<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K/A
(AMENDMENT NO. 2)
(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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<PAGE>
This Amendment No. 2 on Form 10-K/A to the registrant's 10-K for the fiscal
year ended December 31, 1997 is being filed solely to include an audit report
of PricewaterhouseCoopers LLP on the consolidated financial statements included
in Amendment No. 1 on Form 10-K/A and to omit the audit reports of
Price Waterhouse LLP, Coopers & Lybrand L.L.P., Baird, Kurtz & Dobson and
Deloitte & Touche LLP. The consolidated financial statements remain the same as
they were at the time of their inclusion in Amendment No. 1 on Form 10-K/A
other than for the addition of Note 18 "Subsequent Events (unaudited)".
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants of PricewaterhouseCoopers LLP............ F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Income.......................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Total Renal Care Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity, 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.
PricewaterhouseCoopers LLP
Seattle, Washington
February 16, 1998, except as to the pooling of interests with
Renal Treatment Centers, Inc. which is as of May 14, 1998
F-2
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- ----------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents.................................. $ 21,327 $ 6,143
Investments................................................ 41,202
Patient accounts receivable, less allowance for doubtful
accounts of $15,765,000 and $30,695,000, respectively..... 156,207 248,408
Receivable from Tenet...................................... 347 534
Inventories................................................ 10,433 15,766
Deferred income taxes...................................... 5,383 9,853
Prepaid expenses and other current assets.................. 17,304 21,500
-------- ----------
Total current assets..................................... 252,203 302,204
-------- ----------
Property and equipment, net................................ 97,844 172,838
Notes receivable from related parties...................... 1,919 11,344
Deferred taxes, noncurrent................................. 385
Other long-term assets..................................... 1,992 17,198
Intangible assets, net..................................... 311,263 774,266
-------- ----------
$665,221 $1,278,235
======== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Accounts payable........................................... $ 23,841 $ 33,283
Employee compensation and benefits......................... 16,349 25,430
Other accrued liabilities.................................. 12,605 15,927
Current portion of long-term obligations................... 14,433 27,810
-------- ----------
Total current liabilities................................ 67,228 102,450
-------- ----------
Long-term debt............................................. 233,126 723,782
-------- ----------
Deferred income taxes...................................... 61 2,500
-------- ----------
Other long-term liabilities................................ 993 1,594
-------- ----------
Minority interests......................................... 4,714 19,079
-------- ----------
Commitments and contingencies (Notes 8, 9 and 13)
Stockholders' equity:
Preferred stock ($0.001 par value; 5,000,000 shares
authorized; none outstanding)........................... -- --
Common Stock ($0.001 par value; 195,000,000 shares
authorized; 76,686,364 and 77,991,595 shares issued and
outstanding)............................................ 77 78
Additional paid-in capital............................... 343,586 358,492
Notes receivable from stockholders....................... (2,827) (3,030)
Retained earnings........................................ 18,263 73,290
-------- ----------
Total stockholders' equity........................... 359,099 428,830
-------- ----------
$665,221 $1,278,235
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR SEVEN MONTHS ENDED
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.. $214,425 $122,065 $176,463 $299,411 $498,024 $760,997
-------- -------- -------- -------- -------- --------
Operating expenses:
Facilities............ 146,560 83,370 115,219 198,654 344,180 510,990
General and
administrative....... 17,856 10,099 12,117 21,000 32,350 50,099
Provision for doubtful
accounts............. 5,492 3,486 4,552 7,580 15,737 20,525
Depreciation and
amortization......... 12,343 7,098 10,808 18,603 32,445 54,603
Merger costs.......... 500 2,088 2,808
-------- -------- -------- -------- -------- --------
Total operating
expenses............ 182,251 104,053 143,196 247,925 427,520 636,217
-------- -------- -------- -------- -------- --------
Operating income........ 32,174 18,012 33,267 51,486 70,504 124,780
Interest expense, net of
capitalized interest... (8,651) (4,472) (7,694) (12,830) (13,417) (28,214)
Interest rate swap--
early termination
costs..................
Interest income......... 800 634 863 1,029 3,858 3,175
-------- -------- -------- -------- -------- --------
Income before income
taxes, minority
interests,
extraordinary item
and cumulative effect
of change in
accounting
principle............ 24,323 14,174 26,436 39,685 60,945 99,741
Income taxes............ 7,827 4,759 9,931 13,841 22,960 40,212
-------- -------- -------- -------- -------- --------
Income before minority
interests,
extraordinary item and
cumulative effect of
change in accounting
principle.............. 16,496 9,415 16,505 25,844 37,985 59,529
Minority interests in
income of consolidated
subsidiaries........... 1,593 878 1,784 2,544 3,578 4,502
-------- -------- -------- -------- -------- --------
Income before
extraordinary item and
cumulative effect of
change in accounting
principle.............. 14,903 8,537 14,721 23,300 34,407 55,027
Extraordinary loss
related to early
extinguishment of debt,
net of tax............. 2,555 2,555 7,700
Cumulative effect of a
change in accounting
principle, net of tax..
-------- -------- -------- -------- -------- --------
Net income.............. $ 14,903 $ 8,537 $ 12,166 $ 20,745 $ 26,707 $ 55,027
======== ======== ======== ======== ======== ========
Earnings per common
share:
Income before
extraordinary item
and cumulative effect
of a change in
accounting principle,
net of tax........... $ 0.33 $ 0.20 $ 0.26 $ 0.43 $ 0.46 $ 0.71
Extraordinary loss.... (0.04) (0.05) (0.10)
Cumulative effect of a
change in accounting
principle, net
of tax...............
-------- -------- -------- -------- -------- --------
Net income............ $ 0.33 $ 0.20 $ 0.22 $ 0.38 $ 0.36 $ 0.71
======== ======== ======== ======== ======== ========
Weighted average
number of common
shares outstanding... 45,301 42,682 57,109 53,936 74,042 77,524
======== ======== ======== ======== ======== ========
Earnings per common
share--assuming
dilution:
Income before
extraordinary item
and cumulative effect
of a change in
accounting principle,
net of tax........... $ 0.31 $ 0.19 $ 0.25 $ 0.40 $ 0.45 $ 0.69
Extraordinary loss.... (0.05) (0.04) (0.10)
Cumulative effect of a
change in accounting
principle, net of
tax..................
