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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to____________
Commission file number 1-4034
TOTAL RENAL CARE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
FOR THE QUARTER ENDED MARCH 31, 1997
Delaware 51-0354549
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
21250 HAWTHORNE BLVD.
SUITE 800
TORRANCE, CA 90503-5517
(Address of principal executive offices) (Zip Code)
(310) 792-2600
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at May 1, 1997
-------------------- ---------------------------
Common Stock, Par Value $0.001 26,622,434 shares
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TOTAL RENAL CARE HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996............ 1
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 1997 and
March 31, 1996............................................................................ 2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997
and March 31, 1996........................................................................ 3
Notes to Condensed Consolidated Financial Statements........................................ 4
Management's Discussion and Analysis of Financial Condition and Results of Operations......... 5
Liquidity and Capital Resources............................................................... 7
Risk Factors.................................................................................. 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities................................................................. 12
Item 6. Exhibits and Reports on Form 8-K...................................................... 12
Signature.................................................................................. 13
</TABLE>
- -------------
Note: Items 1, 3, 4 and 5 of Part II are omitted because they are not
applicable.
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---- ----
A S S E T S
-----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................................................... $ 7,133,000 $ 19,881,000
Patient accounts receivable, less allowance for doubtful accounts of $8,804,000
and $7,911,000, respectively..................................................... 102,667,000 91,009,000
Receivable from Tenet, a related company.......................................... 438,000 347,000
Other current assets.............................................................. 22,417,000 20,049,000
------------ ------------
Total current assets............................................................. 132,655,000 131,286,000
Property and equipment, net........................................................ 63,479,000 58,266,000
Notes receivable from a related party.............................................. 1,964,000 1,919,000
Other long-term assets............................................................. 2,006,000 1,992,000
Intangible assets, net of accumulated amortization of $15,758,000
and $12,844,000, respectively..................................................... 185,428,000 180,617,000
------------ ------------
Total assets..................................................................... $385,532,000 $374,080,000
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Total current liabilities.......................................................... $ 33,043,000 $ 31,987,000
Long term debt and other........................................................... 102,459,000 103,545,000
Deferred income taxes.............................................................. 3,450,000 2,868,000
Minority interests................................................................. 5,848,000 4,714,000
Stockholders' equity:
Common stock, voting, ($0.001 par value; 55,000,000 shares authorized;
26,609,533 (unaudited) and 26,472,982 issued and outstanding,
respectively).................................................................... 27,000 26,000
Preferred stock, ($0.001 par value; 5,000,000 shares authorized; none
outstanding)..................................................................... -- --
Additional paid-in capital........................................................ 257,895,000 255,897,000
Notes receivable from stockholders................................................ (2,885,000) (2,827,000)
Accumulated deficit............................................................... (14,305,000) (22,130,000)
------------ ------------
Total stockholders' equity....................................................... 240,732,000 230,966,000
------------ ------------
Total liabilities and stockholders' equity........................................ $385,532,000 $374,080,000
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net operating revenues.............................. $89,030,000 $50,237,000
Operating expenses:
Facilities......................................... 60,081,000 33,329,000
General and administrative......................... 5,759,000 3,901,000
Provision for doubtful accounts.................... 1,794,000 996,000
Depreciation and amortization...................... 5,355,000 2,460,000
----------- -----------
Total operating expenses.......................... 72,989,000 40,686,000
----------- -----------
Operating income.................................... 16,041,000 9,551,000
Interest expense.................................... (1,953,000) (1,912,000)
Interest income..................................... 434,000 431,000
----------- -----------
Income before income taxes and minority interests... 14,522,000 8,070,000
Income taxes........................................ 5,392,000 3,041,000
----------- -----------
Income before minority interests.................... 9,130,000 5,029,000
Minority interests in income of consolidated
subsidiaries....................................... 1,305,000 753,000
----------- -----------
Net income 7,825,000 4,276,000
