency or other
governmental body (except as such may be required under the Act or other
securities or Blue Sky laws) and will not conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the charter, by-laws
or partnership agreement, as the case may be, of such Selling Stockholder;
iii) except as disclosed in the Prospectus or the Shareholders
Agreement, no such Selling Stockholder has any right to require registration of
shares of Common Stock or any other security of the Company and with respect to
the offer of the Shares all such rights have been satisfied or waived;
iv) the Custody Agreement has been duly authorized, executed and
delivered by such Selling Stockholder and is a valid and binding agreement of
such Selling Stockholder;
v) such Selling Stockholder has full legal right, power and
authority, and any approval required by law (other than any approval imposed by
the applicable state securities and Blue Sky laws) to sell, assign, transfer and
deliver the Shares to be sold by him in the manner provided in this Agreement
and the Custody Agreement;
vi) such Selling Stockholder will be, immediately prior to the
closing on the Closing Date or any Option Closing Date, as the case may be, the
sole registered owner of the Shares to be sold by such Selling Stockholder at
such time pursuant to this Agreement; upon
27
<PAGE>
delivery and payment for such Shares, and assuming the Underwriters acquired
such Shares in good faith and without notice of any adverse claim, each of the
Underwriters will be the owner of such Shares free of any adverse claim; and
vii) the power of attorney signed by such Selling Stockholder
appointing Leonard W. Frie, Barry C. Cosgrove and John E. King, or any one of
them, as his attorney-in-fact to the extent set forth therein with regard to the
transactions contemplated hereby and by the Registration Statement has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding instrument of such Selling Stockholder, and pursuant
to such power of attorney, such Selling Stockholder has authorized Leonard W.
Frie, Barry C. Cosgrove and John E. King, or any one of them, to execute and
deliver on his behalf this Agreement and any other document necessary or
desirable in connection with the transactions contemplated hereby and to deliver
the Shares to be sold by such Selling Stockholder pursuant to this Agreement.
In giving the opinion specified in (ii) above, such counsel may rely
upon an opinion or opinions of McDermott, Will & Emery, regulatory counsel for
the Company rendered pursuant to paragraph (h) below.
(g) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Barry C. Cosgrove, General Counsel of the Company, to the effect that:
i) the Company is duly incorporated, validly existing and in
good standing as a corporation under the laws of the State of Delaware and has
the corporate power and authority required to carry on its business as it is
currently being conducted and to own, lease and operate its properties;
ii) each Subsidiary of the Company has been duly incorporated or
formed, is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation or as a partnership duly formed and has the
corporate or partnership power and authority, as the case may be, to carry on
its business
28
<PAGE>
as it is currently being conducted and to own, lease and operate its properties,
and, to such counsel's knowledge after due inquiry, each corporate Subsidiary is
duly qualified and is in good standing as a foreign corporation and each
Subsidiary is authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification or authorization, except where the failure to be so qualified or
authorized and be in good standing could not, in the aggregate, reasonably be
expected to have a material adverse effect on the business, operations,
properties, or financial or other condition of the Company and its Subsidiaries,
considered as a whole;
iii) except as disclosed in the Prospectus,(i) all of the
outstanding shares of capital stock of each of the Company's corporate
Subsidiaries have been duly authorized and validly issued and are fully paid and
non-assessable and to such counsel's knowledge after due inquiry, in the case of
TRC, are wholly owned by the Company or are otherwise, owned directly or
indirectly by the Company, free and clear of any Liens and (ii) all of the
outstanding partnership interests in each of the Company's partnership
Subsidiaries have been duly authorized by its respective partnership agreement
and validly issued and to such counsel's knowledge after due inquiry the
partnership interests in such partnerships that are not owned by unaffiliated
third parties are owned directly or indirectly by the Company, free and clear of
any Liens and, to such counsel's knowledge, any partnership capital contribution
obligations of the Company in each partnership Subsidiary have been satisfied;
iv) all the outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights;
v) neither the Company nor any of its Subsidiaries is in
violation of its respective charter, by-laws or partnership agreement, as the
case may be, and, to the best of such counsel's knowledge after due inquiry,
neither the Company nor any of its Subsidiaries is in default in any-material
respect, and no condition exists that with notice or lapse of time or both would
constitute a material default, in the perfor-
29
<PAGE>
mance of any material obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any other agreement,
indenture or instrument to which the Company or any of its' Subsidiaries is a
party or by which it or any of its Subsidiaries or their respective property is
bound except to the extent such violation or default, if any, could not
reasonably be expected to have a material adverse effect on the business,
operations, properties or financial or other condition of the Company and its
Subsidiaries, considered as a whole;
vi) the execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the consummation of