-------- -------- -------- -------- -------- --------
Net income............ $ 0.31 $ 0.19 $ 0.20 $ 0.36 $ 0.35 $ 0.69
======== ======== ======== ======== ======== ========
Weighted average
number of common
shares and
equivalents
outstanding--assuming
dilution............. 47,506 44,879 60,693 57,744 77,225 79,975
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------
NOTES
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................... 21,642,062 $22 $ 25,282 $ 40,296 $ 65,600
Shares issued to Tenet.. 4,888,890 4 4
Shares issued in change
of control:
DLJMB.................. 11,666,667 12 10,488 10,500
Employees.............. 2,077,778 2 1,868 $ (995) 875
Shares issued in
offerings.............. 7,393,315 7 51,994 52,001
Stock issuance costs.... (2,172) (2,172)
Dividend paid to Tenet:
Cash................... (75,500) (75,500)
Intercompany receiv-
able.................. (6,152) (6,152)
Shares issued in
acquisitions........... 729,687 1 2,258 2,259
Shares issued to
employees and others... 1,275,420 1 1,147 (513) 635
Options exercised....... 476,275 1 315 316
Acquisition of treasury
stock.................. (5,797) (47) (47)
Dividend distribution... (1,473) (1,473)
Net income.............. 14,903 14,903
---------- --- -------- ------- -------- --------
Balance at May 31,
1995................... 50,144,297 50 91,133 (1,508) (27,926) 61,749
Net proceeds from
initial public
offering............... 11,500,000 12 98,282 98,294
Shares and options
issued in
acquisitions........... 1,574,616 1 8,453 8,454
Shares issued to
employees and others... 46,117 59 (13) 46
Shares issued to repay
debt................... 67,447 523 523
Options exercised....... 2,355,894 3 2,866 (1,330) 1,539
Conversion of
mandatorily redeemable
common stock........... 1,136,112 1 3,989 3,990
Payments on notes
receivable, net of
interest accrued....... 78 78
Income tax benefit
related to stock
options exercised...... 1,792 1,792
Acquisition of treasury
stock.................. (43,868) (347) (347)
Dividend distribution... (1,499) (1,499)
Adjustment to conform
fiscal years of RTC.... 6,377 6,377
Net income.............. 12,166 12,166
---------- --- -------- ------- -------- --------
Balance at December 31,
1995................... 66,780,615 67 206,750 (2,773) (10,882) 193,162
Net proceeds from stock
offerings.............. 6,666,667 7 128,311 128,318
Shares issued in
acquisitions........... 161,095 2,810 2,810
Shares issued in
connection with
merger................. 2,422,534 2 105 3,097 3,204
Shares issued to
employees and others... 1,883 15 15
Shares issued to repay
debt................... 190,109 1,474 1,474
Options exercised....... 463,461 1 3,183 3,184
Interest accrued on
notes receivable, net
of payments............ (54) (54)
Income tax benefit
related to stock
options exercised...... 938 938
Dividend distribution... (659) (659)
Net income.............. 26,707 26,707
---------- --- -------- ------- -------- --------
Balance at December 31,
1996................... 76,686,364 77 343,586 (2,827) 18,263 359,099
Shares issued in
acquisitions........... 17,613 273 273
Shares issued to
employees and others... 174,775 1,773 1,773
Options exercised....... 447,456 2,019 2,019
Shares issued to repay
debt................... 664,580 1 5,147 5,148
Interest accrued on
notes receivable, net
of payments............ (203) (203)
Income tax benefit
related to stock
options exercised...... 5,453 5,453
Grant of stock options.. 235 235
Issuance of treasury
stock to repay debt.... 807 6 6
Net income.............. 55,027 55,027
---------- --- -------- ------- -------- --------
Balance at December 31,
1997................... 77,991,595 $78 $358,492 $(3,030) $ 73,290 $428,830
========== === ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR SEVEN MONTHS ENDED
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............ $ 14,903 $ 8,537 $ 12,166 $ 20,745 $ 26,707 $ 55,027
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 12,343 7,098 10,808 18,603 32,445 54,603
Extraordinary loss.... 4,258 4,258 12,623
Non-cash interest..... 6,947 3,274 5,228 8,901 4,396
Other non-cash merger
related expenses.....
Compensation expense
from stock option
exercise.............
Deferred income
taxes................ (1,213) (481) (2,219) (2,233) (1,258) (5,131)
Provision for doubtful
accounts............. 5,492 3,486 4,552 7,580 15,737 20,525
Change in accounting
principle, net of
tax..................
Loss (gain) on
disposition of
property and
equipment............ (37) (3) (144) (146) (20) 76
Equity in (earnings)
losses from
affiliate............ (96) (51) (267) (267) 16 (40)
Minority interests in
income of
consolidated
subsidiaries......... 1,593 878 1,784 2,544 3,578 4,502
Changes in operating
assets and
liabilities, net of
effect of
acquisitions:
Accounts receivable.. (28,612) (16,919) (26,608) (40,247) (52,909) (109,811)
Inventories.......... (383) (804) (968) (267) (3,030) (1,843)
Prepaid expenses and
other current
assets.............. (1,363) (398) (277) (432) (8,805) (143)
Other long-term
assets.............. (300) (300) (9,166)
Accounts payable..... 1,618 2,842 (560) (3,194) 2,147 (992)
Employee compensation
and benefits........ 3,473 1,453 (354) 1,216 6,043 8,539
Other accrued
liabilities......... 5,115 1,262 3,757 6,867 (207) 2,791
Income taxes
payable............. (475) (483) 2,323 816 (6,315) 2,329
Other long-term
liabilities......... 107 1,214 916 (222) 13
-------- -------- -------- -------- --------- ---------
Net cash provided by
operating
activities......... 19,305 9,798 14,393 25,360 30,926 21,279
-------- -------- -------- -------- --------- ---------
Cash flow from
investing activities:
Purchases of property
and equipment........ (8,935) (4,912) (8,896) (14,713) (41,740) (62,033)
Additions to
intangible assets.... (1,573) (734) (1,520) (3,086) (10,775) (35,224)
Cash paid for
acquisitions, net of
cash acquired........ (72,799) (29,532) (35,450) (56,911) (179,002) (455,090)
Purchase of
investments.......... (38,500) (26,223) (55,311)
Sale of investments... 38,589 38,589 2,662 14,109 41,202
Investment in
affiliate............ (972) (972) (46) (2,935)
Issuance of long-term
notes receivable..... (1,379) (1,379) (540) (12,502)
Proceeds from
disposition of
property and
equipment............ 62 28 244 495 236 365
-------- -------- -------- -------- --------- ---------
Net cash used in
investing
activities......... (83,156) (22,784) (47,973) (73,904) (273,069) (526,217)
Cash flows from
financing activities:
Advances from Tenet... 2,874 3,499
Proceeds from long-
term borrowings...... 18,539 14,987 258 258 107 4,511
Principal payments on
long-term
obligations.......... (14,414) (61) (2,094) (9,044) (8,649) (26,269)
Proceeds from
convertible notes.... 121,250
Cash dividends paid to
Tenet................ (75,500) (75,500)
Payment of dividend
distribution......... (1,473) (1,023) (417) (1,499) (659)
Net proceeds from debt
offering............. 66,841 66,140
Cash paid to retire
bonds................ (31,912) (31,912) (68,499)
Proceeds from bank
credit facility...... 13,253 31,981 50,916 239,835 505,000
Payment of bank credit
facility............. (4,000) (31,625) (31,625) (188,510)
Net proceeds from
issuance of Common
Stock................ 62,159 11,122 99,947 100,267 131,517 3,792
Income tax benefit
related to stock
options exercised.... 1,792 1,792 938 5,453
Cash received on notes
receivable from
stockholders......... 175 175 170 35
Distributions to
minority interests... (1,708) (723) (1,102) (2,087) (2,442) (2,768)
-------- -------- -------- -------- --------- ---------
Net cash provided by
financing
activities......... 66,571 18,441 67,003 77,241 225,058 489,754
-------- -------- -------- -------- --------- ---------
Net increase (decrease)
in cash............... 2,720 5,455 33,423 28,697 (17,085) (15,184)
Cash and cash
equivalents at
beginning of period... 2,109 4,260 4,989 9,715 38,412 21,327
-------- -------- -------- -------- --------- ---------
Cash and cash
equivalents at end of
period................ $ 4,829 $ 9,715 $ 38,412 $ 38,412 $ 21,327 $ 6,143
======== ======== ======== ======== ========= =========
Supplemental cash flow information (Note 15)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 and also
in Argentina, 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 acquired Renal Treatment Centers, Inc.
("RTC"), with headquarters in Berwyn, Pennsylvania (the "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. In conjunction with this transaction, the
Board and the Company's stockholders authorized an additional 140,000,000
shares of Common Stock. The RTC merger transaction has been accounted for as a
pooling of interests and as such, the consolidated financial statements have
been restated to include RTC for all periods presented. RTC has always used a
December 31 year end while the Company used a May 31 year end until May 31,
1995 after which it changed to a December 31 fiscal year end. Accordingly, the
restated consolidated financial statements combine the Company's balance sheet
as of December 31, 1997 and 1996 and the results of operations and cash flows
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 1996 and the results of operations
and cash flows 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. Net revenue and net income of RTC for the six month period ended
June 30, 1995 was $77,816,000 and $6,377,000, respectively, with the net income
reflected as an adjustment to retained earnings effective July 1, 1995. See
Note 17.
