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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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)
<TABLE>
<S> <C>
Delaware 51-0354549
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
</TABLE>
21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503-5517
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (310) 792-2600
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par
value $0.001 per share
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 16, 1998, based on the price at
which the Common Stock was sold as of March 16, 1998, was $2,833,602,632.
The number of shares of the Registrant's Common Stock outstanding as of
March 16, 1998 was 80,463,321 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS.
The following should be read in conjunction with the Registrant's
Consolidated Financial Statements and the related notes thereto contained
elsewhere in this Form 10-K. This Form 10-K contains forward-looking
statements which involve risks and uncertainties. The Registrant's actual
results may differ significantly from the results discussed in the forward-
looking statements. Unless the context otherwise requires, the term "Company"
refers to Total Renal Care Holdings, Inc. ("TRCH") and its subsidiaries,
including Renal Treatment Centers, Inc. ("RTC"). When discussing results of
operations for periods beginning January 1, 1998 and for the purpose of any
general discussion of the Company and any forward-looking statements made
regarding the Company's operations and any risks associated therewith, the
term "Company" refers to TRCH and its subsidiaries, INCLUDING RTC. When
discussing historical results of operations for periods prior to January 1,
1998, the term "Company" refers to TRCH and its subsidiaries, NOT INCLUDING
RTC. Unless otherwise indicated, all share and per share data of the Company
in this Form 10-K reflect the Company's stock splits effected prior to the
date hereof.
The Company is the third largest, and largest independent, provider of high-
quality dialysis and related services for patients suffering from chronic
kidney failure, also known as end stage renal disease ("ESRD"). As of March
15, 1998, the Company provides dialysis and ancillary services to more than
29,800 patients through a network of 392 outpatient dialysis facilities in 33
states, Washington, D.C., Guam, Puerto Rico, Argentina, Italy and the United
Kingdom. In addition, the Company provides inpatient dialysis services at 259
hospitals. On February 27, 1998, TRCH completed its merger with RTC, adding
185 facilities, 13,200 patients and more than 130 inpatient hospital contracts
(the "Merger"). The Merger was treated as a pooling of interests for
accounting purposes.
The Company has implemented an aggressive, yet disciplined, growth strategy
since the management-led buyout of the Company from Tenet Healthcare
Corporation (the "August 1994 Transaction," as further described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). In 1996, the Company added 66 outpatient dialysis facilities,
4,800 patients and 32 inpatient hospital contracts to its network. In 1997,
the Company added an additional 63 outpatient dialysis facilities, 5,600
patients and 40 inpatient hospital contracts to its network. As of December
31, 1997, RTC, on a stand-alone basis, had 183 outpatient dialysis facilities
and approximately 12,800 patients. From January 1 through March 15, 1998, the
Company has added 12 outpatient dialysis facilities and 1,200 patients. The
Company also has continued to expand its in-house ancillary services to
include vascular access management, a transplant services program, a pediatric
renal program and a clinical research organization ("Total Renal Research" or
"TRR") in addition to the ESRD laboratory and pharmacy facilities established
in 1995. The increase in the number of facilities and hospital contracts,
combined with the enhancement of the Company's ancillary businesses and the
growth in existing businesses, has resulted in an increase in net operating
revenues of 61% to $438.2 million in the fiscal year ended December 31, 1997
as compared to the prior year and an increase in operating income of 64% to
$79.9 million during the same period.
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 with ESRD have been entitled, since 1972, to Medicare
benefits regardless of age or financial circumstances. 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 to 200,000 patients in 1995 from 66,000 in 1982.
The Company estimates that there are currently 230,000 ESRD patients in the
United States and that the United States market for outpatient and inpatient
services to ESRD patients in 1997 exceeded $14 billion.
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The Company attributes the continuing growth in the number of ESRD patients
principally to the aging of the general population and to better treatment and
longer survival of patients with hypertension, diabetes and other illnesses
that lead to ESRD. Management also believes improved medical and 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.
The Company estimates there were approximately 3,000 dialysis facilities in
the United States at the beginning of 1997, of which approximately 26% were
owned by independent physicians (down from 37% in 1992), 25% were hospital-
based facilities (down from 33% in 1992), and 49% were owned by five 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. Moreover, the growth of managed care
organizations has led owners of private centers to sell to chains, which are
better positioned to meet the challenges of managed care. 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
health care environment will continue to drive consolidation within the
dialysis services industry.
The Company estimates that 72%, or approximately 585,000, of the 815,000
ESRD patients worldwide are located outside the United States. International
markets are comprised of highly fragmented delivery systems and several large
underserved markets. The Company believes that the compounded annual net
patient growth rate internationally is 9-10%.
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, during 1996, 85% 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 (14%) 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 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 usually 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. However, the Company does provide both pre-
and post-transplant nursing services and provides transplant pharmaceuticals
in selected markets. 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.
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BUSINESS STRATEGY
The Company has implemented an aggressive, yet disciplined, growth strategy
since the August 1994 Transaction. In 1996, the Company added 66 outpatient
dialysis facilities, 4,800 patients and 32 inpatient hospital contracts to its
network. In 1997, the Company added an additional 63 outpatient dialysis
facilities, 5,600 patients and 40 inpatient hospital contracts to its network.
As of December 31, 1997, RTC, on a stand-alone basis, had 183 facilities and
approximately 12,800 patients. From January 1 through March 15, 1998, the
Company has added 12 outpatient dialysis facilities, and 1,200 patients. The
Company also has continued to expand its in-house ancillary services to
include vascular access management, a transplant services program, a pediatric
renal program and a clinical research organization in addition to the ESRD
laboratory and pharmacy facilities established in 1995. The increase in the
number of facilities and hospital contracts, combined with the enhancement of
the Company's ancillary businesses and the growth in existing businesses, has
resulted in an increase in net operating revenues of 61% to $438.2 million in
the fiscal year ended December 31, 1997 as compared to the prior year and an
increase in operating income of 64% to $79.9 million during the same period.
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 approximately 30 new
facilities scheduled for completion during 1998.
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.
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 the
Company 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
the local competitive market and assessing the target facility's reputation
for providing quality care. In fiscal year 1997, the Company acquired 51 new
facilities. From January 1 through March 15, 1998, the Company has acquired 10
facilities. The new facilities acquired subsequent to January 1, 1997 have
expanded the Company's existing facility networks in Southern and Northern
California, the Minneapolis/St. Paul region and South Florida while providing
significant entries into new markets including Detroit, Michigan and New York,
New York, as well as North Carolina and Puerto Rico.
De Novo Developments. The Company develops new facilities to further enhance
its regional clusters, to 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 12 facilities during
fiscal year 1997. During 1997, de novo developments enhanced existing regional
clusters in Southern and Northern California, South Florida, and Minnesota, as
well as El Paso, Texas, Detroit, Michigan and New Orleans, Louisiana.
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. The Company currently has alliances to work
with the following academic institutions to
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provide the highest quality care for their ESRD patients: University of
Southern California, Louisiana State University, Georgetown University,
Harbor-UCLA Medical Center, Hennepin County Medical Center/University of
Minnesota and the Rogosin Institute in New York City. These academic
affiliations help the Company remain on the leading edge of academic advances
in the caring for ESRD patients. The Company has an Academic Advisory Board
which meets semi-annually to review leading programs and to discuss ways in
which the Company and its community physicians can work together on critical
research to improve the well being of the growing ESRD patient population.
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
health care 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. The facility currently cares for approximately 130 Kaiser patients
through its innovative integrated ESRD program which is currently being
expanded to include two additional de novo facilities in the San Diego market.
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 patients in California) in the country.
In August of 1997, the Company signed a five-year agreement with Pioneer
Provider Network/MedPartners to provide dialysis services throughout
California. In addition to this Primary Preferred Provider Agreement, the
Company also signed its first Disease Management Program with Pioneer Provider
Network/MedPartners to manage their pre-ESRD, ESRD and transplant patients to
improve patient outcomes and to enhance the quality of life of this patient
population through advanced disease management techniques. MedPartners has
over 1.8 million capitated lives, with over 1.5 million of these lives in
Southern California, including approximately 500 ESRD patients.
The Company has also developed innovative programs with payors throughout
the country, including Aetna-New Orleans and Maxicare-New Orleans. These
payors have selected the Company to be their integrated provider of renal
services and have transitioned most of their ESRD patients to the Company's
facilities in New Orleans. These payors elected to partner with the Company
due to its Quality Management Program, Outcomes Programs and geographic
coverage of the regions. As a result of its managed care programs and the
Merger, the Company has signed approximately 315 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 has entered into
a long-term management contract with Total Nephrology Care Network Medical
Associates (the "Physician Network"), a network of over 35 leading
nephrologists in Southern California that works in partnership 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.
Through a long-term management services agreement, the Company is 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 actively developing
similar physician networks in most of its major markets, including Chicago,
South Florida and Minneapolis.
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 owns two ESRD laboratories, one in Florida and one in Minnesota, that
provide both routine (those included in the Medicare composite rate for
dialysis) and non-
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routine (those for which an additional fee is charged) laboratory tests for
its own and other ESRD patients throughout the United States.
The Company opened a pharmacy in February 1995 that provides a comprehensive
prescription oral drug program to patients receiving treatments at the
Company's facilities. The pharmacy recently began a transplant program that
provides immunosuppressive medications that are required to maintain the
viability of a transplant patient's new kidney. The pharmacy also provides
intradialytic parenteral nutrition ("IDPN") to patients who require such
therapy. The Company's dialysis facilities administer erythropoietin ("EPO")
and other injectable drugs to patients upon a physician's prescription.
The Company is the majority owner of an entity which provides 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 Company has a pre- and post-kidney transplant services program in which
transplant nurses and coordinators train and counsel patients and their
families while also assisting in the continuous outcomes monitoring required
for this population.
The Company's commitment to improving outcomes, reducing costs and enhancing
the quality of life in ESRD patients includes research and development of new
products and services. Total Renal Research conducts Phase I through Phase IV
clinical trials on devices, drugs and new technologies in the renal and renal-
related fields. TRR had been in operation for over seventeen years as the Drug
Evaluation Unit and became a subsidiary of the Company in 1997. This clinical
research organization has conducted over 200 clinical trials, working with
over 50 drug companies and ten device companies, over the last 12 years.
The Company is committed to bringing its quality programs and expertise to a
national network of pediatric dialysis centers, and the Company believes that
it is currently the only non-hospital based provider of comprehensive services
to pediatric ESRD patients.
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 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. The Company has entered into
a strategic alliance with a software company to further the development of
H.O.M.E.R. (Health Outcomes Management, Evaluation & Research). This system will
provide enhancements to the current clinical information system through its
patient-centered, clinical management module and will provide operating
efficiencies through its financial module. 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. The Company will continue to focus on enhancing operating
efficiencies, including staffing, purchasing and financial reporting systems
and controls.
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The Company recently implemented a Best Demonstrated Practices Program that
creates value by identifying ways to improve quality of care and to reduce
overall cost at each dialysis facility. Once a facility has demonstrated
proficiency with a certain practice, information and operational systems are
developed and disseminated throughout the organization by the Regional Quality
Management Coordinator, Divisional Vice Presidents and Regional Operations
staff. This program is focused on improvements in staffing level efficiency,
rationalization of drug and ancillary usage, revenue capture and medical
supply utilization.
RECENT FACILITY NETWORK EXPANSION AND MERGER WITH RTC
The Company has implemented an aggressive, yet disciplined, growth strategy
since the August 1994 Transaction. In 1996, the Company added 66 outpatient
dialysis facilities, 4,800 patients and 32 inpatient hospital contracts to its
network. In 1997, the Company added an additional 63 outpatient dialysis
facilities, 5,600 patients and 40 inpatient hospital contracts to its network.
On February 27, 1998, the Company completed its merger with RTC, adding 185
facilities and approximately 13,200 patients.
RTC provides dialysis treatments and ancillary services to patients
suffering from chronic kidney failure, primarily in its freestanding
outpatient dialysis treatment centers or in the patient's home. At December
31, 1997, RTC operated 183 outpatient dialysis facilities in 24 states, the
District of Columbia and Argentina, providing dialysis services to
approximately 12,800 patients. In addition, RTC currently provides inpatient
acute dialysis services to more than 130 hospitals located in its service
areas. RTC has expanded rapidly, primarily through acquisitions, increasing
the number of dialysis facilities in its network from 78, as of December 31,
1995 to 183, as of December 31, 1997.
The acquisition of RTC will provide the Company with a platform to
accelerate its aggressive, yet disciplined, growth plan domestically and
internationally. The Merger solidifies the Company's position as the largest
independent provider of dialysis services with a total of 392 facilities
serving approximately 29,800 patients worldwide. In the United States, the
Company operates 350 facilities serving approximately 27,500 patients. The
addition of RTC added 13 new markets to the Company's existing domestic
operations and increased its penetration in 11 existing markets. As a result
of the Merger, the Company has strong market positions in 11 states:
California, Colorado, Florida, Georgia, Kansas, Maryland, Minnesota, North
Carolina, Oklahoma, Pennsylvania and Texas. Outside the United States, the
Company provides dialysis services to approximately 2,300 patients through 42
facilities in Argentina, Italy and the United Kingdom. The Company estimates
that approximately 585,000, or 72%, of the estimated 815,000 ESRD patients
worldwide are located outside of the United States.
The Company expects to achieve significant cost savings and synergies from
the Merger, including: (i) increased revenue potential resulting from a recent
legislative change in Medicare as secondary payor, (ii) enhanced revenue
growth through applying the Company's ancillary and value-added services
(i.e., lab, pharmacy, etc.) to RTC's patients, (iii) enhanced purchasing
efficiencies, (iv) improvements in labor productivity and skill mix, (v) the
elimination of duplicative overhead expenses and (vi) improved drug and supply
utilization. Many of these cost savings and synergies will be achieved by
applying the Company's existing programs to RTC's business. After giving
effect to these expected cost savings and synergies resulting from the Merger,
the Company expects the Merger to be accretive to its earnings in the fiscal
year ending December 31, 1998 and thereafter. The Company believes that
additional net cost savings and synergies may be realized in 1998 and beyond.
No assurances can be made, however, as to the actual amount and timing of cost
savings and synergies, if any, that will be realized. In addition, the Company
will incur significant one-time merger related costs in early 1998.
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Network Expansion From January 1, 1997 Through March 15, 1998
The following chart lists, by state or country, the number of facilities
acquired (or managed) and de novo facilities developed by TRCH and RTC from
January 1, 1997 through March 15, 1998:
<TABLE>
<CAPTION>
FACILITIES DE NOVOS
STATE ACQUIRED DEVELOPED
----- ---------- ---------
<S> <C> <C>
CA.................................................. 23 4
TX.................................................. 17 3
NC.................................................. 14 0
PA.................................................. 6 1
MI.................................................. 5 1
MD.................................................. 4 2
FL.................................................. 3 2
MN.................................................. 3 1
NY.................................................. 4 0
NV.................................................. 3 0
VA.................................................. 3 0
KS.................................................. 0 3
WA.................................................. 2 1
Puerto Rico......................................... 2 0
IL.................................................. 2 0
NJ.................................................. 1 1
GA.................................................. 1 1
DC.................................................. 1 0
AZ.................................................. 0 1
UT.................................................. 0 1
OK.................................................. 0 1
--- ---
Subtotal............................................ 94 23
<CAPTION>
COUNTRY
-------
<S> <C> <C>
Argentina........................................... 27 1
Italy............................................... 4 0
United Kingdom...................................... 3 0
--- ---
Subtotal............................................ 34 1
Grand Total......................................... 128 24
=== ===
</TABLE>
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OPERATIONS
Location, Capacity and Use of Facilities
As of March 15, 1998 the Company operates 392 outpatient dialysis facilities
with 6,048 dialysis stations. The Company owns or operates, directly or
through wholly-owned subsidiary corporations, 336 of these facilities. Of the
remaining facilities, 39 are partially owned by physicians and 17 are
partially owned by non-physician minority interests. The Company's facilities
range in size from three to 54 dialysis stations. The facilities are located
in the following states and countries in the following numbers:
<TABLE>
<CAPTION>
NO. OF NO. OF
STATE FACILITIES STATE FACILITIES
----- ---------- ----- ----------
<S> <C> <C> <C>
CA.................... 66 HI.......................... 4
TX.................... 36 IN.......................... 3
MN.................... 27 NV.......................... 3
FL.................... 27 Puerto Rico................. 2
NC.................... 19 NM.......................... 2
PA.................... 19 SC.......................... 2
GA.................... 18 Guam........................ 2
MD.................... 15 UT.......................... 1
OK.................... 15 NE.......................... 1
VA.................... 12 WY.......................... 1
IL.................... 11 WI.......................... 1
AZ.................... 8 OH.......................... 1
KS.................... 8 AL.......................... 1
LA.................... 7 DE.......................... 1
---
MI.................... 6
Subtotal.................... 350
NJ.................... 5 COUNTRY
CO.................... 5 Argentina................... 35
MO.................... 5 Italy....................... 4
NY.................... 4 United Kingdom.............. 3
---
WA.................... 4
Subtotal.................... 42
DC.................... 4
SD.................... 4 Grand Total................. 392
===
</TABLE>
The Company also provides acute inpatient dialysis services to 259
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." Each facility also has an Administrator, typically a
registered nurse, who supervises the day-to-day operations of the facility and
its 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.
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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 and CCPD. 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 assistants 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.
Inpatient Dialysis Services
The Company provides inpatient dialysis services (excluding physician
professional services) to 259 hospitals. These services are required in
connection with the hospital's inpatient services to its patients, and the
Company renders these services for a per-treatment fee individually negotiated
with the hospital. In many 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
pharmaceuticals (including EPO, calcium and iron supplements) 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.
The Company owns two licensed clinical laboratories, located in Florida and
Minnesota, specializing in ESRD patient testing. 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
to manage the ESRD condition, some of the costs of which are reimbursed as
part of the dialysis composite rate, (ii) blood tests ordered for co-morbid
ESRD conditions (i.e., diseases that are the result of or cause of ESRD) and
(iii) general symptom testing. In addition, the Minnesota laboratory provides
certain highly-specialized tests, including therapeutic drug monitoring, bone
deterioration and renal stone disease monitoring and certain pre- and post-
kidney transplant testing.
The Company is the majority owner of an entity which provides 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 Company has a pre- and post-kidney transplant services program in which
transplant nurses and coordinators train and counsel patients and their
families while also assisting in the continuous outcomes monitoring required
for this population.
9
<PAGE>
The Company's commitment to improving outcomes, reducing costs and enhancing
the quality of life in ESRD patients includes research and development of new
products and services. Total Renal Research conducts Phase I through Phase IV
clinical trials on devices, drugs and new technologies in the renal and renal-
related fields. TRR had been in operation for over seventeen years as the Drug
Evaluation Unit and became a subsidiary of the Company in 1997. This clinical
research organization has conducted over 200 clinical trials, working with
over 50 drug companies and ten device companies, over the last 12 years.
The Company is committed to bringing its quality programs and expertise to a
national network of pediatric dialysis centers, and the Company believes that
it is currently the only non-hospital based provider of comprehensive services
to pediatric ESRD patients.
Physician Relationships
A key factor in the success of a dialysis 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 nephrology 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.
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). Such agreements are generally terminable by either party with
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 physician or nephrologist selected (in advance)
to serve as the Company's Medical Director. 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, members of a limited liability
corporation or co-shareholders with the Company, such physicians have agreed
to refrain from owning interests in competing facilities within a defined
geographic area 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
10
<PAGE>
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 also has developed a proprietary PC-based Clinical
Information System to support its Quality Management, Outcomes Monitoring,
Measurement and Management and Managed Care Programs. The Company's Quality
Management Program and Clinical Information System have been developed under
the direction of the Company's Vice President, Quality Management and Chief
Medical Officer, 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 26 regional Quality Management Coordinators. The
Company has also added a new position, Corporate Director of Integrated
Quality Development, overseeing specific areas that impact quality such as
Education and Training and Infection Control, adding another dimension to the
Company's integrated approach to quality. This corporate quality management
team works with each facility's multi-disciplinary quality management team
(including the Medical Director) 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. 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.
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 provides facilities and managed
care organizations with detailed patient outcome reports and critical clinical
information. The Clinical Information System has been rolled-out to most of
the Company's facilities (excluding the former RTC facilities). Furthermore,
the Company has implemented connectivity between Kaiser's mainframe and the
Company's Clinical Information System at the Mission Dialysis Center in San
Diego.
H.O.M.E.R. The Company has entered into a strategic alliance with a software
company to further the development of H.O.M.E.R. (Health Outcomes Management,
Evaluation & Research). This system will provide enhancements to the current
clinical information system through its patient-centered, clinical management
module and will provide operating efficiencies through its financial module.
Best Demonstrated Practices. The Company recently implemented a Best
Demonstrated Practices Program that creates value by identifying ways to
improve quality of care and to reduce overall cost at each dialysis facility.
Once a facility has demonstrated proficiency with a certain practice,
information and operational systems are developed and disseminated throughout
the organization by the Regional Quality Management Coordinator and Regional
Operations Directors. This program has been focused on improvements in
staffing level efficiency, rationalization of drug and ancillary usage,
revenue capture and medical supply utilization. The Best Demonstrated
Practices Program is being expanded to include all former RTC facilities.
Physicians Advisory Board. The Company has a Physicians Advisory Board
consisting of 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 issues and the Physicians Advisory Board meets semi-annually to
discuss Company quality and related operational issues. 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 annual 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. The Company recently has decided to provide twice-yearly surveys,
with rapid feedback to the facilities, in order to enhance this vital area of
its Quality Management Program.
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<PAGE>
Sources of Revenue Reimbursement
The following table provides information for the periods indicated regarding
the percentage of Company net operating 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 ENDED YEARS ENDED
YEAR ENDED MAY 31, DECEMBER 31, DECEMBER 31,
------------------ ------------------ -------------------
1995 1994 1995 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Medicare................ 62.0% 59.4% 60.2% 61.8% 61.1% 58.5%
Medicaid................ 8.1 9.3 6.7 6.7 6.1 6.6
Private/alternative
payors................. 24.3 26.3 27.9 25.9 27.3 30.0
Hospital inpatient
dialysis services...... 5.6 5.0 5.2 5.6 5.5 4.9
----- --------- --------- ----- ----- -----
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. 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 a 30-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 patients under 65 years of age who are covered by an employer
group health plan must wait 33 months after commencing dialysis treatments
before Medicare becomes the primary payor. During the first 33 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 30 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 January 1998, a permanent injunction was issued by a
federal court preventing HCFA from retroactively applying its
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<PAGE>
reinterpretation of the OBRA 93 regulations as unlawful retroactive rule-
making. 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.
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 submission. If in the future Medicare were
to include in its composite reimbursement rate any of the 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 $117 and
$139 per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation and recommendations by
the Medical Payment Assessment Commission ("MEDPAC," formerly 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 MEDPAC study dialysis costs and reimbursement and make
findings as to the appropriateness of ESRD reimbursement rates. In January
1998, MEDPAC recommended a 2.7% increase be made in the reimbursement rate.
However, Congress has not yet acted on this recommendation, 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.
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<PAGE>
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.
Since June 1, 1989, the Medicare ESRD program has provided reimbursement for
the administration to dialysis patients of EPO. EPO, a bio-engineered protein,
is beneficial in the treatment of anemia, a medical complication frequently
experienced by dialysis patients. Most of the Company's dialysis patients
receive EPO. The Company had revenues from the administration of EPO (the
substantial majority of which are reimbursed through Medicare and Medicaid
programs) of approximately 20.2% of net patient revenues, in the fiscal year
ended December 31, 1997. Therefore, 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. The
Office of the Inspector General of HHS recently recommended that Medicare
reimbursement for EPO be reduced from $10 to $9 per 1,000 units and HHS has
concurred with this recommendation; however, HHS has not determined whether it
will pursue this change through the rulemaking process. The President's fiscal
1999 budget includes this proposed reduction in EPO reimbursement.
In April 1996, HCFA notified providers that reimbursement of EPO
administration for a patient with a hematocrit measurement exceeding 36% would
be available only if the 90-day rolling hematocrit measurement for such
patient was 36.5% or less. If the 90-day rolling average hematocrit measure
exceeded 36.5%, reimbursement for EPO administration would be denied, except
in very limited instances. In connection with this notification, HCFA
instructed its fiscal intermediaries to review the rolling three month
hematocrit averages and to ascertain compliance therewith. TRCH's and RTC's
single fiscal intermediary enacted such instructions in December and
September, 1997, respectively. Subsequently, HCFA notified its fiscal
intermediaries that it was changing the foregoing reimbursement policy.
Effective for monthly billing periods beginning on or after March 10, 1998,
reimbursement will be available when the 90-day rolling average hematocrit
measure exceeds 36.5%, with payment based on the lower of the actual dosage
billed for the current month or 80% of the prior month's allowable EPO dosage.
In addition, in this notice, HCFA reestablished the authorization to make
payment for EPO for a month when the patient's hematocrit exceeds 36%, when
accompanied by documentation establishing medical necessity. The Company does
not expect this change in reimbursement or this medical review to have a
material adverse effect on the Company's revenues. No prediction can be made
as to whether future rate or reimbursement method changes will be made.
Furthermore, EPO is produced by a single manufacturer, and any interruption of
supply or product cost increases could adversely affect the Company's
operations. Finally, during the period from November 1997 through February
1998, approximately 25% of the Company's Medicare billings for EPO
reimbursement were placed into medical review because of TRCH's intermediary's
non-compliance with HCFA EPO reporting audit guidelines.
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 durable medical equipment regional carriers ("DMERCs") to
process reimbursement claims for IDPN therapy. The DMERCs recently established
new, more stringent medical policies for reimbursement of IDPN therapy, and
many dialysis providers' claims have subsequently been denied or delayed.
Where appropriate, the Company has appealed and continues to appeal such
denials. In addition, the DMERCs are reportedly reviewing the existing IDPN
medical policies. The final outcome of 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.
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
14
<PAGE>
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. 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, Florida does not provide Medicaid benefits on a primary
insurance basis, but does provide benefits as a secondary insurer to Medicare.
Within 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 health care reform reducing dialysis reimbursement or reducing or
eliminating coverage for dialysis services would have a material adverse
effect on the Company's business. To date, the Company has not had any
difficulty in maintaining its licenses or its Medicare and Medicaid
authorizations. The health care services industry will continue to be subject
to intense regulation at the federal and state levels, the scope and effect of
which cannot be predicted. No assurance can be given that the activities of
the Company will not be reviewed and challenged or that health care reform
will not result in a material adverse change to the Company.
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 traditionally
have 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.
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
15
<PAGE>
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
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.
Certain of the Company's dialysis facilities are owned by partnerships or
limited liability companies in which physicians who refer patients to the
facilities hold interests. 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 and limited
liability companies satisfies a majority of the safe harbor's elements.
Certain of the Company's dialysis facilities are leased from entities in
which physicians who refer patients to the centers hold interests. 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, 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
16
<PAGE>
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 have
enacted statutes prohibiting physicians from holding financial interests in
various types of medical facilities to which they refer patients. In certain
of these states, including California, Virginia, Georgia, Florida, Maryland,
Kansas, Louisiana and Texas, the Company has joint ownership relationships
with referring physicians. The Company believes its joint ownership
relationships with these physicians are within the exceptions stated in these
various state laws.
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 sometimes performed by
laboratories independent of the Company for 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 was
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 policy matter, it would be reasonable to argue that the
Virginia Board should grant an exception to a physician
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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 health care 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 imaging 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
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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.
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.
A Kansas statute (the "Kansas Statute") defines unprofessional conduct to
include referring a patient to a health care entity for services if the
licensee (defined to include a physician) has a significant investment
interest in the health care entity, unless the licensee informs the patient in
writing of such significant investment interest and that the patient may
obtain such services elsewhere. A licensee's license may be revoked, suspended
or limited in the event the licensee has committed an act of unprofessional
conduct. The Kansas Statute defines "health care entity" to mean any
corporation, firm, partnership or other business entity which provides
services for diagnosis or treatment of human health conditions and which is
owned separately from a referring licensee's principal practice. The Kansas
Statute also defines "significant investment interest" to mean ownership of at
least 10% of the shares of stock of the corporation which owns or leases the
health care entity. The Company believes that all physicians who have a
financial interest in the Company and who also refer patients to the Company's
dialysis facilities are in compliance with the disclosure requirements of the
Kansas Statute.
A Louisiana statute (the "Louisiana Statute") prohibits health care
providers (defined to include physicians) from making referrals outside the
same group practice as that of the referring health care provider to any other
health care provider, licensed health care facility, or provider of health
care goods and services, including, but not limited to, providers of clinical
laboratory services, diagnostic services, medicinal supplies, and therapeutic
services when the referring health care provider has a financial interest
served by such referral, unless in advance of any such referral, the referring
health care provider discloses to the patient, in writing, the existence of
such financial interest. The Louisiana Statute defines "financial interest" to
mean a significant ownership or investment interest established through debt,
equity, or other means and held by a health care provider or a member of a
health care provider's immediate family, or any form of direct or indirect
remuneration for referral.
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Any health care provider who does not comply with the Louisiana Statute
disclosure requirement must refund all sums such health care provider received
in payment for the goods and services furnished or rendered without disclosure
of the financial interest. Such a refund shall be paid to the individual
patient, third-party payor, or other entity who made the payment to the health
care provider. The Company believes that all physicians who have a financial
interest in the Company and who also refer patients to the Company's dialysis
facilities are in compliance with the Louisiana Statute.
There are several New York statutes that relate to self-referrals (the "New
York Statutes"). Except as discussed below, a practitioner (defined to include
physicians) authorized to order clinical laboratory services, pharmacy
services, or x-ray or imaging services, generally may not make a referral for
such services to an authorized health care provider where such practitioner or
an immediate family member has a financial relationship with the health care
provider receiving the referral (the "New York Referral Prohibition"). The
New York Statutes provide that a health care provider or a referring
practitioner may not present or cause to be presented to any individual or
third party payor or other entity a claim, bill, or other demand for payment
for clinical laboratory services, pharmacy services or x-ray or imaging
services that is prohibited. Under the New York Statutes, a "financial
relationship" is defined to mean an ownership interest, investment interest or
compensation arrangement.
The New York Statutes do make exceptions to the New York Referral
Prohibition for certain types of relationships. Generally, the New York
Statutes will permit a practitioner to make a referral to a health care
provider in which the practitioner or an immediate family member has a
financial interest for clinical laboratory services, pharmacy services, and x-
ray or imaging services if (i) it is related to practitioner services
personally provided by the referring practitioner or provided by a
practitioner in the same group as the referring practitioner, (ii) it is
related to in-office ancillary services, (iii) it is related to a health
maintenance organization or other type of managed care program, (iv) it is
related to inpatient hospital services, (v) it is related to referrals by
hospitals of patients for clinical laboratory services, pharmacy services, or
x-ray or imaging services to be provided by such hospital, (vi) the financial
relationship with the hospital does not relate directly to the services for
which the referral was made or (vii) it is determined not to pose a
substantial risk of payor or patient abuse.
The New York Statutes also make an exception to the New York Referral
Prohibition in the event of an ownership interest or investment interest
between the practitioner or an immediate family member with a health care
provider, upon proper disclosure being made, if (i) the services provided and
the practitioner or the patient are located in a rural area, (ii) the
ownership interest or investment interest is based on the ownership in a
general hospital itself, and not merely a subdivision thereof or (iii) it is
related to services provided by an ambulatory surgical center in connection
with a surgical procedure performed by the referring practitioner at the
ambulatory surgical center.
In addition to providing the exceptions discussed above, the New York
Statutes define ownership interests, investment interests, and compensation
arrangements, each of which is a part of the definition of a financial
relationship, in such a manner as to exclude certain other types of
relationships from the New York Referral Prohibition. The New York Statutes
provide that an ownership interest or an investment interest generally does
not exist based solely on the ownership of investment securities of a publicly
traded company with total assets of over $100,000,000. Further, the New York
Statutes generally define a compensation arrangement to not include (i)
payments for the rental or lease of space, (ii) administrative services
arrangements between a general hospital and a practitioner or immediate family
member, (iii) medical director or medical advisory board services arrangements
between a health care provider, other than a general hospital, and a
practitioner, (iv) recruitment arrangements, (v) isolated financial
transactions, (vi) compensation arrangements between a group practice and a
salaried practitioner of the group practice and (vii) such other arrangements
that are determined not to pose a substantial risk of payor or patient abuse.
With respect to referrals that are not subject to the New York Referral
Prohibition, a practitioner must first disclose to the patient the financial
relationship prior to making the referral if the financial relationship is
either (i) an ownership or investment interest with the health care provider
to which the referral is being made or (ii) a
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compensation arrangement with such health care provider that is in excess of
fair market value or that is based upon the volume and value of the providers'
services (the "New York Disclosure Requirement").
Because dialysis itself is not likely a clinical laboratory service,
pharmacy service, or x-ray or imaging service, only the New York Disclosure
Requirement would need to be satisfied for those joint ownership relationships
the Company maintains with referring physicians. The Company believes that to
the extent only the New York Disclosure Requirement is applicable, all
physicians who have a financial interest in the Company and who also refer
patients to the Company's dialysis facilities are in compliance with the New
York Statutes. Notwithstanding the above, the Company's facilities in New York
may perform laboratory services incidental to dialysis services pursuant to
the orders of the referring physicians thereby making the New York Referral
Prohibition applicable. Although the Company does not believe that the New
York Referral Prohibition is intended to apply to laboratory services that are
provided incident to dialysis services, it is possible that the New York
Referral Prohibition could be interpreted to apply to such laboratory
services. While the New York Statutes contain a number of exceptions to the
New York Referral Prohibition, there is no explicit exception for Medical
Director services or other services for which the Company contracts with and
compensates referring physicians in New York. Thus, if the New York Statutes
are interpreted to apply to referring physicians with whom the Company
contracts, the Company could be required to restructure some or all of its
relationships with such referring physicians. The consequences of such
restructuring, if any, cannot be predicted.
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
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." 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
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 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.
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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 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 or membership interest in a Company dialysis
facility; and certain of the Company's dialysis facilities are leased from
entities in which physicians who refer patients to the facilities hold
interests. 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. However, the
proposed Stark II regulations could require the Company to restructure such
stock and stock option ownership.
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.
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For purposes of Stark II, "designated health services" include: 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 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. These 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. The Company estimates that there
were approximately 3,000 dialysis
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facilities in the United States at the beginning of 1997, of which
approximately 26% were owned by independent physicians (down from 37% in
1992), 25% were hospital-based facilities (down from 33% in 1992) and 49% were
owned by five major multi-facility dialysis providers (up from 30% in 1992).
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 developments of facilities 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 March 15, 1998, the Company had over 8,830 employees, including a
professional staff of approximately 5,332 registered nurses and technicians, a
corporate and regional staff of approximately 685 employees and a facilities
support and maintenance staff of approximately 2,813 employees. Of the
Company's employees, approximately 6,675 are full time employees. Medical
Directors of the Company's dialysis facilities are not employees of the
Company.
RISK FACTORS
In evaluating the Company and its business, the stockholders of the Company
should carefully consider the following risk factors in addition to the other
information contained herein. This Form 10-K contains statements that
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Such forward-looking
statements relate to future events or the future financial performance of the
Company and involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those discussed below, and such factors
could cause actual results to differ materially from those indicated by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Form 10-K will in fact transpire.
Uncertainties in Integrating Business Operations and Achieving Cost Savings
The Merger represents the largest single acquisition which the Company has
made to date. The process of integrating RTC's operations presents a
significant challenge to the Company's management and may lead to
unanticipated costs. There can be no assurance that the Company will be
successful in completing this integration. The integration of RTC's
operations, and of its accounting, personnel, administrative, legal,
information systems and other functions, involves the risk that key employees
may leave even when offered continuing employment. Robert L. Mayer, Jr., RTC's
Chairman, Chief Executive Officer and President, and Frederick C. Jansen,
RTC's Executive Vice President, were expected to and did resign following the
Merger as did certain other officers for whom the Merger constituted an event
of constructive discharge, including
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Ronald H. Rodgers, Jr., RTC's Chief Financial Officer. Except for such
officers, substantially all of the personnel responsible for operations have
remained with the Company following the Merger, although there can be no
assurances that such personnel will not resign at any point in the future or
that they can easily be replaced should they resign. The integration of RTC's
operation requires the devotion of a significant amount of time by senior
executives of the Company, which may detract from the business operations and
development of the Company. There can be no assurance that any of the cost
savings, operating efficiencies or other synergies expected to result from the
Merger will be accomplished as rapidly as currently expected or at all.
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 HCFA for dialysis treatments. Since 1972, qualified
patients suffering from ESRD have been entitled to Medicare benefits
regardless of age or financial circumstances. Approximately 58.5% of the
Company's net patient revenues during the fiscal year ended December 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. No prediction can be made as to 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. No prediction can be made as to whether certain
services, for which the Company is currently separately reimbursed, may in the
future be included in the Medicare composite rate.
Since June 1, 1989, the Medicare ESRD program has provided reimbursement for
the administration to dialysis patients of EPO. EPO, a bio-engineered protein,
is beneficial in the treatment of anemia, a medical complication frequently
experienced by dialysis patients. Most of the Company's dialysis patients
receive EPO. The Company had revenues from the administration of EPO (the
substantial majority of which are reimbursed through Medicare and Medicaid
programs) of approximately 20.2% of net patient revenues, in the fiscal year
ended December 31, 1997. Therefore, 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. The
Office of the Inspector General of HHS recently recommended that Medicare
reimbursement for EPO be reduced from $10 to $9 per 1,000 units and HHS has
concurred with this recommendation; however, HHS has not determined whether it
will pursue this change through the rulemaking process. The President's fiscal
1999 budget includes this proposed reduction in EPO reimbursement.