the transactions contemplated hereby will not conflict with or constitute a
breach of any of the terms or provisions of, or a default under any agreement,
indenture or other instrument to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries or their respective
properties are bound, or violate or conflict with any laws, administrative
regulations or rulings or court decrees applicable to the Company or any of its
subsidiaries or their respective properties, except to the extent such
violation, conflict, breach or default, if any, could not reasonably be expected
to have a material adverse effect on the business, operations, properties or
financial or other condition of the Company and its Subsidiaries, considered as
a whole;
vii) after due inquiry, such counsel does not know of any legal
or governmental proceeding pending or threatened to which the Company or any of
its Subsidiaries is a party or to which any of their respective property is
subject which is required to be described in the Registration Statement or the
Prospectus and is not so described, or of any contract or other document which
is required to be described in the Registration Statement or the Prospectus or
is required to be filed as an exhibit to the Registration Statement which is not
described or filed as required;
viii) other than as set forth in the Shareholders Agreement or
otherwise described in the Prospectus, to the best of such counsel's knowledge,
after due inquiry, no holder of any security of the
30
<PAGE>
Company has any right to require registration of shares of Common Stock or any
other security of the Company;
ix) to the best of such counsel's knowledge, after due inquiry,
all leases to which the Company or any of its subsidiaries is a party are valid
and binding and no default has occurred or is continuing thereunder, which might
result in any material adverse change in the business, prospects, financial
condition or results of operation of the Company and its subsidiaries taken as a
whole, and the Company and its subsidiaries enjoy peaceful and undisturbed
possession under all such leases to which any of them is a party as lessee with
such exceptions as do not materially interfere with the use made by the Company
or such subsidiary;
x) each of the Facilities has such licenses, certifications and
authorizations of governmental or regulatory authorities which are required in
connection with the provision by the Facilities of dialysis services under
applicable licensure, Medicare or Medicaid laws in the manner described in the
Prospectus and which are required to be held by the Facilities as providers of
dialysis services under the Medicare or Medicaid programs; and
xi)(1) Each document filed pursuant to the Exchange Act and
incorporated by reference in the Registration Statement and the Prospectus
(except for financial statements, schedules and other financial data as to which
no opinion need be expressed) complied when so filed as to form in all material
respects with the Exchange Act and the applicable rules and regulations of the
Commission thereunder, (2) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for financial statements, schedules and
other financial data as to which no opinion need be expressed) comply as to form
in all material respects with the Act, and (3) such counsel believes that
(except for financial data, as aforesaid) the Registration Statement (including
the documents incorporated by reference therein) and the prospectus included
therein at the time the Registration Statement became effective did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and that the Prospectus (including the documents incorporated by
refer-
31
<PAGE>
ence therein), as amended or supplemented, if applicable (except for financial
statements, as aforesaid) does not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
In giving the opinions specified in (vi), (vii) and (x) above, such
counsel may rely upon an opinion or opinions of McDermott, Will & Emery,
regulatory counsel for the Company rendered pursuant to paragraph (h) below. In
giving such opinion with respect to the matters covered by clause (xi) such
counsel may state that such counsel's opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and documents incorporated therein by
reference and review and discussion of the contents thereof, but are without
independent check or verification except as specified.
(h) You shall have received on the Closing Date an opinion
(satisfactory to you and to our counsel), dated the Closing Date, of McDermott,
Will & Emery, regulatory counsel for the Company, to the effect that:
i) the statements under the captions "Risk Factors--
Dependence on Medicare, Medicaid and Other Sources of Reimbursement",
"--Operations Subject to Government Regulation", "Business--Operations--
Medicare Reimbursement" and "Business--Governmental Regulation" in the
Prospectus, insofar as such statements constitute a summary of legal
matters, documents or proceedings referred to therein, are fair summaries
in all material respects of the information called for with respect to such
legal matters, documents and proceedings; and
ii) the execution, delivery and performance of this
Agreement by the Company will not require any consent, approval,
authorization or order of any court, regulatory body, administrative agency
or other governmental body in connection with the provision by the dialysis
facilities owned by the Company or its Subsidiaries (the "Facilities") of
dialysis services under applicable licensure, Medicare and Medicaid laws in
the manner described
32
<PAGE>
in the Prospectus or which could affect the status of the Facilities as
providers of dialysis services under the Medicare or Medicaid programs
other than presently effective actions, consents disclosures or filings
that have already been made on or prior to the date hereof.