=========== ===========
Net income per common share....................... $0.29 $0.19
=========== ===========
Weighted average number of common shares and
equivalents outstanding............................ 27,221,000 23,035,000
=========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
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TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 7,825,000 $ 4,276,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 5,355,000 2,460,000
Noncash interest...................................................... 0 1,591,000
Provision for doubtful accounts....................................... 1,794,000 996,000
Other................................................................. (12,263,000) (11,825,000)
------------ ------------
Total adjustments.................................................... (5,114,000) (6,778,000)
------------ ------------
Net cash provided (used) by operating activities.................... 2,711,000 (2,502,000)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment..................................... (7,164,000) (5,772,000)
Cash paid for acquisitions, net of cash acquired........................ (7,789,000) (60,424,000)
Other................................................................... (472,000) (1,116,000)
------------ ------------
Net cash used by investing activities............................... (15,425,000) (67,312,000)
------------ ------------
Cash flows from financing activities:
Borrowings from bank credit facility.................................... 0 51,000,000
Other................................................................... (34,000) (812,000)
------------ ------------
Net cash (used) provided by financing activities.................... (34,000) 50,188,000
------------ ------------
Net decrease in cash..................................................... (12,748,000) (19,626,000)
Cash at beginning of period.............................................. 19,881,000 30,181,000
------------ ------------
Cash at end of period.................................................... $ 7,133,000 $ 10,555,000
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments which are necessary to state fairly the
consolidated financial position, results of operations, and cash flows of Total
Renal Care Holdings, Inc., ("TRCH" or the "Company") as of and for the periods
indicated. TRCH presumes that users of the interim financial information herein
have read or have access to the Company's audited consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the preceding fiscal year and that the adequacy of
additional disclosure needed for a fair presentation, except in regard to
material contingencies or recent significant events, may be determined in that
context. Accordingly, footnote and other disclosures which would substantially
duplicate the disclosures contained in Form 10-K for the year ended December 31,
1996 filed on March 11, 1997 by the Company have been omitted. Certain other
reclassifications of prior period amounts have been made to conform to current
period classifications. The financial information herein is not necessarily
representative of a full year's operations.
2. During the quarter ended March 31, 1997, the Company purchased
substantially all of the assets and assumed certain liabilities of three
centers for total cash consideration of approximately $8.1 million. Goodwill of
approximately $4.5 million was recorded in connection with these transactions
in accordance with the Company's existing accounting policies.
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 three months ended March 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Pro forma net operating revenues (in 000's)... $89,865 $51,659
======= =======
Pro forma net income (in 000's)............... $ 7,926 $ 4,431
======= =======
Pro forma earnings per share.................. $ 0.29 $ 0.19
======= =======
</TABLE>
3. In February 1997, Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS 128), was issued. This pronouncement modifies the
calculation and disclosure of earnings per share (EPS) and will be adopted by
the Company in its financial statements for the year ended December 31, 1997.
Although early adoption is not permitted, proforma disclosure is permitted (see
Exhibit 11). After the adoption date, EPS data for all periods presented,
including quarterly financial data, is required to be restated to conform with
the provisions of SFAS 128.
4. Subsequent to March 31, 1997, the Company completed acquisitions of or
entered into letters of intent to acquire 22 facilities for consideration of
approximately $97.0 million, which have been or will primarily be funded by
additional borrowings under the TRCH Credit Facility.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such statements relating to
future events and financial performance are forward-looking statements involving
risks and uncertainties that are detailed from time to time in the Company's
various Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
Net Operating Revenues. Net operating revenues for the three months ended
March 31, 1997 (First Quarter 1997) increased $38,793,000 to $89,030,000 from
$50,237,000 for the three months ended March 31, 1996 (First Quarter 1996)
representing a 77.2% increase. Of this increase, $36,411,000 was due to
increased treatments from acquisitions, existing facility growth and de novo
developments. The remainder was due to an increase in net operating revenues per
treatment which was $237.38 in the First Quarter of 1997 compared to $231.03 in
the First Quarter of 1996. The increase in operating revenues per treatment was
due to increased ancillary utilization primarily in the administration of EPO
and other medications, an increase in affiliated and unaffiliated facility
management fees and an overall increase in average reimbursement rate.