In April 1996, HCFA notified providers that reimbursement of EPO
administration for a patient with a hematocrit measurement exceeding 36% would
be available only if the 90-day rolling hematocrit measurement for such
patient was 36.5% or less. If the 90-day rolling average hematocrit measure
exceeded 36.5%, reimbursement for EPO administration would be denied, except
in very limited instances. In connection with this notification, HCFA
instructed its fiscal intermediaries to review the rolling three month
hematocrit averages and to ascertain compliance therewith. TRCH's and RTC's
single fiscal intermediary enacted such instructions in December and September
1997, respectively. Subsequently, HCFA notified its fiscal intermediaries that
it was changing the foregoing reimbursement policy. Effective for monthly
billing periods beginning on or after March 10, 1998, reimbursement will be
available when the 90-day rolling average hematocrit measure exceeds 36.5%,
with payment based on the lower of the actual dosage billed for the current
month or 80% of the prior month's allowable EPO dosage. In addition, in this
notice, HCFA reestablished the authorization to make payment for EPO for a
month when the patient's hematocrit exceeds 36%, when accompanied by
documentation establishing medical necessity. The Company does not expect this
change in reimbursement or this medical review to have a material adverse
effect on the Company's revenues. No prediction can be made as to whether
future rate or reimbursement method changes will be made. Furthermore, EPO is
produced by a single manufacturer, and any interruption of supply or product
cost increases could
25
<PAGE>
adversely affect the Company's operations. Finally, during the period from
November 1997 through February 1998, approximately 25% of the Company's
Medicare billings for EPO reimbursement were placed into medical review
because of TRCH's intermediary's non-compliance with HCFA EPO reporting audit
guidelines.
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. Approximately 6.6% of the Company's
net patient revenues during the fiscal year ended December 31, 1997 were
funded by Medicaid or comparable state programs. The Medicaid programs are
subject to statutory and regulatory changes, administrative rulings,
interpretations of policy and governmental funding restrictions, all of which
may have the effect of decreasing program payments, increasing costs or
modifying the way the Company operates its dialysis business.
Approximately 34.9% of the Company's net patient revenues during the fiscal
year ended December 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 nonexclusive 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. The federal
government has 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 Medical Directors of its facilities, nor the minority
ownership interests of referring physicians in certain of the Company's
dialysis facilities meet all of the necessary requirements to obtain full
protection afforded by these safe harbors. Although the Company has never been
challenged under these statutes and the Company 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.
Stark I restricts physician referrals for clinical laboratory services to
entities with which a physician or an immediate family member has a "financial
relationship." HCFA has 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 many of the Company's
competitors as well.
26
<PAGE>
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 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.
It is unlawful in California 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 facilities in California which account for a
significant percentage of net operating revenues. 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. The Company also
operates dialysis facilities and provides laboratory services in Alabama,
Colorado, Delaware, Florida, Georgia, Hawaii, Illinois, Kansas, Maryland,
Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New York,
Oklahoma and Puerto Rico, all of which have so-called "fraud and abuse"
statutes which regulate the Company's relationships with physicians.
At present, ESRD patients eligible for California's Medicaid program,
MediCal, are reimbursed for their transportation costs relating to ESRD
treatments. If this practice is deemed to violate applicable federal or state
law, the Company may be forced to halt that practice and the Company cannot
predict the effect the foregoing would have on the desire of such patients to
use the Company's services.
The Company's licensed clinical laboratories are also subject to extensive
federal and state regulation of performance standards, including the
provisions of The Clinical Laboratory Improvement Act of 1967 and The Clinical
Laboratory Improvement Amendments of 1988 Act, as well as the federal and
state regulations described above. One of the Company's laboratory operations
is presently the subject of a third-party carrier review. The third-party
carrier has requested medical and billing records for certain patients, and
the Company has provided the requested records. The third-party carrier has
not informed the Company of the reason for or the nature or scope of its
review.
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
The Company's business strategy depends in significant part on its ability
to acquire or develop additional dialysis facilities. This strategy is
dependent on the continued availability of suitable acquisition candidates and
27
<PAGE>
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, 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.
Competition
The dialysis industry is fragmented and highly competitive, particularly in
terms of acquisitions of existing dialysis facilities and developing
relationships with referring physicians. Competition for qualified physicians
to act as Medical Directors is also high. Competition for acquisitions has
increased the cost of acquiring existing dialysis facilities. The Company has
also 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, which is possible under the proposed Stark
II regulations, 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, 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 certain 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 "--Operations Subject to
Government Regulation."
Operations Outside the United States
Approximately 7.7% of the Company's patients are serviced by operations
outside the United States. The Company's non-United States operations are
subject to certain political, economic and other uncertainties not encountered
in United States operations, including risks of civil disturbances (or other
risks that may limit or disrupt markets), expropriations and general hazards
associated with the assertions of national sovereignty over certain areas in
which operations are conducted. The Company's operations outside the United
States may face
28
<PAGE>
the additional risk of fluctuating currency values, hard currency shortages,
controls of currency exchange and difficulty in repatriation of income or
capital. No prediction can be made as to what governmental regulations may be
enacted in the future that could adversely affect the international dialysis
industry.
Forward-Looking Statements
Certain statements contained in this Form 10-K, including without limitation
statements containing the words "believes," "anticipates," "intends,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally and in
the regions in which the Company operates; industry capacity; demographic
changes; existing government regulations and changes in, or the failure to
comply with, government regulations; legislative proposals for health care
reform; the ability to enter into managed care provider arrangements on
acceptable terms; changes in Medicare and Medicaid reimbursement levels;
liability and other claims asserted against the Company; competition;
dependence on physician referrals; changes in business strategy or development
plans; the ability to attract and retain qualified personnel, including
physicians; the lack of assurance that the cost savings, growth opportunities
and synergies expected from the Merger will be achieved; the lack of
assurances as to the future performance of the combined companies; the
availability and terms of capital to fund the expansion of the Company's
business, including the acquisition of additional facilities; and other
factors referenced in this Form 10-K. GIVEN THESE UNCERTAINTIES, INVESTORS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS.
ITEM 2. PROPERTIES.
The Company operates 392 outpatient dialysis facilities, of which 382 are
located in premises leased by the Company or its respective general
partnerships, limited liability companies or subsidiary corporations, and ten
of which are owned by the Company. 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 500 to 15,900 square
feet, with an approximate average size of 4,900 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 2008. The Company's
general accounting office in Tacoma, Washington, is leased for a term expiring
in 2000. The Company maintains a 41,500 square foot facility in Berwyn,
Pennsylvania for additional corporate billing and collections purposes. The
Berwyn lease expires in 2001. The Company owns an additional property that it
is presently leasing to a third party. The Company anticipates acquiring at
least three additional properties for use as dialysis facilities during fiscal
1998. 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.
29
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to claims and suits in the ordinary course of
business for which the Company believes it will be covered by insurance. The
Company does not believe that the ultimate resolution of pending proceedings,
whether the underlying claims are covered by insurance or not, will have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
30
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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
closing prices for the Common Stock as reported by the New York Stock
Exchange.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal Year Ended December 31, 1996
1st Quarter............................................... $19.20 $16.43
2nd Quarter............................................... $27.08 $19.65
3rd Quarter............................................... $25.35 $19.50
4th Quarter............................................... $27.68 $19.35
Fiscal Year Ended December 31, 1997
1st Quarter............................................... $21.98 $18.23
2nd Quarter............................................... $24.11 $16.88
3rd Quarter............................................... $30.08 $21.83
4th Quarter............................................... $33.44 $25.06
</TABLE>
The closing price of the Common Stock on March 16, 1998 was $35.69 per
share. As of March 16, 1998 there were approximately 963 holders of the
Company's Common Stock named as holders of record by The Bank of New York, the
Company's registrar and transfer agent. Since the August 1994 Transaction, the
Company has not declared or paid cash dividends to its holders of Common Stock
and does not anticipate paying any cash dividends in the foreseeable future.
The Company is subject to certain restrictions on its ability to pay dividends
on the Common Stock under that certain $800 Million Revolving Credit
Agreement, as amended, by and among the Company and the Lenders party thereto,
DLJ Capital Funding, Inc., as Syndication Agent, First Uniton National Bank,
as Documentation Agent, The Bank of New York as Administrative Agent, and BNY
Capital Markets, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation,
as Co-Arrangers and that certain $250 Million Term Loan Agreement, as amended,
by and among the Company and the Lenders party thereto, DLJ Capital Funding,
Inc., as Syndication Agent, The Bank of New York, as Administrative Agent and
BNY Capital Markets, Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation, as Co-Arrangers.
Effective January 1, 1998, the Company purchased all of the assets of
Monterey Park Dialysis Center, Inc. As partial consideration for the purchase
the Company issued an aggregate of 37,314 unregistered shares of Common Stock
to the two shareholders of Monterey Park Dialysis Center, Inc. on that date.
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.
31
<PAGE>
ITEM 6. SELECTED FINANCIAL 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, 1993, 1994 and 1995 and as of December 31, 1995, 1996 and 1997
and for each of the years in the three year period ended May 31, 1995, the
seven month period ended December 31, 1995, and the years ended December 31,
1996 and 1997 have been derived from the Company's audited consolidated
financial statements. The consolidated financial data for the seven months
ended December 31, 1994 and the year ended December 31, 1995 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 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 "Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements filed as part of this Report.
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEARS ENDED MAY 31, DECEMBER 31,(1) YEAR ENDED DECEMBER 31,
----------------------- --------------- --------------------------------
1993 1994 1995 1994 1995 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:(2)
Net operating
revenues.............. $71,576 $80,470 $98,968 $53,593 $89,711 $134,843 $272,947 $438,205
------- ------- ------- ------- ------- -------- -------- --------
Facility operating
expenses.............. 49,440 56,828 65,583 36,012 57,406 86,977 183,987 292,495
General and
administrative
expenses(3)........... 5,292 7,457 9,115 4,916 7,645 11,844 19,267 29,832
Provision for doubtful
accounts.............. 2,050 1,550 2,371 1,363 1,811 2,819 5,496 8,896
Depreciation and
amortization.......... 3,434 3,752 4,740 2,586 4,383 6,537 15,368 27,124
------- ------- ------- ------- ------- -------- -------- --------
Total operating
expenses.............. 60,216 69,587 81,809 44,877 71,245 108,177 224,118 358,347
------- ------- ------- ------- ------- -------- -------- --------
Operating income....... 11,360 10,883 17,159 8,716 18,466 26,666 48,829 79,858
Interest expense, net.. 9 13 7,203 3,300 5,584 9,244 5,175 13,238
------- ------- ------- ------- ------- -------- -------- --------
Income before income
taxes, minority
interests and
extraordinary item.... 11,351 10,870 9,956 5,416 12,882 17,422 43,654 66,620
Income taxes........... 4,129 4,106 3,511 1,933 4,631 6,209 16,351 25,141
------- ------- ------- ------- ------- -------- -------- --------
Income before minority
interests and
extraordinary item.... 7,222 6,764 6,445 3,483 8,251 11,213 27,303 41,479
Minority interests in
income of consolidated
subsidiaries.......... 775 1,046 1,593 833 1,784 2,544 3,578 4,502
------- ------- ------- ------- ------- -------- -------- --------
Income before
extraordinary item.... $ 6,447 $ 5,718 $ 4,852 $ 2,650 $ 6,467(4) $ 8,669(4) $ 23,725(4) $ 36,977
======= ======= ======= ======= ======= ======== ======== ========
Income per share before
extraordinary
item(5)............... $ 0.27 $ 0.18 $ 0.23(4) $ 0.35(4) $ 0.57(4) $ 0.83
======= ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEARS ENDED
YEARS ENDED MAY 31, DECEMBER 31, DECEMBER 31,
------------------------ ------------ -------------------
1993 1994 1995 1995(1) 1996 1997
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Outpatient facilities
(at period end)....... 36 37 57 68 134 197
Treatments(6).......... 379,397 423,353 481,537 390,806 1,169,023 1,869,854
Hospitals receiving
inpatient services (at
period end)........... 32 28 48 55 87 127
<CAPTION>
MAY 31, DECEMBER 31,
------------------------ --------------------------------
1993 1994 1995 1995 1996 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(2)
Working capital........ $14,609 $20,064 $ 14,971 $ 54,691 $ 99,299 $146,274
Total assets........... 36,003 43,621 77,558 163,998 374,080 695,340
Long-term debt
(including current
portion).............. 267 198 88,142 55,894 104,616 358,584
Mandatorily redeemable
Common Stock(7)....... 3,990
Stockholders' equity
(deficit)............. 29,015 34,733 (30,879)(8) 82,804 230,966 273,672
</TABLE>
(See Notes on following page)
32
<PAGE>
- --------
(1) In 1995, the Company changed its fiscal year end to December 31 from May
31.
(2) The August 1994 Transaction and subsequent acquisitions had a significant
impact on the Company's capitalization and equity securities and on the
Company's results of operations. Consequently, the Balance Sheet Data as
of May 31, 1995 and as of December 31, 1995, 1996 and 1997 and the Income
Statement Data for the fiscal year ended May 31, 1995, for the seven
months ended December 31, 1995, and the years ended December 31, 1996 and
1997 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,
1993 and 1994 include overhead allocations by the Company's former parent
of $235,000 and $1,458,000, respectively. The overhead allocations for the
fiscal year ended May 31, 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 also
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 $0.09 per share, net of tax, on the early extinguishment of
debt. In July and September 1996, the Company recorded a combined
extraordinary loss of $7,700,000 or $0.19 per share net of tax, on the
early extinguishment of debt. See Note 8 of Notes to Consolidated
Financial Statements.
(5) See additional income per share information in the Consolidated Statements
of Income. No income per share information is presented for the years
ended May 31, 1993 and 1994 as the Company was a wholly-owned subsidiary
during those periods.
(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.
(8) In connection with the August 1994 Transaction, the Company paid a special
dividend to Tenet Healthcare Corporation ("Tenet") of $81.7 million,
including $75.5 million in cash.
33
<PAGE>
ITEM 7. 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 related notes thereto contained elsewhere in this
Form 10-K.
BACKGROUND
The Company's wholly-owned subsidiary Total Renal Care, Inc., formerly
Medical Ambulatory Care, Inc., was organized in 1979 by Tenet (formerly
National Medical Enterprises, Inc.), to own and operate Tenet's hospital-based
dialysis services as freestanding dialysis facilities and to acquire and
develop additional dialysis facilities in Tenet's markets. The Company was
organized to facilitate the August 1994 Transaction which consisted of the
sale by Tenet of approximately 75% of its ownership interest 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 (a wholly-owned subsidiary of Tenet), 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.
In the August 1994 Transaction, the Company paid a special dividend of $81.7
million, including $75.5 million in cash, to Tenet out of the net proceeds
from (i) the issuance of units consisting 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 1,000,000 shares
of Common Stock and (ii) borrowing under the Company's revolving credit
facility with The Bank of New York (the "TRC Credit Facility"). The Company
raised additional capital to fund the continuation of its growth strategy
through an initial public offering (the "IPO") on October 30, 1995 in which
the Company issued and sold 11,500,000 shares of its Common Stock and raised
gross proceeds of $107 million. Concurrent with the IPO, the Company listed
its Common Stock on the New York Stock Exchange under the symbol "TRL."
Subsequent to the IPO, the Company changed its fiscal year end from May 31 to
December 31.
The Company raised additional capital to further fund its growth strategy
with two secondary stock offerings in April and October of 1996 which raised
gross proceeds to the Company of approximately $135 million. In October of
1996 the Company increased its credit facility with The Bank of New York from
$130 million to $400 million (the "Credit Facility"). With the proceeds from
the IPO, the April 1996 secondary offering and the Credit Facility, the
Company was able to complete the early retirement of the Discount Notes. On
October 24, 1997, the Company increased the Credit Facility to an aggregate of
$1,050,000,000 in two bank facilities (the "Credit Facilities").
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 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,
except the Merger) 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 had a significant
impact on the Company's results of operations for the fiscal year ended May
31, 1995, the seven months ended December 31, 1995 and the fiscal year ended
December 31, 1996. The Company's results of operations have also been
materially affected by the implementation of the Company's growth strategy
subsequent to the August 1994 Transaction. Consequently, the results of
operations for the year ended May 31, 1995, the seven months ended December
31, 1995 and the fiscal years ended December 31, 1996 and December 31, 1997
are not directly comparable to the results of operations for comparable prior
periods.
34
<PAGE>
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 hemodialysis 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 33 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,
respectively. For the years ended December 31, 1996 and December 31, 1997,
approximately 61% and 59%, respectively, and 6% and 7%, respectively of the
Company's net patient revenues were derived from reimbursement under Medicare
and Medicaid, respectively. See "Item 1. Business--Operations--Sources of
Revenue Reimbursement."
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial and
operating information for each of the last two calendar years:
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARES AND PER TREATMENT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $50,237 $64,583 $73,333 $84,794 $89,030 $104,752 $113,668 $130,755
Facility operating
expenses............... 33,329 43,318 49,474 57,866 59,636 70,371 75,505 86,983
General and
administrative
expenses............... 3,901 4,800 4,943 5,623 6,204 7,179 7,614 8,835
Operating income........ 9,551 11,556 13,126 14,596 16,041 18,709 20,997 24,111
Income before
extraordinary item..... 4,276 5,726 6,536 7,187 7,825 8,866 9,870 10,416
Income per share before
extraordinary item(1).. $ 0.12 $ 0.13 $ 0.15 $ 0.16 $ 0.18 $ 0.20 $ 0.22 $ 0.23
Outpatient facilities... 108 116 126 134 139 166 174 197
Treatments.............. 217,451 274,256 315,580 361,736 375,050 451,664 489,922 553,218
Net operating revenues
per treatment.......... $231.03 $235.48 $232.38 $234.41 $237.38 $ 231.92 $ 232.01 $ 236.35
Operating income
margin................. 19.0% 17.9% 17.9% 17.2% 18.0% 17.9% 18.5% 18.4%
</TABLE>
- --------
(1) See additional income per share information in Note 16 of Notes to
Consolidated Financial Statements.
Utilization of the Company's services is generally not subject to material
seasonal fluctuations. The quarterly variations shown above reflect the impact
of increasing labor costs and decreasing margins related to the corresponding
costs of providing services and amortization of intangibles from acquired
facilities partially offset by the effects of the Best Demonstrated Practices
Program implemented in the fourth quarter of 1996.
35
<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
ENDED
DECEMBER YEARS ENDED
YEAR ENDED 31, DECEMBER 31,
MAY 31, ------------ -------------------
1995 1994 1995 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Facility operating expenses..... 66.3 67.2 64.0 64.5 67.4 66.8
General and administrative
expenses....................... 9.2 9.2 8.5 8.8 7.1 6.8
Provision for doubtful
accounts....................... 2.4 2.5 2.0 2.1 2.0 2.0
Depreciation and amortization... 4.8 4.8 4.9 4.8 5.6 6.2
Operating income................ 17.3 16.3 20.6 19.8 17.9 18.2
Interest expense, net of
interest income................ 7.3 6.2 6.2 6.9 1.9 3.0
Income taxes.................... 3.5 3.6 5.2 4.6 6.0 5.7
Minority interests.............. 1.6 1.6 2.0 1.9 1.3 1.0
Income before extraordinary
item........................... 4.9 4.9 7.2 6.4 8.7 8.4
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Operating Revenues. Net operating revenues increased $165,258,000 to
$438,205,000 for the year ended December 31, 1997 ("Year End 1997") from
$272,947,000 for the year ended December 31, 1996 ("Year End 1996")
representing a 60.6% increase. Of this increase $163,632,000 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 $234.35 in Year End 1997 compared to $233.48
in Year End 1996. The increase in operating revenues per treatment was due to
increased ancillary services utilization and an increase in affiliated and
unaffiliated facility management fees.
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. Facility operating expenses increased $108,508,000 to $292,495,000 in
Year End 1997 from $183,987,000 in Year End 1996 and as a percentage of net
operating revenues, facility operating expenses decreased to 66.8% in Year End
1997 from 67.4% in Year End 1996. This decrease is mostly due to improvements
in labor and pharmaceutical costs as a percentage of revenues partially offset
by an increase in other facility expenses, consisting primarily of rent and
Medical Director fees. In December 1996, the Company implemented its best
demonstrated practices program which focuses primarily upon costs incurred in
labor and supplies.
General and Administrative Expenses. General and administrative expenses
include headquarters expense and administrative, legal, quality assurance,
information systems and centralized accounting support functions. General and
administrative expenses increased $10,565,000 to $29,832,000 in Year End 1997
from $19,267,000 in Year End 1996, and as a percentage of net operating
revenues, general and administrative expenses declined to 6.8% in Year End
1997 from 7.1% in Year End 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 $3,400,000 to $8,896,000 in Year End 1997 from $5,496,000 in Year
End 1996. As a percentage of net operating revenues, the provision for
doubtful accounts remained the same at 2.0% for both periods.
Depreciation and Amortization. Depreciation and amortization increased
$11,756,000 to $27,124,000 in Year End 1997 from $15,368,000 in Year End 1996,
and as a percentage of net operating revenues, depreciation and amortization
increased to 6.2% in Year End 1997 from 5.6% in Year End 1996. This increase
was
36
<PAGE>
attributable to increased amortization due to acquisition activity and
increased depreciation from new facility leaseholds and routine capital
expenditures.
Operating Income. Operating income increased $31,029,000 to $79,858,000 in
Year End 1997 from $48,829,000 in Year End 1996, and as a percentage of net
operating revenues, operating income increased to 18.2% in Year End 1997 from
17.9% in Year End 1996. This increase in operating income as a percent of
revenue is primarily due to decreases in facility operating costs and general
and administrative partially offset by an increase in depreciation and
amortization all as a percentage of net operating revenue.
Interest Expense. Interest expense, net of interest income, increased
$8,063,000 to $13,238,000 in Year End 1997 from $5,175,000 in Year End 1996,
and as a percentage of net operating revenues, interest expense, net of
interest income, was 3.0% in Year End 1997 and 1.9% in Year End 1996. Cash
interest expense during Year End 1997 was $15,678,000 and non-cash interest
during the same period was $0 versus $2,656,000 and $4,396,000 in Year End
1996, respectively. Non-cash interest expense during Year End 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 and the Senior Credit Facilities to fund the Company's
acquisitions.
Provision for Income Taxes. Provision for income taxes increased $8,790,000
to $25,141,000 in Year End 1997 from $16,351,000 in Year End 1996, and the
effective income tax rate, after minority interest expense, decreased to 40.5%
in Year End 1997 from 40.2% in Year End 1996. The overall decrease in the
effective tax rate is due to a reduction in the blended state rates and a
reduction in nondeductible amortization as a percentage of total amortization
expense.
Minority Interests. Minority interests represent the pretax income earned by
physicians and non-physicians 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. Minority interests increased $924,000 to
$4,502,000 in Year End 1997 from $3,578,000 in Year End 1996, and as a
percentage of net operating revenues, minority interest decreased to 1.0% in
Year End 1997 from 1.3% in Year End 1996. 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Operating Revenues. Net operating revenues increased $138,104,000 to
$272,947,000 for Year End 1996 from $134,843,000 for the year ended December
31, 1995 ("Year End 1995") representing a 102.4% increase. Of this increase
$119,904,000 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 $233.48 in Year End
1996 compared to $223.44 in Year End 1995. The increase in operating revenues
per treatment was due to the addition of TRC's ESRD laboratory in 1995
resulting in a full year of revenue in 1996, an overall increase in average
reimbursement rates, increased ancillary services utilization primarily in the
administration of EPO, the opening of its oral pharmaceutical and IV therapy
program, and an increase in affiliated and unaffiliated facility management
fees.
Facility Operating Expenses. Facility operating expenses increased
$97,010,000 to $183,987,000 in Year End 1996 from $86,977,000 in Year End 1995
and as a percentage of net operating revenues, facility operating expenses
increased to 67.4% in Year End 1996 from 64.5% in Year End 1995. In Year End
1996 the increase in facility operating expenses as a percentage of revenue
primarily was due to increased labor and benefits partially incurred as a
result of utilizing existing employees of the acquired facilities during
transition periods after the acquisitions.
General and Administrative Expenses. General and administrative expenses
increased $7,423,000 to $19,267,000 in Year End 1996 from $11,844,000 in Year
End 1995, and as a percentage of net operating revenues, general and
administrative expenses declined to 7.1% in Year End 1996 from 8.8% in Year
End 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.
37
<PAGE>
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $2,677,000 to $5,496,000 in Year End 1996 from $2,819,000 in Year
End 1995, and as a percentage of net operating revenues, provision for
doubtful accounts decreased to 2.0% in Year End 1996 from 2.1% in Year End
1995. The provision for doubtful accounts is influenced by the amount of net
operating revenues generated from non-governmental payor sources. The decrease
for Year End 1996 reflects a decline in the older aging categories of accounts
receivable due to increased collection efforts.
Depreciation and Amortization. Depreciation and amortization increased
$8,831,000 to $15,368,000 in Year End 1996 from $6,537,000 in Year End 1995,
and as a percentage of net operating revenues, depreciation and amortization
increased to 5.6% in Year End 1996 from 4.8% in Year End 1995. This increase
was attributable to increased amortization due to acquisition activity and
increased depreciation from new facility leaseholds and routine capital
expenditures.
Operating Income. Operating income increased $22,163,000 to $48,829,000 in
Year End 1996 from $26,666,000 in Year End 1995, and as a percentage of net
operating revenues, operating income decreased to 17.9% in Year End 1996 from
19.8% in Year End 1995. This decrease in operating income as a percent of
revenue is primarily due to an increase in facility operating expenses and
depreciation and amortization partially offset by a decrease in general and
administrative expenses as a percentage of net operating revenues.
Interest Expense. Interest expense, net of interest income, decreased
$4,069,000 to $5,175,000 in Year End 1996 from $9,244,000 in Year End 1995,
and as a percentage of net operating revenues, interest expense, net of
interest income, was 1.9% in Year End 1996 and 6.9% in Year End 1995. Cash
interest expense during Year End 1996 was $2,656,000 and non-cash interest
during the same period was $4,396,000 versus $1,216,000 and $8,901,000 in Year
End 1995, respectively. The decrease in Year End 1996 interest expense, net of
interest income, was due primarily to the early extinguishment of a portion of
the Discount Notes in December of 1995 and the remainder in the third quarter
of the year ended December 31, 1996 (as discussed in "Liquidity and Capital
Resources" below), and offset by short term investment income earned on excess
proceeds from the public stock offerings in April and October, 1996.
Provision for Income Taxes. Provision for income taxes increased $10,142,000
to $16,351,000 in Year End 1996 from $6,209,000 in Year End 1995, and the
effective income tax rate, after minority interest expense, decreased to 40.6%
in Year End 1996 from 41.3% in Year End 1995. The overall decrease in the
effective tax rate is due to a reduction in the blended state rates and a
reduction in nondeductible amortization as a percentage of total amortization
expense.
Minority Interests. Minority interests increased $1,034,000 to $3,578,000 in
Year End 1996 from $2,544,000 in Year End 1995, and as a percentage of net
operating revenues, minority interest decreased to 1.3% in Year End 1996 from
1.9% in Year End 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.
Extraordinary Loss. In December 1995 the Company redeemed 35% of the
accreted value of the Discount Notes 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 July and
September 1996, the Company retired all remaining outstanding Notes for a
total redemption price of $68,499,000. In connection with these redemptions,
the Company recorded an extraordinary loss of $7,700,000 (net of income tax
effect).
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
38
<PAGE>
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 an ESRD
laboratory, an overall increase in reimbursement rates, increased ancillary
services utilization primarily in the administration of EPO and the opening of
the Company's 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 revenues,
facility operating expenses declined to 64.0% in the 1995 Seven Month Period
from 67.2% in the 1994 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 revenues, 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 revenues, 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 revenues,
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 facility 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 revenues, 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 revenues.
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 Credit
Facility and the increase in non-cash interest expense was due to the August
11, 1994 issuance of the 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 initially would have been incurred on the
Discount Notes on August 15, 1997.
39
<PAGE>
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 revenues, 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 revenues, minority interest 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.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash. Net cash provided by operating activities of the
Company was $5,788,000, $18,447,000, $6,277,000 and $15,069,000 for Year End
1997, Year End 1996, 1995 Seven Month Period and the fiscal year ended May 31,
1995, respectively. Net cash provided by operating activities consists of the
Company's net income, increased by extraordinary items related to the early
extinguishment of debt (for the 1995 Seven Month Period and Year End 1996) and
non-cash expenses such as depreciation, amortization, accreted interest and
the provision for doubtful accounts, and adjusted by changes in components of
working capital, primarily accounts receivable. Net cash used in investing
activities was $276,197,000, $171,546,000, $35,130,000 and $26,607,000 for
Year End 1997, Year End 1996, 1995 Seven Month Period and the fiscal year
ended May 31, 1995, 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. Net cash provided by
financing activities was $255,928,000 for Year End 1997 consisting primarily
of proceeds from the Company's Credit Facilities: $142,799,000 for Year End
1996 consisting primarily of net proceeds from two public issuances of common
stock and net proceeds from the Credit Facility, offset by amounts paid in
connection with the remaining Discount Notes; $56,988,000 for the 1995 Seven
Month Period consisting primarily of net proceeds from the IPO, less amounts
paid in connection with the redemption of 35% of the outstanding Discount
Notes and net payments of borrowings under the Credit Facility; and
$12,135,000 for the fiscal year ended May 31, 1995, consisting primarily of
debt and equity offering proceeds, and borrowings under the Credit Facility,
net of cash dividends paid to Tenet.
Expansion. The Company anticipates aggregate capital requirements for
purchases of equipment and leasehold improvements for outpatient facilities
including the development costs of 30 de novo facilities in the year ending
December 31, 1998 will be approximately $45,000,000, as compared to
$36,878,000 in Year End 1997.
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 to $1,000,000 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.
From January 1, 1998 through March 15, 1998 the Company has paid
approximately $40 million in consideration for acquisitions involving seven
agreements to acquire ten additional facilities. Additionally, the Company has
entered into letters of intent to acquire additional facilities for
approximately $100 million.
40
<PAGE>
Credit Facilities. On October 24, 1997, the Company expanded its existing
$400 million Credit Facility with an aggregate of $1,050,000,000 in two bank
facilities. The Credit Facilities consist of a seven-year $800 million
revolving credit facility and a ten-year $250 million term facility. Under the
revolving credit facility, up to $100,000,000 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. Up to
$75,000,000 of the available letters of credit and borrowings under the
revolving credit facility may be utilized for foreign financing. In general,
borrowings under the Credit Facilities 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%) or (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 1.75% 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
upon, the Alternate Base Rate.
The Credit Facilities contain financial and operating covenants including,
among other things, requirements that the Company maintain certain financial
ratios and satisfy certain financial tests, and impose 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.
On November 25, 1996, the Company entered into a seven year interest rate
swap agreement involving the exchange of fixed and floating interest payment
obligations without the exchange of the underlying principal amounts. At
December 31, 1997 the total notional principal amount of this interest rate
swap agreement was $100,000,000 and the effective interest rate thereon was
7.57%.
On July 24, 1997, the Company entered into a ten-year interest rate swap
agreement. At December 31, 1997 the total notional principal amount of this
interest rate swap agreement was $200,000,000 and the effective interest rate
thereon was 7.77%.
Stock Split. On September 30, 1998 the Company declared a five-for-three
split of its Common Stock in the form of a stock dividend. Stockholders of
record on October 7, 1997 received two additional shares of the Company's
Common Stock for every three shares owned. The dividend shares were delivered
to the record stockholders on October 20, 1997. The Company issued a cash
dividend for all fractional shares of approximately $14,000 which was also
paid on October 20, 1997.
Year 2000 Risks. Certain of the Company's older computer software programs
identify years with two digits instead of four. This is likely to cause
problems because the programs may recognize the year 2000 as the year 1900.
Plans are in process to eliminate all Year 2000 software problems. The Company
fully expects to complete the necessary coversions by the end of the second
quarter of 1999. The Company believes that the cost of modifying those systems
that were not already scheduled for replacement for business reasons prior to
2000 is immaterial. Although the Company does not expect Year 2000 to have a
material adverse effect on its internal operations, it is possible that Year
2000 problems could have a significant adverse effect on (i) the Company's
suppliers and their ability to service the Company and to accurately process
payments received and (ii) the ability of certain third party insurance payors
and governmental payors, such as Medicare and the individual state Medicaid
programs, to accurately process remittances (payments) on patient accounts
receivable due to the Company.
The Merger. The Company expects to achieve significant cost savings and
synergies from the Merger. After giving effect to these expected cost savings
and synergies, the Company expects the Merger to be accretive to its earnings
in the fiscal year ending December 31, 1998 and thereafter. The Company
believes that additional net cost savings and synergies may be realized in
1998 and beyond. No assurances can be made, however, as to the actual amount
and timing of cost savings and synergies, if any, that will be realized. In
addition, the Company will incur significant one-time merger related costs in
early 1998.
41
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
42
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
INFORMATION CONCERNING MEMBERS OF THE BOARD OF DIRECTORS
The following table sets forth certain information concerning members of the
Board of Directors of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
<C> <C> <S>
Chairman of the Board, Chief Executive Officer,
Victor M.G. Chaltiel 56 President and Director
Maris Andersons 60 Director
Peter T. Grauer 52 Director
Regina E. Herzlinger 54 Director
Shaul G. Massry 67 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
Continuous Ambulatory Peritoneal Dialysis, currently the most common mode of
home dialysis.
Maris Andersons has been a Director of the Company since August 1994. Mr.
Andersons was a Senior Vice President and Senior Advisor, Corporate Finance,
of Tenet Healthcare Corporation ("Tenet") until his retirement in 1997. Mr.
Andersons also 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 DLJ Merchant Banking, Inc. ("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 Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"). Mr. Grauer is a Director of S.D.
Warren Holdings Corporation, Doane Products Co. and Jitney Jungle Stores Co.
Regina E. Herzlinger has been a director of the Company since July 1997. Ms.
Herzlinger, the Nancy R. McPherson Professor of Business Administration Chair
at the Harvard Business School, has been a member of the faculty at the
Harvard Business School since 1971. Ms. Herzlinger is a director of C.R. Bard,
Inc., Cardinal Health, Inc., Deere & Company, Manor Care, Inc. and Schering-
Plough Corporation.
Shaul G. Massry has been a director of the Company since April 1997. Dr.
Massry has been a Professor of Medicine, Physiology and Biophysics and Chief,
Division of Nephrology, at the University of Southern California School of
Medicine since 1974. Dr. Massry served as the president of the National Kidney
Foundation from 1990 through 1992.
43
<PAGE>
No arrangement or understanding exists between any director and any other
person or persons pursuant to which any director was or is to be selected as a
director other than pursuant to the Shareholders Agreement. See "Item 13.
Certain Relationships and Related Transactions." None of the directors has any
family relationship among themselves or with any executive officer of the
Company.
INFORMATION CONCERNING EXECUTIVE OFFICERS
The following table sets forth certain information concerning each person
who is an executive officer of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
<C> <C> <S>
Victor M.G. Chairman of the Board, Chief Executive Officer,
Chaltiel 56 President and Director
Leonard W. Frie 51 Executive Vice President and Chief Operating Officer
Barry C. Cosgrove 40 Vice President, General Counsel and Secretary
John E. King 37 Vice President, Finance and Chief Financial Officer
</TABLE>
Executive officers of the Company are elected by and serve at the discretion
of the Board. Set forth below is a brief description of the business
experience of all executive officers other than Mr. Chaltiel, who is also a
director. See "Information Concerning Members of the Board of Directors."
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.
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, Mr. Cosgrove 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.
John E. King has been the Vice President, Finance and Chief Financial
Officer of the Company since its inception in April 1994. Prior thereto, Mr.
King served in the same capacity with Medical Ambulatory Care, Inc. since May
1, 1993. From December 1990 to April 1993, he was the Chief Financial Officer
for one of Tenet's general acute hospitals.
None of the executive officers has any family relationship among themselves
or with any director of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16") requires the Company's
executive officers, directors and beneficial owners of more than 10% of the
Company's Common Stock (collectively, "Insiders") to file reports of ownership
and changes in ownership of Common Stock of the Company with the Securities
and Exchange Commission and the New York Stock Exchange, and to furnish the
Company with copies of all Section 16(a) forms they file. The Company became
subject to Section 16 in conjunction with the registration of its Common Stock
under the Exchange Act effective October 31, 1995. Based solely on its review
of the copies of such forms received by it, or written representations from
certain reporting persons that no Form 5's were required for those persons,
the Company believes that its Insiders complied with all applicable Section 16
filing requirements during fiscal 1997.
44
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid or accrued by the
Company to the Chief Executive Officer and to each of the executive officers
for both of the fiscal years in the two-year period ended December 31, 1997,
for the twelve month period ended December 31, 1995 ("Calendar 1995") and for
the fiscal year ended May 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------------------------
ALL
RESTRICTED SECURITIES OTHER
OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN-
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS* PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Victor M.G. Chaltiel Fiscal 1997 $288,652 $451,776(1) -- -- 333,334 -- $ 5,522(2)
Chairman of the Fiscal 1996 285,186 438,633 -- -- 166,667 -- 5,366(3)
Board, Chief Calendar 1995+ 277,413 419,728++ -- -- -- $3,803,800 9,520(4)
Executive Officer Fiscal 1995 217,708(5) 412,500 -- -- 1,477,778 -- 207,645(6)
President and
Director
Leonard W. Frie Fiscal 1997 182,245 143,754 -- -- 111,916 -- 14,153(7)
Executive Vice Fiscal 1996 181,484 139,568 -- -- 159,140 -- 26,914(8)
President and Calendar 1995+ 176,535 133,551++ -- -- 105,557 14,300 80,849(9)
Chief Operating Fiscal 1995 165,625 131,250 -- $99,061(10) 111,112 28,179 241,880(11)
Officer
Barry C. Cosgrove Fiscal 1997 149,817 115,004 -- -- 111,916 -- 11,582(12)
Vice President, Fiscal 1996 145,189 111,655 -- -- 116,083 -- 10,556(13)
General Counsel Calendar 1995+ 144,480(14) 106,842++ -- -- 62,500 53,625 8,320(15)
and Secretary Fiscal 1995 116,777 105,000 -- -- 83,333 -- 6,695(16)
John E. King Fiscal 1997 130,504 112,500 -- -- 111,916 -- 14,089(17)
Vice President, Fiscal 1996 99,533 93,750 -- -- 74,417 -- 15,509(18)
Finance and Chief Calendar 1995+ 90,789 68,681++ -- -- 20,833 17,875 42,362(19)
Financial Officer Fiscal 1995 88,958 67,500 -- 22,877(20) 27,778 2,500 41,487(21)
</TABLE>
- --------
*Includes options repriced in April 1997. See "--Report on Repricing of
Options."
+ The Company changed its fiscal year from May 31 to December 31 in 1995.
++ Includes the applicable pro-rata portion of the fiscal 1995 bonus amount.
(1) Mr. Chaltiel's 1997 bonus was prepaid in December 1997.
(2) Includes (i) automobile allowance of $5,002, and (ii) $520 paid by the
Company for an umbrella insurance policy.
(3) Includes (i) an automobile allowance of $4,846, and (ii) $520 paid by the
Company for an umbrella insurance policy.
(4) Includes (i) an automobile allowance of $9,000, and (ii) $520 paid by the
Company for an umbrella insurance policy.