The opinions of Riordan & McKinzie, counsels for the Selling
Stockholders, Barry C. Cosgrove and McDermott, Will & Emery, described in
paragraphs (e), (f), (g) and (h) above shall be rendered to you at the
request of the Company and shall so state therein.
(i) You shall have received on the Closing Date an opinion, dated
the Closing Date, of Skadden, Arps, Slate, Meagher & Flom, counsel for the
Underwriters, as to the matters referred to in clauses (i), (ii), (iv), (v)
(but only with respect to the statements under the captions "Description of
Capital Stock" and "Underwriting") and (ix) of the foregoing paragraph (e).
In giving such opinion with respect to the matters covered by clause (ix)
such counsel may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto (other than the
documents incorporated by reference) and review and discussion of the
contents thereof (including documents incorporated by reference), but are
without independent check or verification except as specified.
(j) You shall have received letters on and as of the Closing Date, in
form and substance satisfactory to you, from Price Waterhouse, LLP and KPMG Peat
Marwick, LLP, independent public accountants, with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus and substantially in the form and substance of the
letter delivered to you by such accountants on the date of this Agreement.
(k) The Company shall not have failed at or prior to the Closing Date
to perform or comply with any of the agreements herein contained and required to
be
33
<PAGE>
performed or complied with by the Company at or priority the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
10. Effective Date of Agreement and Termination. This Agreement shall
-------------------------------------------
become effective upon the later of (i) execution of this Agreement and (ii) when
notification of the effectiveness of the Registration Statement has been
released by the Commission.
This Agreement may be terminated at any time prior to the Closing Date
by you by written notice to the Company if any of the following has occurred:
(i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective material adverse change in the condition,
financial or otherwise, of the Company and its Subsidiaries, taken as a whole,
or the earnings, affairs, or business prospects of the Company and its
Subsidiaries, taken as a whole, whether or not arising in the ordinary course of
business, which would, in your judgment, make it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) any
outbreak or escalation of hostilities or other national or international
calamity or crisis or change in economic conditions the effect of which on the
financial markets of the United States or elsewhere, in your judgment, is
material and adverse and would, in your judgment, make it impracticable to
market the Shares on the terms.and in the manner contemplated in the Prospectus,
(iii) the suspension or material limitation of trading in securities on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market or
limitation on prices for securities on any such exchange or the National Market
System, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of any court or other
governmental authority that in your opinion materially and adversely affects,
34
<PAGE>
or will materially and adversely affect, the business or operations of the
Company and its Subsidiaries, taken as a whole, (v) the declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in your opinion has a material adverse effect
on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares the or Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase on such date; provided that in no event shall the number of Firm Shares
--------
or Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date or on an Option Closing Date, as the case may be, any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or
Additional Shares, as the case may be, and the aggregate number of Firm Shares
or Additional Shares, as the case may be, with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date by all Underwriters and arrangements satisfactory to you and the
applicable Sellers for purchase of such Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of
35
<PAGE>
any non-defaulting Underwriter and the applicable Sellers. In any such case
which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any default of any such Underwriter under this
Agreement.
11. Agreements of the Selling Stockholders. Each Selling Stockholder
--------------------------------------
severally agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes with respect to
the Shares to be sold by such Selling Stockholder; and
(b) To take all reasonable actions in cooperation with the Company and
the Underwriters to cause the Registration Statement to become effective at the
earliest possible time, to do and perform all things to be done and performed
under this Agreement prior to the Closing Date (and any Option Closing Date, if
applicable) and to satisfy all conditions precedent to the delivery of the
Shares pursuant to this Agreement.
12. Miscellaneous. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (a) if; to the Company, to TOTAL RENAL
CARE HOLDINGS, INC., 21250 Hawthorne Blvd. Suite 800, Torrance, California
90503-5517, and (b) if to any Underwriter or to you, to you c/o Donaldson,
Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York
10172, Attention: Syndicate Department, or in any case to such other address as
the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Selling Stockholders, the Company, its
officers and directors and of the several Underwriters set forth in or made
pursuant to this Agreement shall remain operative and in full force and effect,
and will survive
36
<PAGE>
delivery of and payment for the Shares, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any Underwriter or
by or on behalf of the Sellers, the officers or directors of the Company or any
controlling person of the Sellers, (ii) acceptance of the Shares and payment for
them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Sellers to comply with the terms or to
fulfill any of the conditions of this Agreement, the Sellers agree to reimburse
the several Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Sellers, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any rights under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
37
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
TOTAL RENAL CARE
HOLDINGS, INC.