Facility Operating Expenses. Facility operating expenses consist of cost and
expenses specifically attributable to the operation of dialysis facilities,
including operating and maintenance cost of such facilities, equipment, direct
labor, and supply and service costs relating to patient care. Facility operating
expense increased $26,752,000 to $60,081,000 in the First Quarter of 1997 from
$33,329,000 in the First Quarter of 1996 and as a percentage of net operating
revenues, facility operating expenses increased to 67.5% in the First Quarter of
1997 from 66.3% in the First Quarter of 1996. The increase in the First Quarter
of 1997 was due to increased labor and benefits partially incurred as a result
of utilizing existing to employees of the acquired facilities during the
transition period.
General and Administrative Expenses. General and administrative expenses
increased $1,858,000 to $5,759,000 in the First Quarter of 1997 from $3,901,000
in the First Quarter of 1996. As a percentage of net operating revenues, general
and administrative expenses declined to 6.5% in the First Quarter of 1997 from
7.8% in the First Quarter of 1996. 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
$798,000 to $1,794,000 in the First Quarter of 1997 from $996,000 in the First
Quarter of 1996. As a percentage of net operating revenues, the provision for
doubtful accounts remained the same at 2.0% for both quarters. The provision for
doubtful accounts is influenced by the amount of net operating revenues
generated from non-governmental payor sources in addition to the relative
percentage of accounts receivable by aging category.
Depreciation and Amortization. Depreciation and amortization increased
$2,895,000 to $5,355,000 in the First Quarter of 1997 from $2,460,000 in the
First Quarter of 1996. As a percentage of net operating revenues, depreciation
and amortization increased to 6.0% in the First Quarter of 1997 from 4.9% in the
First Quarter of 1996. The increase was primarily attributable to increased
amortization due to acquisition activity and increased depreciation from new
center leaseholds and routine capital expenditures.
5
<PAGE>
Operating Income. Operating income increased $6,490,000 to $16,041,000 in the
First Quarter of 1997 from $9,551,000 in the First Quarter of 1996. As a
percentage of net operating revenues, operating income decreased to 18.0% in the
First Quarter of 1997 from 19.0% in the First Quarter of 1996. This decrease in
operating income is primarily due to an increase in depreciation and
amortization and an increase in facility operating costs partially offset by a
decrease in general and administrative expenses as a percentage of net operating
revenue.
Interest Expense. Interest expense, net of interest income, increased $38,000
to $1,519,000 in the First Quarter of 1997 from $1,481,000 in the First Quarter
of 1996. As a percentage of net operating revenues, interest expense, net of
interest income, decreased to 1.7% in the First Quarter of 1997 from 2.9% in the
First Quarter of 1996. Cash interest expense during the First Quarter of 1997
was $1,953,000 versus cash interest expense of $321,000 and non-cash interest of
$1,591,000 in the First Quarter of 1996. Non-cash interest in the First Quarter
of 1996 was related to the Company's Discount Notes which were completely
retired through an early extinguishment during the third quarter of 1996. The
increase in cash interest expense was due primarily to an increase in borrowings
made under the TRCH Credit Facility to fund the Company's acquisitions and to
repurchase the remaining outstanding Discount Notes during the third quarter of
1996.
Provision for Income Taxes. Provision for income taxes increased $2,351,000 to
$5,392,000 in the First Quarter of 1997 from $3,041,000 in the First Quarter of
1996, and the effective tax rate after minority interest decreased to 40.8% in
the First Quarter of 1997 from 41.6% in the First Quarter of 1996. The overall
decrease in the effective tax rate is due to a reduction in the blended state
rates and reducing nondeductible amortization as a percentage of revenues.