(5) Mr. Chaltiel joined the Company as of August 11, 1994. This figure
represents the amount actually earned by Mr. Chaltiel from August 11,
1994 through May 31, 1995.
(6) Includes (i) an automobile allowance of $7,125, (ii) $520 paid by the
Company for an umbrella insurance policy, and (iii) a fee of $200,000
received by Mr. Chaltiel from the Company prior to his employment.
(7) Includes (i) an automobile allowance of $8,500, (ii) $520 paid by the
Company for an umbrella insurance policy, and (iii) $5,133 in deferred
compensation.
(8) Includes (i) an automobile allowance of $8,500, (ii) $520 paid by the
Company for an umbrella insurance policy, (iii) $4,894 in deferred
compensation, and (iv) $13,000 in payment of cash value of accrued Paid
Time Off.
(9) Includes (i) an automobile allowance of $8,500, (ii) $520 paid by the
Company for an umbrella insurance policy, (iii) a relocation fee of
$67,435, (iv) $4,371 in deferred compensation, and (v) $23 reimbursed by
Tenet with respect to an insurance policy.
45
<PAGE>
(10) Granted by Tenet based on Mr. Frie's unvested stock options in Tenet as
of August 22, 1994 and the trading value of Tenet shares on that date.
(11) Includes (i) an automobile allowance of $8,500, (ii) $520 paid by the
Company for an umbrella insurance policy, (iii) a relocation fee of
$88,598, (iv) $10,524 in deferred compensation, (v) $338 reimbursed by
Tenet with respect to an insurance policy, (vi) $900 paid by Tenet with
respect to life and disability insurance under Tenet's Supplemental
Executive Retirement Plan, (vii) a bonus of $32,500 from Tenet, and
(viii) a fee of $100,000 received from Tenet.
(12) Includes (i) an automobile allowance of $7,800, (ii) $520 paid by the
company for an umbrella insurance policy, and (iii) $3,262 in deferred
interest income.
(13) Includes (i) an automobile allowance of $7,800, (ii) $520 paid by the
Company for an umbrella insurance policy, and (iii) $2,236 in deferred
interest income.
(14) Mr. Cosgrove joined the Company as of August 8, 1994. This figure
represents the amount actually earned by Mr. Cosgrove from August 8,
1994 through May 31, 1995.
(15) Includes (i) an automobile allowance of $7,800, and (ii) $520 paid by
the Company for an umbrella insurance policy.
(16) Includes (i) an automobile allowance of $6,175, and (ii) $520 paid by
the Company for an umbrella insurance policy.
(17) Includes (i) an automobile allowance of $7,800, (ii) $520 paid by the
Company for an umbrella insurance policy, and (iii) $5,769 in payment of
cash value of accrued Paid Time Off.
(18) Includes (i) an automobile allowance of $7,800, (ii) $520 paid by the
Company for an umbrella insurance policy, (iii) housing reimbursement of
$3,624, and (iv) $3,565 in payment of cash value of accrued Paid Time
Off.
(19) Includes (i) an automobile allowance of $7,800, (ii) $19,025 paid by the
Company for relocation expenses, (iii) housing reimbursement of $14,990,
(iv) $520 paid by the Company for an umbrella insurance policy, and (v)
$27 reimbursed by Tenet with respect to an insurance policy.
(20) Granted by Tenet based on Mr. King's unvested stock options in Tenet as
of August 22, 1994 and the trading value of Tenet shares on that day.
(21) Includes (i) an automobile allowance of $7,800, (ii) $19,025 paid by the
Company for relocation expenses, (iii) $520 paid by the Company for an
umbrella insurance policy, (iv) housing reimbursement of $13,707, and
(iv) $435 reimbursed by Tenet with respect to an insurance policy.
46
<PAGE>
The following table sets forth information concerning options granted to
each of the named executive officers during fiscal 1997:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- ----------------------------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION 5% 10%
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE ($)(2) ($)(2)
<S> <C> <C> <C> <C> <C> <C>
Victor M.G. Chaltiel.... 333,334 7.4% $18.75 4/24/07 $3,930,599 $9,960,910
Leonard W. Frie......... 111,916 2.6 18.75 4/24/07 1,319,688 3,344,349
Barry C. Cosgrove....... 111,916 2.6 18.75 4/24/07 1,319,688 3,344,349
John E. King............ 111,916 2.6 18.75 4/24/07 1,319,688 3,344,349
</TABLE>
- --------
(1) All options are nonqualified stock options and were granted under the
Company's 1995 Equity Compensation Plan. Such options vest over four year
periods at an annual rate of 25% beginning on the first anniversary of the
date of grant.
(2) The potential realizable dollar value of a grant is the product of: (a)
the difference between: (i) the product of the per-share market price at
the time of the grant and the sum of one (1) plus the adjusted stock price
appreciation rate (the assumed rate of appreciation compounded annually
over the term of the option or SAR); and (ii) the per-share exercise price
of the option or SAR; and (b) the number of securities underlying the
grant at fiscal year-end. Actual gains, if any, on stock option exercises
and Common Stock holdings are dependent on the future performance of the
Common Stock and overall stock market conditions. There can be no
assurance that the amounts reflected in this table will be achieved.
The following table sets forth information concerning the aggregate number
of options exercised by each of the named executive officers during fiscal
1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FY-END AT FY-END
SHARES --------------------- ---------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(#) UNEXERCISABLE($)(1)
<S> <C> <C> <C> <C>
Victor M.G. Chaltiel.... -- -- -- /333,334 $ -- /$2,916,664
Leonard W. Frie......... -- -- 105,555/111,916 2,807,763/ 979,265
Barry C. Cosgrove....... -- -- 62,500/111,916 1,662,500/ 979,265
John E. King............ -- -- 20,833/111,916 554,158/ 979,265
</TABLE>
- --------
(1) Value is determined by subtracting the exercise price from the fair market
value of $27.50 per share (the closing price for the Company's Common
Stock as reported by the New York Stock Exchange as of December 31, 1997)
and multiplying the remainder by the number of underlying shares of Common
Stock.
47
<PAGE>
EMPLOYMENT AGREEMENTS
Mr. Chaltiel entered into an employment agreement with the Company on August
11, 1994, pursuant to which he is employed by the Company for an initial term
of three years, with one year automatic extensions at the end of each year.
Such agreement is terminable by the Company at any time, subject, among other
things, to severance payments as provided in the employment agreement. His
base salary paid during fiscal 1997 was $288,652 and is subject to annual
review by the Board for possible increases, with a minimum increase tied to
the California consumer price index. Until May 31, 1999, Mr. Chaltiel will be
entitled to a yearly bonus of up to 150% of his base salary based upon the
Company achieving certain EBITDA performance targets. He also may be awarded
an additional bonus at the discretion of the Board if Company EBITDA targets
are exceeded by more than 15%. After May 31, 1999, Mr. Chaltiel will be
awarded bonuses in a manner as determined in the sole discretion of the Board,
on a basis reasonably consistent with past bonuses for similar performance.
Although not yet formally effected, the Company anticipates that Mr.
Chaltiel's employment agreement will be amended to reflect the Company's new
fiscal year end of December 31.
Mr. Chaltiel was also granted options pursuant to the Company's 1994 Equity
Compensation Plan representing a total of approximately 1,477,778 shares of
Common Stock. The options had an exercise price of $0.90. By their terms, half
of the options were to vest over a four-year period and the other half were to
vest on the ninth anniversary of the date of grant, subject to accelerated
vesting in the event that the Company satisfied certain EBITDA performance
targets. On September 18, 1995, the Board and the stockholders of the Company
approved an agreement dated as of the same date by and between the Company and
Mr. Chaltiel pursuant to which the vesting schedule for these options was
accelerated such that all of Mr. Chaltiel's outstanding options became vested
and exercisable immediately. In connection with this agreement, Mr. Chaltiel
agreed to exercise all of his options at that time to purchase 1,477,778
shares of Common Stock at an exercise price of $0.90 per share. Mr. Chaltiel
paid the exercise price pursuant to a $1,330,000 four-year promissory note
bearing interest at the lesser of the prime rate or 8%. This note is subject
to repayment, in part or in full, to the extent of the receipt of any proceeds
received by Mr. Chaltiel upon disposition of such shares of Common Stock, and
Mr. Chaltiel pledged these shares as collateral for repayment of this note.
Also, in accordance with the agreement, the Company agreed to advance Mr.
Chaltiel funds of up to $1,521,520 principal amount in the aggregate relating
to Mr. Chaltiel's tax liability in connection with additional taxes associated
with the exercise of such options. Such loans are evidenced by two additional
promissory notes executed by Mr. Chaltiel. The first note for $1,348,447 was
executed concurrently with Mr. Chaltiel's exercise of his options. The second
note for $173,073 was executed as of April 15, 1996. Simultaneously with the
execution of the agreement, Mr. Chaltiel and the Company entered into a
Release and Pledge Agreement whereby the Company released 1,855,555 shares of
Common Stock owned by Mr. Chaltiel from a previous pledge agreement and
substituted the newly acquired 1,477,778 shares of Common Stock therefor.
Mr. Frie entered into an employment agreement with the Company on August 11,
1994 and Messrs. Cosgrove and King entered into employment agreements with the
Company dated September 1, 1994. Pursuant to said employment agreements,
Messrs. Frie, Cosgrove and King are employed by the Company for an initial
term of three years, two years and one year, respectively, with one-year
automatic extensions at the end of each initial term. Each such agreement is
terminable by the Company at any time subject, among other things, to
severance payments as set forth therein. Base salary under the employment
agreements is subject to annual review by the Board for possible increases,
with a minimum increase tied to the California consumer price index. These
employment agreements also provide for annual bonuses, through May 31, 1999,
of up to 75% of base salary, one half of which will be based on the
achievement of certain EBITDA performance targets and the other half of which
will be awarded at the discretion of the Board. After May 31, 1999, bonuses
will be awarded in the sole discretion of the Board. Although not formally
effected, the Company anticipates that the employment agreements of the above
named officers will be amended to reflect the Company's new fiscal year end of
December 31. Each of Messrs. Frie, Cosgrove and King have also been granted
options pursuant to the Company's equity compensation plans. The Options will
vest on the ninth anniversary of the date of grant, subject to accelerated
vesting in the event that the Company satisfies certain EBITDA performance
targets. If yearly performance targets are satisfied, the options will vest at
a rate of 25% at the end of each year on the
48
<PAGE>
anniversary of the date of grant. The exercise price of the options ranges
from $.90 per share to $18.75 per share. Upon voluntary termination of
employment, the Company may have the right to acquire all shares in the
Company held by the terminated employee at Fair Market Value Per Share (as
defined therein). Upon involuntary termination of employment, the Company may
have the right to acquire all shares in the Company held by the terminated
employee at 80% of Fair Market Value Per Share (as defined therein).
On December 14, 1995, the Board amended the employment contract agreement
and stock option agreement of each executive officer (other than Mr. Chaltiel)
to provide for the immediate vesting of all of such officers' stock options at
any time following the sale of fifty percent or more of the stock or assets of
the Company, or upon a merger, consolidation or reorganization in which the
Company does not survive, if any of such officers' employment is terminated
for any reason.
REPORT ON REPRICING OF OPTIONS
In April 1997, the Company's Compensation Committee determined that the
purposes of the Company's equity compensation plans were not being adequately
achieved with respect to those employees holding options that were above
current market value and that it was essential to the best interests of the
Company and the Company's stockholders that the Company retain and motivate
such employees. The Compensation Committee further determined that, because
the exercise prices of certain options were substantially above then-current
trading prices, it would be in the best interests of the Company and the
Company's stockholders to provide such optionees the opportunity to exchange
their above market value options for options exercisable at the current market
value. As of April 24, 1997, upon approval by the Board, the Company offered
such optionees the opportunity to exchange such options for new options at an
exercise price of $18.75 per share. The last sales price of a share of Common
Stock listed on the New York Stock Exchange for that day was $18.75. Any
holder accepting this offer was required to give up existing options. The
repriced options vest over a three year period at an annual rate of 33 1/3%
beginning April 24, 1998.
The following table sets forth information concerning the repricing of
certain options held by each of the named executive officers during fiscal
1997:
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING MARKET PRICE EXERCISE LENGTH OF
OPTIONS/SARS OF STOCK PRICE AT TIME ORIGINAL OPTION
REPRICED OR AT TIME OF OF REPRICING TERM REMAINING
AMENDED REPRICING OR OR NEW EXERCISE AT DATE OF REPRICING
NAME DATE (#)(1) AMENDMENT ($) AMENDMENT ($) PRICE ($)(1) OR AMENDMENT
<S> <C> <C> <C> <C> <C> <C>
Victor M.G. Chaltiel.... 4/24/97 100,000 31.25 39.375 31.25 9 years
Leonard W. Frie......... 4/24/97 32,150 31.25 39.375 31.25 9 years
Barry C. Cosgrove....... 4/24/97 32,150 31.25 39.375 31.25 9 years
John E. King............ 4/24/97 32,150 31.25 39.375 31.25 9 years
</TABLE>
- --------
(1) The number of securities underlying options and exercise prices shown were
subsequently adjusted to reflect the Company's five-for-three stock split
on October 20, 1997 and are currently 53,583 (166,667 with regard to
Mr. Chaltiel) and $18.75, respectively.
COMPENSATION COMMITTEE
Peter T. Grauer, Chair
Maris Andersons
Regina E. Herzlinger
49
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
REGARDING COMPENSATION
The Compensation Committee (the "Committee") oversees the general
compensation policies of the Company, the Company's compensation and stock
incentive plans, establishes the compensation of Mr. Chaltiel, the Company's
Chairman of the Board, Chief Executive Officer and President, and reviews Mr.
Chaltiel's recommendations as to the compensation levels for the other
executive officers.
COMPENSATION POLICY
The goal of the Company's executive compensation program is to provide a
strong and direct link among stockholder values, Company performance and
executive compensation through the design and implementation of a sound
compensation program that will attract and retain highly qualified personnel.
Compensation programs are intended to complement the Company's short- and
long-term business objectives and to focus executive efforts on the
fulfillment of these objectives. The Committee believes that cash compensation
in the form of salary and performance-based bonuses provides Company
executives with short-term rewards for success in operations, and that long-
term compensation through the award of restricted stock and stock options
encourages growth in management stock ownership which leads to expansion of
management's stake in the long-term performance and success of the Company.
Base Salary. In establishing 1997 base salary levels for executive officer
positions, the Committee considered the terms of the relevant employment
agreements. For fiscal 1997, the Company's executive officers (other than Mr.
Chaltiel) generally received raises in their annual base salary of
approximately 3%. Mr. King received a raise in base salary of 20% in fiscal
1997 to adjust his base salary to approximate the levels of the Company's
other executive officers. As the Committee's philosophy is to reward executive
officers through bonuses, stock and stock options, increases in base salary
for fiscal 1997 are minimal compared to the improved corporate performance as
well as increased job responsibilities as a result of the increased size of
the Company.
Bonus. Annual bonuses for executive officers are intended to reflect the
Committee's belief that management's contribution to stockholder returns comes
from maximizing earnings and the quality of those earnings. Bonus awards are
based largely on the Company's attainment of EBITDA performance targets
established in each executive officer's employment agreement and each
executive officer's target bonus is fixed as a percentage of his base salary.
For fiscal 1997, bonuses paid to the Company's executive officers (other than
Mr. Chaltiel) ranged from $112,500 to $143,754 (or 75% of such executive
officers' base salaries).
Restricted Stock and Stock Options. On August 5, 1994, the Company adopted
the 1994 Equity Compensation Plan (the "1994 Plan"). The purpose of the 1994
Plan is to provide incentives and reward the contributions of key employees
and officers for the achievement of long-term Company performance goals, as
measured by earnings per share and the market value of the Common Stock. The
Board set guidelines for the number and terms of stock option or restricted
stock awards based on factors similar to those considered with respect to the
other components of the Company's compensation program. The awards under the
1994 Plan are designed to align the interests of executives with those of the
stockholders. Generally, stock options become exercisable at the end of nine
years, but they may vest over a period of four years based on Company
performance. The individual forfeits any installment which has not vested
during the period of his or her employment. No awards were made to the
executive officers under the 1994 Plan in fiscal 1997.
On October 24, 1995, the Company established the 1995 Equity Compensation
Plan (the "1995 Plan"). The purpose of the 1995 Plan is to offer stock
compensation to employees, directors, and other persons providing services to
the Company and, accordingly, to strengthen the mutuality of interests between
those persons and the Company's stockholders by providing those persons with a
proprietary interest in the Company's long-term growth and financial success.
Under the 1995 Plan, the Board awarded stock options in fiscal 1997 to all
executive officers.
50
<PAGE>
On May 15, 1997, the Company established the 1997 Equity Compensation Plan
(the "1997 Plan"). The purpose of the 1997 Plan is to promote the interests of
the Company and its stockholders by enabling the Company to offer employees,
directors, and other persons providing services to the Company an opportunity
to acquire an equity interest in the Company so as to better attract, retain
and reward such persons, and accordingly, to strengthen the mutuality of
interests between such persons and the Company's stockholders by providing
such persons with a proprietary interest in pursuing the Company's long-term
growth and financial success. No awards were made to the executive officers
under the 1997 Plan in fiscal 1997.
COMPENSATION OF CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT
The Committee believes that Victor M.G. Chaltiel, the Company's Chairman of
the Board, Chief Executive Officer and President, provides valuable services
to the Company and that his compensation should therefore be competitive with
that paid to executives at comparable companies. In addition, the Committee
believes that an important portion of his compensation should be based on
Company performance. Mr. Chaltiel's base salary is determined pursuant to his
employment agreement. Mr. Chaltiel received an increase in his base salary
effective as of October 1, 1997 of $8,762 (or 3% of base salary). The increase
was based only upon a general cost of living increase as the Committee's
philosophy is to reward executive officers through bonuses, stock and stock
options. Mr. Chaltiel is entitled under his employment agreement to a yearly
bonus of up to 150% of his base salary based upon the Company achieving
certain EBITDA performance targets. He also may be awarded an additional bonus
at the discretion of the Committee if Company EBITDA targets are exceeded by
more than 15%. Mr. Chaltiel's bonus for fiscal 1997 was $438,633 (or 150% of
his base salary). On December 31, 1997, Mr. Chaltiel received the value of his
1998 bonus, or an additional $451,776, to assist in paying Federal and state
tax obligations.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer or director of the Company serves as a member of the
board of directors or compensation committee of any other entity which has one
or more executive officers serving as a member of the Company's Board. During
fiscal 1997, Messrs. Chaltiel and Andersons and Dr. Massry were officers,
employees or consultants of the Company. No one other than Messrs. Andersons
and Grauer served as a member of the Compensation Committee during fiscal
1997.
INTERNAL REVENUE CODE SECTION 162(M)
Under Section 162 of the Internal Revenue Code of 1986, as amended, the
amount of compensation paid to certain executives that is deductible with
respect to the Company's corporate taxes is limited to $1,000,000 annually. It
is the current policy of the Board to maximize, to the extent reasonably
possible, the Company's ability to obtain a corporate tax deduction for
compensation paid to executive officers of the Company to the extent
consistent with the best interests of the Company and its stockholders.
COMPENSATION COMMITTEE
Peter T. Grauer, Chair
Maris Andersons
Regina E. Herzlinger
51
<PAGE>
STOCK PRICE PERFORMANCE
The following graph shows a comparison of cumulative total returns for the
Company, the Standard & Poor's 400 and a Company-constructed Peer Group Index
(as defined below). The graph assumes that the value of an investment in Common
Stock and in each such index was $100 on October 31, 1995 (the date the
Company's Common Stock was registered under Section 12 of the Securities
Exchange Act of 1934), and that all dividends have been reinvested. The
Company-constructed Peer Group Index consists of the following companies: Renal
Care Group, Renal Treatment Centers and Vivra (adjusted to reflect the
cessation of trading in Vivra's stock as of June 12, 1997). The Company
believes that the companies in the Peer Group Index are the primary competitors
of the Company. The Peer Group Index is weighted for the market capitalization
of each company within the group.
The comparison in the graph below is based on historical data and is not
intended to forecast the possible future performance of the Company's Common
Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
TOTAL RENAL CARE HOLDINGS, INC., THE STANDARD & POOR'S 400,
AND TOTAL RENAL CARE HOLDINGS, INC.'S SELF-CONSTRUCTED PEER GROUP
LOGO
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 29, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Renal Care Holdings,
Inc....................... 100.00 147.24 177.91 224.95
Peer Group Index........... 100.00 116.87 136.82 212.41
S & P 400.................. 100.00 105.44 127.19 163.95
</TABLE>
The information contained above under the captions "Report of the
Compensation Committee Regarding Compensation" and "Stock Price Performance"
shall not be deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission, nor shall such information be incorporated
by reference into any future filing under the Securities Act or the Exchange
Act, except to the extent that the Company specifically incorporates it by
reference into such filing.
52
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the ownership of the
Company's Common Stock as of December 31, 1997 by (i) all those persons known
by the Company to own beneficially more than 5% of the Company's Common Stock,
(ii) each director and each executive officer of the Company and (iii) all
directors and executive officers as a group. Except as otherwise noted under
"Certain Relationships and Related Transactions," the Company knows of no
agreements among its stockholders which relate to voting or investment power
over its Common Stock or any arrangement the operation of which may at a
subsequent date result in a change of control of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
<S> <C> <C>
NME Properties Corp. ................. 5,000,000 11.2%
c/o Tenet Healthcare Corporation
30 South La Patera Lane
Goleta, California 93117
Putnam Investments, Inc.(1)........... 4,111,762 9.2%
One Post Office Square
Boston, Massachusetts 02109
Pilgrim Baxter & Associates, Ltd...... 3,263,235 7.3%
825 Duportail Road
Wayne, Pennsylvania 19087
Morgan Stanley, Dean Witter, Discover
& Co. ............................... 2,325,456 5.2%
1585 Broadway
New York, New York 10036
Denver Investment Advisors LLC........ 2,268,971 5.1%
1225 17th Street, 26th Floor
Denver, Colorado 80202
Victor M.G. Chaltiel.................. 934,191 2.1%
Maris Andersons....................... -- *
Barry C. Cosgrove..................... 96,951 *
Leonard W. Frie....................... 184,623 *
Peter T. Grauer....................... 11,250 *
John E. King.......................... 36,020 *
Regina E. Herzlinger.................. 11,250 *
Shaul G. Massry....................... 16,806 *
All directors and executive officers
as a group (8 persons)............... 1,291,091 2.9%
</TABLE>
- --------
* Amount represents less than 1% of the Company's Common Stock.
(1) Represents 3,981,764 shares held by Putnam Investment Management, Inc.
("PIM") and 129,998 shares held by Putnam Advisory Company, Inc. ("PAC").
PIM and PAC are each registered investment advisors that are wholly-owned
by Putnam Investments, Inc. The share amounts for PIM and PAC are based
upon information contained in an amendment to Schedule 13G filed with the
Commission on January 27, 1998. A subsequent amendment to that Schedule
13G filed on February 6, 1998 indicated that the holdings of PIM and PAC
had increased to 4,914,799 and 191,601, respectively, bringing the number
of shares beneficially owned by Putnam Investments, Inc. to 5,106,400, or
11% of the Company's Common Stock as of January 31, 1998.
53
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Victor M.G. Chaltiel is Chairman of the Board, Chief Executive Officer,
President and a Director of the Company. Pursuant to Mr. Chaltiel's employment
agreement and the 1994 Plan, Mr. Chaltiel purchased 1,855,557 shares of Common
Stock at $0.90 per share during the year ended May 31, 1995. Mr. Chaltiel paid
$835,000 of the purchase price in cash, with the remainder being evidenced by
a four-year promissory note bearing interest at the lesser of the prime rate
or 8% per annum, which note is secured by a pledge of certain shares of stock
of the Company owned by Mr. Chaltiel. In July 1995, the Board approved a one-
year deferral of all scheduled principal and accrued interest payments under
all outstanding promissory notes from officers of the Company, including this
four-year promissory note. In September 1995, the Company and Mr. Chaltiel
entered into an agreement pursuant to which Mr. Chaltiel purchased 1,477,778
shares of Common Stock upon exercise of options held by him. Mr. Chaltiel paid
for such shares with a four-year promissory note for $1,330,000 bearing
interest at the lesser of the prime rate or 8%. This note is subject to
repayment, in part or in full, to the extent of the receipt of proceeds
received by Mr. Chaltiel upon disposition of such shares of Common Stock, and
Mr. Chaltiel pledged these shares as collateral for repayment of this note.
The Company also agreed to advance Mr. Chaltiel funds of up to $1,521,520
principal amount in the aggregate relating to Mr. Chaltiel's tax liability in
connection with the shares. Such loans are evidenced by two additional
promissory notes executed by Mr. Chaltiel. The first note for $1,348,447 was
executed concurrently with Mr. Chaltiel's exercise of his options in September
1995. The second note for $173,073 was executed as of April 15, 1996.
Simultaneously with the execution of the agreement, Mr. Chaltiel and the
Company entered into a Release and Pledge Agreement whereby the Company
released 1,855,557 shares of Common Stock owned by Mr. Chaltiel from a
previous pledge agreement and substituted the newly acquired 1,477,778 shares
of Common Stock therefor.
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 Common 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 after-tax proceeds of such borrower's bonus from the
Company (based on maximum tax rates then in effect). To date, the Board has
approved deferrals of all scheduled principal and accrued interest payments
under all such loans. No other terms of the loans have been changed.
As of December 31, 1997, Leonard W. Frie, Barry C. Cosgrove and John E. King
had loans outstanding from the Company with principal amounts of $100,000,
$70,000 and $25,000, 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 in September 1995 of $2,678,447 pursuant to similar
loans in connection with Mr. Chaltiel's exercise of options for
1,477,778 shares of Common Stock and related personal income tax obligations,
as described above. These loans are secured by a pledge of 1,444,445 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.
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 101,972 shares of Common Stock in consideration for these
services. As of December 31, 1997, Mr. Andersons has exercised 27,778 of said
options leaving a balance of 74,194 options to purchase shares of Common
Stock.
Shaul G. Massry, a Director of the Company, serves as a consultant to the
Company. In addition to certain compensation as a member of the Board, Dr.
Massry receives $50,000 per year and has been granted options, vesting over
four years, to purchase an aggregate of 44,722 shares of Common Stock in
consideration for these services. As of December 31, 1997, Dr. Massry has
exercised 11,110 of such options leaving a balance of 33,612 options to
purchase shares of Common Stock.
54
<PAGE>
The Company, DLJ Merchant Banking Partners, L.P. ("DLJMBP"), certain members
of management and NME Properties Corp. ("NME"), a wholly-owned subsidiary of
Tenet, entered into a shareholders' agreement (as amended, the "Shareholders'
Agreement") in August 1994 pursuant to which, among other provisions, DLJMBP
had the right to nominate four of the five members of the Company's Board.
Although this right has terminated, an affiliate of DLJMBP, Peter T. Grauer,
continues to serve on the Company's Board. The Shareholders' Agreement further
provides for certain registration rights and for restrictions on transfers of
Common Stock, certain rights of first refusal in favor of DLJMBP in the event
NME proposes to transfer shares of Common Stock and certain rights and
obligations of NME to participate in transfers of shares by DLJMBP. DLJ and
certain of its affiliates from time to time perform various investment banking
and other services for the Company, for which the Company pays customary
consideration.
The Company has entered into indemnity agreements with each of its directors
and all of its officers, which agreements require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors, officers, employees or agents of the
Company (other than liabilities arising from conduct in bad faith or which is
knowingly fraudulent or deliberately dishonest), and, under certain
circumstances, to advance their expenses incurred as a result of proceedings
brought against them.
55
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)Documents filed as part of this Report:
(1) Index to Financial Statements:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants of Price Waterhouse LLP F-1
Consolidated Balance Sheets as of December 31, 1996 and December
31, 1997 F-2
Consolidated Statements of Income for year ended May 31, 1995,
the seven months ended December 31, 1994 (unaudited) and
December 31, 1995 and the years ended December 31, 1995
(unaudited), December 31, 1996 and December 31, 1997 F-3
Consolidated Statements of Stockholders' Equity for the year
ended May 31, 1995, the seven months ended December 31, 1995 and
the years ended December 31, 1996 and December 31, 1997 F-4
Consolidated Statements of Cash Flows for year ended May 31,
1995, the seven months ended December 31, 1994 (unaudited) and
December 31, 1995 and the years ended December 31, 1995
(unaudited), December 31, 1996 and December 31, 1997 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
(2) Index to Financial Statement Schedules:
<TABLE>
<S> <C>
Report of Independent Accountants on Financial Statement
Schedule of Price Waterhouse LLP S-1
Schedule II--Valuation and Qualifying Accounts S-2
</TABLE>
(3)(a) Exhibits:
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company, dated
December 4, 1995.@@
3.2 Certificate of Amendment of Certificate of Incorporation of the Company,
dated February 26, 1998.X
3.3 Bylaws of the Company, dated October 6, 1995.+
4.1 Shareholders Agreement, dated August 11, 1994 between DLJMB, DLJIP,
DLJOP, DLJMBF, NME Properties, Continental Bank, as voting trustee, and
the Company.##
4.2 Agreement and Amendment, dated as of June 30, 1995, between DLJMBP,
DLJIP, DLJOP, DLJMBF, DLJESC, Tenet, the Company, Victor M.G. Chaltiel,
the Putnam Purchasers, the Crescent Purchasers and the Harvard
Purchasers, relating to the Shareholders Agreement dated as of August
11, 1994 between DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties,
Continental Bank, as voting trustee, and the Company.##
10.1 Credit Agreement by and among the Company, the Lenders party thereto, BNY
Capital Markets, Inc. and Donaldson Lufkin & Jenrette Securities
Corporation as Arrangers, DLJ Capital Funding, Inc. as Documentation
Agent and The Bank of New York as Administrative Agent, dated as of
October 11, 1996 (the "TRCH Credit Facility").@
10.2 Guaranty by Total Renal Care, Inc. to The Bank of New York, as
Administrative Agent, pursuant to the TRCH Credit Facility.@
10.3 Subscription Agreement dated May 26, 1994 between DLJMB, DLJIP, DLJOP,
DLJMBF, NME Properties, Tenet and the Company.#
10.4 Services Agreement dated August 11, 1994 between the Company and Tenet.##
</TABLE>
56
<PAGE>
<TABLE>
<C> <S>
10.5 Noncompetition Agreement dated August 11, 1994 between the Company and
Tenet.##
10.6 Employment Agreement dated as of August 11, 1994 by and between the
Company and Victor M.G. Chaltiel (with forms of Promissory Note and
Pledge and Stock Subscription Agreement attached as exhibits thereto)
(the "Chaltiel Employment Agreement").##*
10.7 Amendment to Chaltiel Employment Agreement, dated as of August 11,
1994.##*
10.8 Employment Agreement dated as of September 1, 1994 by and between the
Company and Barry C. Cosgrove.##*
10.9 Employment Agreement dated as of August 11, 1994 by and between the
Company and Leonard W. Frie (the "Frie Employment Agreement").##*
10.10 Amendment to Frie Employment Agreement, dated as of October 11, 1994.##*
10.11 Employment Agreement dated as of September 1, 1994 by and between the
Company and John E. King.##*
10.12 First Amended and Restated 1994 Equity Compensation Plan (the "1994
Plan") of the Company (with form of Promissory Note and Pledge attached
as an exhibit thereto), dated August 5, 1994.##*
10.13 Form of Stock Subscription Agreement relating to the 1994 Plan.##*
10.14 Form of Purchased Shares Award Agreement relating to the 1994 Plan.##*
10.15 Form of Nonqualified Stock Option relating to the 1994 Plan.##*
10.16 1995 Equity Compensation Plan.+*
10.17 Employee Stock Purchase Plan.+*
10.18 Option Exercise and Bonus Agreement dated as of September 18, 1995
between the Company and Victor M.G. Chaltiel.+*
10.19 1997 Equity Compensation Plan.**
10.20 Revolving Credit Agreement, dated as of October 24, 1997, by and among
the Company, the lenders party thereto, DLJ Capital Funding, Inc., as
Syndication Agent, First Union National Bank, as Documentation Agent,
and The Bank of New York, as Administrative Agent (the "Revolving
Credit Agreement").@@@
10.21 Amendment No. 1 and Consent No. 1, dated as of December 1, 1997, to the
Revolving Credit Agreement.@@@
10.22 Term Loan Agreement, dated as of October 24, 1997, by and among the
Company, the lenders party thereto, DLJ Capital Funding, Inc., as
Syndication Agent, First Union National Bank, as Documentation Agent,
and The Bank of New York, as Administrative Agent (the "Term Loan
Agreement").@@@
10.23 First Amendment, dated December 1, 1997, to the Term Loan
Agreement.@@@
10.24 Subsidiary Guaranty (the "Subsidiary Guaranty") dated as of October 24,
1997 by Total Renal Care, Inc., TRC West, Inc. and Total Renal Care
Acquisition Corp. in favor of and for the benefit of The Bank of New
York, as Collateral Agent, the lenders to the Revolving Credit
Agreement, the lenders to the Term Loan Agreement, the Term Agent (as
defined therein), the Acknowledging Interest Rate Exchangers (as
defined therein) and the Acknowledging Currency Exchangers (as defined
therein).@@@
10.25 Borrower Pledge Agreement dated as of October 24, 1997 and entered into
by and between the Company, and The Bank of New York, as Collateral
Agent, the lenders to the Revolving Credit Agreement, the lenders to
the Term Loan Agreement, the Term Agent (as defined therein), the
Acknowledging Interest Rate Exchangers (as defined therein) and the
Acknowledging Currency Exchangers (as defined therein).@@@
</TABLE>
57
<PAGE>
<TABLE>
<C> <S>
10.26 Form of Subsidiary Pledge Agreement dated as of October 24, 1997 by
Total Renal Care, Inc., TRC West, Inc. and Total Renal Care Acquisition
Corp., and The Bank of New York, as Collateral Agent, the lenders to
the Revolving Credit Agreement, the lenders to the Term Loan Agreement,
the Term Agent (as defined therein), the Acknowledging Interest Rate
Exchangers (as defined therein) and the Acknowledging Currency
Exchangers (as defined therein).@@@
10.27 Agreement and Plan of Merger dated as of November 18, 1997 by and among
TRCH, Nevada Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of TRCH, and RTC.###
10.28 Second Amendment, dated January 13, 1998, to the Term Loan Agreement.X
10.29 Amendment No. 2 and Consent No. 2 to the Revolving Credit Agreement and
First Amendment to the Subsidiary Guaranty dated February 17, 1998.X
10.30 Third Amendment to the Term Loan Agreement and First Amendment to the
Subsidiary Guaranty dated February 17, 1998.X
10.31 Special Purpose Option Plan++
10.32 Indenture, dated June 12, 1996 by RTC to PNC Bank including form of RTC
Note (the "Indenture").***
10.33 First Supplemental Indenture, dated as of February 27, 1998, among RTC,
TRCH and PNC Bank under the Indenture.X
10.34 Second Supplemental Indenture, dated as of March 31, 1998, among RTC,
TRCH and PNC Bank under the Indenture.X
10.35 Guaranty, entered into as of March 31, 1998, by TRCH in favor of and for
the benefit of PNC Bank.X
21 List of Subsidiaries of the Company.X
23.1 Consent of Price Waterhouse LLP.X
24 Powers of Attorney with respect to the Company (included on page II-1
hereof). X
27 Financial Data Schedule.X
</TABLE>
- --------
X Included in this filing.
@ Filed on October 18, 1996 as an exhibit to the Company's Current Report on
Form 8-K.
@@ Filed on March 18, 1996 as an exhibit to the Company's Transitional Report
on Form 10-K for the transition period from June 1, 1995 to December 31,
1995.
@@@ Filed on December 19, 1997 as an exhibit to the Company's Current Report
on Form 8-K.
+ Filed on October 24, 1995 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Registration Statement No. 33-97618).
++ Filed on February 25, 1998 as an exhibit to the Company's Registration
Statement on Form S-8 (Registration Statement No. 333-46887).
# Filed on June 6, 1994 as an exhibit to the Company's Registration Statement
on Form S-1 (Registration Statement No. 33-79770).
## Filed on August 29, 1995 as an exhibit to the Company's Form 10-K for the
year ended May 31, 1995.
### Filed on December 19, 1997 as Annex A to the Company's Registration
Statement on Form S-4 (Registration Statement No. 333-42653).
* Management contract or executive compensation plan or arrangement.
** Filed on August 29, 1997 as an exhibit to the Company's Registration
Statement on Form S-8 (Registration Statement No. 333-34695).
*** Filed as an exhibit to RTC's Form 10-Q for the quarter ended June 30,
1996.
58
<PAGE>
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated November 21, 1997, reporting under Item
5 the issuance by TRCH of a press release in connection with the Merger.
Current Report on Form 8-K, dated December 19, 1997, reporting under Item
7: (i) the Audited Financial Statements of the Nephrology Services Business
of Caremark International, Inc., (ii) the Audited Financial Statements of
New West Dialysis, Inc., (iii) the Audited Combined Financial Statements of
Southfield Dialysis Facility, P.C., North Oakland Dialysis Facility, P.C.,
Macomb Kidney Center, P.C., and Novi Kidney Center, P.C., (iv) Audited
Financial Statements of Dialysis Care of North Carolina, (v) Audited
Financial Statements of the Renal Dialysis Business of the Rogosin
Institute, Inc. and (vi) certain Unaudited Pro Forma Financial Statements.
