<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-4034
TOTAL RENAL CARE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<S> <C>
Delaware 51-0354549
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21250 Hawthorne Blvd., Suite 800
Torrance, California 90503-5517
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (310) 792-2600
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class August 1, 1999
----- -----------------
<S> <C>
Common Stock, Par Value $0.001.......................... 81,182,310 shares
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
Unless otherwise indicated in this Form 10-Q, "we," "us," "our" and similar
terms refer to Total Renal Care Holdings, Inc. and its subsidiaries.
INDEX
<TABLE>
<CAPTION>
Page
No.
----
PART I. FINANCIAL INFORMATION
<C> <S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998................................................... 1
Condensed Consolidated Statements of Income and Comprehensive Income
for the three months and six months ended June 30, 1999 and June 30,
1998 ............................................................... 2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and June 30, 1998............................... 3
Notes to Condensed Consolidated Financial Statements................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21
Risk Factors............................................................ 23
<CAPTION>
PART II. OTHER INFORMATION
<C> <S> <C>
Item 1. Legal Procedings............................................... 30
Item 6. Exhibits and Reports on Form 8-K............................... 30
Signatures.............................................................. 31
</TABLE>
- ---------------------
Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
i
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 24,673,000 $ 41,487,000
Patient accounts receivable, less allowance
for doubtful accounts of $103,578,000 and
$61,848,000, respectively................... 444,239,000 416,472,000
Deferred income taxes........................ 54,102,000 31,917,000
Other current assets......................... 69,499,000 50,395,000
-------------- --------------
Total current assets....................... 592,513,000 540,271,000
Property and equipment, net.................... 273,785,000 233,337,000
Notes receivable and other long-term assets.... 79,530,000 57,578,000
Intangible assets, net of accumulated
amortization of $147,350,000 and $114,982,000,
respectively.................................. 1,160,573,000 1,084,395,000
-------------- --------------
Total assets............................... $2,106,401,000 $1,915,581,000
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term obligations..... $ 23,633,000 $ 21,847,000
Other current liabilities.................... 155,486,000 152,617,000
-------------- --------------
Total current liabilities.................. 179,119,000 174,464,000
Long term debt and other....................... 1,409,077,000 1,227,671,000
Deferred income taxes.......................... 14,022,000 8,212,000
Minority interests............................. 24,697,000 23,422,000
Stockholders' equity:
Preferred stock, ($0.001 par value; 5,000,000
shares authorized; none outstanding)........
Common stock, voting, ($0.001 par value;
195,000,000 shares authorized; 81,182,000
and 81,030,000 shares issued and
outstanding, respectively).................. 81,000 81,000
Additional paid-in capital................... 415,884,000 413,095,000
Notes receivable from stockholders........... (371,000) (356,000)
Accumulated other comprehensive income....... (4,059,000)
Retained earnings............................ 67,951,000 68,992,000
-------------- --------------
Total stockholders' equity................. 479,486,000 481,812,000
-------------- --------------
Total liabilities and stockholders'
equity.................................... $2,106,401,000 $1,915,581,000
============== ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months and six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Three months Six months
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Net operating revenues.. $352,993,000 $288,350,000 $705,237,000 $547,099,000
Operating expenses:
Facilities............ 248,530,000 183,324,000 483,763,000 350,319,000
General and
administrative....... 30,541,000 17,605,000 53,278,000 34,515,000
Provision for doubtful
accounts............. 35,707,000 7,779,000 46,185,000 14,542,000
Depreciation and
amortization......... 27,392,000 22,805,000 54,417,000 42,399,000
Write-off of
investments and
loans................ 16,600,000 16,600,000
Merger and related
costs................ 79,435,000
------------ ------------ ------------ ------------
Total operating
expenses............ 358,770,000 231,513,000 654,243,000 521,210,000
Operating income
(loss)............... (5,777,000) 56,837,000 50,994,000 25,889,000
Interest expense, net of
capitalized interest... (24,370,000) (16,544,000) (47,137,000) (31,061,000)
Interest rate swap--
early termination
costs.................. (9,823,000) (9,823,000)
Interest income and
other.................. 1,934,000 1,022,000 3,264,000 2,664,000
------------ ------------ ------------ ------------
Income (loss) before
income taxes,
minority interests,
extraordinary item
and cumulative effect
of change in
accounting
principle............ (28,213,000) 31,492,000 7,121,000 (12,331,000)
Income taxes (benefit).. (9,699,000) 12,088,000 3,323,000 12,960,000
------------ ------------ ------------ ------------
Income (loss) before