There were no transactions between the Company and RTC prior to the
combination and immaterial adjustments were recorded to conform RTC's
accounting policies. Certain reclassifications were made to the RTC financial
statements to conform to the Company's presentations.
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.
In February 1996, RTC acquired, through two separate transactions,
Intercontinental Medical Services, Inc. ("IMS") and Midwest Dialysis Unit and
its affiliates (collectively "MDU"). Each of the transactions was separately
accounted for as a pooling of interests. The consolidated financial statements
include the results of IMS and MDU as of January 1, 1996. Prior year financial
statements have not been restated to reflect these transactions because the
effect of such transactions is not material.
F-7
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1996, RTC acquired Panama City Artificial Kidney Center, Inc. and
North Florida Artificial Kidney Center, Inc. (collectively "the Group"). In
July 1995, RTC acquired Wichita Dialysis Center, P.A., Southeast Kansas
Dialysis Center, P.A., Garden City Dialysis Center, P.A. and Wichita Dialysis
Center, East, P.A. (the "Wichita Companies"). In March 1995, RTC acquired
Healthcare Corporation and its affiliates (collectively, "HCC"). These
transactions were accounted for as a pooling of interests. Accordingly, the
consolidated financial statements have been prepared to give retroactive effect
to the mergers.
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 72%, 68%, 64% and 61%, respectively, of its dialysis revenues
from Medicare and Medicaid programs. Accounts receivable from Medicare and
Medicaid amounted to $119,611,000 and $205,564,000 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) 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 healthcare 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
F-8
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Investments--Investments were comprised of investments in corporate bonds and
government and government agency securities. Investment income is recognized
when earned and realized gains and losses are recognized on a trade date basis,
computed based on original cost. The investments are stated at cost, which
approximates fair market value. All investments were managed by one financial
institution. Subsequent to December 31, 1996, all investments were liquidated,
resulting in an immaterial realized gain.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market and consist principally of drugs and dialysis related supplies.
Property and equipment--Property and equipment are stated at cost.
Maintenance and repairs are charged to expense as incurred. Depreciation and
amortization expense are computed using the straight-line method over the
useful lives of the assets estimated as follows: buildings, 20 to 40 years;
leaseholds and improvements, over the shorter of their estimated useful life or
the lease term; and equipment, 3 to 15 years.
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.
Intangible assets--Business acquisition costs allocated to patient lists are
amortized generally over five to eight years using the straight-line method.
Business acquisition costs allocated to covenants not to compete are amortized
over the terms of the agreements, typically three to eleven 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. (See
Note 18.)
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.
F-9
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the 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 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.
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--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 item, 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. The effect of
the Company's $125,000,000 convertible debt issued during 1996 is included only
if antidilutive. For the years ended December 31, 1996 and 1997, the effect of
the convertible debt is antidilutive and as such, is not to be included in the
diluted EPS calculation. 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 as a means of managing its interest rate exposure (See Notes 8
and 18). 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
would be expected from non-performance by the counterparty.
Financial instruments--The Company's financial instruments consist primarily
of cash, investments, 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 three credit facilities, of which
F-10
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$590,000,000 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 agreement is 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. The fair value of convertible
subordinated notes was approximately $149,700,000 at December 31, 1997.
Foreign currency translation--The Company's principal operations outside of
the United States are in Argentina. The currency in Argentina floats with the
U.S. dollar, therefore, there are no significant foreign currency translation
adjustments. The Company's operations in Europe were nominal through 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 audited. In the opinion of management, the unaudited consolidated
financial information 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.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Land.................... $ 473,000 $ 1,410,000
Buildings............... 5,428,000 6,463,000
Leaseholds and
improvements........... 40,162,000 78,956,000
Equipment............... 93,194,000 147,824,000
Construction in
progress............... 4,638,000 7,352,000
------------ ------------
143,895,000 242,005,000
Less accumulated
depreciation and
amortization........... (46,051,000) (69,167,000)
------------ ------------
Property and equipment,
net.................... $ 97,844,000 $172,838,000
============ ============
</TABLE>
Depreciation and amortization expense on property and equipment was
$5,315,000, $4,855,000, $13,903,000 and $22,160,000 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-11
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INTANGIBLE ASSETS
A summary of intangible assets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Goodwill......................................... $244,539,000 $624,740,000
Patient lists.................................... 58,119,000 122,463,000
Noncompetition agreements........................ 38,984,000 61,797,000
Deferred debt issuance costs..................... 9,122,000 23,415,000
Other............................................ 6,277,000 18,891,000
------------ ------------
357,041,000 851,306,000
Less accumulated amortization.................... (45,778,000) (77,040,000)
------------ ------------
$311,263,000 $774,266,000
============ ============
</TABLE>
Amortization expense applicable to intangible assets was $7,028,000,
$5,953,000, $18,542,000 and $32,443,000 for the year ended May 31, 1995, the
seven months ended December 31, 1995, and the years ended December 31, 1996 and
1997, respectively.
NOTE 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... $ 6,594,000 $10,886,000
Prepaid income taxes............................... 6,491,000 5,501,000
Prepaid expenses................................... 4,084,000 4,910,000
Deposits........................................... 135,000 203,000
----------- -----------
$17,304,000 $21,500,000
=========== ===========
</TABLE>
NOTE 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.
NOTE 6--OTHER ACCRUED LIABILITIES
Other accrued liabilities comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Customer refunds..................................... $ 6,068,000 $ 5,278,000
Accrued interest..................................... 4,185,000 5,395,000
Other................................................ 2,352,000 5,254,000
----------- -----------
$12,605,000 $15,927,000
=========== ===========
</TABLE>
F-12
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
YEAR ENDED SEVEN MONTHS ENDED 31,
MAY 31, DECEMBER 31, ------------------------
1995 1995 1996 1997
----------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Current
Federal......... $ 7,602,000 $9,546,000 $20,655,000 $35,128,000
State........... 1,438,000 1,462,000 3,562,000 6,430,000
Foreign......... 1,070,000
Deferred
Federal......... (1,002,000) (943,000) (1,151,000) (1,963,000)
State........... (211,000) (134,000) (106,000) (453,000)
----------- ---------- ----------- -----------
$ 7,827,000 $9,931,000 $22,960,000 $40,212,000
=========== ========== =========== ===========
</TABLE>
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....................................... $ 4,860,000 $ 8,635,000
Intangibles, primarily patient lists............ 5,241,000 6,055,000
Property and equipment.......................... 33,000
Accrued vacation................................ 831,000 2,114,000
Deferred compensation........................... 107,000 67,000
Foreign NOL carryforward........................ 944,000
Foreign tax credit carryforward................. 200,000
Other........................................... 14,000 17,000
----------- -----------
Gross deferred tax assets....................... 11,053,000 18,065,000
Depreciation and amortization................... (1,976,000) (2,454,000)
Intangible assets............................... (3,442,000) (6,712,000)
Change in tax accounting method................. (313,000) (17,000)
----------- -----------
Gross deferred tax liabilities................ (5,731,000) (9,183,000)
Valuation allowance........................... (1,144,000)
----------- -----------
Net deferred tax assets....................... $ 5,322,000 $ 7,738,000
=========== ===========
</TABLE>
The valuation allowance relates to deferred tax assets established under SFAS
No. 109 for foreign net operating loss carryforwards of $2.86 million and
foreign tax credit carryforwards of $200,000. These unutilized loss and credit
carryforwards which expire in 2002, will be carried forward to future years for
possible utilization. No benefit of these carryforwards has been recognized on
the financial statements.