59
<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, 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, 1996 and 1997,
and the results of their operations and their cash flows for the year ended
May 31, 1995, the seven months ended December 31, 1995 and the years ended
December 31, 1996 and 1997 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
February 16, 1998, except as to Note 17
which is as of March 30, 1998
F-1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 19,881,000 $ 5,400,000
Patient accounts receivable, less allowance for
doubtful accounts of $7,911,000 and $11,892,000,
respectively...................................... 91,009,000 152,481,000
Receivable from Tenet.............................. 347,000 534,000
Inventories........................................ 6,045,000 8,743,000
Deferred income taxes.............................. 3,233,000 6,146,000
Prepaid expenses and other current assets.......... 10,771,000 12,746,000
------------ ------------
Total current assets........................... 131,286,000 186,050,000
Property and equipment, net........................ 58,266,000 100,061,000
Notes receivable from related parties.............. 1,919,000 11,344,000
Other long-term assets............................. 1,992,000 8,148,000
Intangible assets, net............................. 180,617,000 389,737,000
------------ ------------
$374,080,000 $695,340,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................... $ 9,818,000 $ 14,547,000
Employee compensation and benefits................. 12,360,000 15,987,000
Other accrued liabilities.......................... 7,745,000 7,221,000
Current portion of long-term obligations........... 2,064,000 2,021,000
------------ ------------
Total current liabilities...................... 31,987,000 39,776,000
------------ ------------
Long-term debt..................................... 102,552,000 356,563,000
------------ ------------
Deferred income taxes.............................. 2,868,000 5,100,000
------------ ------------
Other long-term liabilities........................ 993,000 1,150,000
------------ ------------
Minority interests................................. 4,714,000 19,079,000
------------ ------------
Commitments and contingencies (Notes 8, 9 and 13)
Stockholders' equity
Preferred stock, ($.001 par value; 5,000,000
shares authorized; none issued or outstanding).. -- --
Common stock ($.001 par value; 195,000,000 shares
authorized; 44,121,637 and 44,589,645 shares
issued and outstanding)......................... 44,000 45,000
Additional paid-in capital....................... 255,879,000 261,810,000
Notes receivable from stockholders............... (2,827,000) (3,030,000)
Retained (deficit) earnings...................... (22,130,000) 14,847,000
------------ ------------
Total stockholders' equity..................... 230,966,000 273,672,000
------------ ------------
$374,080,000 $695,340,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
MAY 31, ------------------------ ----------------------------------------
1995 1994 1995 1995 1996 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $98,968,000 $53,593,000 $89,711,000 $134,843,000 $272,947,000 $438,205,000
----------- ----------- ----------- ------------ ------------ ------------
Operating expenses
Facilities............. 65,583,000 36,012,000 57,406,000 86,977,000 183,987,000 292,495,000
General and
administrative........ 9,115,000 4,916,000 7,645,000 11,844,000 19,267,000 29,832,000
Provision for doubtful
accounts.............. 2,371,000 1,363,000 1,811,000 2,819,000 5,496,000 8,896,000
Depreciation and
amortization.......... 4,740,000 2,586,000 4,383,000 6,537,000 15,368,000 27,124,000
----------- ----------- ----------- ------------ ------------ ------------
Total operating
expenses.............. 81,809,000 44,877,000 71,245,000 108,177,000 224,118,000 358,347,000
----------- ----------- ----------- ------------ ------------ ------------
Operating income........ 17,159,000 8,716,000 18,466,000 26,666,000 48,829,000 79,858,000
Interest expense, net of
capitalized interest... (7,447,000) (3,378,000) (6,291,000) (10,117,000) (7,052,000) (15,678,000)
Interest income......... 244,000 78,000 707,000 873,000 1,877,000 2,440,000
----------- ----------- ----------- ------------ ------------ ------------
Income before income
taxes, minority
interests and
extraordinary item.... 9,956,000 5,416,000 12,882,000 17,422,000 43,654,000 66,620,000
Income taxes............ 3,511,000 1,933,000 4,631,000 6,209,000 16,351,000 25,141,000
----------- ----------- ----------- ------------ ------------ ------------
Income before minority
interests and
extraordinary item.... 6,445,000 3,483,000 8,251,000 11,213,000 27,303,000 41,479,000
Minority interests in
income of consolidated
subsidiaries........... 1,593,000 833,000 1,784,000 2,544,000 3,578,000 4,502,000
----------- ----------- ----------- ------------ ------------ ------------
Income before
extraordinary item.... 4,852,000 2,650,000 6,467,000 8,669,000 23,725,000 36,977,000
Extraordinary loss
related to early
extinguishment of debt,
net of tax............. 2,555,000 2,555,000 7,700,000
----------- ----------- ----------- ------------ ------------ ------------
Net income.............. $ 4,852,000 $ 2,650,000 $ 3,912,000 $ 6,114,000 $ 16,025,000 $ 36,977,000
=========== =========== =========== ============ ============ ============
Earnings per common
share:
Net income before
extraordinary item.... $ 0.27 $ 0.18 $ 0.23 $ 0.35 $ 0.57 $ 0.83
Extraordinary loss..... (0.09) (0.10) (0.19)
----------- ----------- ----------- ------------ ------------ ------------
Net income............. $ 0.27 $ 0.18 $ 0.14 $ 0.25 $ 0.38 $ 0.83
=========== =========== =========== ============ ============ ============
Weighted average number
of common shares
outstanding............ 18,050,000 14,692,000 27,600,000 24,742,000 41,695,000 44,304,000
=========== =========== =========== ============ ============ ============
Earnings per common
share--assuming
dilution:
Net income before
extraordinary item.... $ 0.24 $ 0.16 $ 0.22 $ 0.32 $ 0.55 $ 0.82
Extraordinary loss..... (0.09) (0.09) (0.18)
----------- ----------- ----------- ------------ ------------ ------------
Net income............. $ 0.24 $ 0.16 $ 0.13 $ 0.23 $ 0.37 $ 0.82
=========== =========== =========== ============ ============ ============
Weighted average number
of common shares and
equivalents
outstanding--assuming
dilution............... 19,834,000 16,456,000 29,707,000 26,912,000 42,988,000 45,302,000
=========== =========== =========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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 May 31,
1994................... 111,112 $34,733,000 $ 34,733,000
Shares issued to Tenet.. 4,888,890 $ 4,000 4,000
Shares issued in change
of control:
DLJMB.................. 11,666,667 12,000 $ 10,488,000 10,500,000
Employees.............. 2,077,778 2,000 1,868,000 $ (995,000) 875,000
Shares issued in
offering............... 1,000,000 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
receivable............ (6,152,000) (6,152,000)
Shares issued in
acquisitions........... 495,773 1,000 445,000 446,000
Shares issued to
employees and others... 1,275,420 1,000 1,147,000 (513,000) 635,000
Net income.............. 4,852,000 4,852,000
---------- ------- ------------ ----------- ----------- ------------
Balance at May 31,
1995................... 21,515,640 21,000 12,675,000 (1,508,000) (42,067,000) (30,879,000)
Net proceeds from
initial public
offering............... 11,500,000 12,000 98,282,000 98,294,000
Shares and options
issued in
acquisitions........... 1,238,033 1,000 5,334,000 5,335,000
Shares issued to
employees and others... 46,117 59,000 (13,000) 46,000
Options exercised....... 1,744,443 2,000 1,564,000 (1,330,000) 236,000
Conversion of
mandatorily redeemable
common stock........... 1,136,112 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................... 37,180,345 37,000 123,695,000 (2,773,000) (38,155,000) 82,804,000
Net proceeds from stock
offerings.............. 6,666,667 7,000 128,311,000 128,318,000
Shares issued in
acquisitions........... 161,095 2,810,000 2,810,000
Shares issued to
employees and others... 1,883 15,000 15,000
Options exercised....... 111,647 110,000 110,000
Interest accrued on
notes receivable, net
of payments............ (54,000) (54,000)
Income tax benefit
related to stock
options exercised...... 938,000 938,000
Net income.............. 16,025,000 16,025,000
---------- ------- ------------ ----------- ----------- ------------
Balance at December 31,
1996................... 44,121,637 44,000 255,879,000 (2,827,000) (22,130,000) 230,966,000
Shares issued in
acquisitions........... 17,613 273,000 273,000
Shares issued to
employees and others... 174,775 1,773,000 1,773,000
Options exercised....... 275,620 1,000 711,000 712,000
Interest accrued on
notes receivable, net
of payments............ (203,000) (203,000)
Income tax benefit
related to stock
options exercised...... 3,174,000 3,174,000
Net income.............. 36,977,000 36,977,000
---------- ------- ------------ ----------- ----------- ------------
Balance at December 31,
1997................... 44,589,645 $45,000 $261,810,000 $(3,030,000) $14,847,000 $273,672,000
========== ======= ============ =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
MAY 31, -------------------------- ------------------------------------------
1995 1994 1995 1995 1996 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income............ $ 4,852,000 $ 2,650,000 $ 3,912,000 $ 6,114,000 $ 16,025,000 $ 36,977,000
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 4,740,000 2,586,000 4,383,000 6,537,000 15,368,000 27,124,000
Extraordinary loss.... 4,258,000 4,258,000 12,623,000
Non-cash interest..... 6,947,000 3,274,000 5,228,000 8,901,000 4,396,000
Deferred income
taxes................ (716,000) 16,000 (469,000) (726,000) 667,000 (681,000)
Provision for doubtful
accounts............. 2,371,000 1,363,000 1,811,000 2,819,000 5,496,000 8,896,000
(Gain) loss on
disposition of
property and
equipment............ (34,000) (144,000) (146,000) (20,000) 10,000
Minority interests in
income of
consolidated
subsidiaries......... 1,593,000 833,000 1,784,000 2,544,000 3,578,000 4,502,000
Changes in operating
assets and
liabilities, net of
effect of
acquisitions:
Accounts receivable.. (9,547,000) (4,023,000) (15,256,000) (20,801,000) (32,939,000) (74,715,000)
Inventories.......... (122,000) (303,000) (331,000) (150,000) (1,976,000) (1,328,000)
Prepaid expenses and
other current
assets.............. (856,000) (261,000) (134,000) (532,000) (7,638,000) 1,408,000
Other long-term
assets.............. (300,000) (300,000)
Accounts payable..... (536,000) 728,000 205,000 (968,000) (2,688,000) 447,000
Employee compensation
and benefits........ 1,994,000 2,000 (622,000) 1,090,000 4,995,000 3,583,000
Other accrued
liabilities......... 4,383,000 544,000 461,000 4,182,000 1,096,000 (448,000)
Income taxes
payable............. 465,000 277,000 (931,000) (314,000)
Other long-term
liabilities......... 107,000 1,214,000 916,000 (222,000) 13,000
------------ ------------ ------------ ------------ ------------- -------------
Net cash provided by
operating
activities......... 15,069,000 7,981,000 6,277,000 12,807,000 18,447,000 5,788,000
------------ ------------ ------------ ------------ ------------- -------------
Cash flow from
investing activities
Purchases of property
and equipment........ (3,835,000) (860,000) (3,748,000) (6,880,000) (25,464,000) (36,878,000)
Additions to
intangible assets.... (358,000) (159,000) (972,000) (1,167,000) (7,530,000) (23,268,000)
Cash paid for
acquisitions, net of
cash acquired........ (22,476,000) (5,722,000) (28,303,000) (45,056,000) (138,202,000) (200,624,000)
Investment in other
long-term assets .... (972,000) (972,000) (46,000) (2,935,000)
Issuance of long-term
notes receivable..... (1,379,000) (1,379,000) (540,000) (12,502,000)
Proceeds from
disposition of
property and
equipment............ 62,000 28,000 244,000 273,000 236,000 10,000
------------ ------------ ------------ ------------ ------------- -------------
Net cash used in
investing
activities......... (26,607,000) (6,713,000) (35,130,000) (55,181,000) (171,546,000) (276,197,000)
------------ ------------ ------------ ------------ ------------- -------------
Cash flows from
financing activities
Advances from Tenet... 2,874,000 3,499,000
Proceeds from issuance
of note payable...... 258,000 258,000 107,000 553,000
Principal payments on
long-term
obligations.......... (367,000) (11,000) (880,000) (1,238,000) (918,000) (15,551,000)
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) (31,912,000) (68,499,000)
Proceeds from bank
credit facility...... 13,253,000 21,341,000 31,295,000 209,335,000 268,000,000
Payment of bank credit
facility............. (4,000,000) (31,625,000) (31,625,000) (124,335,000)
Net proceeds from
issuance of common
stock................ 10,742,000 10,810,000 98,941,000 98,965,000 128,443,000 2,485,000
Income tax benefit
related to stock
options exercised.... 1,792,000 1,792,000 938,000 3,174,000
Cash received on notes
receivable from
stockholders......... 175,000 175,000 170,000 35,000
Distributions to
minority interests... (1,708,000) (723,000) (1,102,000) (2,087,000) (2,442,000) (2,768,000)
------------ ------------ ------------ ------------ ------------- -------------
Net cash provided by
financing
activities......... 12,135,000 4,215,000 56,988,000 65,623,000 142,799,000 255,928,000
------------ ------------ ------------ ------------ ------------- -------------
Net increase (decrease)
in cash............... 597,000 5,483,000 28,135,000 23,249,000 (10,300,000) (14,481,000)
Cash and cash
equivalents at
beginning of period... 1,449,000 1,449,000 2,046,000 6,932,000 30,181,000 19,881,000
------------ ------------ ------------ ------------ ------------- -------------
Cash and cash
equivalents at end of
period................ $ 2,046,000 $ 6,932,000 $ 30,181,000 $ 30,181,000 $ 19,881,000 $ 5,400,000
============ ============ ============ ============ ============= =============
</TABLE>
Supplemental cash flow information (Note 15)
See accompanying notes to consolidated financial statements
F-5
<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 of the United States, Puerto
Rico, Europe and 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 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 common stock
of the Company to effect a change in control of the Company. 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.
On February 27, 1998, the Company completed its merger with Renal Treatment
Centers, Inc. (the "Merger"). The Merger was treated as a pooling of interests
for accounting purposes (see Note 17).
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. Appropriate allowances are established based upon credit
risk of specific third-party payors, historical trends and other factors and
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, 1995, the seven months ended December 31,
1995 and the years ended December 31, 1996 and 1997, the Company received
approximately 70%, 67%, 67% and 65%, respectively, of its dialysis revenues
from Medicare and Medicaid programs. Accounts receivable from Medicare and
Medicaid amounted to $40,159,000 and $79,824,000 as of December 31, 1996, and
1997, 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.
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)
F-6
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
January 1998, a permanent injunction was issued by a federal court preventing
HCFA from retroactively applying its reinterpretation of the OBRA 93
regulations as unlawful retroactive rule-making. 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.
As a Medicare and Medicaid provider, the Company is subject to extensive
regulation by both the federal government and the states in which the Company
conducts its business. Due to heightened awareness of federal and state
budgets, scrutiny is being placed on the health care industry, potentially
subjecting the Company to regulatory investigation and changes in billing
procedures.
The provisions of the Kennedy-Kassebaum legislation issued January 1, 1997
may limit the Company's ability to pay for policy premiums for patients even
with proven financial hardship. However, the Company believes that the bill
did not intend to limit the Company's ability to pay premiums for insurance
coverage to third-party or governmental payors. In the Fall of 1997, the
Office of Inspector General of the HHS issued an advisory opinion which would
allow the Company to make grants to a foundation that may provide for such
premium payments on behalf of ESRD patients. In addition, legislation is
currently pending which would permit the Company to pay premiums for insurance
coverage for patients with proven financial hardship.
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, three to 15 years.
Capitalized Interest
The Company capitalizes interest associated with the costs of significant
facility expansion and construction. Interest is capitalized by using an
interest rate which is equal to the weighted average borrowing rate on the
Company's long-term debt. Approximately $685,000 in interest expense was
capitalized for the year ended December 31, 1997.
F-7
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible assets
Business acquisition costs allocated to patient lists are amortized over
five to seven 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. Pre-opening and development costs, included in
other intangible assets, are amortized over five years.
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
40 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 from operations of the underlying businesses. Adjustments are made
if the sum of the expected future undiscounted 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.
Income taxes
The Company accounts for income taxes using an asset and liability approach,
which 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.
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 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 interests
Minority interests represent the proportionate equity interest of other
partners and stockholders in the Company's consolidated entities which are not
wholly owned. As of December 31, 1997, these included 29 active partnerships
and corporations.
Stock-based compensation
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). This pronouncement requires the 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 Opinion 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 requires the Company to value stock-based
compensation using an accepted valuation model. Compensation cost is 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. SFAS 123 requires the
Company to either reflect the results of the valuation in the consolidated
financial statements or alternatively continue to apply the provisions of APB
25 and make appropriate disclosure of the impact of such valuation in the
accompanying notes to consolidated financial statements.
F-8
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has elected to continue to apply the provisions of APB 25 to
their employee stock-based compensation plans and therefore has included the
required disclosure 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 (see Note 10).
Earnings per share and unaudited pro forma net income per share
In February 1997, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). The Company adopted SFAS 128 in the fourth quarter of 1997, as required
by this pronouncement. SFAS 128 establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated by
dividing net income before extraordinary items and net income by the weighted
average number of shares of common stock outstanding. Accordingly, earnings
per common share--assuming dilution includes the dilutive effects of stock
options and warrants using the treasury stock method, in determining the
weighted average number of shares of common stock outstanding. Earnings per
share for all periods presented have been restated following the provisions of
SFAS 128.
Interest rate swap agreements
The Company has entered into two interest rate swap agreements (see Note 8)
as a means of managing its interest rate exposure. The Company has not entered
these agreements for trading or speculative purposes. These agreements have
the effect of converting the Company's line of credit obligation from a
variable rate to a fixed rate. Net amounts paid or received are reflected as
adjustments to interest expense. The counterparty to these agreements is a
large international financial institution. These interest rate swap agreements
subject the Company to financial risk that will vary during the life of the
agreements in relation to the prevailing market interest rates. The Company is
also exposed to credit loss in the event of non-performance by this
counterparty. However, the Company does not anticipate non-performance by the
other party, and no material loss is expected from non-performance by the
counterparty.
Financial instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, notes receivable from related parties, accounts payable, employee
compensation and benefits, and other accrued liabilities. These balances, as
presented in the financial statements at December 31, 1996 and 1997,
approximate their fair value. Borrowings under the Company's two credit
facilities, of which $353,000,000 was outstanding as of December 31, 1997,
reflect fair value as they are subject to fees and rates competitively
determined in the marketplace. The fair value of the interest rate swap
agreements are based on the present value of expected future cash flows from
the agreement and was in a net payable position of $49,000 at December 31,
1997.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited financial statements
In December 1995, the Company changed its year-end to December 31 from May
31. The information presented for the seven months ended December 31, 1994 and
the year ended December 31, 1995 has not been
F-9
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
audited. In the opinion of management, the unaudited consolidated statements
of income 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 for the seven months ended
December 31, 1994 and the year ended December 31, 1995.
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>
DECEMBER 31,
-------------------------
1996 1997
<S> <C> <C>
Land............................................. $ 373,000 $ 448,000
Buildings........................................ 3,978,000 4,275,000
Leaseholds and improvements...................... 25,463,000 49,089,000
Equipment........................................ 50,174,000 77,816,000
Construction in progress......................... 4,638,000 7,352,000
----------- ------------
84,626,000 138,980,000
Less accumulated depreciation and amortization... (26,360,000) (38,919,000)
----------- ------------
$58,266,000 $100,061,000
=========== ============
</TABLE>
Depreciation and amortization expense on property and equipment was
$3,163,000, $2,326,000, $7,302,000 and $12,427,000 for the year ended May 31,
1995, the seven months ended December 31, 1995, and the years ended December
31, 1996 and 1997, respectively.
3. INTANGIBLE ASSETS
A summary of intangible assets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
<S> <C> <C>
Goodwill......................................... $152,122,000 $333,680,000
Patient lists.................................... 12,765,000 22,420,000
Noncompetition agreements........................ 22,978,000 39,156,000
Deferred debt issuance costs..................... 4,488,000 18,037,000
Other............................................ 1,108,000 2,469,000
------------ ------------
193,461,000 415,762,000
Less accumulated amortization.................... (12,844,000) (26,025,000)
------------ ------------
$180,617,000 $389,737,000
============ ============
</TABLE>
Amortization expense applicable to intangible assets was $1,577,000,
$2,057,000, $8,066,000, and $14,697,000 for the year ended May 31, 1995, the
seven months ended December 31, 1995, and the years ended December 31, 1996
and 1997, respectively.
F-10
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
<S> <C> <C>
Supplier rebates and other non-trade receivables... $ 6,424,000 $ 9,664,000
Prepaid income taxes............................... 2,708,000 649,000
Prepaid expenses................................... 1,504,000 2,259,000
Deposits........................................... 135,000 174,000
----------- -----------
$10,771,000 $12,746,000
=========== ===========
</TABLE>
5. NOTES RECEIVABLE FROM RELATED PARTIES
During the year ended December 31, 1997 the Company entered into various
agreements to provide funding for expansion to certain companies that provide
renal dialysis or renal related services. These notes receivables are secured
by the assets and operations of these companies. Approximately $9,205,000 was
outstanding and included in notes receivable from related parties at December
31, 1997. Additionally, a note receivable from the Company's President was
approximately $1,678,000 and $1,820,000 at December 31, 1996 and 1997,
respectively.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
<S> <C> <C>
Customer refunds....................................... $6,068,000 $4,608,000
Other.................................................. 1,677,000 2,613,000
---------- ----------
$7,745,000 $7,221,000
========== ==========
</TABLE>
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
SEVEN MONTHS YEARS ENDED DECEMBER
YEAR ENDED ENDED 31,
MAY 31, DECEMBER 31, -----------------------
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Current
Federal.................. $3,275,000 $3,708,000 $12,803,000 $21,518,000
State.................... 952,000 954,000 2,881,000 4,304,000
Deferred
Federal.................. (555,000) 9,000 544,000 (567,000)
State.................... (161,000) (40,000) 123,000 (114,000)
---------- ---------- ----------- -----------
$3,511,000 $4,631,000 $16,351,000 $25,141,000
========== ========== =========== ===========
</TABLE>
F-11
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
<S> <C> <C>
Receivables, primarily allowance for doubtful
accounts....................................... $ 2,724,000 $ 4,446,000
Accrued vacation................................ 831,000 1,717,000
Deferred compensation........................... 107,000 67,000
----------- -----------
Gross deferred tax assets..................... 3,662,000 6,230,000
----------- -----------
Depreciation and amortization................... (1,811,000) (2,454,000)
Intangible assets............................... (1,173,000) (2,713,000)
Change in tax accounting method................. (313,000) (17,000)
----------- -----------
Gross deferred tax liabilities................ (3,297,000) (5,184,000)
----------- -----------
Net deferred tax assets....................... $ 365,000 $ 1,046,000
=========== ===========
</TABLE>
The 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
SEVEN MONTHS DECEMBER
YEAR ENDED ENDED 31,
MAY 31, DECEMBER 31, -----------
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Federal income tax rate.............. 34.0% 35.0% 35.0% 35.0%
State taxes, net of federal benefit.. 5.9% 5.3% 4.7% 4.5%
Nondeductible amortization of
intangible assets................... 1.1% 1.1% 0.8% 0.6%
Other................................ 0.2% 0.1% 0.1% 0.1%
---- ---- ---- ----
Effective tax rate................... 41.2% 41.5% 40.6% 40.2%
Minority interests in partnerships... (5.9%) (5.5%) (3.1%) (2.5%)
---- ---- ---- ----
Effective tax rate before minority
interests........................... 35.3% 36.0% 37.5% 37.7%
==== ==== ==== ====
</TABLE>
8. LONG-TERM DEBT
Long-term debt comprises:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
<S> <C> <C>
Credit facilities................................ $ 85,000,000 $353,000,000
Acquisition obligations.......................... 15,886,000 2,183,000
Capital lease obligations (see Note 9)........... 3,122,000 2,509,000
Other............................................ 608,000 892,000
------------ ------------
104,616,000 358,584,000
Less current portion............................. (2,064,000) (2,021,000)
------------ ------------
$102,552,000 $356,563,000
============ ============
</TABLE>
F-12
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of long-term debt for the years ending December 31 are as
follows:
<TABLE>
<S> <C>
1998........................................ $ 2,021,000
1999........................................ 1,995,000
2000........................................ 612,000
2001........................................ 290,000
2002........................................ 88,000
Thereafter.................................. 353,578,000
</TABLE>
12% Senior Subordinated Discount Notes
In August 1994, the Company completed a public offering consisting of units
of 12% Senior Subordinated Discount Notes (the "Notes") and common stock.
Aggregate proceeds from the offering were $71,294,000, of which $900,000 was
allocated to the common stock, based upon the estimated value of the stock,
and the remaining $70,394,000 to the Notes. The Notes had a stated maturity of
August 15, 2004 with the first semi-annual cash interest payment commencing on
February 15, 1998, at a rate of 12% per annum. Prior to February 15, 1998,
interest was paid in kind through amortization of the discount. The discount
was amortized using the effective interest rate of 12.39%.
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. In July and
September 1996, the Company retired the remaining 65% of the outstanding Notes
for $68,499,000, including consent payments of $1,100,000. An extraordinary
loss on the early extinguishment of debt of $12,623,000, net of income tax
effect of $4,923,000, was recorded in the year ended December 31, 1996.
Credit Facilities
On October 24, 1997, the Company expanded its existing $400 million
revolving credit facility to an aggregate of $1,050,000,000 consisting of a
seven-year $800 million revolving credit facility and a ten-year $250 million
term facility. Under the $800 million revolving credit facility, up to
$100,000,000 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. Up to $75,000,000 of the available
letters of credit or borrowings under the revolving senior credit facility may
be utilized for foreign financing. In general, borrowings under the credit
facilities 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%); or (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 1.75%
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 upon, the Alternate Base
Rate.
Maximum borrowings under the $800 million revolving credit facility will be
reduced by $75,000,000 on September 30, 2001, $125,000,000 on September 30,
2002, and another $200,000,000 on September 30, 2003, and the revolving credit
facility terminates on September 30, 2004. Under the $250 million term
facility, payments of $2,500,000 shall be made each consecutive year beginning
on September 30, 1998 and continuing through September 30, 2006. The remaining
balance of $227,500,000 is due on September 30, 2007 when the term facility
terminates. The credit facilities contain 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. The Company is in compliance with all such
covenants.
F-13
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company and certain of its subsidiaries, including Total Renal Care,
Inc. ("TRC"), TRC West, Inc., Total Renal Care Acquisition Corp., RTC, Renal
Treatment Centers--Mid-Atlantic, Inc., Renal Treatment Centers--Northeast,
Inc., Renal Treatment Centers--California, Inc., Renal Treatment Centers--
West, Inc. and Renal Treatment Centers--Southeast, Inc. (see Note 17), have
guaranteed the Company's obligations under the credit facilities on a senior
basis.
Acquisition Obligations
In conjunction with certain facility acquisitions, the Company issued three
letters of credit. Two of these were released on April 1, 1997. The remaining
letter of credit of $3,000,000 is being released to the seller in three annual
principal installments of $1,000,000 commencing January 1997. The Company has
also agreed to pay the seller interest at 6.5% on the outstanding principal.
As of December 31, 1996 and 1997 the aggregate amount outstanding, including
accrued interest, was $15,886,000 and $2,183,000, respectively.
Interest Rate Swap Agreements
On November 25, 1996, the Company entered into a seven-year interest rate
swap agreement involving the exchange of fixed and floating interest payment
obligations without the exchange of the underlying principal amounts. At
December 31, 1997 the total notional principal amount of this interest rate
swap agreement was $100,000,000 and the effective interest rate thereon was
7.57%.
On July 24, 1997, the Company entered into a ten-year interest rate swap
agreement. At December 31, 1997 the total notional principal amount of this
interest rate swap agreement was $200,000,000 and the effective interest rate
thereon was 7.77%.
9. LEASES
The Company leases the majority of its facilities under noncancelable
operating leases expiring in various years through 2021. 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>
1998......................................... $14,808,000
1999......................................... 13,000,000
2000......................................... 11,890,000
2001......................................... 9,626,000
2002......................................... 8,774,000
Thereafter................................... 39,969,000
-----------
Total minimum lease payments................. $98,067,000
===========
</TABLE>
Rental expense under all operating leases for the year ended May 31, 1995,
the seven months ended December 31, 1995 and the years ended December 31, 1996
and 1997 amounted to $3,323,000, $2,644,000, $9,054,000 and $14,599,000,
respectively.
F-14
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
1998......................................... $ 978,000
1999......................................... 906,000
2000......................................... 564,000
2001......................................... 245,000
2002......................................... 28,000
Thereafter................................... 176,000
----------
2,897,000
Less--Portion representing interest.......... 388,000
----------
Total capital lease obligation, including
current portion of
$782,000.................................... $2,509,000
==========
</TABLE>
The net book value of fixed assets under capital lease was $1,858,000 and
$2,228,399 at December 31, 1996 and 1997, respectively. Capital lease
obligations are included in long-term debt (see Note 8).
10. STOCKHOLDERS' EQUITY
Public offerings of common stock
On November 3, 1995, the Company completed an initial public offering of its
common stock at an offering price of $9.30 per share. The Company received net
proceeds of $98,294,000 after the deduction of underwriting discounts and
commissions and other expenses. The Company used net proceeds of $62,912,000
to redeem outstanding notes and to repay outstanding borrowings. The remainder
of the net proceeds was used for general corporate purposes, acquisitions, de
novo facility developments and other capital expenditures.
On April 3, 1996, and October 31, 1996 the Company completed equity
offerings of its 13,416,667 and 4,166,667 shares of common stock,
respectively; 5,833,333 and 833,334, respectively, of which were sold for the
Company's account and 7,583,333 and 3,333,333 respectively, of which were sold
by certain of the Company's stockholders. The net proceeds received by the
Company of $109,968,000 and $18,350,000, respectively, were used to repay
borrowings incurred under the Company's credit facilities in connection with
acquisitions, to repurchase and subsequently retire its 12% senior
subordinated debt, to finance other acquisitions and de novo developments and
for working capital and other corporate purposes.
Change in shares, stock splits and dividends
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 $0.001 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
4,888,890 shares of common stock for $4,400.
Immediately following the public offering of 12% senior subordinated debt 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. Subsequently, the Company has
not made, nor does it intend to make, dividends to its stockholders.
During October 1995 the Company's directors authorized an increase in the
authorized number of shares of common stock to 55,000,000, authorized
5,000,000 new shares of $0.001 par value preferred stock, and approved
F-15
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
a three-into-two reverse stock split of the Company's 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.
On September 30, 1997 the Company announced a common stock dividend to all
stockholders of record as of October 7, 1997, to be effective on October 20,
1997. Each stockholder received two additional shares of common stock for each
three shares held. Fractional shares calculated as a result of the stock
dividend were paid out in cash in the amount of approximately $14,000. As
such, all share and per share amounts presented in the financial statements
and related notes thereto have been retroactively restated to reflect this
dividend which was accounted for as a stock split.
Earnings per share
The reconciliation of the numerators and denominators used to calculate
earnings per share for all periods presented is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED
-------------------------- ---------------------------------------
YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
MAY 31, 1995 1994 1995 1995 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net income:
As reported............ $4,852,000 $2,650,000 $3,912,000 $6,114,000 $16,025,000 $36,977,000
=========== =========== ========== ========== =========== ===========
Applicable common
shares:
Average outstanding
during the period..... 18,125,000 14,822,000 27,728,000 24,864,000 41,825,000 44,429,000
Average mandatorily
redeemable common
shares outstanding
during the period..... 110,000
Reduction in shares in
connection with notes
receivable from
employees............. (185,000) (130,000) (128,000) (122,000) (130,000) (125,000)
----------- ----------- ---------- ---------- ----------- -----------
Weighted average number
of shares outstanding
for use in computing
earnings per share..... 18,050,000 14,692,000 27,600,000 24,742,000 41,695,000 44,304,000
Outstanding stock
options (based on the
treasury stock
method)............... 1,784,000 1,764,000 2,107,000 2,170,000 1,293,000 998,000
----------- ----------- ---------- ---------- ----------- -----------
Adjusted weighted
average number of
common and common
share equivalent
shares outstanding.. 19,834,000 16,456,000 29,707,000 26,912,000 42,988,000 45,302,000
=========== =========== ========== ========== =========== ===========
Earnings per common
share.................. $0.27 $0.18 $0.14 $0.25 $0.38 $0.83
Earnings per common
share-- assuming
dilution............... $0.24 $0.16 $0.13 $0.23 $0.37 $0.82
</TABLE>
F-16
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation Plans
At December 31, 1997, the Company has four stock-based compensation plans,
which are described below.
1994 Stock Plan. In August 1994, the Company established the Total Renal
Care Holdings, Inc. 1994 Equity Compensation Plan ("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, consultants and facility medical directors of the Company.
Under terms of the 1994 Stock Plan, the Company may grant awards for up to
8,474,078 shares of common stock. Original 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. In April 1996, the
Company changed the vesting schedule for new options granted so that options
vest over four years from the date of grant. The exercise price of each option
equals the market price of the Company's stock on the date of grant, and an
option's maximum term is ten years.
Purchase rights to acquire 1,314,450 common shares for $.90-$3.60 per share
were 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, 1996 and 1997 the outstanding notes plus accrued interest totaled
$378,000, $227,000, and $212,000 respectively.
During the year ended May 31, 1995, 1,477,778 options 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 President's vesting period and all of
the options became 100% vested. Pursuant to this action, the 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
President executed a full recourse note for $1,349,000 bearing interest at the
lesser of prime or 8% per annum to meet his tax liability in connection with
the stock option exercise. In April 1996, this note was increased by an
additional $173,000. These notes are secured by other shares of company stock
and mature in September 1999 or upon disposition of the common stock by the
President.
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 1,666,667 common shares reserved
for issuance under the 1995 Stock Plan. Options granted generally vest over
four years from the date of grant and an option's maximum term is ten years,
subject to certain restrictions. The Company generally issues awards with the
exercise prices equal to the market price of the Company's stock on the date
of grant.
1997 Stock Plan. In July 1997, the Company established the Total Renal Care
Holdings, Inc. 1997 Equity Compensation Plan ("1997 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 4,166,667 common shares reserved
for issuance under the 1997 Stock Plan. Options granted generally vest over
four years from the date of grant and an option's maximum term is ten years.
The Company generally issues awards with the exercise prices equal to the
market price of the Company's stock on the date of grant.
F-17
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants for the seven months ended December 31, 1995, year ended December 31,
1996, and year ended December 31, 1997, respectively: dividend yield of 0
percent for all periods; weighted average expected volatility of 40.5%, 36.35%
and 35.12%; risk-free interest rates of 5.92%, 6.56% and 6.40% and expected
lives of six years for all periods.
A combined summary of the status of the 1994 Stock Plan, 1995 Stock Plan,
and 1997 Stock Plan as of and for the seven months ended December 31, 1995 and
years ended December 31, 1996 and 1997, is presented below:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 2,863,890 $0.90 1,441,685 $ 1.91 3,118,394 $13.82
Granted................. 322,238 5.41 1,818,913 22.28 3,931,080 19.74
Exercised............... (1,744,443) 0.90 (111,647) 0.92 (275,620) 3.96
Forfeited............... (30,557) 2.43 (1,734,016) 22.46
---------- ----- --------- ------ ---------- ------
Outstanding at end of
year................... 1,441,685 $1.91 3,118,394 $13.82 5,039,838 $16.01
========== ===== ========= ====== ========== ======
Options exercisable at
year end............... 351,855 663,007 797,474
Weighted-average fair
value of options
granted during the
year................... $ 3.17 $ 10.52 $ 9.15
</TABLE>
Forfeitures and grants include the effects of modifications to the terms of
awards as if the original award was repurchased and exchanged for a new award
of greater value. On April 24, 1997, 1,649,735 shares were cancelled and
reawarded at the market price as of that date. The new awards vest annually
over 3 years on the anniversary date of the new award.
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
EXERCISE REMAINING AVERAGE AVERAGE EXERCISE
PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS PRICE
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 5.00 950,917 6.8 years $ 1.15 666,411 $1.08
$ 5.01-$10.00 19,735 7.0 years 5.44 10,531 5.47
$10.01-$15.00 13,890 7.8 years 11.82 7,230 11.82
$15.01-$20.00 3,561,952 8.8 years 18.64 99,969 17.49
$20.01-$25.00 100,002 9.3 years 22.07 2,083 20.73
$25.01-$30.00 300,283 9.6 years 26.20 11,250 28.43
$30.01-$35.00 93,059 9.8 years 30.79
- ------------- --------- --------- ------ ------- -----
$ 0.01-$35.00 5,039,838 8.5 years $16.01 797,474 $3.73
============= ========= ========= ====== ======= =====
</TABLE>
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 qualifying employees 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 and through an optional
lump sum payment made in advance of the first day of the purchase right
period. 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 began on
F-18
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
November 3, 1995 (the date of completion of the initial public offering, and
ended 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. Payroll
withholdings related to the Stock Purchase Plan, included in accrued employee
compensation and benefits, were $1,790,000 and $1,120,307 at December 31, 1996
and 1997 respectively. Subsequent to December 31, 1996 and December 31, 1997,
174,775 and 49,060 shares, respectively were issued to satisfy the Company's
obligations under the Plan.
For the November 1995 and July 1996 purchase right periods the fair value of
the employees' purchase rights were estimated on the beginning date of the
purchase right period using the Black-Scholes model with the following
assumptions for grants on November 3, 1995 and July 1, 1996, respectively:
dividend yield of 0 percent for both periods; expected volatility of 36.6
percent for both periods; risk-free interest rate of 5.5 and 6.6 percent and
expected lives of 1.2 and 0.5 years. Using these assumptions, the weighted-
average fair value of purchase rights granted on November 3, 1995 and July 1,
1996 is $2.86 and $7.37, respectively.
The fair value of the January 1, 1997 and July 1, 1997 purchase right period
were not estimated at December 31, 1997 because of the employee's ability to
withdraw from participation through December 31.
Pro forma net income and earnings per share. The Company applied APB 25 and
related interpretations in accounting for all of its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED YEAR ENDED
ENDED DECEMBER DECEMBER
DECEMBER 31, 31, 31,
1995 1996 1997
<S> <C> <C> <C>
Income before extraordinary item...... $6,159,000 $20,480,000 $32,210,000
Extraordinary loss related to early
extinguishment
of debt, net of tax.................. 2,555,000 7,700,000
---------- ----------- -----------
Net income.......................... $3,604,000 $12,780,000 $32,210,000
========== =========== ===========
Earnings per common share:
Income before extraordinary item.... $ 0.22 $ 0.49 $ 0.73
Extraordinary loss.................. (0.09) (0.18)
---------- ----------- -----------
Net income.......................... $ 0.13 $ 0.31 $ 0.73
========== =========== ===========
Weighted average number of common
shares outstanding................... 27,600,000 41,695,000 44,304,000
========== =========== ===========
Earnings per common share-assuming
dilution:
Income before extraordinary item.... $ 0.22 $ 0.49 $ 0.73
Extraordinary loss.................. (0.09) ( 0.18)
---------- ----------- -----------
Net income.......................... $ 0.13 $ 0.31 $ 0.73
========== =========== ===========
Weighted average number of common
shares and equivalents outstanding--
assuming dilution.................... 28,167,000 41,695,000 44,304,000
========== =========== ===========
</TABLE>
F-19
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock issued to employees outside of plans
In connection with the change in control, the Company awarded its Chief
Executive Officer and Chief Operating Officer rights to purchase 1,855,555 and
222,222 common shares, respectively, at a purchase price of $.90 per share.