minority interests,
extraordinary item
and cumulative effect
of change in
accounting
principle............ (18,514,000) 19,404,000 3,798,000 (25,291,000)
Minority interests in
income of consolidated
subsidiaries........... 2,521,000 1,565,000 4,839,000 2,958,000
------------ ------------ ------------ ------------
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ (21,035,000) 17,839,000 (1,041,000) (28,249,000)
Extraordinary loss, net
of tax of $6,087,000
and $7,688,000,
respectively........... 9,932,000 12,744,000
Cumulative effect of
change in accounting
principle, net of tax
of $4,300,000.......... 6,896,000
------------ ------------ ------------ ------------
Net income (loss)....... $(21,035,000) $ 7,907,000 $ (1,041,000) $(47,889,000)
============ ============ ============ ============
Earnings (loss) per
common share:
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ $ (0.26) $ 0.22 $ (0.01) $ (0.35)
Extraordinary loss,
net of tax........... (0.12) (0.16)
Cumulative effect of
change in accounting
principle, net of
tax.................. (0.09)
------------ ------------ ------------ ------------
Net income (loss)..... $ (0.26) $ 0.10 $ (0.01) $ (0.60)
============ ============ ============ ============
Weighted average number
of common shares
outstanding............ 81,149,000 80,714,000 81,125,000 79,692,000
============ ============ ============ ============
Earnings (loss) per
common share--assuming
dilution:
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ $ (0.26) $ 0.22 $ (0.01) $ (0.35)
Extraordinary loss,
net of tax........... (0.12) (0.16)
Cumulative effect of
change in accounting
principle, net of
tax.................. (0.09)
------------ ------------ ------------ ------------
Net income (loss)..... $ (0.26) $ 0.10 $ (0.01) $ (0.60)
============ ============ ============ ============
Weighted average number
of common shares and
equivalents
outstanding--assuming
dilution............... 81,149,000 87,263,000 81,125,000 79,692,000
============ ============ ============ ============
STATEMENTS OF
COMPREHENSIVE INCOME
Net income (loss)..... $(21,035,000) 7,907,000 (1,041,000) (47,889,000)
Other comprehensive
income:
Foreign currency
translation......... (3,723,000) (4,059,000)
------------ ------------ ------------ ------------
Comprehensive income
(loss)............... $(24,758,000) $ 7,907,000 $ (5,100,000) $(47,889,000)
============ ============ ============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Six months
-----------------------------
1999 1998
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (1,041,000) $ (47,889,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 54,417,000 42,399,000
Extraordinary item, net of tax.............. 12,744,000
Provision for doubtful accounts............. 46,185,000 14,542,000
Write-off of investments and loans.......... 16,600,000
Change in accounting principle, net of tax.. 6,896,000
Compensation expense from stock option
exercise................................... 16,000,000
Changes in working capital.................. (85,210,000) (70,903,000)
------------ ---------------
Total adjustments......................... 31,992,000 21,678,000
------------ ---------------
Net cash provided by (used in) operating
activities............................. 30,951,000 (26,211,000)
------------ ---------------
Cash flows from investing activities:
Purchases of property and equipment........... (61,799,000) (35,842,000)
Cash paid for acquisitions, net of cash
acquired..................................... (127,627,000) (216,669,000)
Other......................................... (37,725,000) (34,268,000)
------------ ---------------
Net cash used in investing activities... (227,151,000) (286,779,000)
------------ ---------------
Cash flows from financing activities:
Borrowings from bank credit facility.......... 181,875,000 1,397,000,000
Principal payments on long-term obligations... (7,237,000) (1,114,070,000)
Net proceeds from sale of common stock........ 2,033,000 19,615,000
Other......................................... 2,715,000 5,395,000
------------ ---------------
Net cash provided by financing
activities............................. 179,386,000 307,940,000
------------ ---------------
Net decrease in cash............................ (16,814,000) (5,050,000)
Cash at beginning of period..................... 41,487,000 6,143,000
------------ ---------------
Cash at end of period........................... $ 24,673,000 $ 1,093,000
============ ===============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In our opinion the interim financial information reflects all normal
recurring adjustments which are necessary to state fairly our consolidated
financial position, results of operations, and cash flows as of and for the
periods indicated. We presume that users of the interim financial information
have read or have access to our audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the preceding fiscal year and that the adequacy of additional
disclosure needed for a fair presentation, except in regard to material
contingencies or recent significant events, may be determined in that context.
Accordingly, we have omitted footnote and other disclosures which would
substantially duplicate the disclosures contained in our Form 10-K for the year
ended December 31, 1998. We have made certain reclassifications of prior period
amounts to conform to current period classifications. The interim financial
information herein is not necessarily representative of a full year's
operations.