By:
----------------------------
Title:
THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE II HERETO
By:
----------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
UBS SECURITIES LLC
Acting severally on behalf of themselves
and the several Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
----------------------------
Title:
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
UNDERWRITERS SHARES
- ------------ ------
<S> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation
Merrill Lynch, Pierce,
Fenner & Smith Incorporated
UBS Securities LLC
---------
3,000,000
=========
</TABLE>
<PAGE>
SCHEDULE II
-----------
SELLING STOCKHOLDERS
--------------------
ADDITIONAL
FIRM SHARES SHARES
----------- ----------
<PAGE>
ANNEX I
-------
REQUIRED LOCK-UPS
-----------------
Victor M.G. Chaltiel
Leonard W. Frie
Mary Ellen Chambers
Barry C. Cosgrove
Sidney J. Kernion
John E. King
Stan M. Lindenfeld
Lois A. Mills
Maris Andersons
Peter T. Grauer
Marsha M. Plotnitsky
David B. Wilson
National Medical Enterprises, Inc.
DLJ Merchant Banking Partners, L.P.
DLJ International Partners, C.V.
DLJ Offshore Partners, C.V.
DLJ First ESC, LLC
DLJ Merchant Banking Funding, Inc.
<PAGE>
EXHIBIT 5
October 18, 1996
Total Renal Care Holdings, Inc.
21250 Hawthorne Boulevard, Suite 800
Torrance, California 90503-5517
Ladies and Gentlemen:
We have acted as counsel to Total Renal Care Holdings, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of the sale in an
underwritten public offering of up to 3,450,000 shares of the Common Stock,
$0.001 par value per share, up to 500,000 of which are authorized but unissued
and will be offered by the Company (the "Company Shares"). This opinion is
delivered to you in connection with that certain Registration Statement on
Form S-3 (the "Registration Statement") to be filed with the Securities and
Exchange Commission (the "Commission") under the 1933 Act.
In rendering the opinion set forth herein, we have made such investigations
of fact and law, and examined such documents and instruments, or copies
thereof established to our satisfaction to be true and correct copies thereof,
as we have deemed necessary under the circumstances.
Based upon the foregoing and such other examination of law and fact as we
have deemed necessary, and in reliance thereon, we are of the opinion that the
Company Shares have been duly authorized and will, upon sale and delivery
thereof and receipt by the Company of full payment therefor as contemplated in
the Registration Statement, be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration
Statement.
Very truly yours,
/s/ RIORDAN & McKINZIE
<PAGE>
EXHIBIT 11
TOTAL RENAL CARE HOLDINGS, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE AND PRO FORMA NET INCOME PER COMMON
SHARE
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>
SEVEN MONTHS ENDED SIX MONTHS ENDED
-------------------------- ------------------------
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
MAY 31, 1995 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income:
As reported........... $ 4,852,000 $ 2,650,000 $ 3,912,000 $ 2,899,000 $10,002,000
Pro forma adjustments:
(1)
Increase in general
and administration
expenses............. (625,000) (625,000)
Increase in interest
expense.............. (1,811,000) (1,811,000)
Increase in
amortization expense. (105,000) (105,000)
Increase in other
fees................. (42,000) (42,000)
Decrease in provision
for income taxes..... 1,032,000 1,032,000
----------- ----------- ----------- ----------- -----------
Pro forma net
income............. $ 3,301,000 $ 1,099,000 $ 3,912,000 $ 2,899,000 $10,002,000
=========== =========== =========== =========== ===========
Applicable common
shares:
Average outstanding
during the period
(2).................. 12,850,000 12,554,000 16,637,000 13,069,000 24,077,000
Average mandatorily
redeemable common
shares outstanding
during the period.... 794,000 794,000 794,000
Outstanding stock
options (3).......... 1,747,000 1,111,000 1,264,000 1,605,000 825,000
Reduction in shares in
connection with notes
receivable from
employees (3)........ (111,000) (78,000) (77,000) (50,000) (65,000)
----------- ----------- ----------- ----------- -----------
Adjusted weighted
average number of
common and common
share equivalent
shares outstanding. 15,280,000 14,381,000 17,824,000 15,418,000 24,837,000
=========== =========== =========== =========== ===========
Net income per common $0.22 $0.19 $0.40
share.................. ===== ===== =====
Pro forma net income per $0.22 $0.08
common share........... ===== =====
</TABLE>
- --------------------
(1) Pro forma adjustments give effect to the August 1994 recapitalization
transaction as if it had occurred on June 1, 1994.