These rights were awarded outside of the 1994 Stock Plan in connection with
the respective employment agreements. All such purchase rights were made and
the Company received notes totaling $935,000 for the uncollected portion of
the purchase proceeds. The notes bear terms similar to those issued in
connection with the 1994 Stock Plan.
11. TRANSACTIONS WITH RELATED PARTIES
The Company 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 $347,000 and $534,000 at
December 31, 1996 and 1997, respectively. Net operating revenues received from
Tenet for these services were $2,130,000, $1,332,000, $2,260,000 and
$2,640,000 for the year ended May 31, 1995, the seven months ended December
31, 1995, and the years ended December 31, 1996 and 1997, 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 year ended May 31, 1995
amounted to $152,000.
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 $1,409,000 for year ended
May 31, 1995.
DLJMB
An affiliate of DLJMB was the underwriter for a public debt offering of
units, comprising 12% Senior Subordinated Discount Notes and 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 $2,496,000 and $1,160,000, respectively. During the seven months ended
December 31, 1995 and the year ended December 31, 1996 an affiliate of DLJMB
also was one of several underwriters for the initial public offering of common
stock as well as the two additional public stock offerings in which the
Company issued 11,500,000, 11,666,667 and 833,334 shares, respectively. Fees
for these transactions to DLJMB or its affiliates were $7,245,000, $5,075,000,
and $780,000, respectively.
On August 12, 1997, the Company filed a registration statement with the
Securities and Exchange Commission for an offering of 4,325,873 shares of
common stock to be offered by affiliates of DLJ Merchant Banking Partners,
L.P. ("DLJMB"), as well as certain officers of the Company. Of the shares
sold, 3,673,723 were offered by DLJ Merchant Banking affiliates, representing
their entire remaining interest in the Company. Donaldson, Lufkin & Jenrette
Securities Corporation was the sole underwriter of the offering. The Company
did not receive any of the proceeds from the sale of shares being sold by the
selling stockholders. Effective with the August 1997 public offering of common
stock, DLJMB and its affiliates are no longer considered a related party.
F-20
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. 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 was allocated for the year ended May 31, 1995 to
each participant not eligible for participation in the 1994 Stock Plan (see
Note 10) 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,
the Company accrued contributions under the Plan in the amount of $200,000.
The Company did not make any contributions subsequent to May 31, 1995.
13. CONTINGENCIES
The Company's laboratory subsidiary is presently the subject of a Medicare
carrier review. The carrier has requested certain medical and billing records
for certain patients and the Company has provided the requested records. The
carrier has not informed the Company of the reason for or the exact nature or
scope of this review.
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.
14. ACQUISITIONS
Beginning in August 1994, the Company implemented an acquisition strategy
which through December 31, 1997 has resulted in the acquisition of 135
facilities providing services to ESRD patients, 99 programs providing acute
hospital in-patient dialysis services, two laboratories, a vascular access
management company and a clinical research company specializing in renal and
renal related services. In addition, during this period the Company developed
25 de novo facilities, entered into a management contract covering an
additional two unaffiliated facilities and purchased the minority interest at
one of its existing facilities. The following is a summary of acquisitions
activity:
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
YEAR ENDED DECEMBER YEAR ENDED DECEMBER 31,
MAY 31, 31, -------------------------
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Number of facilities
acquired................... 15 12 57 51
Number of common shares
issued..................... 495,773 1,238,033 102,645 17,613
Numbers of mandatorily
redeemable shares issued... 1,136,112
Number of common stock
options issued............. 66,667
Estimated fair value of
common shares issued....... $ 446,000 $ 5,284,000 $ 1,830,000 $ 273,000
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
Acquisition obligations (see
Note 8).................... 15,886,000
Cash paid................... 23,007,000 28,303,000 138,202,000 200,624,000
----------- ----------- ------------ ------------
Aggregate purchase price.... $27,443,000 $34,881,000 $155,918,000 $200,897,000
=========== =========== ============ ============
</TABLE>
F-21
<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. The initial
allocations of fair market value are preliminary and subject to adjustment
during the first year following the acquisition. The results of operations of
the facilities and laboratories have been included in the Company's financial
statements from their respective acquisition dates. These initial allocations
were as follows:
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
YEAR ENDED DECEMBER YEARS ENDED DECEMBER 31,
MAY 31, 31, --------------------------
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Identified intangibles.... $ 4,807,000 $ 8,063,000 $ 20,695,000 $ 25,570,000
Goodwill.................. 18,782,000 24,700,000 102,608,000 170,477,000
Tangible assets........... 6,845,000 6,798,000 41,100,000 19,859,000
Liabilities assumed....... (2,991,000) (4,680,000) (8,485,000) (15,009,000)
----------- ----------- ------------ ------------
Total purchase price.... $27,443,000 $34,881,000 $155,918,000 $200,897,000
=========== =========== ============ ============
</TABLE>
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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net revenues........................................ $401,541,000 $520,092,000
Net income before extraordinary items............... $ 17,000,000 $ 39,810,000
Pro forma net income per share before extraordinary
items.............................................. $ 0.59 $ 0.90
Pro forma net income per share before extraordinary
items--assuming dilution........................... $ 0.57 $ 0.88
</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.
Subsequent to December 31, 1997, the Company entered into 13 agreements to
acquire additional facilities of which seven have been consummated and six are
expected to close imminently. The aggregate purchase price is approximately
$140 million. The composition of the final purchase price is expected to be
cash and proceeds from the Company's credit facilities, however, a portion of
the purchase price may consist of issuance of the Company's common stock. The
Company is actively pursuing additional acquisitions on which letters of
intent had not been signed as of the date of these financial statements.
Additionally, as described in Note 17, subsequent to December 31, 1997, the
Company merged with another provider of dialysis services.
F-22
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SUPPLEMENTAL CASH FLOW INFORMATION
The table below provides supplemental cash flow information:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
MAY 31, DECEMBER 31, DECEMBER DECEMBER 31,
1995 1995 31, 1996 1997
<S> <C> <C> <C> <C>
Cash paid for:
Income taxes................. $4,112,000 $ 957,000 $12,871,000 $20,364,000
Interest, net of capitalized
interest.................... 256,000 1,063,000 2,120,000 13,511,000
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 2,810,000 273,000
Fixed assets acquired under
capital lease obligations... 1,483,000 1,117,000 530,000
Contribution to
partnerships................ 1,111,000 430,000 2,318,000
</TABLE>
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary unaudited quarterly financial data for the years ended December 31,
1996 and 1997 from the Company's filings on Form 10-Q is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $50,237 $64,583 $73,333 $84,794 $89,030 $104,752 $113,668 $130,755
Operating income........ 9,551 11,556 13,126 14,596 16,041 18,709 20,997 24,111
Income before
extraordinary item .... 4,276 5,726 6,536 7,187 7,825 8,866 9,870 10,416
Net income (loss)....... 4,276 5,726 (1,164) 7,187 7,825 8,866 9,870 10,416
Earning (loss) per
common share:
Income before
extraordinary item per
share................. 0.12 0.13 0.15 0.16 0.18 0.20 0.22 0.23
Extraordinary loss..... 0.00 0.00 (0.17) 0.00 0.00 0.00 0.00 0.00
Net income (loss) per
share ................ 0.12 0.13 (0.02) 0.16 0.18 0.20 0.22 0.23
Earnings (loss) per
common share-- assuming
dilution:..............
Income before
extraordinary item per
share................. 0.11 0.13 0.15 0.16 0.17 0.20 0.22 0.23
Extraordinary loss..... 0.00 0.00 (0.17) 0.00 0.00 0.00 0.00 0.00
Net income (loss) per
share................. 0.11 0.13 (0.02) 0.16 0.17 0.20 0.22 0.23
</TABLE>
F-23
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENTS
On February 27, 1998 the Company acquired Renal Treatment Centers, Inc.
("RTC"), with headquarters in Berwyn, Pennsylvania ("Merger"). In connection
with the Merger, the Company issued 34,565,729 shares of its common stock in
exchange for all of the outstanding shares of RTC common stock. RTC
shareholders received 1.335 shares of the Company's common stock for each
share of RTC common stock that they owned. The Company also issued 2,156,424
options in substitution for previously outstanding RTC stock options,
including 1,662,354 of the vested options that were exercised on the merger
date or shortly thereafter. In addition, the Company guaranteed $125,000,000
of RTC's 5 5/8% subordinated convertible notes. As a result of this
transaction, the Board and the Company's stockholders authorized an additional
140,000,000 shares of common stock. The Merger will be accounted for as a
pooling of interests and as such, the consolidated financial statements will
be restated to include RTC for all periods presented.
The following unaudited pro forma combined condensed balance sheet presents
the combined financial position of the Company and RTC as of December 31,
1997, and the following unaudited pro forma combined condensed statements of
operations present the results of operations for the year ended May 31, 1995,
the seven months ended December 31, 1995 and the years ended December 31, 1996
and 1997, in each case as previously announced by the Company and by RTC,
respectively. The Company is reviewing the financial statements of RTC and has
determined that the accounts receivable and certain other accounts recorded by
RTC as of December 31, 1997 were overstated by an aggregate amount estimated
to be between $25 million and $30 million. The Company has determined that at
least some, and perhaps all, of such noncash charges will be recorded in 1997.
This will require a revision of RTC's previously announced results of
operations for 1997. Whether any portion of such noncash charges will be
recorded in prior years has not yet been determined. The following unaudited
pro forma combined condensed financial statements should be read in light of
the uncertainty resulting from such review and preliminary determination. In
addition, as with any pro forma financial statements, these unaudited pro
forma combined condensed financial statements may not be indicative of the
results to be expected in the future and do not reflect any changes in the
operations of either the Company or RTC which may result from the combination
of their operations or the significant one-time merger related costs which
will be recorded in early 1998.
The following unaudited pro forma combined condensed financial statements
combine the Company's balance sheet as of December 31, 1997 and the results of
operations for the twelve months ended December 31, 1997 and 1996, the seven
month period ended December 31, 1995 and the twelve months ended May 31, 1995
with RTC's balance sheet as of December 31, 1997 and the results of operations
for the twelve months ended December 31, 1997 and 1996, the six months ended
December 31, 1995 and the twelve months ended December 31, 1994, respectively.
F-24
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MERGER PRO FORMA
TRCH RTC ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 5,400,000 $ 1,565,000 $ 6,965,000
Accounts receivable,
net.................... 152,481,000 124,564,000 277,045,000
Other current assets.... 28,169,000 13,929,000 42,098,000
------------ ------------ ----------- --------------
Total current assets.. 186,050,000 140,058,000 326,108,000
Property and equipment,
net.................... 100,061,000 72,604,000 172,665,000
Intangible assets, net.. 389,737,000 382,744,000 772,481,000
Other assets............ 19,492,000 12,046,000 $(2,600,000)(2) 28,938,000
------------ ------------ ----------- --------------
Total assets.......... $695,340,000 $607,452,000 $(2,600,000) $1,300,192,000
============ ============ =========== ==============
Current liabilities..... $ 39,776,000 $ 65,126,000 $ 104,902,000
Long term debt.......... 356,563,000 367,358,000 723,921,000
Other long-term
liabilities............ 6,250,000 $(2,600,000)(2) 3,650,000
Minority interests...... 19,079,000 19,079,000
Common stock............ 45,000 251,000 (218,000)(1) 78,000
Addition paid-in
capital................ 261,810,000 96,852,000 (170,000)(1) 358,492,000
Notes receivable from
stockholders........... (3,030,000) (3,030,000)
Retained earnings....... 14,847,000 78,253,000 93,100,000
Treasury stock.......... (388,000) 388,000 (1)
------------ ------------ ----------- --------------
Total stockholders'
equity............... 273,672,000 174,968,000 448,640,000
------------ ------------ ----------- --------------
Total liabilities and
stockholders'
equity............... $695,340,000 $607,452,000 $(2,600,000) $1,300,192,000
============ ============ =========== ==============
</TABLE>
- --------
(1) The unaudited pro forma combined condensed balance sheet gives effect to
the proposed merger of TRCH and RTC by combining the respective balance
sheets of the two companies as of December 31, 1997 on a pooling of
interests basis. As shown above, the capital accounts have been adjusted
as if 33,450,808 shares of common stock of TRCH (survivor) were issued in
exchange for all of the outstanding shares of RTC. The difference between
par value of RTC shares received in exchange and the par value of TRCH's
shares issued has been charged to additional paid capital.
(2) For purposes of the unaudited pro forma combined condensed balance sheet,
RTC's long term deferred tax asset from domestic operations is offset
against the Company's long term deferred tax liability.
F-25
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED DECEMBER 31,
MAY 31, DEC. 31, -------------------------
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Net operating revenues
TRCH..................... $ 98,968,000 $ 89,711,000 $272,947,000 $438,205,000
RTC...................... 115,457,000 86,752,000 235,397,000 332,939,000
------------ ------------ ------------ ------------
$214,425,000 $176,463,000 $508,344,000 $771,144,000
============ ============ ============ ============
Net income before
extraordinary item
TRCH..................... $ 4,852,000 $ 6,467,000 $ 23,725,000 $ 36,977,000
RTC...................... 10,051,000 8,254,000 19,290,000 29,251,000
------------ ------------ ------------ ------------
$14,903,000 $ 14,721,000 $ 43,015,000 $ 66,228,000
============ ============ ============ ============
Net income after
extraordinary item
TRCH..................... $ 4,852,000 $ 3,912,000 $ 16,025,000 $ 36,977,000
RTC...................... 10,051,000 8,254,000 19,290,000 29,251,000
------------ ------------ ------------ ------------
$14,903,000 $ 12,166,000 $ 35,315,000 $ 66,228,000
============ ============ ============ ============
Earnings per common share
Income before
extraordinary item...... $ 0.33 $ 0.26 $ 0.58 $ 0.85
============ ============ ============ ============
Net Income............... $ 0.33 $ 0.22 $ 0.48 $ 0.85
============ ============ ============ ============
Weighted average number
of common shares
outstanding............. 45,539,000 56,465,000 74,042,000 77,524,000
============ ============ ============ ============
Earnings per common share--
assuming dilution
Income before
extraordinary item...... $ 0.31 $ 0.25 $ 0.56 $ 0.83
============ ============ ============ ============
Net income............... $ 0.31 $ 0.20 $ 0.46 $ 0.83
============ ============ ============ ============
Weighted average number
of common shares and
equivalents
outstanding--assuming
dilution................ 48,087,000 60,049,000 77,225,000 79,975,000
============ ============ ============ ============
</TABLE>
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of Torrance, State of California, on the 30th day of March, 1998.
TOTAL RENAL CARE HOLDINGS, INC.
/s/ Victor M.G. Chaltiel
By: _________________________________
Victor M.G. Chaltiel
Chairman of the Board,
Chief Executive Officer and
President
POWER OF ATTORNEY
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 or her true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution, for him and in
his name or for her and in her name, place and stead, in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
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 or her substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Victor M.G. Chaltiel Chairman of the Board, Chief March 30, 1998
____________________________________ Executive Officer, President
Victor M.G. Chaltiel and Director (Principal
Executive Officer)
/s/ John E. King Vice President and Chief March 30, 1998
____________________________________ Financial Officer (Principal
John E. King Financial Officer and
Principal Accounting
Officer)
/s/ Maris Andersons Director March 30, 1998
____________________________________
Maris Andersons
/s/ Peter T. Grauer Director March 30, 1998
____________________________________
Peter T. Grauer
/s/ Regina E. Herzlinger Director March 30, 1998
____________________________________
Regina E. Herzlinger
/s/ Shaul G. Massry Director March 30, 1998
____________________________________
Shaul G. Massry
</TABLE>
II-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Total Renal Care Holdings, Inc.
Our audit of the consolidated financial statements referred to in our report
dated February 16, 1998, except as to Note 17 which is as of March 30, 1998,
appearing on page F-1 of this Annual Report on Form 10-K also included audits
of the information included in the Financial Statement Schedule listed in Item
14(a)(2) of this Form 10-K for the year ended May 31, 1995, the seven months
ended December 31, 1995 and the years ended December 31, 1996 and 1997. In our
opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information for the year ended May 31, 1995, the seven months
ended December 31, 1995 and the years ended December 31, 1996 and 1997 set
forth therein when read in conjunction with the related consolidated financial
statements.
PRICE WATERHOUSE LLP
Seattle, Washington
February 16, 1998
S-1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
--------------------- ----------
BALANCE AT AMOUNTS BALANCE 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,
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
Year ended December 31,
1996................... 5,668,000 5,496,000 1,896,000 5,149,000 7,911,000
Year ended December 31,
1997................... 7,911,000 8,896,000 101,000 5,016,000 11,892,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
(3)(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Company, dated December 4, 1995.@@
3.2 Certificate of Amendment of Certificate of Incorporation of
the Company, dated February 26, 1998.X
3.3 Bylaws of the Company, dated October 6, 1995.+
4.1 Shareholders Agreement, dated August 11, 1994 between DLJMB,
DLJIP, DLJOP, DLJMBF, NME Properties, Continental Bank, as
voting trustee, and the Company.##
4.2 Agreement and Amendment, dated as of June 30, 1995, between
DLJMBP, DLJIP, DLJOP, DLJMBF, DLJESC, Tenet, the Company,
Victor M.G. Chaltiel, the Putnam Purchasers, the Crescent
Purchasers and the Harvard Purchasers, relating to the
Shareholders Agreement dated as of August 11, 1994 between
DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties, Continental
Bank, as voting trustee, and the Company.##
10.1 Credit Agreement by and among the Company, the Lenders party
thereto, BNY Capital Markets, Inc. and Donaldson Lufkin &
Jenrette Securities Corporation as Arrangers, DLJ Capital
Funding, Inc. as Documentation Agent and The Bank of New
York as Administrative Agent, dated as of October 11, 1996
(the "TRCH Credit Facility").@
10.2 Guaranty by Total Renal Care, Inc. to The Bank of New York,
as Administrative Agent, pursuant to the TRCH Credit
Facility.@
10.3 Subscription Agreement dated May 26, 1994 between DLJMB,
DLJIP, DLJOP, DLJMBF, NME Properties, Tenet and the
Company.#
10.4 Services Agreement dated August 11, 1994 between the Company
and Tenet.##
10.5 Noncompetition Agreement dated August 11, 1994 between the
Company and Tenet.##
10.6 Employment Agreement dated as of August 11, 1994 by and
between the Company and Victor M.G. Chaltiel (with forms of
Promissory Note and Pledge and Stock Subscription Agreement
attached as exhibits thereto) (the "Chaltiel Employment
Agreement").##*
10.7 Amendment to Chaltiel Employment Agreement, dated as of
August 11, 1994.##*
10.8 Employment Agreement dated as of September 1, 1994 by and
between the Company and Barry C. Cosgrove.##*
10.9 Employment Agreement dated as of August 11, 1994 by and
between the Company and Leonard W. Frie (the "Frie
Employment Agreement").##*
10.10 Amendment to Frie Employment Agreement, dated as of October
11, 1994.##*
10.11 Employment Agreement dated as of September 1, 1994 by and
between the Company and John E. King.##*
10.12 First Amended and Restated 1994 Equity Compensation Plan (the
"1994 Plan") of the Company (with form of Promissory Note
and Pledge attached as an exhibit thereto), dated August 5,
1994.##*
10.13 Form of Stock Subscription Agreement relating to the 1994
Plan.##*
10.14 Form of Purchased Shares Award Agreement relating to the 1994
Plan.##*
10.15 Form of Nonqualified Stock Option relating to the 1994
Plan.##*
10.16 1995 Equity Compensation Plan.+*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
<C> <S> <C>
10.17 Employee Stock Purchase Plan.+*
10.18 Option Exercise and Bonus Agreement dated as of September 18,
1995 between the Company and Victor M.G. Chaltiel.+*
10.19 1997 Equity Compensation Plan.**
10.20 Revolving Credit Agreement, dated as of October 24, 1997, by
and among the Company, the lenders party thereto, DLJ
Capital Funding, Inc., as Syndication Agent, First Union
National Bank, as Documentation Agent, and The Bank of New
York, as Administrative Agent (the "Revolving Credit
Agreement").@@@
10.21 Amendment No. 1 and Consent No. 1, dated as of December 1,
1997, to the Revolving Credit Agreement.@@@
10.22 Term Loan Agreement, dated as of October 24, 1997, by and
among the Company, the lenders party thereto, DLJ Capital
Funding, Inc., as Syndication Agent, First Union National
Bank, as Documentation Agent, and The Bank of New York, as
Administrative Agent (the "Term Loan Agreement").@@@
10.23 First Amendment, dated December 1, 1997, to the Term Loan
Agreement.@@@
10.24 Subsidiary Guaranty (the "Subsidiary Guaranty") dated as of
October 24, 1997 by Total Renal Care, Inc., TRC West, Inc.
and Total Renal Care Acquisition Corp. in favor of and for
the benefit of The Bank of New York, as Collateral Agent,
the lenders to the Revolving Credit Agreement, the lenders
to the Term Loan Agreement, the Term Agent (as defined
therein), the Acknowledging Interest Rate Exchangers (as
defined therein) and the Acknowledging Currency Exchangers
(as defined therein).@@@
10.25 Borrower Pledge Agreement dated as of October 24, 1997 and
entered into by and between the Company, and The Bank of New
York, as Collateral Agent, the lenders to the Revolving
Credit Agreement, the lenders to the Term Loan Agreement,
the Term Agent (as defined therein), the Acknowledging
Interest Rate Exchangers (as defined therein) and the
Acknowledging Currency Exchangers (as defined
therein).@@@
10.26 Form of Subsidiary Pledge Agreement dated as of October 24,
1997 by Total Renal Care, Inc., TRC West, Inc. and Total
Renal Care Acquisition Corp., and The Bank of New York, as
Collateral Agent, the lenders to the Revolving Credit
Agreement, the lenders to the Term Loan Agreement, the Term
Agent (as defined therein), the Acknowledging Interest Rate
Exchangers (as defined therein) and the Acknowledging
Currency Exchangers (as defined therein).@@@
10.27 Agreement and Plan of Merger dated as of November 18, 1997 by
and among TRCH, Nevada Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of TRCH, and RTC.###
10.28 Second Amendment, dated January 13, 1998, to the Term Loan
Agreement.X
10.29 Amendment No. 2 and Consent No. 2 to the Revolving Credit
Agreement and First Amendment to the Subsidiary Guaranty
dated February 17, 1998.X
10.30 Third Amendment to the Term Loan Agreement and First
Amendment to the Subsidiary Guaranty dated February 17,
1998.X
10.31 Special Purpose Option Plan.++
10.32 Indenture, dated June 12, 1996, by RTC to PNC Bank including
form of RTC Note (the "Indenture").***
10.33 First Supplemental Indenture, dated as of February 27, 1998,
among RTC, TRCH and PNC Bank under the Indenture.X
10.34 Second Supplemental Indenture, dated as of March 31, 1998,
among RTC, TRCH and PNC Bank under the Indenture.X
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10.35 Guaranty, entered into as of March 31, 1998, by TRCH in favor of and for
the benefit of PNC Bank.X
21 List of Subsidiaries of the Company.X
23.1 Consent of Price Waterhouse LLP.X
24 Powers of Attorney with respect to the Company (included on Page
II-1 hereof).X
27 Financial Data Schedule.X
</TABLE>
- --------
X Included in this filing.
@ Filed on October 18, 1996 as an exhibit to the Company's Current Report on
Form 8-K.
@@ Filed on March 18, 1996 as an exhibit to the Company's Transitional Report
on Form 10-K for the transition period from June 1, 1995 to December 31,
1995.
@@@ Filed on December 19, 1997 as an exhibit to the Company's Current Report
on Form 8-K.
+ Filed on October 24, 1995 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Registration Statement No. 33-97618).
++ Filed on February 25, 1998 as an exhibit to the Company's Registration
Statement on Form S-8 (Registration Statement No. 333-46887).
# Filed on June 6, 1994 as an exhibit to the Company's Registration Statement
on Form S-1 (Registration Statement No. 33-79770).
## Filed on August 29, 1995 as an exhibit to the Company's Form 10-K for the
year ended May 31, 1995.
### Filed on December 19, 1997 as Annex A to the Company's Registration
Statement on Form S-4 (Registration No. 333-42653).
* Management contract or executive compensation plan or arrangement.
** Filed on August 29, 1997 as an exhibit to the Company's Registration
Statement on Form S-8 (Registration Statement No. 333-34695).
*** Filed as an exhibit to RTC's Form 10-Q for the quarter ended June 30,
1996.
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TOTAL RENAL CARE HOLDINGS, INC.
Total Renal Care Holdings, Inc. (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: That the Corporation was originally incorporated under the name
Medical Ambulatory Care Delaware, Inc., and the date of the filing of the
Corporation's original Certificate of Incorporation with the Delaware Secretary
of State was April 4, 1994.
SECOND: That the Board of Directors of the Corporation adopted a
resolution proposing and declaring advisable the following amendment to the
Corporation's Certificate of Incorporation:
"NOW, THEREFORE, BE IT RESOLVED, that the first paragraph of Article
Fourth of the Company's Certificate of Incorporation be amended to read in
its entirety as follows (the "Amendment"):
"A. SHARES AUTHORIZED. The total number of shares of all classes of
stock which the Corporation shall have the authority to issue is Two
Hundred Million (200,000,000) shares consisting of One Hundred Ninety-
Five Million (195,000,000) shares of Common Stock, par value $0.001
per share (the "Common Stock"), and Five Million (5,000,000) shares of
Preferred Stock, par value $0.001 per share (the "Preferred Stock").""
THIRD: That the foregoing amendment was duly adopted by all of the duly
elected directors of the Corporation in accordance with the applicable
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: The foregoing amendment was duly adopted by a majority of the
outstanding shares of stock of the Corporation in accordance with the applicable
provisions of Section 242 of the General Corporation Law of the State of
Delaware and the Corporation's Certificate of Incorporation.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed
by Barry C. Cosgrove, its Vice President, General Counsel and Secretary, this
26th day of February, 1998.
TOTAL RENAL CARE HOLDINGS, INC.,
a Delaware corporation
By:
-------------------------------------
Barry C. Cosgrove,
Vice President, General Counsel
and Secretary
56101.1
2
<PAGE>
EXHIBIT 10.28
TOTAL RENAL CARE HOLDINGS, INC.
SECOND AMENDMENT
TO TERM LOAN AGREEMENT
This SECOND AMENDMENT TO TERM LOAN AGREEMENT (this "AMENDMENT") is dated as
of January 13, 1998, and entered into by and among TOTAL RENAL CARE HOLDINGS,
INC., a Delaware corporation (the "Borrower"), the financial institutions
listed on the signature pages hereof and their respective successors and
assigns (the "Lenders", each a "Lender"), DLJ CAPITAL FUNDING, INC., as
Syndication Agent (the "Syndication Agent"), THE BANK OF NEW YORK, as
administrative agent for the Lenders (in such capacity, the "Administrative
Agent"), and, for purposes of Section 4 hereof, the Credit Support Parties (as
defined in Section 4 hereof) listed on the signature pages hereof, and is made
with reference to that certain Term Loan Agreement dated as of October 24,
1997, as amended by that certain First Amendment to Term Loan Agreement dated
as of December 1, 1997 (said agreement, as so amended, being the "TERM LOAN
AGREEMENT"), by and among Borrower, Lenders, Syndication Agent and
Administrative Agent. Capitalized terms used herein without definition shall
have the same meanings herein as set forth in the Term Loan Agreement.
RECITALS
WHEREAS, Borrower and Lenders desire to amend the Term Loan Agreement in
order to (i) revise the definition of "Subordinated Indebtedness" contained
therein, (ii) revise certain negative covenants regarding amendments to
Subordinated Indebtedness and (iii) make certain other changes as set forth
herein.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as
follows:
SECTION 1. AMENDMENTS TO THE TERM LOAN AGREEMENT
1.1 Amendments to Section 1: Provisions Relating to Defined Terms
A. Subsection 1.1 of the Term Loan Agreement is hereby amended by the
definition of "Subordinated Indebtedness" therefrom in its entirety and
substituting the following therefor:
"Subordinated Indebtedness": any unsecured Indebtedness of the Borrower
subordinated in right of payment to the payment in full of the Obligations
of the Borrower and other senior obligations of the Borrower; provided that
(i) the negative covenants in such Indebtedness are less restrictive than
the negative covenants in this Agreement as in effect at the time such
Indebtedness is incurred, (ii) the affirmative covenants in such
Indebtedness are no more restrictive than the affirmative covenants in this
Agreement as in effect at the time such Indebtedness is incurred, (iii) the
events of default in such Indebtedness relating to insolvency and
nonpayment of amounts owed thereunder are no more restrictive than the
corresponding defaults in this Agreement as in effect at the time such
Indebtedness is incurred, and the other events of default in such
Indebtedness are less restrictive than the corresponding defaults in this
Agreement as in effect at the time such Indebtedness is incurred, (iv) such
Indebtedness does not cross-default to other Indebtedness (but may cross-
accelerate to other Indebtedness of Borrower or any Subsidiary Guarantor
that has guarantied such Indebtedness), (v) the subordination provisions in
such Indebtedness are on market terms for subordinated debt instruments
prevailing at or around the time such Indebtedness is incurred and (vi)
such Indebtedness provides for no scheduled payment or mandatory
prepayments of principal before March 30, 2008, other than (x) redemptions
made at the option of the holders of such Indebtedness upon a change in
control of the Borrower in circumstances where the holders of the Term
Loans would have rights to prepayment under Section 2.4(c), provided that
any such redemptions are made not fewer than 30 days after such change in
control and (y) mandatory prepayments required as a result of asset
dispositions if such
1
<PAGE>
Indebtedness allows the Borrower to satisfy such mandatory prepayment
requirement by prepayment of senior obligations of the Borrower or
reinvestment of the asset disposition proceeds within a specified period of
time.
1.2 Amendments to Section 8: Negative Covenants
A. Section 8.1(b) of the Term Loan Agreement is hereby amended by (i)
deleting the "and" at the end of clause (xii) thereof, (ii) relabeling clause
(xiii) thereof as clause (xiv) and (iii) adding a new clause (xiii) thereto as
follows:
"(xiii) Guaranties by any Guarantor of Borrower's obligations under any
Subordinated Indebtedness permitted hereunder, provided that (a) all
Obligations of Borrower are guarantied by such Guarantor under the
Subsidiary Guaranty, (b) each such Guaranty is subordinated to at least the
same extent as the Subordinated Indebtedness guarantied thereby is
subordinated to the Obligations of Borrower, (c) each such Guaranty
contains a limitation as to maximum amount guarantied thereby similar to
that set forth in subsection 2.2(a) of the Subsidiary Guaranty, provided
that in no event shall the liability of the Guarantor under such Guaranty
exceed the maximum amount permissible under applicable fraudulent
conveyance or similar law, and (d) each such Guaranty is otherwise on
market terms for guaranties of subordinated debt instruments prevailing at
or around the time such Guaranties are entered into; and".
B. Section 8.5 of the Term Loan Agreement is hereby amended by (i) deleting
the "and" at the end of clause (k) thereof, (ii) relabeling clause (l) thereof
as clause (m) and (iii) adding a new clause (l) thereto as follows:
"(l) Contingent Obligations to the extent permitted by Section 8.1(b);
and".
C. Section 8.15 of the Term Loan Agreement is hereby amended by adding a new
subsection (d) thereto as follows:
"(d) The Borrower will not, and will not permit any of its Subsidiaries
to, amend or otherwise change the terms of any Subordinated Indebtedness,
or make any payment consistent with an amendment thereof or change thereto,
if the effect of such amendment or change is to change (to any date before
March 30, 2008) any dates upon which payments of principal are due thereon,
change the redemption, prepayment or defeasance provisions thereof (unless
the redemption or prepayment provisions as so changed would be permitted
under clause (vi) of the definition of "Subordinated Indebtedness"), change
the subordination provisions thereof (or of any guaranty thereof), or grant
any Lien to secure payment thereof, or if the effect of such amendment or
change, together with all other amendments or changes made, is to increase
materially the obligations of the obligor thereunder or to confer any
additional rights on the holders of such Subordinated Indebtedness (or a
trustee or other representative on their behalf) which would be adverse to
the Borrower or Lenders."
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "SECOND
AMENDMENT EFFECTIVE DATE"):
A. All fees and expenses incurred by Syndication Agent and its counsel,
O'Melveny & Myers LLP, in connection with the preparation, negotiation and
closing of this Amendment shall have been paid by Borrower.
B. All fees and expenses incurred by Administrative Agent and its
counsel, Emmet, Marvin & Martin, LLP, in connection with the preparation,
negotiation and closing of this Amendment shall have been paid by Borrower.
2
<PAGE>
SECTION 3. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend the
Term Loan Agreement in the manner provided herein, Borrower represents and
warrants to each Lender that the following statements are true, correct and
complete:
A. CORPORATE POWER AND AUTHORITY. Each Credit Party has all requisite
corporate power and authority to enter into this Amendment and to carry out
the transactions contemplated by, and perform its obligations under, the Term
Loan Agreement as amended by this Amendment (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment
have been duly authorized by all necessary corporate action on the part of
each Credit Party. The performance of the Amended Agreement has been duly
authorized by all necessary corporate action on the part of each Credit Party.
C. NO CONFLICT. The execution and delivery by each Credit Party of this
Amendment, and the performance by each Credit Party of the Amended Agreement
do not and will not (i) violate any provision of any law or any governmental
rule or regulation applicable to Borrower or any of its Subsidiaries, the
Certificate or Articles of Incorporation or Bylaws of Borrower or any of its
Subsidiaries or any order, judgment or decree of any court or other agency of
government binding on Borrower or any of its Subsidiaries, (ii) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both)
a default under any contractual obligation of Borrower or any of its
Subsidiaries, (iii) result in or require the creation or imposition of any
Lien upon any of the properties or assets of Borrower or any of its
Subsidiaries (other than Liens created under any of the Loan Documents in
favor of Administrative Agent on behalf of Lenders), or (iv) require any
approval of stockholders or any approval or consent of any Person under any
contractual obligation of Borrower or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by each Credit Party of
this Amendment, and the performance by each Credit Party of the Amended
Agreement do not and will not require any registration with, consent or
approval of, or notice to, or other action to, with or by, any federal, state
or other governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement have been
duly executed and delivered by each Credit Party and are the legally valid and
binding obligations of each Credit Party, enforceable against each Credit
Party in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally or by equitable principles relating to
enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM TERM LOAN
AGREEMENT. The representations and warranties contained in Section 4 of the
Term Loan Agreement are and will be true, correct and complete in all material
respects on and as of the Second Amendment Effective Date to the same extent
as though made on and as of that date, except to the extent such
representations and warranties specifically relate to an earlier date, in
which case they were true, correct and complete in all material respects on
and as of such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will
result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default.
SECTION 4. ACKNOWLEDGEMENT AND CONSENT
Borrower is a party to the Borrower Pledge Agreement pursuant to which
Borrower has pledged certain Collateral to Administrative Agent to secure the
Obligations. TRC is a party to the Subsidiary Guaranty and the Subsidiary
Pledge Agreement pursuant to which TRC has (i) guarantied the Obligations and
(ii) pledged certain Collateral to Administrative Agent to secure the
Obligations and to secure the obligations of TRC under the Subsidiary
Guaranty. TRC West, Inc. is a party to the Subsidiary Guaranty pursuant to
which TRC West, Inc. has guarantied the Obligations. Total Renal Care
Acquisition Corp. is a party to the Subsidiary Guaranty pursuant
3
<PAGE>
to which Total Renal Care Acquisition Corp. has guarantied the Obligations.
Borrower, TRC, TRC West, Inc. and Total Renal Care Acquisition Corp. are
collectively referred to herein as the "CREDIT SUPPORT PARTIES", and the
Borrower Pledge Agreement, the Subsidiary Pledge Agreement and the Subsidiary
Guaranty are collectively referred to herein as the "CREDIT SUPPORT
DOCUMENTS".
Each Credit Support Party hereby acknowledges that it has reviewed the terms
and provisions of the Term Loan Agreement and this Amendment and consents to
the amendment of the Term Loan Agreement effected pursuant to this Amendment.
Each Credit Support Party hereby confirms that each Credit Support Document to
which it is a party or otherwise bound and all Collateral encumbered thereby
will continue to guaranty or secure, as the case may be, to the fullest extent
possible the payment and performance of all "Guarantied Obligations" and
"Secured Obligations," as the case may be (in each case as such terms are
defined in the applicable Credit Support Document), including without
limitation the payment and performance of all such "Guarantied Obligations"
and "Secured Obligations," as the case may be, in respect of the Obligations
of Borrower now or hereafter existing under or in respect of the Amended
Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of the Credit
Support Documents to which it is a party or otherwise bound shall continue in
full force and effect and that all of its obligations thereunder shall be
valid and enforceable and shall not be impaired or limited by the execution or
effectiveness of this Amendment. Each Credit Support Party represents and
warrants that all representations and warranties contained in the Amended
Agreement and the Credit Support Documents to which it is a party or otherwise
bound are true, correct and complete in all material respects on and as of the
Second Amendment Effective Date to the same extent as though made on and as of
that date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that (i) notwithstanding
the conditions to effectiveness set forth in this Amendment, such Credit
Support Party is not required by the terms of the Term Loan Agreement or any
other Loan Document to consent to the amendments to the Term Loan Agreement
effected pursuant to this Amendment and (ii) nothing in the Term Loan
Agreement, this Amendment or any other Loan Document shall be deemed to
require the consent of such Credit Support Party to any future amendments to
the Term Loan Agreement.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE TERM LOAN AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
(i) On and after the Second Amendment Effective Date, each reference in
the Term Loan Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Term Loan Agreement, and
each reference in the other Loan Documents to the "Term Loan Agreement",
"thereunder", "thereof" or words of like import referring to the Term Loan
Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Term Loan
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of
Administrative Agent or any Lender under, the Term Loan Agreement or any of
the other Loan Documents.
B. FEES AND EXPENSES. Borrower acknowledges that all costs, fees and
expenses as described in Section 11.5 of the Term Loan Agreement incurred by
Administrative Agent, Syndication Agent, Co-Arrangers, Special Counsel, and
Emmet, Marvin and Martin, LLP with respect to this Amendment and the documents
and transactions contemplated hereby shall be for the account of Borrower.