The information related to the activity for the three months and six months
ended June 30, 1998 has been restated for certain reclassifications and
adjustments. The accrued merger and related costs initially reported by us in
the first six months of 1998 amounted to $92,835,000. We have revised our
financial reporting relating to certain costs initially included in our merger
and related costs and accrual resulting in a decrease in merger and related
costs of $13,400,000, partially offset by an increase to facilities operating
costs of $1,700,000 and an increase to depreciation and amortization of
$590,000 for a net decrease to our first quarter 1998 operating expenses of
$11,110,000 and a net increase to our second quarter 1998 operating expenses of
$2,870,000. These reclassifications and adjustments are more fully described in
our Form 10-K for the year ended December 31, 1998.
Our Form 10-Q for the three months ended March 31, 1999 will be restated for
adjustments to correct for previously unrecorded amounts due to suppliers. Our
operating expenses and other current liabilities for the three months ended
March 31, 1999 increased by $13,150,000 and net income for the same period is
reduced by $7,890,000, net of tax of $5,260,000. The additional expenses are
reflected in the interim financial information for the six months ended June
30, 1999 in this report.
2. On February 27, 1998, we acquired Renal Treatment Centers, Inc., or RTC,
in a merger transaction. The merger was accounted for as a pooling of
interests. As a result, we restated our condensed consolidated financial
statements to include RTC for all periods presented. We had no transactions
with RTC prior to the combination and no adjustments were necessary to conform
RTC's accounting policies to ours.
Merger and related costs recorded during the first six months of 1998 in
connection with our merger with RTC included costs associated with certain of
the integration activities, transaction costs and costs of employee severance
and amounts due under employment agreements and other compensation programs. A
summary of merger and related costs and accrual activity through June 30, 1999
is as follows:
<TABLE>
<CAPTION>
Severance
Direct and Costs to
Transaction Employment Integrate
Costs Costs Operations Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Initial expense......... $ 21,580,000 $ 41,960,000 $ 15,895,000 $ 79,435,000
Amounts utilized in
1998................... (22,885,000) (37,401,000) (13,137,000) (73,423,000)
Adjustment of
estimates.............. 1,305,000 (959,000) (1,593,000) (1,247,000)
------------ ------------ ------------ ------------
Accrual, December 31,
1998................... $ 3,600,000 1,165,000 4,765,000
============
Amounts utilized--1st
quarter 1999........... (600,000) (90,000) (690,000)
------------ ------------ ------------
Accrual, March 31,
1999................... 3,000,000 1,075,000 4,075,000
Amounts utilized--2nd
quarter 1999........... (90,000) (90,000)
------------ ------------ ------------
Accrual, June 30, 1999.. $ 3,000,000 $ 985,000 $ 3,985,000
============ ============ ============
</TABLE>
4
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The remaining balance of severance and employment costs represents tax gross-
up payments expected to be paid by the end of 1999. The remaining balance of
costs to integrate operations represents remaining lease payments on RTC's
vacant laboratory lease space.
3. During the six months ended June 30, 1999, we purchased 35 centers and
additional interests from minority partners in certain of our partnerships.
Total cash consideration for these transactions was approximately $127.6
million.
We accounted for these transactions under the purchase method. The cost of
these acquisitions has been allocated primarily to intangible assets such as
patient charts, noncompete agreements and goodwill to the extent the purchase
price exceeds the value of the tangible assets, primarily capital equipment.
The results of operations on a pro forma basis, as though the above
acquisitions had been combined with us at the beginning of each period
presented for the six months ended June 30, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Pro forma net operating revenues................ $718,380,000 $576,705,000
Pro forma loss before extraordinary item and
cumulative effect of change in accounting
principle...................................... $ (364,000) $(27,036,000)
Pro forma net loss.............................. $ (364,000) $(46,676,000)
Pro forma loss per share before extraordinary
item and cumulative effect of change in
accounting principle:
Basic......................................... $ 0.00 $ (0.59)
Assuming dilution............................. $ 0.00 $ (0.59)
</TABLE>
4. In March 1998, Statement of Position No. 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use, or SOP 98-1, was
issued. We adopted SOP 98-1 in the first quarter of 1999, effective January 1,
1999. SOP 98-1 defines internal-use software and identifies whether internal-
use software costs that we incur must be expensed or capitalized. Costs that
should be capitalized include external direct costs of materials and services,
payroll and payroll related costs for employees directly associated with the
internal-use software projects and certain interest costs incurred in the
application development stage. All other internal-use software costs are
expensed as incurred. The impact of the adoption of SOP 98-1 was not material
to our operations.
In April 1998, Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities, or SOP 98-5, was issued. We adopted SOP 98-5 effective
January 1, 1998. SOP 98-5 requires that pre-opening and organization 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 remaining
unamortized pre-opening, development and organizational costs existing prior to
January 1, 1998 of $11,196,000 were recognized, net of tax of $4,300,000, as
the cumulative effect of a change in accounting principle in the first quarter
of 1998.