F-13
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation between the Company's effective tax rate and the U.S.
federal income tax rate on income is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS YEARS ENDED
YEAR ENDED ENDED DECEMBER 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........................... 4.0 3.8 4.1 4.1
Foreign income taxes............... 0.4
Nondeductible amortization of
intangible assets................. 0.9 1.5 1.1 0.8
Federal and state income tax
benefit from S corporation status
of HCC............................ (4.0) (1.1) (0.3)
Valuation allowance................ 1.2
Other.............................. (0.5) 1.1 0.1 0.7
---- ---- ------ ------
Effective tax rate................. 34.4 40.3 40.0 42.2
Minority interests in
partnerships...................... (2.2) (2.7) (2.3) (1.9)
==== ==== ====== ======
Effective tax rate before minority
interests......................... 32.2% 37.6% 37.7% 40.3%
==== ==== ====== ======
</TABLE>
NOTE 8--LONG-TERM DEBT
Long-term debt comprises:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Credit Facilities.............................. $ 85,000,000 $590,000,000
Convertible Subordinated Notes, 5 5/8%, due
2006.......................................... 125,000,000 125,000,000
Acquisition obligations........................ 29,091,000 26,651,000
Capital lease obligations(Note 9).............. 6,716,000 5,180,000
Other.......................................... 1,752,000 4,761,000
------------ ------------
247,559,000 751,592,000
Less current portion........................... (14,433,000) (27,810,000)
------------ ------------
$233,126,000 $723,782,000
============ ============
</TABLE>
Maturities of long-term debt for the years ending December 31 are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 27,810,000
1999............................................................ 3,180,000
2000............................................................ 45,775,000
2001............................................................ 60,507,000
2002............................................................ 60,305,000
Thereafter...................................................... 554,015,000
</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 "1994 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 1994
Notes. The 1994 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%.
F-14
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 7, 1995, the Company redeemed 35% of the accreted value of the
1994 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 1994
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--At December 31, 1997 and 1996, the Company had outstanding
borrowings under its revolving credit facilities of $353,000,000 and
$85,000,000, respectively. (See Note 18).
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 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.
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., have guaranteed the Company's
obligations under the credit facilities on a senior basis.
RTC also had a Credit Agreement which provided for a $350,000,000 revolving
credit/term facility available to fund acquisitions and general working capital
requirements, of which $237,000,000 and no amounts were outstanding as of
December 31, 1997 and December 31, 1996, respectively. Borrowings under the RTC
Credit Agreement bear interest at either (i) the agent bank's base rate payable
on a quarterly basis or (ii) a one-, two-, three-, or six-month period Libor
rate plus .50% to 1.50%, depending on RTC's ratio of consolidated debt to
annualized cash flow, payable at maturity, or, in the case of a six-month
period rate, at three months and maturity. The weighted average interest rate
of all loans outstanding at December 31, 1997 was 6.9%. The loans are
collateralized by all stock of RTC's subsidiaries and the assignment of all
intercompany notes. The RTC Credit Agreement was terminated and repaid with
borrowings under the TRCH Credit Facilities on February 27, 1998.
F-15
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Convertible Subordinated Notes--In June 1996, RTC issued $125,000,000 of 5
5/8% Convertible Subordinated Notes due 2006 (the "RTC Notes"). The RTC Notes
are convertible, at the option of the holder, at any time after August 12, 1996
through maturity, unless previously redeemed or repurchased, into Common Stock
at a conversion price of $25.62 principal amount per share, subject to certain
adjustments. At any time on or after July 17, 1999, all or any part of the RTC
Notes will be redeemable at the Company's option on at least 15 and not more
than 60 days notice as a whole or, from time to time, in part at redemption
prices ranging from 103.94% to 100% of the principal amount thereof, depending
on the year of redemption, together with accrued interest to, but excluding,
the date fixed for redemption.
The 5 5/8% subordinated convertible notes are issued by the Company's wholly-
owned subsidiary, Renal Treatment Centers, Inc. and is guaranteed by the
Company. The following is summarized financial information of RTC:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents............................ $ 1,446,000 $ 743,000
Accounts receivable, net............................. 65,198,000 95,927,000
Other current assets................................. 54,273,000 19,484,000
------------ ------------
Total current assets............................... 120,917,000 116,154,000
Property and equipment, net.......................... 39,578,000 72,777,000
Intangible assets, net............................... 130,646,000 384,529,000
Other assets......................................... 2,807,000 12,034,000
------------ ------------
Total assets....................................... $293,948,000 $585,494,000
============ ============
Current liabilities.................................. $ 35,240,000 $ 62,673,000
Long-term debt....................................... 130,574,000 367,219,000
Other long-term liabilities.......................... -- 444,000
Stockholder's equity................................. 128,134,000 155,158,000
------------ ------------
$293,948,000 $585,494,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net operating revenues.................. $164,568,000 $225,077,000 $322,792,000
Total operating expenses................ 139,748,000 203,402,000 277,869,000
------------ ------------ ------------
Operating income........................ 24,820,000 21,675,000 44,923,000
Interest expense, net................... 2,557,000 4,384,000 11,802,000
------------ ------------ ------------
Income (loss) before income taxes....... 22,263,000 17,291,000 33,121,000
Income taxes............................ 7,632,000 6,609,000 15,071,000
------------ ------------ ------------
Net income.............................. $ 14,631,000 $ 10,682,000 $ 18,050,000
============ ============ ============
</TABLE>
Acquisition Obligations--In 1994, pursuant to a business acquisition, RTC
entered into an agreement to pay $7,364,100 in annual installments commencing
June 1995 through June 1998. Interest on the unpaid principal amount of the
note accrued at an annual rate of 6.50%, payable in arrears each June 1 from
1995 from 1998. The note allowed the seller to convert the principal amount of
the note into that number of shares of Common Stock of RTC based upon the
average daily closing sale price of RTC stock during December 1994. During
1997, the note payable was paid in full through the issuance of Common Stock.
F-16
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1996, pursuant to a business acquisition, RTC entered into an agreement to
pay a total of $8,050,000 in one installment in January 1997. During 1997,
pursuant to several business acquisitions, RTC entered into several other
agreements to pay the various Sellers a total of $24,468,000 in one installment
in January 1998.
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 December 31, 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%.
NOTE 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........................................................ $ 28,282,000
1999........................................................ 25,461,000
2000........................................................ 23,350,000
2001........................................................ 20,740,000
2002........................................................ 19,588,000
Thereafter.................................................. 74,233,000
------------
Total minimum lease payments................................ $191,654,000
============
</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 $7,425,000, $5,851,000, $15,901,000 and $24,589,000,
respectively.
F-17
<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......................................................... $2,473,000
1999......................................................... 2,091,000
2000......................................................... 801,000
2001......................................................... 245,000
2002......................................................... 28,000
Thereafter................................................... 176,000
----------
5,814,000
Less--Portion representing interest.......................... 634,000
----------
Total capital lease obligation, including current portion of
$782,000.................................................... $5,180,000
==========
</TABLE>
The net book value of fixed assets under capital lease was $5,932,000 and
$5,649,000 at December 31, 1996 and 1997, respectively. Capital lease
obligations are included in long-term debt (Note 8).
NOTE 10--STOCKHOLDERS' EQUITY
Public offerings of Common Stock--On March 1, 1994, RTC completed a public
offering whereby it issued 6,393,315 shares of Common Stock. The stock offering
resulted in net proceeds to RTC in the amount of $51,101,000 after the
deduction of certain expenses.
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 $.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 debt 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 is it intending 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 $.001 par value preferred stock, and
F-18
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approved 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.
Dividend distributions paid during 1995 and 1996 were to the former
shareholders of entities acquired by RTC in transactions accounted for as
poolings of interests as described in Note 1.
On September 30, 1997 the Company announced a Common Stock dividend to all
shareholders of record as of October 7, 1997, to be paid on October 20, 1997.