Minority Interest. Minority interest increased $552,000 to $1,305,000 in the
First Quarter of 1997 from $753,000 in the First Quarter of 1996. As a
percentage of net operating revenues, minority interest remained at 1.5% for
both quarters. The increase in minority interest expense is a result of an
increase in the number of company facilities owned by partnership affiliates and
an increase in profitability at existing partnership affiliates and
subsidiaries.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2,711,000 for the First Quarter
of 1997 and net cash used by operating activities was $2,502,000 for the First
Quarter of 1996. Net cash provided by operating activities consists of the
Company's net income, increased by non-cash expenses such as depreciation,
amortization, non-cash interest and the provision for doubtful accounts, and
adjusted by changes in components of working capital, primarily accounts
receivable, in the first three months of 1997. Net cash used in investing
activities was $15,425,000 and 67,312,000 for the First Quarter of 1997 and
1996, respectively. 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. For the First Quarter of 1997 net cash used in
financing activities was $34,000 and for the First Quarter of 1996 the net cash
provided by financing activities was $50,188,000. In the First Quarter of 1997
the primary use of cash in financing activities was $1,349,000 in principal
repayments on borrowings offset by $1,588,000 in net proceeds from a sale of
common stock related to the Company's Employee Stock Purchase Plan and the
exercise of stock options. As a result, cash decreased by $12,748,000 to
$7,133,000 in the First Quarter of 1997.
As of March 31, 1997, the Company had working capital of $99,612,000,
including cash of $7,133,000.
The Company anticipates that its aggregate capital requirements for purchases
of equipment and leasehold improvements for outpatient facilities, including de
novo facilities after March 31, 1997 through December 31, 1997 will be
approximately $18.2 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 $800,000 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 and plans to open between 20 to 25 de Novo
facilities this year.
During the period January 1, 1997 through March 31, 1997, the Company paid
approximately $8.1 million in consideration for the acquisition of three
facilities in two separate transactions. Subsequent to March 31, 1997, the
Company completed acquisitions of or entered into letters of intent to acquire
22 facilities for consideration of approximately $97.0 million, which will
primarily be funded by additional borrowings under the TRCH Credit Facility.
The TRCH 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.
The Company believes that the borrowings under the TRCH 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 TRCH 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.
7
<PAGE>
RISK FACTORS
In evaluating the Company, its business and its financial position the
following risk factors should be carefully considered in addition to the other
information contained herein. The following factors could affect the Company's
actual future results and could cause them to differ from any forward-looking
statements made by or on behalf of the Company.
DEPENDENCE ON MEDICARE, MEDICAID AND OTHER SOURCES OF REIMBURSEMENT
The Company is reimbursed for dialysis services primarily at fixed rates
established in advance under the Medicare End Stage Renal Disease program. Under
this program, once a patient becomes eligible for Medicare reimbursement,
Medicare is responsible for payment of 80% of the composite rates determined by
the Health Care Financing Administration ("HCFA") for dialysis treatments. Since
1972, qualified patients suffering from chronic kidney failure, also known as
end stage renal disease ("ESRD") have been entitled to Medicare benefits
regardless of age or financial circumstances. The Company estimates that
approximately 61% of its net patient revenues during its fiscal year ended
December 31, 1996 and 60% during the three months ended March 31, 1997 were
funded by Medicare. Since 1983, numerous Congressional actions have resulted in
changes in the Medicare composite reimbursement rate from a national average of
$138 per treatment in 1983 to a low of $125 per treatment on average in 1986 and
to approximately $126 per treatment on average at present. The Company is not
able to predict whether future rate changes will be made. Reductions in
composite rates could have a material adverse effect on the Company's revenues
and net earnings. Furthermore, increases in operating costs that are subject to
inflation, such as labor and supply costs, without a compensating increase in
prescribed rates, may adversely affect the Company's earnings in the future. The
Company is also unable to predict whether certain services, as to which the
Company is currently separately reimbursed, may in the future be included in the
Medicare composite rate.
Since June 1, 1989, the Medicare ESRD program has provided reimbursement for
the administration to dialysis patients of 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 $55.1 million, or 20%
of net patient revenues, in its fiscal year ended December 31, 1996 and $17.7
million, or 20% of net patient revenues, during the three months ended March 31,
1997. EPO reimbursement significantly affects the Company's net income. Medicare
reimbursement for EPO was reduced from $11 to $10 per 1,000 units for services
rendered after December 31, 1993. EPO is produced by a single manufacturer, and
any interruption of supply or product cost increases could adversely affect the
Company's operations.