4
<PAGE>
C. HEADINGS. Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are physically
attached to the same document. This Amendment (other than the provisions of
Section 1 hereof, the effectiveness of which is governed by Section 2 hereof)
shall become effective upon the execution of a counterpart hereof by Borrower,
Required Lenders, Administrative Agent, and each of the Credit Support Parties
and receipt by Borrower and Administrative Agent of written or telephonic
notification of such execution and authorization of delivery thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective officers thereunto duly authorized
as of the date first written above.
BORROWER: TOTAL RENAL CARE HOLDINGS, INC.
By: _________________________________
Title: V/P Finance & CFO
CREDIT SUPPORT PARTIES: TOTAL RENAL CARE, INC., (for
purposes of
Section 4 only) as a Credit Support
Party
By: _________________________________
Title: V/P Finance & CFO
TRC WEST, INC., (for purposes of
Section 4 only) as a Credit Support
Party
By: _________________________________
Title: President
TOTAL RENAL CARE ACQUISITION CORP.,
(for purposes of Section 4 only) as
a Credit Support Party
By: _________________________________
Title: V/P Finance & CFO
AGENTS: THE BANK OF NEW YORK, Individually
and as
Administrative Agent
By: _________________________________
Title: Vice President
S-1
<PAGE>
DLJ CAPITAL FUNDING, INC.,
Individually and as Syndication
Agent
By: _________________________________
Title: ______________________________
LENDERS:
BDC FINANCE, LLC
By: _________________________________
Title: ______________________________
CITIBANK, N.A.
By: _________________________________
Title: ______________________________
CONTINENTAL ASSURANCE COMPANY
Separate Account (E)
By: TCW Asset Management Company, as
Attorney-In-Fact, as Assignee
By: _________________________________
Title: ______________________________
By: _________________________________
Title: ______________________________
DEBT STRATEGIES FUND, INC.
By: _________________________________
Title: ______________________________
S-2
<PAGE>
DEEPROCK & COMPANY
By: Eaton Vance Management as
Investment Advisor
By: _________________________________
Title: Vice President
FRANKLIN FLOATING RATE TRUST
By: _________________________________
Title: ______________________________
KZH HOLDING CORPORATION III
By: _________________________________
Title: Authorized Agent
KZH--CRESCENT CORPORATION
By: _________________________________
Title: Authorized Agent
KZH--SOLEIL CORPORATION
By: _________________________________
Title: Authorized Agent
LEHMAN COMMERCIAL PAPER INC.
By: _________________________________
Title: ______________________________
S-3
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By: _________________________________
Title: ______________________________
MORGAN STANLEY SENIOR FUNDING, INC.
By: _________________________________
Title: Vice President
OCTAGON CREDIT INVESTORS LOAN
PORTFOLIO (a unit of The Chase
Manhattan Bank)
By: _________________________________
Title: Managing Director
ORIX USA CORP.
By: _________________________________
Title: Executive Vice President
PARIBAS CAPITAL FUNDING LLC
By: _________________________________
Title: Director
PILGRIM AMERICA PRIME RATE TRUST
By: _________________________________
Title: ______________________________
S-4
<PAGE>
PIMCO HIGH YIELD FUND (Acct 705)
By: Pacific Investment Management
Company, as its Investment
Advisor acting through Investors
Fiduciary Trust Company in the
Nominee Name of IFTCO
By: _________________________________
Title: ______________________________
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By: _________________________________
Title: Vice President
SENIOR HIGH INCOME PORTFOLIO, INC.
By: _________________________________
Title: ______________________________
T. ROWE PRICE HIGH YIELD FUND INC.
By: _________________________________
Title: ______________________________
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By: _________________________________
Title: Vice President
S-5
<PAGE>
EXHIBIT 10.29
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
AMENDMENT NO. 2 and CONSENT NO. 2, dated as of February 17, 1998, to the
Revolving Credit Agreement, as amended by Amendment No.1 and Consent No. 1,
dated as of December 1, 1997 (the "Revolving Credit Agreement"), dated as of
October 24, 1997, by and among TOTAL RENAL CARE HOLDINGS, INC., a Delaware
corporation (the "Borrower"), the lenders party thereto (the "Lenders"), DLJ
CAPITAL FUNDING, INC., as Syndication Agent (the "Syndication Agent"), FIRST
UNION NATIONAL BANK, as Documentation Agent, and THE BANK OF NEW YORK, as
administrative agent (in such capacity, the "Administrative Agent"), and
AMENDMENT NO. 1, dated as of February 17, 1998, to the Subsidiary Guaranty,
entered into as of October 24, 1997 (the "Subsidiary Guaranty"), by the
GUARANTORS party thereto in favor of THE BANK OF NEW YORK, as collateral agent
(in such capacity, the "Collateral Agent")(this "Amendment").
RECITALS
I. Capitalized terms used herein which are not otherwise defined herein
shall have the respective meanings ascribed thereto in the Revolving Credit
Agreement.
II. The Borrower has requested that the Administrative Agent and the Lenders
agree to amend the Revolving Credit Agreement, among other things, to permit
the Borrower to guaranty, on a subordinated basis, the obligations of RTC
under the 5-5/8% Notes upon the terms and conditions contained herein, and the
Administrative Agent and the Required Lenders are willing to so agree.
III. The Borrower has requested that the Collateral Agent and the Lenders
agree to amend the Subsidiary Guaranty to designate the Subsidiary Guaranty as
"Designated Senior Indebtedness" under the 5-5/8% Indenture upon the terms and
conditions contained herein, and the Collateral Agent and the Required Lenders
are willing to so agree.
Accordingly, in consideration of the Recitals and the covenants and
conditions hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Section 1.1 of the Revolving Credit Agreement is amended by amending and
restating in its entirety the definition of "Letter of Credit" as follows:
"Letter of Credit": as defined in Section 2.19, provided that each of the
following shall constitute a Letter of Credit for the purposes of this
Agreement: (i) each of the Existing Letters of Credit and (ii) effective
upon the consummation of the Permitted Merger, the letter of credit no.
S111397 in the amount of $800,000, dated January 22, 1997, issued by First
Union National Bank (formerly known as First Union National Bank of North
Carolina) to Mutual Indemnity (Bermuda) Ltd. for the account of RTC, as
such letter of credit may be renewed from time to time in accordance with
its terms.
2. Section 1.1 of the Revolving Credit Agreement is amended by amending and
restating in its entirety the definition of "Letter of Credit Issuer" as
follows:
"Letter of Credit Issuer": BNY (or any successor thereto) and, solely for
purposes of the Letter of Credit referred to in clause (ii) of the
definition of "Letter of Credit", First Union National Bank (or any
successor thereto).
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3. Section 1.1 of the Revolving Credit Agreement is amended by adding the
following definition in appropriate alphabetical order:
"5 5/8% Guaranty": The guaranty by the Borrower of RTC's obligations
under the 5 5/8% Notes, provided that (i) such guaranty is subordinated to
at least the same extent as the Indebtedness under the 5 5/8% Notes is
subordinated to the Guarantied Obligations (as such term is defined in the
Subsidiary Guaranty) of RTC under the Subsidiary Guaranty, (ii) such
guaranty is otherwise on market terms for guaranties of subordinated debt
instruments prevailing at or around the time such guaranty is entered into
and (iii) such guaranty is in form and substance satisfactory to the
Administrative Agent and the Syndication Agent, as such guaranty may be
amended, supplemented or otherwise modified from time to time in accordance
with Section 8.9.
4. Section 4 of the Revolving Credit Agreement is amended by adding a new
Section 4.22 thereto as follows:
4.22 Subordinated Indebtedness
The subordination provisions of the 5 5/8% Indenture, the 5 5/8% Notes
and the 5 5/8% Guaranty will be enforceable against the holders thereof,
and the Loans and all other monetary obligations hereunder and all
monetary obligations under the Subsidiary Guaranty will constitute
"Senior Indebtedness" and "Designated Senior Indebtedness" (or any
comparable terms) as defined in such provisions.
5. Section 8.1 of the Revolving Credit Agreement is amended by 1. deleting
the word "and" immediately before clause (xvi) of such Section 8.1 and 2.
inserting the following immediately prior to the period at the end of such
Section 8.1:
, and (xvii) the 5 5/8% Guaranty.
6. Section 8.5 of the Revolving Credit Agreement is amended by 1. deleting
the word "and" immediately before clause (l) to Section 8.5 and 2. inserting
the following immediately prior to the period at the end of such Section 8.5:
; and (m) Contingent Obligations to the extent permitted by Section 8.1.
7. Section 8.9(d) of the Revolving Credit Agreement is hereby amended by 1.
deleting the words "5 5/8% Indenture or the 5 5/8% Notes" and 2. substituting
in their place the following:
5 5/8% Indenture, the 5 5/8% Notes or the 5 5/8% Guaranty.
8. Section 11 of the Revolving Credit Agreement is amended by adding a new
Section 11.22 thereto as follows:
11.22 Designation as Designated Senior Indebtedness
This Agreement, the Subsidiary Guaranty, and all Loans and all other
monetary obligations hereunder and thereunder, are hereby expressly
designated as "Designated Senior Indebtedness", as that term is defined
in the 5 5/8% Indenture and in the 5 5/8% Guaranty.
9. The Subsidiary Guaranty is amended by adding a new Section 4.15 thereto
as follows:
4.15 Designation as Designated Senior Indebtedness; Incorporation of
Defaults
This Guaranty, the Financing Documents, and all monetary obligations
hereunder and thereunder, are hereby expressly designated as
"Designated Senior Indebtedness", as that term is defined in the 5 5/8%
Indenture. The occurrence of any Default or Event of Default
constitutes a default under this Guaranty.
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10. The Administrative Agent and the Lenders, to the extent their consent is
required, hereby consent to the amendment of the Term Loan Facility
substantially in the form of Exhibit A attached hereto (the "Third Term Loan
Amendment").
11. Paragraphs 1-10 of this Amendment shall not be effective until such date
as each of the following conditions shall have been satisfied:
(a). The Third Term Loan Amendment shall have become effective, and the
Administrative Agent shall have received a certificate of an Authorized
Signatory of the Borrower attaching a true, complete and correct copy of
the fully executed Third Term Loan Amendment.
(b). The Borrower shall have paid the reasonable fees and disbursements
of Special Counsel which shall have accrued up to the date hereof.
12. On the date hereof, each Credit Party hereby (a) reaffirms and admits
the validity and enforceability of the Loan Documents (as amended by this
Amendment) and all of its obligations thereunder, (b) agrees and admits that
it has no defenses to or offsets against any such obligation, and (c)
represents and warrants that no Default or Event of Default has occurred and
is continuing, and that each of the representations and warranties made by it
in the Loan Documents (as amended by this Amendment) to which it is a party is
true and correct with the same effect as though such representation and
warranty had been made on the date hereof.
13. In all other respects, the Loan Documents shall remain in full force and
effect, and no amendment in respect of any term or condition of any Loan
Document contained herein shall be deemed to be an amendment in respect of any
other term or condition contained in any Loan Document.
14. This Amendment may be executed in any number of counterparts all of
which, taken together, shall constitute one Amendment. In making proof of this
Amendment, it shall only be necessary to produce the counterpart executed and
delivered by the party to be charged.
15. THIS AMENDMENT IS BEING EXECUTED AND DELIVERED IN, AND IS INTENDED TO BE
PERFORMED IN, THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCEABLE IN
ACCORDANCE WITH, AND BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW
YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
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<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused this Amendment to be
executed on its behalf.
TOTAL RENAL CARE HOLDINGS, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
THE BANK OF NEW YORK,
Individually, as a Letter of Credit
Issuer, as the Swing Line Lender,
as Administrative Agent and as
Collateral Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
DLJ CAPITAL FUNDING, INC.,
Individually and as Syndication
Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
FIRST UNION NATIONAL BANK,
Individually, as a Letter of Credit
Issuer and as Documentation Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
ABN AMRO BANK N.V.
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
ALLIED IRISH BANKS, P.L.C., CAYMAN
ISLANDS BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
BANK LEUMI TRUST COMPANY OF NEW YORK
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
BANK OF MONTREAL
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
THE BANK OF NOVA SCOTIA
By: _________________________________
Name: _______________________________
Title: ______________________________
BANQUE NATIONALE DE PARIS
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
BANQUE PARIBAS
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
CITY NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
CORESTATES BANK N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
CREDIT LYONNAIS NEW YORK BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
FLEET NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
THE FUJI BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
HIBERNIA NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
THE INDUSTRIAL BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY
By: _________________________________
Name: _______________________________
Title: ______________________________
LONG TERM CREDIT BANK OF JAPAN, LTD.
By: _________________________________
Name: _______________________________
Title: ______________________________
MELLON BANK, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
MICHIGAN NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
NATIONAL CITY BANK OF KENTUCKY
By: _________________________________
Name: _______________________________
Title: ______________________________
COOPERATIEVE CENTRALE RAIFFEISEN--
BOERENLEENBANK B.A, "RABOBANK
NEDERLAND", NEW YORK BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
ROYAL BANK OF CANADA
By: _________________________________
Name: _______________________________
Title: ______________________________
THE ROYAL BANK OF SCOTLAND PLC
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
THE SAKURA BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
THE SANWA BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
SOCIETE GENERALE
By: _________________________________
Name: _______________________________
Title: ______________________________
THE SUMITOMO BANK, LIMITED, CHICAGO
BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
THE SUMITOMO TRUST & BANKING CO.,
LTD., NEW YORK BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
SUNTRUST BANK, NASHVILLE, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
THE TOYO TRUST & BANKING CO., LTD.
By: _________________________________
Name: _______________________________
Title: ______________________________
UNION BANK OF CALIFORNIA, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
U.S. BANK NATIONAL ASSOCIATION
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 2 AND CONSENT NO. 2
TO REVOLVING CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SUBSIDIARY GUARANTY
AGREED AND CONSENTED TO:
TOTAL RENAL CARE, INC.
By: _____________________________
Name: ___________________________
Title: __________________________
TRC WEST, INC.
By: _____________________________
Name: ___________________________
Title: __________________________
TOTAL RENAL CARE ACQUISITION CORP.
By: _____________________________
Name: ___________________________
Title: __________________________
<PAGE>
EXHIBIT 10.30
EXECUTION COPY
TOTAL RENAL CARE HOLDINGS, INC.
THIRD AMENDMENT TO TERM LOAN AGREEMENT
AND FIRST AMENDMENT TO SUBSIDIARY GUARANTY
This THIRD AMENDMENT TO TERM LOAN AGREEMENT AND FIRST AMENDMENT TO
SUBSIDIARY GUARANTY (this "AMENDMENT") is dated as of February 17, 1998, and
entered into by and among TOTAL RENAL CARE HOLDINGS, INC., a Delaware
corporation (the "Borrower"), the financial institutions listed on the
signature pages hereof and their respective successors and assigns (the
"Lenders", each a "Lender"), DLJ CAPITAL FUNDING, INC., as Syndication Agent
(the "Syndication Agent"), THE BANK OF NEW YORK, as collateral agent and as
administrative agent for the Lenders (in such capacity, the "Administrative
Agent"), and, for purposes of Sections 2 and 5 hereof, the Credit Support
Parties (as defined in Section 5 hereof) listed on the signature pages hereof,
and is made with reference to that certain Term Loan Agreement dated as of
October 24, 1997, as amended by that certain First Amendment to Term Loan
Agreement dated as of December 1, 1997 and that certain Second Amendment to
Term Loan Agreement dated as of January 13, 1998 (as so amended, the "TERM
LOAN AGREEMENT"), by and among Borrower, Lenders, Syndication Agent and
Administrative Agent. Capitalized terms used herein without definition shall
have the same meanings herein as set forth in the Term Loan Agreement.
RECITALS
WHEREAS, Borrower and Lenders desire to amend the Term Loan Agreement to
permit Borrower to guaranty, on a subordinated basis, obligations of RTC under
the RTC Convertible Subordinated Notes on and after the effectiveness of the
RTC Merger Agreement;
WHEREAS, the Subsidiary Guarantors and the Collateral Agent desire to amend
the Subsidiary Guaranty to provide that the obligations thereunder are
expressly designated as "Designated Senior Indebtedness," as that term is
defined in the RTC Convertible Subordinated Indenture; and
WHEREAS, subject to the terms and conditions of this Amendment, Lenders are
willing to agree to such amendments.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as
follows:
SECTION 1. AMENDMENTS TO THE TERM LOAN AGREEMENT
1.1 Amendments to Section 4: Representations and Warranties
Section 4 of the Term Loan Agreement is hereby amended by adding a new
Section 4.22 thereto as follows:
"4.22 Subordinated Indebtedness
The subordination provisions of (i) the RTC Convertible Subordinated
Indenture, (ii) any Guarantee by the Borrower of the Indebtedness under the
RTC Convertible Subordinated Indenture and the RTC Convertible Subordinated
Notes, (iii) any Subordinated Indebtedness of the Borrower now existing or
hereafter incurred or assumed by the Borrower and (iv) any Guarantee by any
Subsidiary of the Borrower of any Subordinated Indebtedness of the Borrower
will be enforceable against the holders thereof, and the Loans and all
other monetary Obligations hereunder and all monetary obligations under the
Subsidiary Guaranty will constitute "Senior Indebtedness' and "Designated
Senior Indebtedness' (or any comparable terms) as defined in such
provisions."
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1.2 Amendments to Section 8: Negative Covenants
A. Section 8.1(b) of the Term Loan Agreement is hereby further amended by
(i) deleting the "and" at the end of clause (xiii) thereof, (ii) relabeling
clause (xiv) thereof as clause (xv) and (iii) adding a new clause (xiv)
thereto as follows:
"(xiv) a Guarantee by the Borrower of RTC's obligations under the RTC
Convertible Subordinated Notes provided that (a) such Guarantee is
subordinated to at least the same extent as the Indebtedness under the RTC
Convertible Subordinated Notes is subordinated to the Obligations of RTC
under the Subsidiary Guaranty and (b) such Guarantee is otherwise on market
terms for guaranties of subordinated debt instruments prevailing at or
around the time such Guarantee is entered into; and".
1.3 Amendments to Section 11: Other Provisions
Section 11 of the Term Loan Agreement is hereby amended by adding a new
Section 11.20 thereto as follows:
"11.20 Designation as Designated Senior Indebtedness
This Agreement, the Subsidiary Guaranty, and all Loans and all other
monetary Obligations hereunder and thereunder, are hereby expressly
designated as "Designated Senior Indebtedness,' as that term is defined in
the RTC Convertible Subordinated Indenture and in any Guarantee thereof."
SECTION 2. AMENDMENT TO THE SUBSIDIARY GUARANTY
The Subsidiary Guaranty is hereby amended by adding a new Section 4.15
thereto as follows:
"4.15 Designation as Designated Senior Indebtedness; Incorporation of
Defaults
This Guaranty, the Financing Documents, and all monetary obligations
hereunder and thereunder, are hereby expressly designated as 'Designated
Senior Indebtedness', as that term is defined in the 5 5/8% Indenture. The
occurrence of any Default or Event of Default constitutes a default under
this Guaranty."
SECTION 3. CONDITIONS TO EFFECTIVENESS
Sections 1 and 2 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "THIRD
AMENDMENT EFFECTIVE DATE"):
A. Required Lenders (as such term is defined in the Revolving Credit
Agreement) shall have entered into an amendment and consent thereto that
consents to this Amendment, which amendment and consent shall be in form and
substance satisfactory to the Administrative Agent and Syndication Agent, and
all conditions to the effectiveness thereof (other than effectiveness hereof)
shall have been satisfied or waived.
B. All fees and expenses incurred by Syndication Agent and its counsel,
O'Melveny & Myers LLP, in connection with the preparation, negotiation and
closing of this Amendment shall have been paid by Borrower.
SECTION 4. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend the
Term Loan Agreement in the manner provided herein, Borrower represents and
warrants to each Lender that the following statements are true, correct and
complete:
A. CORPORATE POWER AND AUTHORITY. Each Credit Party has all requisite
corporate power and authority to enter into this Amendment and to carry out
the transactions contemplated by, and perform its obligations under, the Term
Loan Agreement as amended by this Amendment (the "AMENDED AGREEMENT").
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<PAGE>
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment
have been duly authorized by all necessary corporate action on the part of
each Credit Party. The performance of the Amended Agreement has been duly
authorized by all necessary corporate action on the part of each Credit Party.
C. NO CONFLICT. The execution and delivery by each Credit Party of this
Amendment, and the performance by each Credit Party of the Amended Agreement
do not and will not (i) violate any provision of any law or any governmental
rule or regulation applicable to Borrower or any of its Subsidiaries, the
Certificate or Articles of Incorporation or Bylaws of Borrower or any of its
Subsidiaries or any order, judgment or decree of any court or other agency of
government binding on Borrower or any of its Subsidiaries, (ii) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both)
a default under any contractual obligation of Borrower or any of its
Subsidiaries, (iii) result in or require the creation or imposition of any
Lien upon any of the properties or assets of Borrower or any of its
Subsidiaries (other than Liens created under any of the Loan Documents in
favor of Administrative Agent on behalf of Lenders), or (iv) require any
approval of stockholders or any approval or consent of any Person under any
contractual obligation of Borrower or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by each Credit Party of
this Amendment, and the performance by each Credit Party of the Amended
Agreement do not and will not require any registration with, consent or
approval of, or notice to, or other action to, with or by, any federal, state
or other governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement have been
duly executed and delivered by each Credit Party and are the legally valid and
binding obligations of each Credit Party, enforceable against each Credit
Party in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally or by equitable principles relating to
enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM TERM LOAN
AGREEMENT. The representations and warranties contained in Section 4 of the
Term Loan Agreement are and will be true, correct and complete in all material
respects on and as of the Third Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will
result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default.
SECTION 5. ACKNOWLEDGEMENT AND CONSENT
Borrower is a party to the Borrower Pledge Agreement pursuant to which
Borrower has pledged certain Collateral to Administrative Agent to secure the
Obligations. TRC is a party to the Subsidiary Guaranty and the Subsidiary
Pledge Agreement pursuant to which TRC has (i) guarantied the Obligations and
(ii) pledged certain Collateral to Administrative Agent to secure the
Obligations and to secure the obligations of TRC under the Subsidiary
Guaranty. TRC West, Inc. is a party to the Subsidiary Guaranty pursuant to
which TRC West, Inc. has guarantied the Obligations. Total Renal Care
Acquisition Corp. is a party to the Subsidiary Guaranty pursuant to which
Total Renal Care Acquisition Corp. has guarantied the Obligations. Borrower,
TRC, TRC West, Inc. and Total Renal Care Acquisition Corp. are collectively
referred to herein as the "CREDIT SUPPORT PARTIES", and the Borrower Pledge
Agreement, the Subsidiary Pledge Agreement and the Subsidiary Guaranty are
collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS".
Each Credit Support Party hereby acknowledges that it has reviewed the terms
and provisions of the Term Loan Agreement and this Amendment and consents to
the amendment of the Term Loan Agreement effected pursuant to this Amendment.
Each Credit Support Party hereby confirms that each Credit Support Document to
which it is a party or otherwise bound and all Collateral encumbered thereby
will continue to guaranty or secure,
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as the case may be, to the fullest extent possible the payment and performance
of all "Guarantied Obligations" and "Secured Obligations," as the case may be
(in each case as such terms are defined in the applicable Credit Support
Document), including without limitation the payment and performance of all
such "Guarantied Obligations" and "Secured Obligations," as the case may be,
in respect of the Obligations of Borrower now or hereafter existing under or
in respect of the Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of the Credit
Support Documents to which it is a party or otherwise bound shall continue in
full force and effect and that all of its obligations thereunder shall be
valid and enforceable and shall not be impaired or limited by the execution or
effectiveness of this Amendment. Each Credit Support Party represents and
warrants that all representations and warranties contained in the Amended
Agreement and the Credit Support Documents to which it is a party or otherwise
bound are true, correct and complete in all material respects on and as of the
Third Amendment Effective Date to the same extent as though made on and as of
that date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that (i) notwithstanding
the conditions to effectiveness set forth in this Amendment, such Credit
Support Party is not required by the terms of the Term Loan Agreement or any
other Loan Document to consent to the amendments to the Term Loan Agreement
effected pursuant to this Amendment and (ii) nothing in the Term Loan
Agreement, this Amendment or any other Loan Document shall be deemed to
require the consent of such Credit Support Party to any future amendments to
the Term Loan Agreement.
SECTION 6. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE TERM LOAN AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
(i) On and after the Third Amendment Effective Date, each reference in
the Term Loan Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Term Loan Agreement, and
each reference in the other Loan Documents to the "Term Loan Agreement",
"thereunder", "thereof" or words of like import referring to the Term Loan
Agreement shall mean and be a reference to the Amended Agreement.
(ii) On and after the Third Amendment Effective Date, each reference in
the Subsidiary Guaranty to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Subsidiary Guaranty and
each reference in the other Loan Documents to the "Subsidiary Guaranty",
"thereunder", "thereof" or words of like import referring to the Subsidiary
Guaranty shall mean and be a reference to the Subsidiary Guaranty as
amended by this Amendment.
(iii) Except as specifically amended by this Amendment, the Term Loan
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(iv) The execution, delivery and performance of this Amendment shall not,
except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of Administrative
Agent or any Lender under, the Term Loan Agreement or any of the other Loan
Documents.
B. FEES AND EXPENSES. Borrower acknowledges that all costs, fees and
expenses as described in Section 11.5 of the Term Loan Agreement incurred by
Administrative Agent, Syndication Agent, Co-Arrangers, and Special Counsel,
with respect to this Amendment and the documents and transactions contemplated
hereby shall be for the account of Borrower.
C. HEADINGS. Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose or be given any substantive effect.
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D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are physically
attached to the same document. This Amendment (other than the provisions of
Sections 1 and 2 hereof, the effectiveness of which is governed by Section 3
hereof) shall become effective upon the execution of a counterpart hereof by
Borrower, Required Lenders, Administrative Agent, and each of the Credit
Support Parties and receipt by Borrower and Administrative Agent of written or
telephonic notification of such execution and authorization of delivery
thereof.
[Remainder of page intentionally left blank]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective officers thereunto duly authorized
as of the date first written above.
BORROWER: TOTAL RENAL CARE HOLDINGS, INC.
By: _________________________________
Title: ______________________________
CREDIT SUPPORT PARTIES: TOTAL RENAL CARE, INC., (for
purposes of Sections 2 and 5 only)
as a Credit Support Party
By: _________________________________
Title: ______________________________
TRC WEST, INC., (for purposes of
Sections 2 and 5 only) as a Credit
Support Party
By: _________________________________
Title: ______________________________
TOTAL RENAL CARE ACQUISITION CORP.,
(for purposes of Sections 2 and 5
only) as a Credit Support Party
By: _________________________________
Title: ______________________________
AGENTS: THE BANK OF NEW YORK, Individually
as Administrative Agent, and
Collateral Agent
By: _________________________________
Title: ______________________________
S-1
<PAGE>
DLJ CAPITAL FUNDING, INC.,
Individually and as Syndication
Agent
By: _________________________________
Title: ______________________________
LENDERS: BDC FINANCE, LLC
By: _________________________________
Title: ______________________________
CITIBANK, N.A.
By: _________________________________
Title: ______________________________
CONTINENTAL ASSURANCE COMPANY
Separate Account (E)
By: TCW Asset Management Company, as
Attorney-In-Fact, as Assignee
By: _________________________________
Title: ______________________________
By: _________________________________
Title: ______________________________
DEBT STRATEGIES FUND, INC.
By: _________________________________
Title: ______________________________
S-2
<PAGE>
DEEPROCK & COMPANY
By: Eaton Vance Management as
Investment Advisor
By: _________________________________
Title: ______________________________
FRANKLIN FLOATING RATE TRUST
By: _________________________________
Title: ______________________________
KZH HOLDING CORPORATION III
By: _________________________________
Title: ______________________________
KZH--CRESCENT CORPORATION
By: _________________________________
Title: ______________________________
KZH--SOLEIL CORPORATION
By: _________________________________
Title: ______________________________
LEHMAN COMMERCIAL PAPER INC.
By: _________________________________
Title: ______________________________
S-3
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By: _________________________________
Title: ______________________________
MORGAN STANLEY SENIOR FUNDING, INC.
By: _________________________________
Title: ______________________________
OCTAGON CREDIT INVESTORS LOAN
PORTFOLIO (a unit of The Chase
Manhattan Bank)
By: _________________________________
Title: ______________________________
ORIX USA CORP.
By: _________________________________
Title: ______________________________
PARIBAS CAPITAL FUNDING LLC
By: _________________________________
Title: ______________________________
PILGRIM AMERICA PRIME RATE TRUST
By: _________________________________
Title: ______________________________
S-4
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By: _________________________________
Title: ______________________________
SENIOR HIGH INCOME PORTFOLIO, INC.
By: _________________________________
Title: ______________________________
T. ROWE PRICE HIGH YIELD FUND INC.
By: _________________________________
Title: ______________________________
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By: _________________________________
Title: ______________________________
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management,
L.P., as Investment Advisor
By: _________________________________
Title: ______________________________
S-5
<PAGE>
EXHIBIT 10.33
EXECUTION COPY
FIRST SUPPLEMENTAL INDENTURE (this "First
Supplemental Indenture") dated as of February 27,
1998, among Renal Treatment Centers, Inc., a Delaware
corporation (the "Company"), Total Renal Care
Holdings, Inc., a Delaware corporation ("TRCH"), and
PNC Bank, National Association, as trustee (the
"Trustee"), under the Indenture (the "Indenture")
dated as of June 12, 1996, between the Company and
the Trustee.
WHEREAS pursuant to an Agreement and Plan of Merger dated as of
November 18, 1997 (the "Merger Agreement"), among TRCH, Nevada Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of TRCH ("Merger
Sub") and the Company, Merger Sub merged with and into the Company (the
"Merger") and the Company continued as the surviving corporation and thereupon
became a wholly owned subsidiary of TRCH;
WHEREAS pursuant to the Merger Agreement, each outstanding share of
common stock, par value $0.01 per share, of the Company ("RTC Common Stock")
will be converted into 1.335 shares of common stock, par value $0.001 per share,
of TRCH ("TRCH Common Stock");
WHEREAS in connection with the Merger and the conversion of RTC Common
Stock into TRCH Common Stock, TRCH is required to execute and deliver to the
Trustee a supplemental indenture pursuant to Sections 15.6 and 16.5 of the
Indenture;
WHEREAS Section 11.1 of the Indenture provides that, without the
consent of the Noteholders, the Company, when authorized by a resolution of its
Board of Directors, and the Trustee may enter into indentures supplemental to
the Indenture for the purpose of, among other things, making provision with
respect to adjustments to the conversion rights of holders pursuant to the
requirements of Section 15.6 and the repurchase obligations of the Company
pursuant to the requirements of Section 16.5;
<PAGE>
2
WHEREAS the entry into this First Supplemental Indenture by the
parties hereto is in all respects authorized by the provisions of the Indenture;
and
WHEREAS all things necessary to make this First Supplemental Indenture
a valid indenture and agreement according to its terms have been done;
NOW THEREFORE, TRCH hereby covenants and agrees with the Company and
the Trustee for the benefit of the present and future holders of the Notes as
follows:
ARTICLE I
SECTION 1.01 Conversion Right. The holder of each Note outstanding
----------------
as of the date the Merger is consummated shall have the right, during the period
such Note shall be convertible as specified in Section 15.1 of the Indenture, to
convert such Note into shares of TRCH Common Stock equal to 1.335 times the
number of shares of RTC Common Stock such holder would have had the right to
receive upon conversion immediately prior to the date of the consummation of the
Merger.
SECTION 1.02 Antidilution Adjustments. The conversion price in
------------------------
effect at any time shall be subject to adjustment as set forth in Section 15.5
of the Indenture.
ARTICLE II
SECTION 2.01 Amendment to Definition of "Common Stock". The
-----------------------------------------
definition of "Common Stock" set forth in Section 1.1 of the Indenture is hereby
amended by deleting it in its entirety and replacing it with the following:
"The term "Common Stock" shall mean any stock of any class of TRCH
which has no preference in respect of dividends or of amounts payable
in the event of any voluntary or involuntary liquidation, dissolution
or winding up of TRCH and which is not subject to redemption by TRCH.
Subject to the provisions of Section 15.6, however, shares issuable on
conversion of Notes shall include only
<PAGE>
3
shares of the class designated as common stock of TRCH as of February
27, 1998, or shares of any class or classes resulting from any
reclassification or reclassifications hereof and which have no
preference in respect of dividends or of amounts payable in the event
of any voluntary or involuntary liquidation, dissolution or winding up
of TRCH and which are not subject to redemption by TRCH; provided that
--------
if at any time there shall be more than one such resulting class, the
shares of each such class then so issuable shall be substantially in
the proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number of
shares of all such classes resulting from all such reclassifications."
SECTION 2.02 Definition of "TRCH". The following definition shall be
--------------------
added to Section 1.1 of the Indenture:
"TRCH: The term "TRCH" shall mean Total Renal Care Holdings, Inc., a
----
Delaware corporation."
SECTION 2.03 Amendments to Article XV. Article XV is hereby amended
------------------------
such that each reference therein to "the Company" shall be deemed to read "TRCH"
and each reference therein to the "Board of Directors" shall mean the Board of
Directors of TRCH.
SECTION 2.04 Amendment to Section 16.4. Pursuant to Section 16.5 of
-------------------------
the Indenture, Section 16.4 is hereby amended such that each reference therein
to the Company shall be deemed to read "TRCH".
ARTICLE III
SECTION 3.01 First Supplemental Indenture. The Trustee accepts the
----------------------------
provisions of this First Supplemental Indenture upon the terms and conditions
set forth in the Indenture as amended by this First Supplemental Indenture.
<PAGE>
4
SECTION 3.02 Other Terms of Indenture. Except insofar as herein
------------------------
otherwise expressly provided, all the provisions, terms and conditions of the
Indenture are in all respects ratified and confirmed and shall remain in full
force and effect.
SECTION 3.03 Definitions. Capitalized terms used herein and not
-----------
defined herein have the meanings ascribed to such terms in the Indenture unless
the context of this First Supplemental Indenture otherwise requires.
SECTION 3.04 Governing Law. This First Supplemental Indenture shall
-------------
be deemed to be a contract made under the laws of New York, and for all purposes
shall be construed in accordance with, the laws of New York.
SECTION 3.05 Counterparts. This First Supplemental Indenture may be
------------
executed in any number of counterparts, each of which shall be an original, but
such counterparts shall together constitute but one and the same instrument.
<PAGE>
5
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed by their respective authorized
officers as of the date first written above.
TOTAL RENAL CARE HOLDINGS, INC.,
by
------------------------------
Name:
Title:
Attest:
------------------------------
Name:
RENAL TREATMENT CENTERS, INC.,
by
------------------------------
Name:
Title:
Attest:
------------------------------
Name:
<PAGE>
6
PNC BANK, NATIONAL ASSOCIATION
as Trustee,
by
------------------------------
Name:
Title:
Attest:
------------------------------
Name:
<PAGE>
EXHIBIT 10.34
EXECUTION COPY
SECOND SUPPLEMENTAL INDENTURE (this "Second Supplemental Indenture")
dated as of March 31, 1998, among Renal Treatment Centers, Inc., a Delaware
corporation (the "Company"), Total Renal Care Holdings, Inc., a Delaware
corporation ("TRCH"), and PNC Bank, National Association, as trustee (the
"Trustee"), under the Indenture (the "Indenture") dated as of June 12,
1996, between the Company and the Trustee, as amended by that certain First
Supplemental Indenture, dated as of February 27, 1998, among the Company,
TRCH and the Trustee.
WHEREAS pursuant to an Agreement and Plan of Merger dated as of November 18,
1997 (the "Merger Agreement"), among TRCH, Nevada Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of TRCH ("Merger Sub") and
the Company, Merger Sub merged with and into the Company (the "Merger") and
the Company continued as the surviving corporation and thereupon became a
wholly owned subsidiary of TRCH;
WHEREAS the Boards of Directors of the Company and TRCH have determined that
it is in the best interests of the Company and TRCH, on the one hand, and the
noteholders, on the other hand, to make TRCH a guarantor of the obligations of
the Company under the Indenture;
WHEREAS TRCH, in furtherance of the foresaid determinations, as guarantor,
will enter into a guaranty in the form attached hereto as Exhibit A (the
"Guaranty") in favor of the Trustee for the benefit of the Noteholders;
WHEREAS Section 11.1(d) of the Indenture provides that, without the consent
of the Noteholders, the Company, when authorized by a resolution of its Board
of Directors, and the Trustee may enter into indentures supplemental to the
Indenture in order to, among other things, add such further covenants,
restrictions or conditions as the Company's Board of Directors and the Trustee
shall consider to be for the benefit of the holders of the Notes;
WHEREAS the entry into this Second Supplemental Indenture by the parties
hereto is in all respects authorized by the provisions of the Indenture; and
WHEREAS all things necessary to make this Second Supplemental Indenture a
valid indenture and agreement according to its terms have been done;
NOW THEREFORE, TRCH hereby covenants and agrees with the Company and the
Trustee for the benefit of the present and future holders of the Notes as
follows:
ARTICLE I
SECTION 1.01 Guaranty of the Notes by TRCH. For value received and pursuant
to the Guaranty dated March 31, 1998 in favor of the Trustee for the benefit
of the Noteholders, TRCH guarantees (a) the due and punctual payment of the
principal of, and premium, if any, and interest on each Note, when and as the
same shall become due and payable, subject to any applicable grace period,
whether at maturity, by acceleration or otherwise, the due and punctual
payment of interest on the overdue principal of, and premium, if any, and
interest on the Notes, to the extent lawful, and the due and punctual
performance of all other Obligations (as defined in the Guaranty) of Company
to the Noteholders or the Trustee all in accordance with the terms of such
Note and the Indenture, subject, however, to the limitations set forth in the
Guaranty, and (ii) in the case of any extension of time of payment or renewal
of any Notes or any of such other Obligations, that the same will be promptly
paid in full when due or performed in accordance with the terms of the
extension or renewal, at stated maturity, by acceleration or otherwise. TRCH
hereby agrees that its obligations under the Guaranty shall be absolute and
unconditional, irrespective of, and shall be unaffected by, any invalidity,
irregularity or unenforceability of any
<PAGE>
such Note or the Indenture, any failure to enforce the provisions of any such
Note or the Indenture, any waiver, modification or indulgence granted to
Company with respect thereto by the Noteholder of such Note or the Trustee, or
any other circumstances which may otherwise constitute a legal or equitable
discharge of a surety or Guarantor.
SECTION 1.02 Effectiveness of the Guaranty. TRCH agrees that the Guaranty
set forth in Section 1.02 above shall be and remain in full force and effect
notwithstanding any failure to endorse on each Note a notation of such
Guaranty and that each Note shall be entitled to the full benefit of the
Guaranty whether or not the Guaranty is notated thereon.