Each shareholder 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 DECEMBER 31, YEAR ENDED DECEMBER 31,
MAY 31, ------------------------ -------------------------------------
1995 1994 1995 1995 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Income:
As reported............ $14,903,000 $8,537,000 $12,166,000 $20,745,000 $26,707,000 $55,027,000
=========== ========== =========== =========== =========== ===========
Net Income--assuming
dilution:
As reported............ 14,903,000 8,537,000 12,166,000 20,745,000 26,707,000 55,027,000
Add back interest on
RTC earnout note, tax
effected.............. -- -- 136,000 283,000 233,000 34,000
----------- ---------- ----------- ----------- ----------- -----------
$14,903,000 $8,537,000 $12,302,000 $21,028,000 $26,940,000 $55,061,000
=========== ========== =========== =========== =========== ===========
Applicable common
shares:
Average outstanding
during the period..... 45,376,000 42,812,000 57,237,000 54,058,000 74,172,000 77,649,000
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..... 45,301,000 42,682,000 57,109,000 53,936,000 74,042,000 77,524,000
Outstanding stock
options (based on the
treasury stock
method)............... 2,205,000 2,197,000 2,728,000 2,897,000 2,411,000 2,288,000
Dilutive effect of RTC
earnout note.......... -- -- 856,000 911,000 772,000 163,000
----------- ---------- ----------- ----------- ----------- -----------
Adjusted weighted
average number of
common and common
share equivalent
shares outstanding.... 47,506,000 44,879,000 60,693,000 57,744,000 77,225,000 79,975,000
=========== ========== =========== =========== =========== ===========
Earnings per common
share.................. $ 0.33 $ 0.20 $ 0.22 $ 0.38 $ 0.36 $ 0.71
Earnings per common
share--assuming
dilution............... $ 0.31 $ 0.19 $ 0.20 $ 0.36 $ 0.35 $ 0.69
</TABLE>
F-19
<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
have been awarded to certain employees under the 1994 Stock Plan, the majority
of which were granted in connection with the change in control. All such rights
were exercised and the Company received notes for the uncollected portion of
the purchase proceeds. The notes bear interest at the lesser of The Bank of New
York's prime rate or 8%, are full recourse to the employees, and are secured by
the employees' stock. The notes are repayable four years from the date of
issuance, subject to certain prepayment requirements. At December 31, 1995,
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 of the options issued to
purchase Common Stock were issued to the Company's President. These options
originally vested 50% over four years and 50% in the same manner as other
options granted under the 1994 Stock Plan. In September 1995, the Board of
Directors and stockholders agreed to accelerate the 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-20
<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) .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
----------------------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE EXERCISE
OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS PRICE
RANGE OF EXERCISE PRICES --------- ---------------- -------------- ------- ----------------
<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 0
--------- --------- ------ ------- ------
5,039,838 8.5 years $16.01 797,474 $ 3.73
========= ========= ====== ======= ======
</TABLE>
RTC Stock Plan. In September 1990, RTC established a stock plan, which
provided for awards of incentive and nonqualified stock options to certain
directors, officers, employees and other individuals. In 1995 and 1996, the
stock plan was amended to increase the number of RTC common shares available
for grant to 3,253,395 and 4,321,395 respectively. In addition, in 1996, RTC
established an option plan for outside directors pursuant to which nonqualified
stock options to purchase up to 80,100 shares of RTC Common Stock were reserved
for issuance.
F-21
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options granted generally vest from three to five years and an option's
maximum term is ten years, subject to certain restrictions. Incentive stock
options were granted at an exercise price not less than the fair market value
of RTC's Common Stock on the date of grant. Nonqualified stock options were
permitted to be granted as low as 50% of market value, subject to certain floor
restrictions. Accordingly, compensation expense for the difference between the
fair market value and the exercise price for nonqualified stock options is
recorded over the vesting period of such options.
In May 1995, RTC granted 559,557 incentive stock options to certain
directors, officers and employees of RTC. These options were granted at an
exercise price equal to the fair market value of RTC's Common Stock on the date
of the grant. These options vest over three years. Certain options totaling
407,175 vest upon the earlier of attainment of predetermined earnings per share
targets or nine years.
In March 1996, RTC granted 821,495 incentive stock options to certain
directors, officers and employees of RTC. These options were granted at an
exercise price equal to the fair market value of RTC's Common Stock on the date
of the grant and vest over four years. Certain options aggregating 231,398 vest
upon the earlier of attainment of predetermined earnings per share targets or
nine years.
In December 1996, RTC granted 133,500 incentive stock options to an officer
of the Company. These options were granted at an exercise price equal to the
fair market value of RTC's Common Stock on the date of the grant and were fully
vested on the grant date.
Also in December 1996, RTC granted 40,050 non-qualified stock options in
connection with the release of RTC from certain obligations. The options were
granted at an exercise price equal to the fair market value of RTC's Common
Stock on the date of grant and were fully vested as of December 31, 1997.
During 1997, RTC granted 1,182,543 incentive stock options to certain
directors, officers and employees. These options were granted at an exercise
price equal to the fair market value of RTC's Common Stock on the dates of the
grants and vest in two to five years.
In 1997 RTC granted 26,700 options to acquisition consultants for covenants
not to compete. These options were granted at a price equal to the fair market
values of RTC's Common Stock on the date of the grant and were valued at
$235,000.
Upon consummation of the Merger, all outstanding options were converted to
The Total Renal Care Holdings Inc. Special Purpose Plan ("Special Purpose
Plan") options. The Special Purpose Plan provides for awards of incentive and
nonqualified stock options in exchange for outstanding RTC stock plan options.
The Special Purpose Plan options have the same provisions and terms as the RTC
stock plan, including acceleration provisions upon certain sale of assets,
mergers and consolidations. On the Merger date, there was a conversion of
2,156,426 of the Company's options. Further, options for 1,305,738 shares
became fully vested due to change in control accelerated vesting provisions
which were contained in the original grants. Options for 1,662,356 shares were
exercised subsequent to the Merger date. The Stock Plan Committee has the
option of accelerating the remaining options upon certain sale of assets,
mergers and consolidations.
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
the six months ended December 31, 1995, the year ended December 31, 1996 and
the year ended December 31, 1997, respectively: dividend yield of 0 percent for
all periods; weighted average expected volatility of 29.3%, 29.3% and 43%; risk
free interest rates of 6.39%, 6.18% and 6.55%; and expected lives of 6.00,
5.63, and 4.29 years.