The Company provides certain of its patients with intradialytic parenteral
nutrition ("IDPN"), a nutritional supplement administered during dialysis to
patients suffering from nutritional deficiencies. The Company has historically
been reimbursed by the Medicare program for the administration of IDPN therapy.
Beginning in 1993, HCFA designated four durable medical equipment regional
carriers ("DMERCs") to process reimbursement claims for IDPN therapy. The DMERCs
established new, more stringent medical policies for reimbursement of IDPN
therapy which were adopted by HCFA in April 1996, and many dialysis providers'
claims have been denied or delayed. Where appropriate, the Company has appealed
and continues to appeal such denials. The final outcome of some appeals and the
anticipated review is uncertain. 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 only to
a select number of its patients whom the Company believes meet the most
stringent guidelines. Although the Company fully expects to be paid on
outstanding claims, there can be no certainty to that effect.
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 6% of its
net patient revenues during the fiscal year ended December 31, 1996 and 8% of
its net patient revenues during the three month period ended March 31, 1997 were
funded by Medicaid or
8
<PAGE>
comparable state programs. The Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy and
governmental funding restrictions, all of which may have the effect of
decreasing program payments, increasing costs or modifying the way the Company
operates its dialysis business.
Approximately 33% of the Company's net patient revenues during the fiscal year
ended December 31, 1996 and 32% during the three month period ended March 31,
1997 were from sources other than Medicare and Medicaid. These sources include
payments from third-party, non-government payors, at rates that generally exceed
the Medicare and Medicaid rates, and payments from hospitals with which the
Company has contracts for the provision of acute dialysis treatments. Any
restriction or reduction of the Company's ability to charge for such services at
rates in excess of those paid by Medicare would adversely affect the Company's
net operating revenues and net income. The Company is unable to quantify or
predict the degree, if any, of the risk of reductions in payments under these
various payment plans. The Company is a party to non-exclusive agreements with
certain third-party payors and termination of such third-party agreements could
have an adverse effect on the Company.
OPERATIONS SUBJECT TO GOVERNMENT REGULATION
The Company is subject to extensive regulation by both the federal government
and the states in which the Company conducts its business. The Company is
subject to the illegal remuneration provisions of the Social Security Act and
similar state laws, which impose civil and criminal sanctions on persons who
solicit, offer, receive or pay any remuneration, directly or indirectly, for
referring a patient for treatment that is paid for in whole or in part by
Medicare, Medicaid or similar state programs. In July 1991 and November 1992,
the federal government published regulations that provide exceptions or "safe
harbors" for certain business transactions. Transactions that are structured
within the safe harbors are deemed not to violate the illegal remuneration
provisions. Transactions that do not satisfy all elements of a relevant safe
harbor do not necessarily violate the illegal remuneration statute, but may be
subject to greater scrutiny by enforcement agencies. Neither the arrangements
between the Company and the physician directors of its facilities ("Medical
Directors") nor the minority ownership interests of referring physicians in
certain of the Company's dialysis facilities fall within the protection afforded
by these safe harbors. Although the Company has never been challenged under
these statutes and believes it complies in all material respects with these and
all other applicable laws and regulations, there can be no assurance that the
Company will not be required to change its practices or relationships with its
Medical Directors or with referring physicians holding minority ownership
interests or that the Company will not experience material adverse effects as a
result of any such challenge.
The Omnibus Budget Reconciliation Act of 1989 includes certain provisions
("Stark I") that restrict physician referrals for clinical laboratory services
to entities with which a physician or an immediate family member has a
"financial relationship." In August 1995, HCFA published regulations
interpreting Stark I. The regulations specifically provide that services
furnished in an ESRD facility that are included in the composite billing rate
are excluded 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.
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
9
<PAGE>
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 December 31, 1996 and the three months ended
March 31, 1997. 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.
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 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.
10
<PAGE>
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.
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 30
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."
11
<PAGE>
ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE. [THIS SECTION TO BE UPDATED]
ITEM 2: CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities
On July 12, 1996, TRC purchased all of the assets of the Bertha Sirk
Dialysis Center, Inc. and the Greenspring Dialysis Center, Inc.