ARTICLE II
SECTION 2.01 Definition of "Guaranty". The following definition shall be
added to Section 1.1 of the Indenture:
"Guaranty: The term "Guaranty" shall mean a Guaranty in the form attached
hereto as Exhibit A, in favor of and for the benefit of the Trustee, as
representative of the Noteholders.
SECTION 2.02 Amendment to Section 7.1. Section 7.1 of the Indenture is
hereby amended by adding a new sentence after the second complete sentence of
that section as follows:
"In addition, without limiting the foregoing provisions, upon the
effectiveness of such acceleration of the principal of all the Notes and
the interest accrued thereon, the Trustee shall promptly make a demand for
payment on the Notes under the Guaranty not discharged."
SECTION 2.03 Amendment to Section 14.1. Section 14.1 of the Indenture is
hereby amended by adding a new sentence to the end of that section as follows:
"Notwithstanding the foregoing, the Trustee may seek recourse for the
payment of the principal of or premium, if any, or interest on any Note, or
for any claim based thereon or otherwise in respect thereof or for
Obligations (as defined in the Guaranty) of the Company against TRCH under
the Guaranty in accordance with the provisions of Article VII and the
Guaranty."
ARTICLE III
SECTION 3.01 Second Supplemental Indenture. The Trustee accepts the
provisions of this Second Supplemental Indenture upon the terms and conditions
set forth in the Indenture as amended by this Second Supplemental Indenture.
SECTION 3.02 Other Terms of Indenture. Except insofar as herein otherwise
expressly provided, all the provisions, terms and conditions of the Indenture
are in all respects ratified and confirmed and shall remain in full force and
effect.
SECTION 3.03 Definitions. Capitalized terms used herein and not defined
herein have the meanings ascribed to such terms in the Indenture unless the
context of this Second Supplemental Indenture otherwise requires.
SECTION 3.04 Governing Law. This Second Supplemental Indenture shall be
deemed to be a contract made under the laws of New York, and for all purposes
shall be construed in accordance with, the laws of New York.
SECTION 3.05 Counterparts. This Second Supplemental Indenture may be
executed in any number of counterparts, each of which shall be an original,
but such counterparts shall together constitute but one and the same
instrument.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed by their respective authorized officers as of the
date first written above.
TOTAL RENAL CARE HOLDINGS, INC.,
by
----------------------------------
Name:
Title:
Attest:
----------------------------------
Name:
RENAL TREATMENT CENTERS, INC.,
by
----------------------------------
Name:
Title:
Attest:
----------------------------------
Name:
PNC BANK, NATIONAL ASSOCIATION
as Trustee,
by
----------------------------------
Name:
Title:
Attest:
----------------------------------
Name:
3
<PAGE>
EXHIBIT A
GUARANTY
This Guaranty (this "Guaranty") is entered into as of March 31, 1998 by
Total Renal Care Holdings, Inc., a Delaware corporation ("Guarantor"), in
favor of PNC Bank, National Association, as Trustee ("Trustee") for the
benefit of the noteholders ("Noteholders") under that certain Indenture, dated
as of June 12, 1996, between Renal Treatment Centers, Inc., a Delaware
corporation and wholly owned subsidiary of Guarantor ("Company"), and Trustee,
as amended by that certain First Supplemental Indenture, dated as of February
27, 1998, between Company, Guarantor and Trustee (as amended, supplemented or
otherwise modified from time to time, the "Indenture") with respect to
Company's 5 5/8% Convertible Subordinated Notes due 2006 (the "Notes"). Unless
otherwise defined herein, capitalized terms used in this Guaranty shall have
the meanings assigned to such terms in the Indenture.
RECITALS
A. Company became a wholly owned subsidiary of Guarantor pursuant to that
certain Agreement and Plan of Merger by and among Guarantor, Nevada
Acquisition Corp., a Delaware corporation, and Company, dated as of November
18, 1997 (the "Merger").
B. Guarantor has determined that it is in its best interest irrevocably and
unconditionally to guaranty the Notes.
Now, therefore, based upon the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor hereby agrees as follows:
SECTION 1
DEFINITIONS
1.1 Certain Defined Terms. As used in this Guaranty, the following terms
shall have the following meanings unless the context otherwise requires:
"Additional Interest" means additional interest on the Notes pursuant to
Section 2.3 of the Indenture which Company and Guarantor, jointly and
severally, hereby agree to pay to the Noteholders.
"Credit Facilities" means, collectively, (i) Guarantor's $800,000,000
Revolving Credit Agreement, dated as of October 24, 1997 with DLJ Capital
Funding, Inc., as Syndication Agent, First Union National Bank, as
Documentation Agent, The Bank of New York, as Administrative Agent, BNY
Capital Markets, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation,
as Co-Arrangers, and the various lenders party thereto, together with the
promissory notes issued thereunder and the other documents related thereto,
and (ii) Guarantor's $250,000,000 Term Loan Agreement, dated as of October 24,
1997, with DLJ Capital Funding, Inc., as Syndication Agent, The Bank of New
York, as Administrative Agent, BNY Capital Markets, Inc. and Donaldson, Lufkin
& Jenrette Securities Corporation, as Co-Arrangers, and the various lenders
party thereto, together with the promissory notes issued thereunder and the
other documents related thereto, in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreements extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or adding
subsidiaries of Guarantor and/or Company as additional borrowers or guarantors
thereunder) all or any portion of the Indebtedness and other Obligations under
such agreements and whether by the same or any other agent, lender or group of
lenders.
4
<PAGE>
"Designated Senior Indebtedness" means any Indebtedness under either of the
Credit Facilities and any other Indebtedness in an original principal amount
of at least $50 million, provided that by its terms such Indebtedness
expressly provides that it is "Designated Senior Indebtedness" for purposes of
this Guaranty.
"Indebtedness" means (without duplication), with respect to any Person, any
obligation at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balance that constitutes accounts
payable or trade payables, and other accrued liabilities arising in the
ordinary course of business) if and to the extent any of the foregoing
indebtedness would appear as a liability upon a balance sheet of such Person
prepared in accordance with generally accepted accounting principles ("GAAP"),
and shall also include, to the extent not otherwise included, (i) any
obligations secured by a lien to which the property or assets owned or held by
such Person is subject, whether or not the obligation or obligations secured
thereby shall have been assumed, to the extent of the fair market value of
such property or assets, (ii) guarantees of items of other Persons which would
be included within this definition for such other Persons (whether or not such
items would appear upon the balance sheet of the guarantor), to the extent of
the amount of the Indebtedness so guaranteed, and (iii) all obligations for
the reimbursement of any obligor on any letter of credit, banker's acceptance
or similar credit transaction. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent obligations,
the maximum liability upon the occurrence of the contingency giving rise to
the obligations; provided, that (i) the amount outstanding at any time of any
Indebtedness issued with original issue discount is the principal amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP and (ii) Indebtedness shall not include any liability for federal, state,
local or other taxes. Notwithstanding any other provision of the foregoing
definition, any trade payable arising from the purchase of goods or materials
or for the services obtained in the ordinary course of business shall not be
deemed to be "Indebtedness." Furthermore, guarantees of (or obligations with
respect to letters of credit supporting) Indebtedness otherwise included in
the determination of such amount shall not also be included.
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate
the maturity of any Designated Senior Indebtedness.
"Obligations" means, with respect to any Indebtedness, any principal,
premium, interest, penalties, fees, indemnifications, reimbursements, damages
and other expenses payable under the documentation governing such
Indebtedness.
"Payment Default" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of or premium, if any, or interest on or any other amount payable in
connection with any Designated Senior Indebtedness.
"Person" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Senior Indebtedness," as to Guarantor, means the principal of and premium,
if any, and interest on, and any and all other fees, expense reimbursement
obligations and all other Obligations and amounts due pursuant to the terms of
all agreements, documents and instruments providing for, creating, securing or
evidencing or otherwise entered into in connection with (a) all Indebtedness
of Guarantor owed to lenders or agents under either of the Credit Facilities,
(b) all obligations of Guarantor to reimburse any bank or other person in
respect of amounts paid under letters of credit, acceptances or other similar
instruments and all obligations of Guarantor with respect to guarantees of
such reimbursement obligations, (c) all other Indebtedness of Guarantor which
does not provide that it is to be ranked pari passu with or subordinate to the
Guaranty and (d) all deferrals, renewals,
5
<PAGE>
refinancings, extensions and refundings of, and amendments, modifications and
supplements to, any of the Senior Indebtedness described above.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (i) Indebtedness of Guarantor to any of its Subsidiaries, or
to any Affiliate of Guarantor or any of such Affiliate's Subsidiaries, (ii)
Indebtedness represented by the Guaranty, (iii) any Indebtedness which by the
express terms of the agreement or instrument creating, evidencing or governing
the same is junior or subordinate in right of payment to any item of Senior
Indebtedness, (iv) any trade payable arising from the purchase of goods or
materials or for services obtained in the ordinary course of business, and (v)
any Indebtedness to or guaranteed on behalf of, any stockholders, director,
officer or employee of Guarantor or any Subsidiary of Guarantor.
SECTION 2
THE GUARANTY
2.1 Guaranty.
(a) Subject to the provisions hereof, Guarantor hereby unconditionally
guarantees in favor of the Trustee for benefit of the Noteholders, (i) the due
and punctual payment of the principal of, and premium, if any, and interest on
each Note, when and as the same shall become due and payable, subject to any
applicable grace period, whether at maturity, by acceleration or otherwise,
the due and punctual payment of interest on the overdue principal of, and
premium, if any, and interest on the Notes, to the extent lawful, and the due
and punctual performance of all other Obligations of Company to the
Noteholders or the Trustee all in accordance with the terms of such Note and
the Indenture, subject, however, to the limitations set forth in Section 2.2,
and (ii) in the case of any extension of time of payment or renewal of any
Notes or any of such other Obligations, that the same will be promptly paid in
full when due or performed in accordance with the terms of the extension or
renewal, at stated maturity, by acceleration or otherwise. Guarantor hereby
agrees that its obligations thereunder and hereunder shall be absolute and
unconditional, irrespective of, and shall be unaffected by, any invalidity,
irregularity or unenforceability of any such Note or the Indenture, any
failure to enforce the provisions of any such Note or the Indenture, any
waiver, modification or indulgence granted to Company with respect thereto by
the Noteholder of such Note or the Trustee, or any other circumstances which
may otherwise constitute a legal or equitable discharge of a surety or
Guarantor.
(b) Guarantor hereby waives diligence, presentment, demand for payment,
filing of claims with a court in the event of merger or bankruptcy of Company,
any right to require a proceeding first against Company, protest or notice
with respect to any such Note or the Indebtedness evidenced thereby and all
demands whatsoever, and covenants that this Guaranty will not be discharged as
to any such Note except by payment in full of the principal thereof, premium
if any, and interest thereon and as provided in Section 13.1 of the Indenture.
Guarantor further agrees that, as between Guarantor, on the one hand, and the
Noteholders and the Trustee, on the other hand, (i) the maturity of the
Obligations guaranteed hereby may be accelerated as provided in Article 7 of
the Indenture for the purposes of this Guaranty, notwithstanding any stay,
injunction or other prohibition preventing such acceleration in respect of the
Obligations guaranteed hereby, and (ii) in the event of any declaration of
acceleration of such Obligations as provided in Article 7 of the Indenture,
such Obligations (whether or not due and payable) shall forthwith become due
and payable by Guarantor for the purpose of this Guaranty. In addition,
without limiting the foregoing provisions, upon the effectiveness of an
acceleration under Article 7 of the Indenture, the Trustee shall promptly make
a demand for payment on the Notes under the Guaranty provided for herein and
not discharged.
2.2 Effectiveness of the Guaranty. Guarantor agrees that this Guaranty shall
be and remain in full force and effect notwithstanding any failure to endorse
on each Note a notation of such Guaranty and that each Note shall be entitled
to the full benefit of the Guaranty whether or not the Guaranty is notated
thereon.
6
<PAGE>
2.3 Limitation of Guaranty. Notwithstanding any term or provision of the
Indenture to the contrary, the maximum aggregate amount of the obligations
guaranteed hereunder by Guarantor shall not exceed the maximum amount that can
be guaranteed hereunder by Guarantor without rendering the Guaranty, as it
relates to Guarantor, voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally.
2.4 Guaranty Obligations Subordinated to Guarantor Senior Indebtedness.
(a) Guarantor hereby covenants and agrees that, to the extent and in the
manner set forth herein, the Indebtedness represented by the Guaranty and the
payment of the principal of, premium, if any, and interest on the Notes
pursuant to the Guaranty by Guarantor are hereby expressly made subordinate
and subject in right of payment as provided herein to the prior indefeasible
payment and satisfaction in full in cash of all Senior Indebtedness.
(b) The holders of Senior Indebtedness (including, without limitation,
Designated Senior Indebtedness) shall have the right to rely on this Section
2.4 and the following Section 2.4 through Section 2.12, and such provisions
are made for the benefit of the holders of Senior Indebtedness; and such
holders are made obligees hereunder and they or each of them may enforce such
provisions, and no amendment or modification of the provisions contained
herein shall diminish the rights of such holders unless such holders have
agreed in writing thereto.
2.5 Payment Over of Proceeds upon Dissolution, etc., of Guarantor. In the
event of (x) any insolvency or bankruptcy case or proceeding, or any
receivership, arrangement, reorganization, liquidation, dissolution or other
similar case or proceeding in connection therewith whether or not involving
insolvency or bankruptcy, relative to Guarantor or to its creditors, as such,
or to its assets, whether voluntary or involuntary, or (y) any general
assignment for the benefit of creditors or other marshaling of assets or
liabilities of Guarantor (except in connection with the merger or
consolidation of Guarantor or its liquidation or dissolution following the
transfer of all or substantially all of its assets, upon the terms and
conditions that would be permitted under Article 12 of the Indenture if
references to "Company" were to Guarantor) (all of the foregoing referred to
herein individually as a "Guarantor Bankruptcy Proceeding" and collectively as
"Guarantor Bankruptcy Proceedings"), then and in any such event:
i. the holders of all Senior Indebtedness shall be entitled to receive
payment and satisfaction in full in cash of all amounts due on or in
respect of all such Senior Indebtedness (including any interest accruing
after the commencement of any such Guarantor Bankruptcy Proceeding whether
or not such interest is an allowable claim enforceable against Company in
any such proceeding) before the Noteholders are entitled to receive or
retain, pursuant to this Guaranty, any payment or distribution of any kind
by Guarantor on account of this Guaranty;
ii. any payment or distribution of assets of Guarantor of any kind or
character, whether in cash, property or securities, by set-off or
otherwise, to which the Noteholders or the Trustee would be entitled but
for the subordination provisions hereof shall be paid by the liquidating
trustee or agent or other Person making such payment or distribution,
whether a trustee in bankruptcy, a receiver or liquidating trustee or
otherwise, directly to the holders of Senior Indebtedness or their
representative or representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any of such Senior
Indebtedness may have been issued, ratably according to the aggregate
amounts remaining unpaid on account of such Senior Indebtedness held or
represented by each, to the extent necessary to make payment in full in
cash of all such Senior Indebtedness remaining unpaid, after giving effect
to any concurrent payment or distribution, or provision therefor, to the
holders of such Senior Indebtedness;
iii. in the event that, notwithstanding the foregoing provisions of this
Section 2.5, the Trustee or the Noteholder of any Note shall have received
any payment or distribution of assets of Guarantor of any kind or
character, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of this Guaranty
before all Senior Indebtedness is paid and satisfied in full in cash,
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then such payment or distribution shall be held by the recipient in trust
for the benefit of holders of such Senior Indebtedness and shall be
immediately paid over or delivered to the holders of such Senior
Indebtedness or their representative or representatives to the extent
necessary to make payment in full in cash of all such Senior Indebtedness
remaining unpaid after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness; and
iv. the consolidation of Guarantor with, or the merger of Guarantor with
or into, another Person or the liquidation or dissolution of Guarantor
following the conveyance, transfer or lease of its properties and assets
substantially as an entirety to another Person upon the terms and
conditions set forth herein shall not be deemed a dissolution, winding-up,
liquidation, reorganization, assignment for the benefit of creditors or
marshaling of assets and liabilities of such Guarantor for, as would be
applicable as if references to "Company" were to Guarantor, the purposes of
Article 12 of the Indenture if the Person formed by such consolidation or
the surviving entity of such merger or the Person which acquires by
conveyance, transfer or lease such properties and assets substantially as
an entirety, as the case may be, shall, as a part of such consolidation,
merger, conveyance, transfer or lease, comply with the conditions set forth
in such Article 12 of the Indenture, as would be applicable as if
references to "Company" were to Guarantor.
2.6 Suspension of Guaranty Obligations When Senior Indebtedness in Default.
(a) Unless Section 2.5 hereof shall be applicable, after the occurrence of a
Payment Default with respect to any Designated Senior Indebtedness which
constitutes Senior Indebtedness, no payment or distribution of any kind or
character of Guarantor (including, without limitation, cash, property and any
payment or distribution which may be payable or deliverable by reason of the
payment of any other Indebtedness of Guarantor being subordinated to its
Obligations herein) may be made by or on behalf of Guarantor, including,
without limitation, by way of set-off or otherwise, for or on account hereof,
and neither the Trustee nor any Noteholder shall take or receive from
Guarantor, directly or indirectly in any manner, payment in respect of all or
any portion of its Obligations hereof commencing on the date of receipt by the
Trustee of written notice from any representative of the holders of any
Designated Senior Indebtedness which constitutes Senior Indebtedness (each, a
"Guarantor Representative") of such Payment Default, and in any such event,
such prohibition shall continue until such Payment Default is cured, waived in
writing or ceases to exist. At such time as the prohibition set forth in the
preceding sentence shall no longer be in effect, subject to the provisions of
the preceding and following paragraph, Guarantor shall resume making any and
all required payments in respect hereof, including any missed payments.
(b) Unless Section 2.5 hereof shall be applicable, upon the occurrence of a
Non-Payment Event of Default on Designated Senior Indebtedness, no payment or
distribution of any kind or character (including, without limitation, cash,
property and any payment or distribution which may be payable or deliverable
by reason of the payment of any other Indebtedness of Guarantor being
subordinated to its Obligations herein) shall be made by Guarantor, including,
without limitation, by way of set-off or otherwise, for or on account of any
of its Obligations herein, and neither the Trustee nor any Noteholder shall
take or receive from Guarantor, directly or indirectly in any manner, payment
in respect of all or any portion of its obligations on its Guaranty for a
period (a "Guaranty Payment Blockage Period") commencing on the date of
receipt by the Trustee of written notice from any Guarantor Representative of
such Non-Payment Event of Default, unless and until (subject to any blockage
of payments that may then be in effect under the preceding paragraphs), the
earlier of: (x) the date that such Non-Payment Event of Default shall have
been cured or waived in writing or shall have ceased to exist or such
Designated Senior Indebtedness shall have been paid in full in cash or (y) the
date that such Guaranty Payment Blockage Period shall have been terminated by
written notice to Guarantor or the Trustee from the applicable Guarantor
Representative, after which, in the case of clause (x) or (y), Guarantor shall
resume making any and all required payments in respect of its Obligations
herein, including any missed payments. Any number of additional Guaranty
Payment Blockage Periods may be commenced during any Guaranty Payment Blockage
Period.
(c) In the event that, notwithstanding the foregoing, the Trustee or any
Noteholder shall have received any payment or distribution from Guarantor
prohibited by the foregoing provisions of this Section 2.6, then and in
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such event such payment or distribution shall be held in trust for the benefit
of and shall be paid over and delivered forthwith to the holders of the Senior
Indebtedness or their representative or representatives for distribution to
the holders of Senior Indebtedness or, if no amounts are then due in respect
of Senior Indebtedness, promptly returned to Guarantor, or otherwise as a
court of competent jurisdiction shall direct.
2.7 Subrogation to Rights of Noteholders of Senior Indebtedness.
(a) Upon the payment in full in cash of all Senior Indebtedness, the
Noteholders shall be subrogated to the rights of the holders of such Senior
Indebtedness to receive payments and distributions of cash, property and
securities of Guarantor made on such Senior Indebtedness until all amounts due
to be paid hereunder shall be paid in full. For purposes of such subrogation,
no payments or distributions to holders of Senior Indebtedness of any cash,
property or securities to which Noteholders or the Trustee would be entitled
except for the provisions hereof, and no payments over pursuant to the
provisions hereof to holders of Senior Indebtedness by Noteholders or the
Trustee, shall, as among Guarantor, its creditors other than holders of Senior
Indebtedness and the Noteholders be deemed to be a payment or distribution by
Guarantor to or on account of Senior Indebtedness.
(b) If any payment or distribution to which the Noteholders would otherwise
have been entitled but for the provisions hereof shall have been applied,
pursuant to the provisions hereof, to the payment of all amounts payable under
Senior Indebtedness, then and in such case, the Noteholders shall be entitled
to receive from the holders of such Senior Indebtedness at the time
outstanding any payments or distributions received by such holders of Senior
Indebtedness in excess of the amount sufficient to pay all amounts payable
under or in respect of such Senior Indebtedness in full in cash.
2.8 Guaranty Subordination Provisions Solely to Define Relative Rights. The
subordination provisions hereof are and are intended solely for the purpose of
defining the relative rights of the Noteholders on the one hand and the
holders of Senior Indebtedness on the other hand. Nothing contained herein or
in the Indenture or in the Notes is intended to or shall (a) impair, as to
Guarantor, its creditors other than holders of its Senior Indebtedness and the
Noteholders, the obligation of Guarantor, which is absolute and unconditional,
to make payments to the Noteholders in respect of its Obligations hereof; or
(b) affect the relative rights against Guarantor of the Noteholders and
creditors of Guarantor other than the holders of the Senior Indebtedness; or
(c) prevent the Trustee or any Noteholder from exercising all remedies
otherwise permitted by applicable law upon a Default or an Event of Default
under the Indenture, subject to the rights, if any, hereunder of the holders
of Senior Indebtedness (1) in any case, proceeding, dissolution, liquidation
or other winding-up, assignment for the benefit of creditors or other
marshaling of assets and liabilities of Company referred to in Section 2.5
hereof, to receive, pursuant to and in accordance with such Section, cash,
property and securities otherwise payable or deliverable to the Trustee or
such Noteholder, or (2) under the conditions specified in Section 2.6 hereof,
to prevent any payment prohibited by such Section or enforce their rights
pursuant to Section 2.6(c) hereof.
2.9 Trustee's Relation to Senior Indebtedness. With respect to the holders
of Senior Indebtedness, the Trustee undertakes to perform or to observe only
such of its covenants and obligations as are specifically set forth herein,
and no implied covenants or obligations with respect to the holders of Senior
Indebtedness shall be read into this Guaranty against the Trustee. The Trustee
shall not be deemed to owe any fiduciary duty to the holders of Senior
Indebtedness and the Trustee shall not be liable to any holder of Senior
Indebtedness if it shall mistakenly pay over or deliver to Noteholders,
Company, Guarantor or any other Person moneys or assets to which any holder of
Senior Indebtedness shall be entitled by virtue of this Guaranty or otherwise.
2.10 No Waiver of Subordination Provisions. No right of any present or
future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of Company or Guarantor or by any act or failure to
act, in good faith, by any such holder, or by any non-compliance by Company or
Guarantor with the terms, provisions and covenants of this Guaranty or the
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
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2.11 Notice to Trustee.
(a) Guarantor shall give prompt written notice to the Trustee of any fact
known to Guarantor which would prohibit the making of any payment to or by the
Trustee at its Corporate Trust Office in respect of the Notes. Notwithstanding
the provisions of this Guaranty or any provision of the Indenture, the Trustee
shall not be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Trustee in respect of the
Notes, unless and until the Trustee shall have received written notice thereof
from Guarantor or any Guarantor Representative or from any trustee, fiduciary
or agent therefor; and, prior to the receipt of any such written notice, the
Trustee, subject to the provisions of this Section 2.11, shall be entitled in
all respects to assume that no such facts exist.
(b) The Trustee shall be entitled to rely on the delivery to it and
Guarantor of a written notice by any Guarantor Representative to establish
that such notice has been given by a holder of Senior Indebtedness (or a
trustee, fiduciary or agent therefor); provided, however, that failure to give
such notice to Guarantor shall not affect in any way the right of the Trustee
to rely on such notice. In the event that the Trustee determines in good faith
that further evidence is required with respect to the right of any Person as a
holder of Senior Indebtedness to participate in any payment or distribution
pursuant hereto, the Trustee may request such Person to furnish evidence to
the reasonable satisfaction of the Trustee as to the amount of Senior
Indebtedness held by such Person, the extent to which such Person is entitled
to participate in such payment or distribution and any other facts pertinent
to the rights of such Person hereunder, and if such evidence is not furnished,
the Trustee may defer any payment to such Person pending judicial
determination as to the right of such Person to receive such payment.
2.12 Reliance on Judicial Order or Certificate of Liquidating Agent. Upon
any payment or distribution of assets of Company or Guarantor referred to
herein, the Trustee, and the Noteholders shall be entitled to rely upon any
order or decree entered by any court of competent jurisdiction in which such
insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding-up or similar case or proceeding is pending, or a
certificate of the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee for the benefit of creditors, agent or other Person making
such payment or distribution, delivered to the Trustee or to the Noteholders,
for the purpose of ascertaining the Persons entitled to participate in such
payment or distribution, the holders of Senior Indebtedness and other
Indebtedness of Company or Guarantor, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts
pertinent thereto.
SECTION 3
REPRESENTATIONS AND WARRANTIES
To induce the Trustee and the Noteholders to accept this Guaranty, Guarantor
hereby represents and warrants that the following statements are true and
correct:
3.1 Corporate Existence. Guarantor is duly organized, validly existing and
in good standing under the laws of the State of Delaware, has full corporate
power and authority to own its assets and properties and to operate its
business as presently owned and conducted, and as proposed to be conducted,
and is qualified to do business and in good standing in every jurisdiction
where its assets are located and wherever necessary to carry out its business
and operations, except where failure to be so qualified or in good standing or
a lack of such corporate power or authority has not had or would not have, in
the aggregate, a material adverse effect.
3.2 Corporate Power; Authorization; Enforceable Obligations. Guarantor has
the corporate power, authority and legal right to execute, deliver and perform
this Guaranty and all obligations required hereunder and has taken all
necessary corporate action to authorize its Guaranty hereunder on the terms
and conditions hereof and its execution, delivery and performance of this
Guaranty and all obligations required hereunder. No consent of any other
Person including, without limitation, stockholders and creditors of Guarantor,
and no license, permit, approval or authorization of, or exemption by, notice
or report to, or registration, filing or
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declaration with, any governmental authority is required by Guarantor in
connection with this Guaranty or the execution, delivery, performance,
validity or enforceability of this Guaranty and all obligations required
hereunder, except for pursuant to the Credit Facilities. This Guaranty has
been, and each instrument or document required hereunder will be, executed and
delivered by a duly authorized officer of Guarantor, and this Guaranty
constitutes, and each instrument or document required hereunder when executed
and delivered hereunder will constitute, the legally valid and binding
obligation of Guarantor, enforceable against Guarantor in accordance with its
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws or equitable
principles relating to or limiting creditors' rights generally.
3.3 No Legal Bar to this Guaranty. The execution, delivery and performance
of this Guaranty and the documents or instruments required hereunder, and the
use of the proceeds of the borrowings under the Indenture, will not violate
any provision of any existing law or regulation binding on Guarantor, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on Guarantor, or the certificate of incorporation or bylaws
of Guarantor or any securities issued by Guarantor, or any mortgage,
indenture, lease, contract or other agreement, instrument or undertaking to
which Guarantor is a party or by which Guarantor or any of its assets may be
bound, the violation of which would have a material adverse effect on the
business, operations, assets or financial condition of Guarantor and will not
result in, or require, the creation or imposition of any lien on any of its
property, assets or revenues pursuant to the provisions of any such mortgage,
indenture, lease, contract or other agreement, instrument or undertaking.
SECTION 4
MISCELLANEOUS
4.1 Survival of Warranties. All agreements, representations and warranties
made herein shall survive the execution and delivery of this Guaranty and the
Indenture.
4.2 Notices. Any communications between Trustee and Guarantor and any
notices or requests provided herein to be given may be given by mailing the
same, postage prepaid, or by telex, facsimile transmission or cable to each
such party at its address set forth below or to such other addresses as each
such party may in writing hereafter indicate. Any notice, request or demand to
or upon Trustee or Guarantor shall not be effective until received:
TRUSTEE:Corporate Trust Office
1700 Market Street
Philadelphia, PA 19103
Attention: Corporate Trust Division
(Renal Treatment Centers, Inc., 5 5/8%
Convertible Subordinated Notes due 2006)
GUARANTOR:Total Renal Care Holdings, Inc.
Suite 800
21250 Hawthorne Boulevard
Torrance, CA 90503
Attention: Chief Financial Officer
4.3 Severability. In case any provision in or obligation under this Guaranty
shall be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not in any way
be affected or impaired thereby.
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4.4 Amendments and Waivers. No amendment, modification, termination or
waiver of any provision of this Guaranty, and no consent to any departure by
Guarantor therefrom, shall in any event be effective without the written
concurrence of Trustee and, in the case of any such amendment or modification,
Guarantor. Any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which it was given.
4.5 Headings. Section and section headings in this Guaranty are included
herein for convenience of reference only and shall not constitute a part of
this Guaranty for any other purpose or be given any substantive effect.
4.6 Applicable Law. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF
GUARANTOR, TRUSTEE AND THE NOTEHOLDERS HEREUNDER SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL
OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN
RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein
or in the Indenture, terms used in Article 8 and Article 9 of the Uniform
Commercial Code in the State of New York are used herein as therein defined.
4.7 Successors and Assigns. This Guaranty is a continuing guaranty and shall
be binding upon Guarantor and its successors and assigns. This Guaranty shall
inure to the benefit of Noteholders and their respective successors and
assigns. Guarantor shall not assign this Guaranty or any of the rights or
obligations of Guarantor hereunder without the prior written consent of
Trustee. The terms and provisions of this Guaranty shall inure to the benefit
of any transferee or assignee of any Note transferred or assigned in
accordance with the provisions of the Indenture, and in the event of such
transfer or assignment the rights and privileges herein conferred upon such
Noteholder shall automatically extend to and be vested in such transferee or
assignee, all subject to the terms and conditions hereof.
4.8 Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS
BROUGHT AGAINST GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY, OR ANY
OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING
AND DELIVERING THIS AGREEMENT, GUARANTOR, FOR ITSELF AND IN CONNECTION WITH
ITS PROPERTIES, IRREVOCABLY:
(a) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION
AND VENUE OF SUCH COURTS;
(b) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(c) DESIGNATES AND APPOINTS CT CORPORATION SERVICES, OR SUCH OTHER
PERSONS LOCATED IN NEW YORK STATE AS MAY HEREAFTER BE SELECTED BY THE
GUARANTOR AND AGREEING IN WRITING TO SO SERVE, AS ITS AGENT TO RECEIVE ON
ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH
COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY THE GUARANTOR TO BE
EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS
SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO THE GUARANTOR AT ITS
ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 4.2 PROVIDED THAT, UNLESS
OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL
NOT AFFECT THE VALIDITY OF SERVICE OF SUCH PROCESS. IF ANY AGENT APPOINTED
BY THE GUARANTOR REFUSES TO ACCEPT SERVICE, THE
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GUARANTOR HEREBY AGREES THAT SERVICE OF PROCESS SUFFICIENT FOR PERSONAL
JURISDICTION IN ANY ACTION AGAINST THE GUARANTOR IN THE STATE OF NEW YORK
MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO
THE GUARANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 4.2, AND
THE GUARANTOR HEREBY ACKNOWLEDGES THAT SUCH SERVICE SHALL BE EFFECTIVE AND
BINDING IN EVERY RESPECT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO
BRING PROCEEDINGS AGAINST THE GUARANTOR IN THE COURTS OF ANY OTHER
JURISDICTION; AND
(d) AGREES THAT THE PROVISIONS OF THIS SECTION 4.8 RELATING TO
JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE
FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW
SECTION 5-1402 OR OTHERWISE.
4.9 Waiver of Trial Jury. GUARANTOR AND, BY ACCEPTANCE OF THE BENEFITS
HEREOF, TRUSTEE AND EACH NOTEHOLDER, EACH HEREBY AGREES TO WAIVE, TO THE
EXTENT PERMITTED BY LAW, ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY. The scope of this
waiver is intended to be all-encompassing of any and all disputes that may be
filed in any court and that relate to the subject matter of this transaction,
including without limitation contract claims, tort claims, breach of duty
claims and all other common law and statutory claims. Guarantor and, by its
acceptance of the benefits hereof, Trustee and each Noteholder each (i)
acknowledges that this waiver is a material inducement for Guarantor, Trustee
and each Noteholder to enter into a business relationship, that Guarantor,
Trustee and each Noteholder have already relied on this waiver in entering
into this Guaranty or accepting the benefits thereof, as the case may be, and
that each will continue to rely on this waiver in their related future
dealings with respect to the transaction contemplated hereby and (ii) further
warrants and represents that each has reviewed this waiver with its legal
counsel, and that each knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING
THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A
MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 4.9 AND EXECUTED
BY GUARANTIED PARTY AND GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
GUARANTY. In the event of litigation, this Guaranty may be filed as a written
consent to a trial by the court.
4.10 No Other Writing. This writing is intended by Guarantor, Trustee and
each Noteholder as the final expression of this Guaranty and is also intended
as a complete and exclusive statement of the terms of their agreement with
respect to the matters covered hereby. No course of dealing, course of
performance or trade usage, and no parol evidence of any nature, shall be used
to supplement or modify any terms of this Guaranty. There are no conditions to
the full effectiveness of this Guaranty.
4.11 Further Assurances. At any time or from time to time, upon the request
of Trustee, Guarantor shall execute and deliver such further documents and do
such other acts and things as Trustee may reasonably request in order to
effect fully the purposes of this Guaranty.
4.12 Trustee as Agent.
(a) Trustee has been appointed to act as Trustee hereunder by the
Noteholders. Trustee shall be obligated, and shall have the right hereunder,
to make demands, to give notices, to exercise or refrain from exercising any
rights, and to take or refrain from taking any action, solely in accordance
with this Guaranty and the Indenture.
(b) Trustee shall at all times be the same Person that is Trustee under the
Indenture. Written notice of resignation by Trustee pursuant to Section 8.10
of the Indenture shall also constitute notice of resignation as
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Trustee under this Guaranty; removal of Trustee pursuant to Section 8.10 of the
Indenture shall also constitute removal as Trustee under this Guaranty; and
appointment of a successor Trustee pursuant to Section 8.10 of the Indenture
shall also constitute appointment of a successor Trustee under this Guaranty.
Upon the acceptance of any appointment as Trustee under Section 8.10 of the
Indenture by a successor Trustee, that successor Trustee shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring or removed Trustee under this Guaranty, and the retiring or
removed Trustee under this Guaranty shall promptly (i) transfer to such
successor Trustee all sums held hereunder, together with all records and other
documents necessary or appropriate in connection with the performance of the
duties of the successor Trustee under this Guaranty, and (ii) take such other
actions as may be necessary or appropriate in connection with the assignment to
such successor Trustee of the rights created hereunder, whereupon such retiring
or removed Trustee shall be discharged from its duties and obligations under
this Guaranty. After any retiring or removed Trustee's resignation or removal
hereunder as Trustee, the provisions of this Guaranty shall inure to its
benefit as to any actions taken or omitted to be taken by it under this
Guaranty while it was Trustee hereunder.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed
and delivered by its officer thereunto duly authorized as of the date first
written above.
TOTAL RENAL CARE HOLDINGS, INC.
By: _________________________________
Name:
Title:
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EXHIBIT 10.35
GUARANTY
This Guaranty (this "Guaranty") is entered into as of March 31, 1998 by
Total Renal Care Holdings, Inc., a Delaware corporation ("Guarantor"), in
favor of PNC Bank, National Association, as Trustee ("Trustee"), for the
benefit of the noteholders ("Noteholders") under that certain Indenture, dated
as of June 12, 1996, between Renal Treatment Centers, Inc., a Delaware
corporation and wholly owned subsidiary of Guarantor ("Company"), and Trustee,
as amended by that certain First Supplemental Indenture, dated as of February
27, 1998, between Company, Guarantor and Trustee (as amended, supplemented or
otherwise modified from time to time, the "Indenture") with respect to
Company's 5 5/8% Convertible Subordinated Notes due 2006 (the "Notes"). Unless
otherwise defined herein, capitalized terms used in this Guaranty shall have
the meanings assigned to such terms in the Indenture.
RECITALS
A. Company became a wholly owned subsidiary of Guarantor pursuant to that
certain Agreement and Plan of Merger by and among Guarantor, Nevada
Acquisition Corp., a Delaware corporation, and Company, dated as of November
18, 1997 (the "Merger").
B. Guarantor has determined that it is in its best interest irrevocably and
unconditionally to guaranty the Notes.
Now, therefore, based upon the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor hereby agrees as follows:
SECTION 1
DEFINITIONS
1.1 Certain Defined Terms. As used in this Guaranty, the following terms
shall have the following meanings unless the context otherwise requires:
"Additional Interest" means additional interest on the Notes pursuant to
Section 2.3 of the Indenture which Company and Guarantor, jointly and
severally, hereby agree to pay to the Noteholders
"Credit Facilities" means, collectively, (i) Guarantor's $800,000,000
Revolving Credit Agreement, dated as of October 24, 1997 with DLJ Capital
Funding, Inc., as Syndication Agent, First Union National Bank, as
Documentation Agent, The Bank of New York, as Administrative Agent, BNY
Capital Markets, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation,
as Co-Arrangers, and the various lenders party thereto, together with the
promissory notes issued thereunder and the other documents related thereto,
and (ii) Guarantor's $250,000,000 Term Loan Agreement, dated as of October 24,
1997, with DLJ Capital Funding, Inc., as Syndication Agent, The Bank of New
York, as Administrative Agent, BNY Capital Markets, Inc. and Donaldson, Lufkin
& Jenrette Securities Corporation, as Co-Arrangers, and the various lenders
party thereto, together with the promissory notes issued thereunder and the
other documents related thereto, in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreements extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or adding
subsidiaries of Guarantor and/or Company as additional borrowers or guarantors
thereunder) all or any portion of the Indebtedness and other Obligations under
such agreements and whether by the same or any other agent, lender or group of
lenders.