F-22
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the RTC Stock Plan as of and for the six months
ended December 31, 1995, and the years ended December 31, 1996 and 1997, is
presented below:
<TABLE>
<CAPTION>
SIX 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.............. 1,985,756 $ 6.62 1,658,601 $ 7.33 2,293,483 $11.09
Granted................. 4,197 12.55 997,376 16.50 1,182,543 16.84
Exercised............... (326,012) 3.08 (351,814) 8.73 (171,830) 7.60
Forfeited............... (5,340) 8.43 (10,680) 9.09 (19,004) 13.09
--------- ------ --------- ------ --------- ------
Outstanding at end of
year................... 1,658,601 $ 7.33 2,293,483 $11.09 3,285,192 $13.33
========= ====== ========= ====== ========= ======
Options exercisable at
year end............... 995,018 966,903 1,785,169
========= ========= =========
Weighted-average fair
value of options
granted during the
year................... $ 4.90 $ 7.35 $ 9.70
========= ========= =========
</TABLE>
The following table summarizes information about RTC fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
RANGE OF EXERCISE PRICES --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.75-$ 7.49........... 703,307 4.87 $ 6.49 614,100 $ 6.58
$ 7.50-$11.24........... 516,430 7.61 8.58 274,262 8.58
$11.25-$14.99........... 4,197 7.89 12.55 4,197 12.55
$15.00-$18.74........... 1,995,843 9.09 16.59 868,580 16.70
$18.75-$22.50........... 65,415 9.33 20.13 24,030 20.37
--------- ---- ------ --------- ------
3,285,192 7.96 $13.33 1,785,169 $12.01
========= ==== ====== ========= ======
</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 Plan. 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 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
$411,000, $1,790,000 and $1,120,307 at December 31, 1995, 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
F-23
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Opinion
No. 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
ENDED YEAR ENDED YEAR ENDED
DEC. 31, DECEMBER DECEMBER
1995 31, 1996 31, 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income before extraordinary item......... $14,038,000 $28,830,000 $43,282,000
Extraordinary loss related to early
extinguishment of debt, net of tax...... 2,555,000 7,700,000 0
----------- ----------- -----------
Net income............................. $11,483,000 $21,130,000 $43,282,000
=========== =========== ===========
Earnings per common share:
Income before extraordinary item....... $ 0.25 $ 0.39 $ 0.56
Extraordinary loss..................... (0.05) (0.10) 0
----------- ----------- -----------
Net income............................. $ 0.20 $ 0.29 $ 0.56
=========== =========== ===========
Weighted average number of common shares
and equivalents outstanding............. 56,465,000 74,042,000 77,524,000
=========== =========== ===========
Earnings per common share--assuming
dilution:
Income before extraordinary item....... $ 0.20 $ 0.25 $ 0.55
Extraordinary loss..................... (0.05) (0.09) 0
----------- ----------- -----------
Net income............................... $ 0.15 $ 0.16 $ 0.55
=========== =========== ===========
Weighted average number of common shares
and equivalents outstanding--assuming
dilution................................ 58,220,000 83,477,000 78,982,000
=========== =========== ===========
</TABLE>
STOCK ISSUED TO EMPLOYEES OUTSIDE OF PLANS
In connection with the change in control in August 1994, 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.
F-24
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 public debt offering of units,
comprising 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. Effective with the August 1997 public offering of
Common Stock, DLJMB and it's affiliates are no longer considered a related
party.
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 (Note 9)
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.
RTC has a defined contribution savings plan covering substantially all of
their employees. RTC's contributions under the plan were approximately
$231,002, $462,004, $548,471, and $1,069,283 for the six months ended December
31, 1995 and for the years ended December 31, 1995, 1996 and 1997,
respectively. Effective July 1, 1998, the plan will be terminated and merged
into the Company's plan.
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. (See Note 18).
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.
F-25
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. MERGERS AND ACQUISITIONS
MERGERS
During the fiscal years 1996 and 1995, RTC completed the following five
mergers. There were no mergers in 1994 and 1997.
MERGER WITH GROUP
On July 23, 1996, RTC acquired the Group. The two dialysis facilities
acquired are located in Florida and serviced a total of approximately 185
patients as of the acquisition date. The transaction was accounted for under
the pooling of interest method of accounting. In the transaction, RTC issued
482,377 shares of its Common Stock in exchange for all of the outstanding stock
of the Group.
MERGER WITH MDU
On February 29, 1996, RTC acquired MDU. The 11 dialysis facilities acquired
are located in Oklahoma and serviced approximately 317 patients as of the
acquisition date. The transaction was accounted for under the pooling of
interests method of accounting. In the transaction, RTC issued 767,168 shares
of its Common Stock in exchange for all of the outstanding stock of MDU.
MERGER WITH IMS
On February 20, 1996, RTC acquired IMS. The four dialysis facilities acquired
are located in Hawaii and served a total of approximately 444 patients as of
the acquisition date. The transaction was accounted for under the pooling of
interests method of accounting. In the transaction, RTC issued 1,047,464 shares
of its Common Stock in exchange for all of the outstanding stock of IMS.
MERGER WITH THE WICHITA COMPANIES
On August 1, 1995, RTC acquired Wichita Dialysis Center, P.A, Southeast
Kansas Dialysis Center, P.A., Garden City Dialysis Center, P.A. and Wichita
Dialysis Center, East, P.A. (the "Wichita Companies"). All of the facilities
acquired are located in Kansas and serviced approximately 355 patients as of
the acquisition date. The transaction was accounted for under the pooling of
interest method of accounting. In the transaction, RTC issued 1,558,920 shares
of its Common Stock in exchange for all of the outstanding stock of the Wichita
Companies.
MERGER WITH HCC
On March 6, 1995, RTC completed its acquisition of Healthcare Corporation and
its affiliates (collectively, "HCC"). The 13 facilities acquired from HCC are
located in Missouri, Illinois, North Carolina, Florida and Washington, D.C. and
serviced approximately 720 patients as of the acquisition date. The transaction
was accounted for under the pooling of interests method of accounting. In the
transaction, RTC issued 2,292,222 shares of its Common Stock in exchange for
all of the outstanding stock of HCC.
F-26
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The consolidated financial statements give retroactive effect to the mergers
with the Group, the Wichita Companies and HCC and include the Group, the
Wichita Companies, and HCC for all periods presented. The consolidated
financial statements include the operations of IMS and MDU as of January 1,
1996. The following is a summary of the separate and combined results of
operations for periods prior to the mergers (dollars in thousands):
<TABLE>
<CAPTION>
POOLING RTC
RTC COMPANIES* COMBINED
-------- ---------- --------
FOR THE YEAR ENDED DECEMBER 31, 1996:
<S> <C> <C> <C>
Net patient revenue............................ $217,529 $ 7,548 $225,077
Income from operations......................... 20,495 1,180 21,675
Net income..................................... 9,985 697 10,682
FOR THE YEAR ENDED DECEMBER 31, 1995:
Net patient revenue............................ $150,467 $14,101 $164,568
Income from operations......................... 23,319 1,501 24,820
Net income..................................... 13,239 1,392 14,631
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995:
Net patient revenue............................ $ 83,685 $ 3,067 $ 86,752
Income from operations......................... 14,289 512 14,801
Net income..................................... 7,709 545 8,254
</TABLE>
- ---------------------
* Includes pooling transactions only for period prior to acquisition. Activity
subsequent to acquisition dates is included in RTC.
ACQUISITIONS
Beginning in August 1994, the Company implemented an acquisition strategy
which through the year ended December 31, 1997 has resulted in the acquisition
of 231 facilities providing services to ESRD patients, more than 180 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 forty-six 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
for all acquisitions that were accounted for as purchases. (See Note 18).
<TABLE>
<CAPTION>
SEVEN
MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
MAY 31, DECEMBER -------------------------
1995 31, 1995 1996 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Number of facilities
acquired................... 24 16 67 119
Number of common shares
issued..................... 729,687 1,574,616 102,645 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....... $ 2,259,000 $ 8,403,000 $ 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
(Note 8)................... 15,886,000
Cash paid................... 73,330,000 35,450,000 179,002,000 455,090,000
----------- ----------- ------------ ------------
Aggregate purchase price.... $79,579,000 $45,147,000 $196,718,000 $455,363,000
=========== =========== ============ ============
</TABLE>
F-27
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The assets and liabilities of the acquired entities in the preceding table
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
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
MAY 31, DECEMBER --------------------------
1995 31, 1995 1996 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Identified intangibles.... $16,277,000 $10,321,000 $ 34,682,000 $ 87,498,000
Goodwill.................. 57,520,000 32,144,000 135,456,000 366,121,000
Tangible assets........... 9,973,000 7,414,000 44,265,000 47,053,000
Liabilities assumed....... (4,191,000) (4,732,000) (17,685,000) (45,309,000)
----------- ----------- ------------ ------------
Total purchase price.... $79,579,000 $45,147,000 $196,718,000 $455,363,000
=========== =========== ============ ============
</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)
<S> <C> <C>
Net operating revenues............................ $794,235,000 $930,960,000
Net income before extraordinary items............. 50,253,000 70,539,000
Pro forma net income per share before
extraordinary items.............................. 0.68 0.91
Pro forma net income per share before
extraordinary items,
assuming dilution................................ 0.65 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.