(collectively, "Bertha Sirk/Greenspring"). As partial consideration for
the purchase, the Company issued an aggregated of 25,168 unregistered
shares of Common Stock to the two shareholders of Bertha
Sirk/Greenspring. Such unregistered shares were exempt from
registration under the Securities Act pursuant to Rule 505 and Rule 506
of Regulation D. No underwriter participated in the transaction and the
unregistered shares are not convertible or exchangeable into other
equity securities of the Company.
On August 1, 1996, TRC entered into an agreement with Port Charlotte
Artificial Kidney Center, Inc. ("Port Charlotte") to merge Port
Charlotte with and into TRC. As partial consideration for the merger,
the Company issued an aggregated of 36,420 unregistered shares of
Common Stock to the two shareholders of Port Charlotte. Such
unregistered share were exempt from registration under the Securities
Act pursuant to Rule 505 and Rule 506 of Regulation D. No underwriter
participated in the transaction and the unregistered shares are not
convertible or exchangeable into other equity securities of the
Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Computation of per share earnings for the three months ended
March 31, 1997 and March 31, 1996 and proforma computation of per share
earnings for the three months ended March 31, 1997 and March 31, 1996.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which this
report was filed.
12
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Total Renal Care Holdings, Inc.
(Registrant)
/s/ John E. King
----------------
John E. King
Vice President, Finance and
Chief Financial Officer
Date: May 14, 1997
John E. King is signing in the dual capacities as i) Chief Financial Officer,
and ii) a duly authorized officer of the Company.
13
<PAGE>
EXHIBIT 11
TOTAL RENAL CARE HOLDINGS, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Applicable Common Shares
Average outstanding during the period.......... 26,589,000 22,351,000
Outstanding stock options...................... 717,000 773,000
Reduction in shares in connection with notes
receivable from employees.................... (85,000) (89,000)
----------- -----------
Weighted average number of shares outstanding.... 27,221,000 23,035,000
=========== ===========
Net income....................................... $ 7,825,000 $ 4,276,000
=========== ===========
Net income per common share ..................... $0.29 $0.19
=========== ===========
</TABLE>
PRO FORMA COMPUTATION OF PER SHARE EARNINGS
In February 1997, Statement of Financial Accounting Standards No. 128, Earnings
per Share (SFAS 128), was issued. This pronouncement modifies the calculation
and disclosure of earnings per share (EPS) and will be adopted by the Company in
its financial statements for the year ended December 31, 1997. The following
discloses the earnings per share calculations in accordance with the provisions
of SFAS 128.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Applicable Common Shares
Average outstanding during the period................ 26,589,000 22,351,000
Reduction in shares in connection with notes
receivable from employees.......................... (85,000) (89,000)
----------- -----------
Weighted average number of shares outstanding for use
in computing earnings per share...................... 26,504,000 22,262,000
----------- -----------
Dilutive effect of outstanding stock options..... 717,000 773,000
Weighted average number of shares outstanding for use
in computing earnings per share-assuming dilution.... 27,221,000 23,035,000
=========== ===========
Net income.............................................. $ 7,825,000 $ 4,276,000
=========== ===========
Net income per common share............................. $ 0.30 $ 0.19
=========== ===========
Net income per common share-assuming dilution........... $ 0.29 $ 0.19
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,133,000
<SECURITIES> 0
<RECEIVABLES> 102,667,000
<ALLOWANCES> 0
<INVENTORY> 10,252,000
<CURRENT-ASSETS> 132,655,000
<PP&E> 63,479,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 385,532,000
<CURRENT-LIABILITIES> 33,043,000
<BONDS> 0
0
0
<COMMON> 27,000
<OTHER-SE> 240,732,000
<TOTAL-LIABILITY-AND-EQUITY> 385,532,000
<SALES> 0
<TOTAL-REVENUES> 89,030,000
<CGS> 0
<TOTAL-COSTS> 72,989,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,794,000
<INTEREST-EXPENSE> 1,953,000
<INCOME-PRETAX> 13,217,000
<INCOME-TAX> 5,392,000
<INCOME-CONTINUING> 7,825,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,825,000
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