(2) Average shares outstanding give effect to the shares issued as part of the
August 1994 recapitalization transaction as if these shares were issued on
June 1, 1994 and the issuance of cheap stock.
(3) Based on the treasury stock method.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Total Renal Care Holdings, Inc.:
We consent to the use of our reports on the consolidated financial
statements and related financial statement schedule of Total Renal Care
Holdings, Inc. and subsidiaries included herein and the combined financial
statements and related financial statement schedule of Lake County Dialysis
Services Inc., Dialysis Management Services, Inc., Logan Square Dialysis
Services, Inc., Home Dialysis Care, Ltd., and Lincoln Park Nephrology
Associates, S.C. incorporated herein by reference and to the reference to our
firm under the heading "Experts" in the prospectus.
Our report on the consolidated financial statements of Total Renal Care
Holdings, Inc. refers to a change in the method of accounting for income taxes
to adopt Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, effective June 1, 1993.
KPMG Peat Marwick LLP
Seattle, Washington
October 17, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated March 15, 1996,
relating to the financial statements of Total Renal Care Holdings, Inc., which
appears in such Prospectus. We also consent to the incorporation by reference
in the Prospectus constituting part of this Registration Statement on Form S-3
of our report dated March 15, 1996, appearing on page F-1 of Total Renal Care
Holdings, Inc.'s Annual Report on Form 10-K for the period ended December 31,
1995. We also consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report
dated March 15, 1996 relating to the Financial Statement Schedule for the
seven months ended December 31, 1995 and the year ended May 31, 1995 appearing
on page S-1 of Total Renal Care Holdings, Inc.'s Annual Report on Form 10-K.
We also consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report
dated August 4, 1995 relating to the combined financial statements of Center
for Kidney Disease, Inc., Venture Dialysis Center, Inc. and Miami Beach Kidney
Center, Inc., which appears in the Current Report on Form 8-K/A-1 dated
September 29, 1995. We also consent to the incorporation by reference in the
Prospectus constituting part of this Registration Statement on Form S-3 of our
report dated January 31, 1996 relating to the combined financial statements of
Southwest Renal Care, Ltd. and Dialysis Medical Supplies, Inc., which appears
in the Current Report on Form 8-K/A-1 dated February 13, 1996. We also consent
to the incorporation by reference in this Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated February 5, 1996
relating to the financial statements of Downtown Dialysis Center, Inc. and our
report dated February 28, 1996 relating to the financial statements of the
Nephrology Services Business of Caremark International Inc., both of which
appear in the Current Report on Form 8-K dated March 18, 1996. We also consent
to the incorporation by reference in this Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated July 3, 1996 relating
to the financial statements of Burbank Dialysis Group, Inc., our report dated
July 3, 1996 relating to the financial statements of Pasadena Dialysis Center,
Inc., our report dated September 24, 1996 relating to the combined financial
statements of Piedmont Dialysis, Inc. and Peralta Renal Care, our report dated
September 6, 1996 relating to the combined financial statements of Houston
Kidney Center, Northwest Kidney Center, LLP, North Houston Kidney Center, LLP
and Houston Kidney Center-Southeast, LLP and our report dated September 6,
1996 relating to the combined financial statements of Bertha Sirk Dialysis
Center, Inc. and Greenspring Dialysis Center, Inc., all of which appear in the
Current Report on Form 8-K dated October 18, 1996. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Seattle, Washington
October 18, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our reports
dated February 22, 1996, relating to the financial statements of Greer Kidney
Center, Inc. and Upstate Dialysis Center, Inc. which appear on pages F-11 and
F-18 of the Current Report on Form 8-K dated March 18, 1996. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
MEEKS, ROBERTS, ASHLEY, SUMNER & SIRMANS
Certified Public Accountants
Ocilla, Georgia
October 17, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE REGISTRATION
STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-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> 9,752,000
<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> 114,820,000
<CGS> 0
<TOTAL-COSTS> 93,713,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,333,000
<INTEREST-EXPENSE> 4,150,000
<INCOME-PRETAX> 18,570,000
<INCOME-TAX> 7,151,000
<INCOME-CONTINUING> 10,002,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,002,000
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