F-28
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
The table below provides supplemental cash flow information:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED YEAR ENDED
YEAR ENDED ENDED DECEMBER DECEMBER
MAY 31, DECEMBER 31, 31, 31,
1995 1995 1996 1997
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Cash paid for:
Income taxes................. $8,970,000 $3,599,000 $30,069,000 $37,402,000
Interest..................... 1,346,000 1,919,000 5,730,000 25,039,000
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................ 6,249,000 5,335,000 2,810,000 273,000
Fixed assets acquired under
capital lease obligations... 542,000 2,021,000 3,670,000 829,000
Contribution to
partnerships................ 1,111,000 943,000 2,318,000
Issuance of Common Stock in
connection with earn out
note........................ 7,364,000 523,000 1,474,000 5,148,000
Issuance of Common Stock in
connection with IMS and MDU
mergers..................... 3,204,000
Grant of stock options in
connection with covenant not
to compete.................. 235,000
</TABLE>
NOTE 16--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary unaudited quarterly financial data for the years ended December 31,
1996 and 1997 is as follows (in thousands, except per share amounts).
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPT. DEC. 31, MARCH JUNE 30, SEPT. DEC. 31,
1996 1996 30, 1996 1996 31, 1997 1997 30, 1997 1997
--------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $98,493 $117,719 $133,707 $148,105 $157,937 $179,715 $197,749 $225,596
Operating income........ 12,512 17,547 18,437 22,008 24,596 28,694 33,287 38,203
Income before
extraordinary item..... 5,655 9,002 8,731 11,019 11,788 13,470 14,632 15,137
Net income.............. 5,655 9,002 1,031 11,019 11,788 13,470 14,632 15,137
Earnings per common
share:
Income before
extraordinary item per
share................. 0.08 0.12 0.12 0.14 0.15 0.17 0.19 0.19
Extraordinary loss..... 0.00 0.00 0.11 0.00 0.00 0.00 0.00 0.00
Net income per share... 0.08 0.12 0.01 0.14 0.15 0.17 0.19 0.19
Earnings per common
share--assuming
dilution:
Income before
extraordinary item per
share................. 0.08 0.11 0.11 0.14 0.15 0.17 0.18 0.19
Extraordinary loss..... 0.00 0.00 0.10 0.00 0.00 0.00 0.00 0.00
Net income per share... 0.08 0.11 0.01 0.14 0.15 0.17 0.18 0.19
</TABLE>
F-29
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--FEBRUARY 27, 1998 MERGER
As described in Note 1, on February 27, 1998 the Company acquired Renal
Treatment Centers, Inc. ("RTC") in a transaction accounted for as a pooling of
interests. The results of operations for TRCH and the combined amounts
presented in the consolidated financial statements follow:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
MAY 31, DECEMBER 31, DECEMBER 31, DECEMBER 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 86,752,000 225,077,000 322,792,000
------------ ------------ ------------ ------------
$214,425,000 $176,463,000 $498,024,000 $760,997,000
============ ============ ============ ============
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 10,682,000 18,050,000
------------ ------------ ------------ ------------
$ 14,903,000 $ 14,721,000 $ 34,407,000 $ 55,027,000
============ ============ ============ ============
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 10,682,000 18,050,000
------------ ------------ ------------ ------------
$ 14,903,000 $ 12,166,000 $ 26,707,000 $ 55,027,000
============ ============ ============ ============
</TABLE>
In connection with the Merger, fees and expenses incurred or anticipated
which are relative to the Merger and to the integration of the combined
companies will be expensed as required under the pooling of interests
accounting method. Such fees and expenses amounted to $92,835,000 in the first
quarter of 1998. The charge includes financial advisory, legal, accounting and
other direct transaction costs, payments under severance and employment
agreements and other costs associated with certain compensation plans and costs
to combine the two operations. Costs to combine operations include the
impairment of certain systems and equipment, elimination of duplicate
departments and facilities, and other costs associated with planning and
executing the merger of operations. Included in other long term assets at
December 31, 1997 are $8,247,000 of deferred merger expenses.
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
As a result of the Merger, the RTC Revolving Credit Agreement ("RTC Credit
Agreement") was terminated and the outstanding balance of approximately
$297,228,000 was paid off through additional borrowings under the Company's
Credit Facilities. The remaining net unamortized deferred financing costs in
the amount of $4,392,000, less tax of $1,580,000, related to the RTC Credit
Agreement were recognized as an extraordinary loss in the first quarter of
1998.
In April 1998, Statement of Position No. 98-5, Reporting on the Costs of
Start-Up Activities ("SOP 98-5"), was issued and was adopted by the Company in
the first quarter of 1998 (effective January 1, 1998). SOP 98-5 requires that
pre-opening and organizational costs, incurred in conjunction with facility
pre-opening activities, which previously had been treated as deferred costs and
amortized over five years, should be expensed as incurred. As a result of the
adoption of SOP 98-5, all existing unamortized pre-opening, development and
organizational costs have been recognized as the cumulative effect of a change
in accounting principle in the consolidated statement of income for the six
months ended June 30, 1998.
F-30
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 30, 1998, the Company replaced its existing $1,050,000,000 credit
facilities with an aggregate of $1,350,000,000 in two senior bank facilities
("Senior Credit Facilities"). The Senior Credit Facilities consist of seven-
year $950,000,000 revolving senior credit facility and a ten-year $400,000,000
senior term facility. The terms and rates are comparable to those in effect
with the previous credit facilities and allow for an expansion of the leverage
ratio as well as a waiver for cash costs associated with the Merger. As a
result of this refinancing, remaining net deferred financing costs in the
amount of approximately $16,019,000, less tax of $6,087,000 was recognized as
an extraordinary loss in the second quarter of 1998.
In conjunction with the refinancing of the existing credit facilities the
Company's two existing forward interest rate swap agreements with notional
amounts of $100,000,000 and $200,000,000 were cancelled in April 1998. The loss
associated with the early cancellation of those swaps was approximately
$9,823,000. During the quarter ended June 30, 1998, the Company entered into
forward interest rate swap agreements, with a combined notional amount of
$800,000,000. The lengths of the agreements are between three and ten years
with cancellation clauses at the swap holders' option from one to seven years.
The underlying blended interest rate is fixed at approximately 5.65% plus an
applicable margin based upon the Company's current leverage ratio. Currently,
the effective interest rate for these swaps is 7.15%.
During the quarter ended March 31, 1998, the Company purchased nine centers
and a pharmacy operation. Total cash consideration for these transactions was
$51 million. During the quarter ended June 30, 1998, the Company purchased 25
centers and acquired additional ownership interest in certain of the Company's
partnerships. Total cash consideration for these transactions was $166 million.
These transactions were accounted for under the purchase method. The cost of
these acquisitions will be allocated primarily to intangible assets such as
patient charts, noncompete agreements, goodwill and capital equipment. The
results of operations on a pro forma basis as though the above acquisition had
been combined with the Company at the beginning of each period presented for
the six months ended June 30, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Pro forma net operating revenues................ $566,279,000 $383,948,000
Pro forma net (loss) income before extraordinary
item and cumulative effect of change in
accounting principle........................... (32,065,000) 28,002,000
Pro forma net (loss) income..................... $(51,705,000) $ 28,002,000
Pro forma (loss) earnings per share before
extraordinary item and Cumulative effect of
change in accounting principle:
Basic......................................... $ (0.40) $ 0.36
Assuming dilution............................. $ (0.40) $ 0.35
</TABLE>
Subsequent to June 30, 1998, the Company completed acquisitions or signed
definitive agreements or entered into agreements in principle to acquire 46
dialysis facilities for consideration of approximately $175 million, which has
been or will primarily be funded by additional borrowings under the Company's
Senior Credit Facilities.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in the current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. Management
of the Company anticipates that, due to its limited use of derivative
instruments, the adoption of FAS 133 will not have a significant effect on the
Company's results of operations or its financial position.