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"Designated Senior Indebtedness" means any Indebtedness under either of the
Credit Facilities and any other Indebtedness in an original principal amount of
at least $50 million, provided that by its terms such Indebtedness expressly
provides that it is"Designated Senior Indebtedness" for purposes of this
Guaranty.
"Indebtedness" means (without duplication), with respect to any Person, any
obligation at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balance that constitutes accounts
payable or trade payables, and other accrued liabilities arising in the
ordinary course of business) if and to the extent any of the foregoing
indebtedness would appear as a liability upon a balance sheet of such Person
prepared in accordance with generally accepted accounting principles ("GAAP"),
and shall also include, to the extent not otherwise included, (i) any
obligations secured by a lien to which the property or assets owned or held by
such Person is subject, whether or not the obligation or obligations secured
thereby shall have been assumed, to the extent of the fair market value of such
property or assets, (ii) guarantees of items of other Persons which would be
included within this definition for such other Persons (whether or not such
items would appear upon the balance sheet of the guarantor), to the extent of
the amount of the Indebtedness so guaranteed, and (iii) all obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent obligations, the
maximum liability upon the occurrence of the contingency giving rise to the
obligations; provided, that (i) the amount outstanding at any time of any
Indebtedness issued with original issue discount is the principal amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP and (ii) Indebtedness shall not include any liability for federal, state,
local or other taxes. Notwithstanding any other provision of the foregoing
definition, any trade payable arising from the purchase of goods or materials
or for the services obtained in the ordinary course of business shall not be
deemed to be "Indebtedness." Furthermore, guarantees of (or obligations with
respect to letters of credit supporting) Indebtedness otherwise included in the
determination of such amount shall not also be included.
"Non-Payment Event of Default" means any event (other than a Payment Default)
the occurrence of which entitles one or more Persons to accelerate the maturity
of any Designated Senior Indebtedness.
"Obligations" means, with respect to any Indebtedness, any principal,
premium, interest, penalties, fees, indemnifications, reimbursements, damages
and other expenses payable under the documentation governing such Indebtedness.
"Payment Default" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of or premium, if any, or interest on or any other amount payable in connection
with any Designated Senior Indebtedness.
"Person" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Senior Indebtedness," as to Guarantor, means the principal of and premium,
if any, and interest on, and any and all other fees, expense reimbursement
obligations and all other Obligations and amounts due pursuant to the terms of
all agreements, documents and instruments providing for, creating, securing or
evidencing or otherwise entered into in connection with (a) all Indebtedness of
Guarantor owed to lenders or agents under either of the Credit Facilities, (b)
all obligations of Guarantor to reimburse any bank or other person in respect
of amounts paid under letters of credit, acceptances or other similar
instruments and all obligations of Guarantor with respect to guarantees of such
reimbursement obligations, (c) all other Indebtedness of Guarantor which does
not provide that it is to be ranked pari passu with or subordinate to the
Guaranty and (d) all deferrals, renewals,
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refinancings, extensions and refundings of, and amendments, modifications and
supplements to, any of the Senior Indebtedness described above. Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness will not include
(i) Indebtedness of Guarantor to any of its Subsidiaries, or to any Affiliate
of Guarantor or any of such Affiliate's Subsidiaries, (ii) Indebtedness
represented by the Guaranty, (iii) any Indebtedness which by the express terms
of the agreement or instrument creating, evidencing or governing the same is
junior or subordinate in right of payment to any item of Senior Indebtedness,
(iv) any trade payable arising from the purchase of goods or materials or for
services obtained in the ordinary course of business, and (v) any Indebtedness
to or guaranteed on behalf of, any stockholders, director, officer or employee
of Guarantor or any Subsidiary of Guarantor.
SECTION 2
THE GUARANTY
2.1 Guaranty.
(a) Subject to the provisions hereof, Guarantor hereby unconditionally
guarantees in favor of the Trustee for the benefit of the Noteholders, (i) the
due and punctual payment of the principal of, and premium, if any, and interest
on each Note, when and as the same shall become due and payable, subject to any
applicable grace period, whether at maturity, by acceleration or otherwise, the
due and punctual payment of interest on the overdue principal of, and premium,
if any, and interest on the Notes, to the extent lawful, and the due and
punctual performance of all other Obligations of Company to the Noteholders or
the Trustee all in accordance with the terms of such Note and the Indenture,
subject, however, to the limitations set forth in Section 2.2, and (ii) in the
case of any extension of time of payment or renewal of any Notes or any of such
other Obligations, that the same will be promptly paid in full when due or
performed in accordance with the terms of the extension or renewal, at stated
maturity, by acceleration or otherwise. Guarantor hereby agrees that its
obligations thereunder and hereunder shall be absolute and unconditional,
irrespective of, and shall be unaffected by, any invalidity, irregularity or
unenforceability of any such Note or the Indenture, any failure to enforce the
provisions of any such Note or the Indenture, any waiver, modification or
indulgence granted to Company with respect thereto by the Noteholder of such
Note or the Trustee, or any other circumstances which may otherwise constitute
a legal or equitable discharge of a surety or Guarantor.
(b) Guarantor hereby waives diligence, presentment, demand for payment,
filing of claims with a court in the event of merger or bankruptcy of Company,
any right to require a proceeding first against Company, protest or notice with
respect to any such Note or the Indebtedness evidenced thereby and all demands
whatsoever, and covenants that this Guaranty will not be discharged as to any
such Note except by payment in full of the principal thereof, premium if any,
and interest thereon and as provided in Section 13.1 of the Indenture.
Guarantor further agrees that, as between Guarantor, on the one hand, and the
Noteholders and the Trustee, on the other hand, (i) the maturity of the
Obligations guaranteed hereby may be accelerated as provided in Article 7 of
the Indenture for the purposes of this Guaranty, notwithstanding any stay,
injunction or other prohibition preventing such acceleration in respect of the
Obligations guaranteed hereby, and (ii) in the event of any declaration of
acceleration of such Obligations as provided in Article 7 of the Indenture,
such Obligations (whether or not due and payable) shall forthwith become due
and payable by Guarantor for the purpose of this Guaranty. In addition, without
limiting the foregoing provisions, upon the effectiveness of an acceleration
under Article 7 of the Indenture, the Trustee shall promptly make a demand for
payment on the Notes under the Guaranty provided for herein and not discharged.
2.2 Effectiveness of Guaranty. Guarantor agrees that this Guaranty shall be
and remain in full force and effect notwithstanding any failure to endorse on
each Note a notation of such Guaranty and that each Note shall be entitled to
the full benefit of the Guaranty whether or not the Guaranty is notated
thereon.
2.3 Limitation of Guaranty. Notwithstanding any term or provision of the
Indenture to the contrary, the maximum aggregate amount of the obligations
guaranteed hereunder by Guarantor shall not exceed the maximum amount that can
be guaranteed hereunder by Guarantor without rendering the Guaranty, as it
relates to
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Guarantor, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors
generally.
2.4 Guaranty Obligations Subordinated to Guarantor Senior Indebtedness.
(a) Guarantor hereby covenants and agrees that, to the extent and in the
manner set forth herein, the Indebtedness represented by the Guaranty and the
payment of the principal of, premium, if any, and interest on the Notes
pursuant to the Guaranty by Guarantor are hereby expressly made subordinate
and subject in right of payment as provided herein to the prior indefeasible
payment and satisfaction in full in cash of all Senior Indebtedness.
(b) The holders of Senior Indebtedness (including, without limitation,
Designated Senior Indebtedness) shall have the right to rely on this Section
2.4 and the following Section 2.5 through Section 2.12, and such provisions
are made for the benefit of the holders of Senior Indebtedness; and such
holders are made obligees hereunder and they or each of them may enforce such
provisions, and no amendment or modification of the provisions contained
herein shall diminish the rights of such holders unless such holders have
agreed in writing thereto.
2.5 Payment Over of Proceeds upon Dissolution, etc., of Guarantor. In the
event of (x) any insolvency or bankruptcy case or proceeding, or any
receivership, arrangement, reorganization, liquidation, dissolution or other
similar case or proceeding in connection therewith whether or not involving
insolvency or bankruptcy, relative to Guarantor or to its creditors, as such,
or to its assets, whether voluntary or involuntary, or (y) any general
assignment for the benefit of creditors or other marshaling of assets or
liabilities of Guarantor (except in connection with the merger or
consolidation of Guarantor or its liquidation or dissolution following the
transfer of all or substantially all of its assets, upon the terms and
conditions that would be permitted under Article 12 of the Indenture if
references to "Company" were to Guarantor) (all of the foregoing referred to
herein individually as a "Guarantor Bankruptcy Proceeding" and collectively as
"Guarantor Bankruptcy Proceedings"), then and in any such event:
i. the holders of all Senior Indebtedness shall be entitled to receive
payment and satisfaction in full in cash of all amounts due on or in
respect of all such Senior Indebtedness (including any interest accruing
after the commencement of any such Guarantor Bankruptcy Proceeding whether
or not such interest is an allowable claim enforceable against Company in
any such proceeding) before the Noteholders are entitled to receive or
retain, pursuant to this Guaranty, any payment or distribution of any kind
by Guarantor on account of this Guaranty;
ii. any payment or distribution of assets of Guarantor of any kind or
character, whether in cash, property or securities, by set-off or
otherwise, to which the Noteholders or the Trustee would be entitled but
for the subordination provisions hereof shall be paid by the liquidating
trustee or agent or other Person making such payment or distribution,
whether a trustee in bankruptcy, a receiver or liquidating trustee or
otherwise, directly to the holders of Senior Indebtedness or their
representative or representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any of such Senior
Indebtedness may have been issued, ratably according to the aggregate
amounts remaining unpaid on account of such Senior Indebtedness held or
represented by each, to the extent necessary to make payment in full in
cash of all such Senior Indebtedness remaining unpaid, after giving effect
to any concurrent payment or distribution, or provision therefor, to the
holders of such Senior Indebtedness;
iii. in the event that, notwithstanding the foregoing provisions of this
Section 2.5, the Trustee or the Noteholder of any Note shall have received
any payment or distribution of assets of Guarantor of any kind or
character, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of this Guaranty
before all Senior Indebtedness is paid and satisfied in full in cash, then
such payment or distribution shall be held by the recipient in trust for
the benefit of holders of such Senior Indebtedness and shall be immediately
paid over or delivered to the holders of such Senior Indebtedness or their
representative or representatives to the extent necessary to make payment
in full in cash of all such Senior Indebtedness remaining unpaid after
giving effect to any concurrent payment or distribution to or for the
holders of such Senior Indebtedness; and
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iv. the consolidation of Guarantor with, or the merger of Guarantor with
or into, another Person or the liquidation or dissolution of Guarantor
following the conveyance, transfer or lease of its properties and assets
substantially as an entirety to another Person upon the terms and
conditions set forth herein shall not be deemed a dissolution, winding-up,
liquidation, reorganization, assignment for the benefit of creditors or
marshaling of assets and liabilities of such Guarantor for, as would be
applicable as if references to "Company" were to Guarantor, the purposes of
Article 12 of the Indenture if the Person formed by such consolidation or
the surviving entity of such merger or the Person which acquires by
conveyance, transfer or lease such properties and assets substantially as
an entirety, as the case may be, shall, as a part of such consolidation,
merger, conveyance, transfer or lease, comply with the conditions set forth
in such Article 12 of the Indenture, as would be applicable as if
references to "Company" were to Guarantor.
2.6 Suspension of Guaranty Obligations When Senior Indebtedness in Default.
(a) Unless Section 2.5 hereof shall be applicable, after the occurrence of a
Payment Default with respect to any Designated Senior Indebtedness which
constitutes Senior Indebtedness, no payment or distribution of any kind or
character of Guarantor (including, without limitation, cash, property and any
payment or distribution which may be payable or deliverable by reason of the
payment of any other Indebtedness of Guarantor being subordinated to its
Obligations herein) may be made by or on behalf of Guarantor, including,
without limitation, by way of set-off or otherwise, for or on account hereof,
and neither the Trustee nor any Noteholder shall take or receive from
Guarantor, directly or indirectly in any manner, payment in respect of all or
any portion of its Obligations hereof commencing on the date of receipt by the
Trustee of written notice from any representative of the holders of any
Designated Senior Indebtedness which constitutes Senior Indebtedness (each, a
"Guarantor Representative") of such Payment Default, and in any such event,
such prohibition shall continue until such Payment Default is cured, waived in
writing or ceases to exist. At such time as the prohibition set forth in the
preceding sentence shall no longer be in effect, subject to the provisions of
the preceding and following paragraph, Guarantor shall resume making any and
all required payments in respect hereof, including any missed payments.
(b) Unless Section 2.5 hereof shall be applicable, upon the occurrence of a
Non-Payment Event of Default on Designated Senior Indebtedness, no payment or
distribution of any kind or character (including, without limitation, cash,
property and any payment or distribution which may be payable or deliverable
by reason of the payment of any other Indebtedness of Guarantor being
subordinated to its Obligations herein) shall be made by Guarantor, including,
without limitation, by way of set-off or otherwise, for or on account of any
of its Obligations herein, and neither the Trustee nor any Noteholder shall
take or receive from Guarantor, directly or indirectly in any manner, payment
in respect of all or any portion of its obligations on its Guaranty for a
period (a "Guaranty Payment Blockage Period") commencing on the date of
receipt by the Trustee of written notice from any Guarantor Representative of
such Non-Payment Event of Default, unless and until (subject to any blockage
of payments that may then be in effect under the preceding paragraphs), the
earlier of: (x) the date that such Non-Payment Event of Default shall have
been cured or waived in writing or shall have ceased to exist or such
Designated Senior Indebtedness shall have been paid in full in cash or (y) the
date that such Guaranty Payment Blockage Period shall have been terminated by
written notice to Guarantor or the Trustee from the applicable Guarantor
Representative, after which, in the case of clause (x) or (y), Guarantor shall
resume making any and all required payments in respect of its Obligations
herein, including any missed payments. Any number of additional Guaranty
Payment Blockage Periods may be commenced during any Guaranty Payment Blockage
Period.
(c) In the event that, notwithstanding the foregoing, the Trustee or any
Noteholder shall have received any payment or distribution from Guarantor
prohibited by the foregoing provisions of this Section 2.6, then and in such
event such payment or distribution shall be held in trust for the benefit of
and shall be paid over and delivered forthwith to the holders of the Senior
Indebtedness or their representative or representatives for distribution to
the holders of Senior Indebtedness or, if no amounts are then due in respect
of Senior Indebtedness, promptly returned to Guarantor, or otherwise as a
court of competent jurisdiction shall direct.
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2.7 Subrogation to Rights of Noteholders of Senior Indebtedness.
(a) Upon the payment in full in cash of all Senior Indebtedness, the
Noteholders shall be subrogated to the rights of the holders of such Senior
Indebtedness to receive payments and distributions of cash, property and
securities of Guarantor made on such Senior Indebtedness until all amounts due
to be paid hereunder shall be paid in full. For purposes of such subrogation,
no payments or distributions to holders of Senior Indebtedness of any cash,
property or securities to which Noteholders or the Trustee would be entitled
except for the provisions hereof, and no payments over pursuant to the
provisions hereof to holders of Senior Indebtedness by Noteholders or the
Trustee, shall, as among Guarantor, its creditors other than holders of Senior
Indebtedness and the Noteholders be deemed to be a payment or distribution by
Guarantor to or on account of Senior Indebtedness.
(b) If any payment or distribution to which the Noteholders would otherwise
have been entitled but for the provisions hereof shall have been applied,
pursuant to the provisions hereof, to the payment of all amounts payable under
Senior Indebtedness, then and in such case, the Noteholders shall be entitled
to receive from the holders of such Senior Indebtedness at the time
outstanding any payments or distributions received by such holders of Senior
Indebtedness in excess of the amount sufficient to pay all amounts payable
under or in respect of such Senior Indebtedness in full in cash.
2.8 Guaranty Subordination Provisions Solely to Define Relative Rights. The
subordination provisions hereof are and are intended solely for the purpose of
defining the relative rights of the Noteholders on the one hand and the
holders of Senior Indebtedness on the other hand. Nothing contained herein or
in the Indenture or in the Notes is intended to or shall (a) impair, as to
Guarantor, its creditors other than holders of its Senior Indebtedness and the
Noteholders, the obligation of Guarantor, which is absolute and unconditional,
to make payments to the Noteholders in respect of its Obligations hereof; or
(b) affect the relative rights against Guarantor of the Noteholders and
creditors of Guarantor other than the holders of the Senior Indebtedness; or
(c) prevent the Trustee or any Noteholder from exercising all remedies
otherwise permitted by applicable law upon a Default or an Event of Default
under the Indenture, subject to the rights, if any, hereunder of the holders
of Senior Indebtedness (1) in any case, proceeding, dissolution, liquidation
or other winding-up, assignment for the benefit of creditors or other
marshaling of assets and liabilities of Company referred to in Section 2.5
hereof, to receive, pursuant to and in accordance with such Section, cash,
property and securities otherwise payable or deliverable to the Trustee or
such Noteholder, or (2) under the conditions specified in Section 2.6 hereof,
to prevent any payment prohibited by such Section or enforce their rights
pursuant to Section 2.6(c) hereof.
2.9 Trustee's Relation to Senior Indebtedness. With respect to the holders
of Senior Indebtedness, the Trustee undertakes to perform or to observe only
such of its covenants and obligations as are specifically set forth herein,
and no implied covenants or obligations with respect to the holders of Senior
Indebtedness shall be read into this Guaranty against the Trustee. The Trustee
shall not be deemed to owe any fiduciary duty to the holders of Senior
Indebtedness and the Trustee shall not be liable to any holder of Senior
Indebtedness if it shall mistakenly pay over or deliver to Noteholders,
Company, Guarantor or any other Person moneys or assets to which any holder of
Senior Indebtedness shall be entitled by virtue of this Guaranty or otherwise.
2.10 No Waiver of Subordination Provisions. No right of any present or
future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of Company or Guarantor or by any act or failure to
act, in good faith, by any such holder, or by any non-compliance by Company or
Guarantor with the terms, provisions and covenants of this Guaranty or the
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
2.11 Notice to Trustee.
(a) Guarantor shall give prompt written notice to the Trustee of any fact
known to Guarantor which would prohibit the making of any payment to or by the
Trustee at its Corporate Trust Office in respect of the Notes. Notwithstanding
the provisions of this Guaranty or any provision of the Indenture, the Trustee
shall not be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by
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the Trustee in respect of the Notes, unless and until the Trustee shall have
received written notice thereof from Guarantor or any Guarantor Representative
or from any trustee, fiduciary or agent therefor; and, prior to the receipt of
any such written notice, the Trustee, subject to the provisions of this
Section 2.11, shall be entitled in all respects to assume that no such facts
exist.
(b) The Trustee shall be entitled to rely on the delivery to it and
Guarantor of a written notice by any Guarantor Representative to establish
that such notice has been given by a holder of Senior Indebtedness (or a
trustee, fiduciary or agent therefor); provided, however, that failure to give
such notice to Guarantor shall not affect in any way the right of the Trustee
to rely on such notice. In the event that the Trustee determines in good faith
that further evidence is required with respect to the right of any Person as a
holder of Senior Indebtedness to participate in any payment or distribution
pursuant hereto, the Trustee may request such Person to furnish evidence to
the reasonable satisfaction of the Trustee as to the amount of Senior
Indebtedness held by such Person, the extent to which such Person is entitled
to participate in such payment or distribution and any other facts pertinent
to the rights of such Person hereunder, and if such evidence is not furnished,
the Trustee may defer any payment to such Person pending judicial
determination as to the right of such Person to receive such payment.
2.12 Reliance on Judicial Order or Certificate of Liquidating Agent. Upon
any payment or distribution of assets of Company or Guarantor referred to
herein, the Trustee, and the Noteholders shall be entitled to rely upon any
order or decree entered by any court of competent jurisdiction in which such
insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding-up or similar case or proceeding is pending, or a
certificate of the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee for the benefit of creditors, agent or other Person making
such payment or distribution, delivered to the Trustee or to the Noteholders,
for the purpose of ascertaining the Persons entitled to participate in such
payment or distribution, the holders of Senior Indebtedness and other
Indebtedness of Company or Guarantor, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts
pertinent thereto.
SECTION 3
REPRESENTATIONS AND WARRANTIES
To induce the Trustee and the Noteholders to accept this Guaranty, Guarantor
hereby represents and warrants that the following statements are true and
correct:
3.1 Corporate Existence. Guarantor is duly organized, validly existing and
in good standing under the laws of the State of Delaware, has full corporate
power and authority to own its assets and properties and to operate its
business as presently owned and conducted, and as proposed to be conducted,
and is qualified to do business and in good standing in every jurisdiction
where its assets are located and wherever necessary to carry out its business
and operations, except where failure to be so qualified or in good standing or
a lack of such corporate power or authority has not had or would not have, in
the aggregate, a material adverse effect.
3.2 Corporate Power; Authorization; Enforceable Obligations. Guarantor has
the corporate power, authority and legal right to execute, deliver and perform
this Guaranty and all obligations required hereunder and has taken all
necessary corporate action to authorize its Guaranty hereunder on the terms
and conditions hereof and its execution, delivery and performance of this
Guaranty and all obligations required hereunder. No consent of any other
Person including, without limitation, stockholders and creditors of Guarantor,
and no license, permit, approval or authorization of, or exemption by, notice
or report to, or registration, filing or declaration with, any governmental
authority is required by Guarantor in connection with this Guaranty or the
execution, delivery, performance, validity or enforceability of this Guaranty
and all obligations required hereunder, except for pursuant to the Credit
Facilities. This Guaranty has been, and each instrument or document required
hereunder will be, executed and delivered by a duly authorized officer of
Guarantor, and this Guaranty constitutes, and each instrument or document
required hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of Guarantor, enforceable against
Guarantor in accordance
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with its terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws or equitable
principles relating to or limiting creditors' rights generally.
3.3 No Legal Bar to this Guaranty. The execution, delivery and performance
of this Guaranty and the documents or instruments required hereunder, and the
use of the proceeds of the borrowings under the Indenture, will not violate
any provision of any existing law or regulation binding on Guarantor, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on Guarantor, or the certificate of incorporation or bylaws
of Guarantor or any securities issued by Guarantor, or any mortgage,
indenture, lease, contract or other agreement, instrument or undertaking to
which Guarantor is a party or by which Guarantor or any of its assets may be
bound, the violation of which would have a material adverse effect on the
business, operations, assets or financial condition of Guarantor and will not
result in, or require, the creation or imposition of any lien on any of its
property, assets or revenues pursuant to the provisions of any such mortgage,
indenture, lease, contract or other agreement, instrument or undertaking.
SECTION 4
MISCELLANEOUS
4.1 Survival of Warranties. All agreements, representations and warranties
made herein shall survive the execution and delivery of this Guaranty and the
Indenture.
4.2 Notices. Any communications between Trustee and Guarantor and any
notices or requests provided herein to be given may be given by mailing the
same, postage prepaid, or by telex, facsimile transmission or cable to each
such party at its address set forth below or to such other addresses as each
such party may in writing hereafter indicate. Any notice, request or demand to
or upon Trustee or Guarantor shall not be effective until received:
TRUSTEE: Corporate Trust Office
1700 Market Street
Philadelphia, PA 19103
Attention:
Corporate Trust Division
(Renal Treatment Centers, Inc., 5 5/8%
Convertible Subordinated Notes due 2006)
GUARANTOR: Total Renal Care Holdings, Inc.
Suite 800
21250 Hawthorne Boulevard
Torrance, CA 90503
Attention: Chief Financial Officer
4.3 Severability. In case any provision in or obligation under this Guaranty
shall be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not in any way
be affected or impaired thereby.
4.4 Amendments and Waivers. No amendment, modification, termination or
waiver of any provision of this Guaranty, and no consent to any departure by
Guarantor therefrom, shall in any event be effective without the written
concurrence of Trustee and, in the case of any such amendment or modification,
Guarantor. Any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which it was given.
4.5 Headings. Section and section headings in this Guaranty are included
herein for convenience of reference only and shall not constitute a part of
this Guaranty for any other purpose or be given any substantive effect.
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4.6 Applicable Law. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF
GUARANTOR, TRUSTEE AND THE NOTEHOLDERS HEREUNDER SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL
OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN
RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein
or in the Indenture, terms used in Article 8 and Article 9 of the Uniform
Commercial Code in the State of New York are used herein as therein defined.
4.7 Successors and Assigns. This Guaranty is a continuing guaranty and shall
be binding upon Guarantor and its successors and assigns. This Guaranty shall
inure to the benefit of Noteholders and their respective successors and
assigns. Guarantor shall not assign this Guaranty or any of the rights or
obligations of Guarantor hereunder without the prior written consent of
Trustee. The terms and provisions of this Guaranty shall inure to the benefit
of any transferee or assignee of any Note transferred or assigned in
accordance with the provisions of the Indenture, and in the event of such
transfer or assignment the rights and privileges herein conferred upon such
Noteholder shall automatically extend to and be vested in such transferee or
assignee, all subject to the terms and conditions hereof.
4.8 Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS
BROUGHT AGAINST GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY, OR ANY
OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING
AND DELIVERING THIS AGREEMENT, GUARANTOR, FOR ITSELF AND IN CONNECTION WITH
ITS PROPERTIES, IRREVOCABLY:
(A) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION
AND VENUE OF SUCH COURTS;
(B) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(C) DESIGNATES AND APPOINTS CT CORPORATION SERVICES, OR SUCH OTHER
PERSONS LOCATED IN NEW YORK STATE AS MAY HEREAFTER BE SELECTED BY THE
GUARANTOR AND AGREEING IN WRITING TO SO SERVE, AS ITS AGENT TO RECEIVE ON
ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH
COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY THE GUARANTOR TO BE
EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS
SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO THE GUARANTOR AT ITS
ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 4.2 PROVIDED THAT, UNLESS
OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL
NOT AFFECT THE VALIDITY OF SERVICE OF SUCH PROCESS. IF ANY AGENT APPOINTED
BY THE GUARANTOR REFUSES TO ACCEPT SERVICE, THE GUARANTOR HEREBY AGREES
THAT SERVICE OF PROCESS SUFFICIENT FOR PERSONAL JURISDICTION IN ANY ACTION
AGAINST THE GUARANTOR IN THE STATE OF NEW YORK MAY BE MADE BY REGISTERED OR
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE GUARANTOR AT ITS ADDRESS
PROVIDED IN ACCORDANCE WITH SECTION 4.2, AND THE GUARANTOR HEREBY
ACKNOWLEDGES THAT SUCH SERVICE SHALL BE EFFECTIVE AND BINDING IN EVERY
RESPECT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO BRING PROCEEDINGS
AGAINST THE GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND
9
<PAGE>
(D) AGREES THAT THE PROVISIONS OF THIS SECTION 4.8 RELATING
TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST
EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR
OTHERWISE.
4.9 Waiver of Trial Jury. GUARANTOR AND, BY ACCEPTANCE OF THE BENEFITS
HEREOF, TRUSTEE AND EACH NOTEHOLDER, EACH HEREBY AGREES TO WAIVE, TO THE
EXTENT PERMITTED BY LAW, ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY. The scope of this
waiver is intended to be all-encompassing of any and all disputes that may be
filed in any court and that relate to the subject matter of this transaction,
including without limitation contract claims, tort claims, breach of duty
claims and all other common law and statutory claims. Guarantor and, by its
acceptance of the benefits hereof, Trustee and each Noteholder each (i)
acknowledges that this waiver is a material inducement for Guarantor, Trustee
and each Noteholder to enter into a business relationship, that Guarantor,
Trustee and each Noteholder have already relied on this waiver in entering
into this Guaranty or accepting the benefits thereof, as the case may be, and
that each will continue to rely on this waiver in their related future
dealings with respect to the transaction contemplated hereby and (ii) further
warrants and represents that each has reviewed this waiver with its legal
counsel, and that each knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING
THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A
MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 4.9 AND EXECUTED
BY GUARANTIED PARTY AND GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
GUARANTY. In the event of litigation, this Guaranty may be filed as a written
consent to a trial by the court.
4.10 No Other Writing. This writing is intended by Guarantor, Trustee and
each Noteholder as the final expression of this Guaranty and is also intended
as a complete and exclusive statement of the terms of their agreement with
respect to the matters covered hereby. No course of dealing, course of
performance or trade usage, and no parol evidence of any nature, shall be used
to supplement or modify any terms of this Guaranty. There are no conditions to
the full effectiveness of this Guaranty.
4.11 Further Assurances. At any time or from time to time, upon the request
of Trustee, Guarantor shall execute and deliver such further documents and do
such other acts and things as Trustee may reasonably request in order to
effect fully the purposes of this Guaranty.
4.12 Trustee as Agent.
(a) Trustee has been appointed to act as Trustee hereunder by the
Noteholders. Trustee shall be obligated, and shall have the right hereunder,
to make demands, to give notices, to exercise or refrain from exercising any
rights, and to take or refrain from taking any action, solely in accordance
with this Guaranty and the Indenture.
(b) Trustee shall at all times be the same Person that is Trustee under the
Indenture. Written notice of resignation by Trustee pursuant to Section 8.10
of the Indenture shall also constitute notice of resignation as Trustee under
this Guaranty; removal of Trustee pursuant to Section 8.10 of the Indenture
shall also constitute removal as Trustee under this Guaranty; and appointment
of a successor Trustee pursuant to Section 8.10 of the Indenture shall also
constitute appointment of a successor Trustee under this Guaranty. Upon the
acceptance of any appointment as Trustee under Section 8.10 of the Indenture
by a successor Trustee, that successor Trustee shall thereupon succeed to and
become vested with all the rights, powers, privileges and duties of the
retiring or removed Trustee under this Guaranty, and the retiring or removed
Trustee under this Guaranty shall promptly (i) transfer to such successor
Trustee all sums held hereunder, together with all records and other documents
necessary or appropriate in connection with the performance of the duties of
the successor Trustee under this Guaranty, and (ii) take such other actions as
may be necessary or appropriate in connection with the assignment to such
successor Trustee of the rights created hereunder, whereupon such retiring or
removed Trustee shall be discharged from its duties and obligations under this
Guaranty. After any retiring or removed Trustee's
10
<PAGE>
resignation or removal hereunder as Trustee, the provisions of this Guaranty
shall inure to its benefit as to any actions taken or omitted to be taken by it
under this Guaranty while it was Trustee hereunder.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed
and delivered by its officer thereunto duly authorized as of the date first
written above.
TOTAL RENAL CARE HOLDINGS, INC.
By:
Name:
Title:
11
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
JURISDICTION OF
NAME STRUCTURE INCORPORATION
<S> <C> <C>
Astro, Hobby, West MI.,
Renal Care Limited
Partnership Limited Partnership DE
Bay Area Dialysis
Partnership Partnership CA
Beverly Hills Dialysis
Partnership Partnership CA
Burbank Dialysis
Partnership Partnership CA
Caper S.A. Sociedad Anonima* (1)
Capital Dialysis
Partnership Partnership CA
Carroll County Dialysis
Facility, Inc. Corporation MD
Carroll County Dialysis
Facility Limited
Partnership Limited Partnership MD
Centro Modelo Privado de
Enfermedades Renales
S.A. Sociedad Anonima* (1)
CERCOS S.R.L. Sociedad de Responsibilidad Limitada Italy
Continental Dialysis
Center, Inc. Corporation VA
Continental Dialysis
Center of Springfield-
Fairfax, Inc. Corporation VA
Crescent City Dialysis
Center Partnership LA
Dialysis Care of North
Carolina, L.L.C. Limited Liability Company DE
Dialysis Laboratories,
Inc. Corporation FL
Dialysis Treatment
Centers of Macon, L.L.C. Limited Liability Company GA
East End Dialysis Center,
Inc. Corporation VA
Eastmont Partnership Partnership CA
Eaton Canyon Dialysis
Partnership Partnership CA
Enfermedades Renales--
Centro de Dialisis S.A. Sociedad Anonima* (2)
ENNE E. S.R.L. Sociedad de Responsibilidad Limitada Italy
Flamingo Park Kidney
Center, Inc. Corporation FL
Garey Dialysis Center
Partnership Partnership CA
Guam Renal Care
Partnership Partnership Guam
Guam Renal Management
Partnership Partnership Guam
Houston Kidney
Center/Total Renal Care
Integrated Services
Network, L.P. Partnership DE
Hutchinson Dialysis,
L.L.C. Limited Liability Company KS
Kenner Dialysis Partnership LA
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF
NAME STRUCTURE INCORPORATION
<S> <C> <C>
Lincoln Park Dialysis
Services, Inc. Corporation IL
Los Angeles Dialysis
Center Partnership CA
Mason-Dixon Dialysis
Facilities, Inc. Corporation MD
Moncrief Dialysis
Center/Total Renal Care
Limited Partnership Limited Partnership DE
Nedial Napoli, S.R.L. Sociedad de Responsibilidad Limitada Italy
Nedial, S.R.L. Sociedad de Responsibilidad Limitada Italy
Nudial S.A. Sociedad Anonima* (3)
Open Access Sonography Corporation FL
Pacific Coast Dialysis
Center Partnership CA
Pacific Dialysis
Partnership Partnership Guam
Peninsula Dialysis
Centers, Inc. Corporation VA
Raquemar S.A. Sociedad Anonima (3)
Renal Diagnostic
Laboratories, Inc. Corporation DE
Renal Treatment Centers--
California, Inc. Corporation DE
Renal Treatment Centers--
Hawaii, Inc. Corporation DE
Renal Treatment Centers--
Illinois, Inc. Corporation DE
Renal Treatment Centers,
Inc. Corporation DE
Renal Treatment Centers--
Management Acquisition,
Inc. Corporation DE
Renal Treatment Centers--
Mid-Atlantic, Inc. Corporation DE
Renal Treatment Centers--
Northeast, Inc. Corporation DE
Renal Treatment Centers--
Southeast, Inc. Corporation DE
Renal Treatment Centers--
West, Inc. Corporation DE
RTC Argentina S.A. Sociedad Anonima (3)
RTC Buenos Aires S.A. Sociedad Anonima (3)
RTC Cordoba S.A. Sociedad Anonima (3)
RTC Holdings, Inc. Corporation DE
RTC Holdings
International, Inc. Corporation DE
RTC Supply, Inc. Corporation DE
RTC--Texas Acquisition,
Inc. Corporation DE
RTC TN, Inc. Corporation DE
San Gabriel Valley
Partnership Partnership CA
Servicio De Nefrologia
Del Hospital Regional
Espanol De Bahia Blanca
S.A. Sociedad Anonima (4)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF
NAME STRUCTURE INCORPORATION
<S> <C> <C>
Servicio Integral De
Nefrologia Y
Hemodialisis S.A. Sociedad Anonima (4)
Southwest Dialysis
Center, Inc. Corporation TX
Sunrise Dialysis
Partnership Partnership CA
Theradial S.A. Sociedad Anonima (4)
Tomball Dialysis, Inc. Corporation TX
Total Acute Kidney Care,
Inc. Corporation FL
Total Nephrology Care
Network Medical
Associates, Inc. Corporation CA
Total Renal Care (UK)
Limited Corporation (4)
Total Renal Care
Acquisition Corp. Corporation DE
Total Renal Care/Crystal
River Dialysis Center,
L.L.C. Limited Liability Company FL
Total Renal Care
Hollywood Partnership Partnership CA
Total Renal Care, Inc. Corporation CA
Total Renal Care
International Limited Corporation (5)
Total Renal Care of New
York, Inc. Corporation NY
Total Renal Care of
Puerto Rico, Inc. Corporation Puerto Rico
Total Renal Care of Utah,
L.L.C. Limited Liability Company DE
Total Renal Care/Peralta
Renal Center Partnership CA
Total Renal Care/Piedmont
Dialysis Center Partnership CA
Total Renal Care Texas
Limited Partnership Limited Partnership DE
Total Renal Care West,
Inc. Corporation DE
Total Renal Italia,
S.R.L. Sociedad de Responsibilidad Limitada Italy
Total Renal Research
Institute, Inc. Corporation DE
Total Renal Support
Services, Inc. Corporation DE
Total Renal Support
Services of North
Carolina, L.L.C. Limited Liability Company DE
TRC El Paso Limited
Partnership Limited Partnership DE
TRC-Petersburg, L.L.C. Limited Liability Company DE
TRC-Rogosin Group, L.P. Limited Partnership NY
Tri-City Dialysis Center,
Inc. Corporation VA
Unidad Modelo de
Nefrologia y
Hemodialysis S.A. Sociedad Anonima* (1)
University Park Dialysis Partnership CA
University Park Dialysis
Partnership Partnership CA
Wilshire Dialysis Center Partnership CA
</TABLE>
- --------
(1) Cordoba, Province of Cordoba, Argentina
(2) Mendoza, Province of Mendoza, Argentina
(3) City of Buenos Aires, Argentina
(4) Argentina
(5) United Kingdom
* These entities were each originally a Sociedad de Responsibilidad Limitada
(S.R.L.), but were each transformed into a Sociedad Anonima prior to
acquisition by RTC Argentina S.A. The transformation in each case is still
in the process of being registered before the applicable Public Register of
Commerce.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statements on
Form S-8 (No. 33-84610, No. 33-83018, No. 33-99862, No. 33-99864, No. 333-
1620, No. 333-34693, No. 333-34695, No. 333-42653 and No. 333-46887) of Total
Renal Care Holdings, Inc. of our report dated February 16, 1998, except as to
Note 17 which is as of March 30, 1998, appearing on page F-1 in this Annual
Report on Form 10-K. We also consent to the incorporation by reference of our
report on the Financial Statement Schedules, which appears on page S-1 of this
Form 10-K.
Price Waterhouse LLP
Seattle, Washington
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,400,000
<SECURITIES> 0
<RECEIVABLES> 152,481,000
<ALLOWANCES> 0
<INVENTORY> 8,743,000
<CURRENT-ASSETS> 186,050,000
<PP&E> 100,061,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 695,340,000
<CURRENT-LIABILITIES> 39,776,000
<BONDS> 0
0
0
<COMMON> 45,000
<OTHER-SE> 273,627,000
<TOTAL-LIABILITY-AND-EQUITY> 695,340,000
<SALES> 438,205,000
<TOTAL-REVENUES> 438,205,000
<CGS> 0
<TOTAL-COSTS> 358,347,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,896,000
<INTEREST-EXPENSE> 13,238,000
<INCOME-PRETAX> 66,620,000
<INCOME-TAX> 25,141,000
<INCOME-CONTINUING> 41,479,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,977,000
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.82
</TABLE>