F-31
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's Florida-based laboratory subsidiary is the subject of a third-
party carrier review relating to certain claims submitted by the Company for
Medicare reimbursement. The Company understands that similar reviews have been
undertaken with respect to other providers' laboratory activities. The carrier
has alleged that 99.3% of the tests performed by the Company's laboratory for
the review period the carrier initially identified (from January 1995 to April
1996) were not properly supported by the prescribing physicians' medical
justification. The carrier has issued a formal overpayment determination in the
amount of $5.6 million and has suspended all payments of the Company's
laboratory-related claims. In addition, the carrier has informed the local
offices of the Departments of Justice ("DOJ") and Health and Human Services
("HHS") of this matter. The Company has consulted with outside counsel,
reviewed the Company's records, is disputing the overpayment determination
vigorously and has provided extensive supporting documentation of the Company's
claims. The Company continues to cooperate with the carrier to resolve this
matter and has initiated the process of a formal review of the carrier's
determination. However, the Company is unable to determine at this time
(1) when this matter will be resolved or when the laboratory's payment
suspension will be lifted, (2) what, if any, of the laboratory claims will be
disallowed; (3) what action DOJ or HHS may take with respect to this matter;
(4) the outcome of the carrier's review of the additional periods from May 1996
through March 1998, including the initiation of another payment suspension;
(5) whether additional periods may be reviewed by the carrier; or (6) any other
outcome of this investigation. Determinations adverse to the Company could have
an adverse impact on the Company's business, results of operations or financial
condition.
F-32
<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 the pooling of interests with Renal
Treatment Centers, Inc. which is as of May 14, 1998, appearing on page F-2 of
this Annual Report on Form 10-K/A also included audits of the information
included in the Financial Statement Schedule listed in Item 14(a)(2) of this
Form 10-K/A 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 later consolidated financial statements.
PricewaterhouseCoopers LLP
Seattle, Washington
February 16, 1998, except as to the pooling of interests with
Renal Treatment Centers, Inc. which is as of May 14, 1998
S-1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
-------------------- ----------
BALANCE AT BALANCES
BEGINNING AMOUNTS OF AMOUNTS BALANCE AT
OF CHARGED TO COMPANIES WRITTEN END
DESCRIPTION YEAR INCOME ACQUIRED OFF OF YEAR
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended May 31,
1995................... $ 3,051,000 5,492,000 1,203,000 3,005,000 $ 6,741,000
Seven months ended
December 31, 1995...... $ 6,741,000 4,552,000 541,000 2,662,000 $ 9,172,000
Year ended December 31,
1996................... $ 9,172,000 15,737,000 1,896,000 11,040,000 $15,765,000
Year ended December 31,
1997................... $15,765,000 20,525,000 2,962,000 8,557,000 $30,695,000
</TABLE>
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TOTAL RENAL CARE HOLDINGS, INC.
/s/ John E. King
By: _________________________________
John E. King
Vice President, Finance and
Chief Financial Officer
Date: November 24, 1998
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
<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.+++
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 Subscription Agreement dated May 26, 1994 between
DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties, Tenet and
the Company.#
10.2 Services Agreement dated August 11, 1994 between the
Company and Tenet.##
10.3 Noncompetition Agreement dated August 11, 1994 between
the Company and Tenet.##
10.4 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").##*
10.5 Amendment to Chaltiel Employment Agreement, dated as of
August 11, 1994.##*
10.6 Employment Agreement dated as of September 1, 1994 by
and between the Company and Barry C. Cosgrove.##*
10.7 Employment Agreement dated as of August 11, 1994 by and
between the Company and Leonard W. Frie (the "Frie
Employment Agreement").##*
10.8 Amendment to Frie Employment Agreement, dated as of
October 11, 1994.##*
10.9 Employment Agreement dated as of September 1, 1994 by
and between the Company and John E. King.##*
10.10 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.##*
10.11 Form of Stock Subscription Agreement relating to the
1994 Plan.##*
10.12 Form of Purchased Shares Award Agreement relating to
the 1994 Plan.##*
10.13 Form of Nonqualified Stock Option relating to the 1994
Plan.##*
10.14 1995 Equity Compensation Plan.+*
10.15 Employee Stock Purchase Plan.+*
10.16 Option Exercise and Bonus Agreement dated as of
September 18, 1995 between the Company and Victor M.G.
Chaltiel.+*
10.17 1997 Equity Compensation Plan.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
<C> <S> <C>
10.18 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). 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. subsequently executed an
agreement in this form on February 27, 1998.@@@
10.19 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).@@@
10.20 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). RTC subsequently executed an
agreement in this form on February 27, 1998.@@@
10.21 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.###
10.22 Amendment No. 2 and Consent No. 2 to the Revolving
Credit Agreement and First Amendment to the Subsidiary
Guaranty dated February 17, 1998.+++
10.23 Third Amendment to the Term Loan Agreement and First
Amendment to the Subsidiary Guaranty dated February
17, 1998. (The provisions of this agreement amending
the original term loan agreement have been superseded
by exhibit no. 10.31 hereof.)+++
10.24 Special Purpose Option Plan.++
10.25 Indenture, dated June 12, 1996, by RTC to PNC Bank
including form of RTC Note (the "Indenture").***
10.26 First Supplemental Indenture, dated as of February 27,
1998, among RTC, TRCH and PNC Bank under the
Indenture.+++
10.27 Second Supplemental Indenture, dated as of March 31,
1998, among RTC, TRCH and PNC Bank under the
Indenture.+++
10.28 Guaranty, entered into as of March 31, 1998, by the
Company in favor of and for the benefit of PNC
Bank.+++
10.29 Amended and Restated Term Loan Agreement, dated April
30, 1998, by and among the Company, the lenders party
thereto, DLJ Capital Funding, Inc., as Syndication
Agent, and The Bank of New York, as Administrative
Agent (the "Term Loan Agreement").++++
10.30 Amended and Restated Revolving Credit Agreement, dated
April 30, 1998, 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").++++
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
<C> <S> <C>
10.31 Form of First Amendment to Borrower/Subsidiary Pledge
Agreement, dated April 30, 1998, by and among the Company,
RTC, Total Renal Care, Inc., and The Bank of New York, as
Collateral Agent.++++
10.32 Form of Acknowledgment and Confirmation, dated April 30, 1998,
by the Company, RTC, TRC West, Inc., Total Renal Care, Inc.,
Total Renal Care Acquisition Corp., 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. for the benefit of The Bank of New York, as Collateral
Agent and the lenders party to the Term Loan Agreement or the
Revolving Credit Agreement.++++
21 List of Subsidiaries of the Company.+++
23.1 Consent of PricewaterhouseCoopers LLP.X
24 Powers of Attorney with respect to the Company.+++
27 Financial Data Schedule.++++
</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 March 31, 1998 as an exhibit to the Company's Form 10-K for the
year ended December 31, 1997.
++++ Filed on May 18, 1998 as an exhibit to Amendment No. 1 on Form 10-K/A to
the Company's Form 10-K for the year ended December 31, 1997.
# 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.
(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.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
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, No. 333-46887) of
Total Renal Care Holdings, Inc. of our report dated February 16, 1998, except
as to the pooling of interest with Renal Treatment Centers, Inc. which is as of
May 14, 1998, appearing on page F-2 in this Annual Report on Form 10K/A. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page S-1 of this Form 10K/A.
PricewaterhouseCoopers LLP
Seattle, Washington
November 25, 1998