5
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. The reconciliation of the numerators and denominators used to calculate
earnings (loss) per common share for all periods presented is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............... $(21,035,000) $17,839,000 $(1,041,000) $(28,249,000)
Interest, net of tax
resulting from dilutive
effect of convertible
debt.................... 1,055,000
------------ ----------- ----------- ------------
Adjusted income (loss)... (21,035,000) 18,894,000 (1,041,000) (28,249,000)
Extraordinary loss, net
of tax.................. 9,932,000 12,744,000
Cumulative effect of
change in accounting
principle, net of tax... 6,896,000
------------ ----------- ----------- ------------
Income (loss)--assuming
dilution................ $(21,035,000) $ 8,962,000 $(1,041,000) $(47,889,000)
============ =========== =========== ============
Applicable common shares
Average outstanding
during the period..... 81,176,000 80,724,000 81,149,000 79,703,000
Reduction in shares in
connection with notes
receivable from
employees............... (27,000) (10,000) (24,000) (11,000)
------------ ----------- ----------- ------------
Weighted average number
of shares outstanding
for use in computing
earnings per share...... 81,149,000 80,714,000 81,125,000 79,692,000
Dilutive effect of
outstanding stock
options................. 1,670,000
Dilutive effect of
convertible debt........ 4,879,000
------------ ----------- ----------- ------------
Weighted average number
of shares and
equivalents outstanding
for use in computing
earnings per share--
assuming dilution....... 81,149,000 87,263,000 81,125,000 79,692,000
============ =========== =========== ============
Earnings (loss) per
common share:
Income (loss) per
common share before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ (0.26) $ 0.22 $ (0.01) $ (0.35)
Extraordinary loss, net
of tax................ (0.12) (0.16)
Cumulative effect of
change in accounting
principle, net of
tax................... (.09)
------------ ----------- ----------- ------------
Net income (loss) per
common share............ $ (0.26) $ 0.10 $ (0.01) $ (0.60)
============ =========== =========== ============
Earnings (loss) per
common share--assuming
dilution:
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ (0.26) $ 0.22 $ (0.01) $ (0.35)
Extraordinary loss, net
of tax................ (0.12) (0.16)
Cumulative effect of
change in accounting
principle, net of
tax................... (0.09)
------------ ----------- ----------- ------------
Net income (loss) per
common share--assuming
dilution................ $ (0.26) $ 0.10 $ (0.01) $ (0.60)
============ =========== =========== ============
</TABLE>
Included in the above calculation for the three months ended June 30, 1998,
is the effect of RTC's 5 5/8% convertible subordinated notes due 2006 treated
on an "as converted" basis; however, the effect is not included for all other
periods presented because it was anti-dilutive. Our 7% convertible notes due
2009 were also anti-dilutive for all periods presented.
6
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. In conjunction with the refinancing of our credit facilities, our two
existing forward interest rate swap agreements with notional amounts of
$100,000,000 and $200,000,000 were canceled in April 1998. The loss associated
with the early cancellation of these swaps was approximately $9,823,000.
During the quarter ended June 30, 1998, we entered into forward interest rate
cancelable 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 rate is fixed at approximately 5.65% plus an applicable margin based
upon our current leverage ratio. At June 30, 1999, the effective interest rate
for borrowings under the swap agreements was 8.53%.
During the second quarter of 1999, we received notification from two of our
swap agreement counterparties that they had exercised their right to cancel
agreements in the aggregate notional amount of $100,000,000. The remaining
$700,000,000 of swap agreements with maturities from the years 2003 through
2008 and cancellation option dates from the years 2001 through 2005 are still
in effect.
7. In June 1996, RTC issued $125,000,000 of 5 5/8% convertible subordinated
notes due 2006. These notes are convertible, at the option of the holder, at
any time after August 12, 1996 through maturity, unless previously redeemed or
repurchased, into our common stock at a conversion price of $25.62 principal
amount per share, subject to certain adjustments. All or any part of these
notes are redeemable at our 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. TRCH has guaranteed these notes.
7
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is summarized financial information of RTC:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents......................... $ 746,000 $ 5,396,000
Accounts receivable, net.......................... 131,912,000 130,129,000
Other current assets.............................. 20,348,000 19,106,000
------------ ------------
Total current assets............................ 153,006,000 154,631,000
Property and equipment, net....................... 92,990,000 75,641,000
Intangible assets, net............................ 416,791,000 406,562,000
Other assets...................................... 8,241,000 9,249,000
------------ ------------
Total assets.................................... $671,028,000 $646,083,000
============ ============
Current liabilities (includes intercompany payable
to TRCH of $278,452,000 and $306,628,000,
respectively).................................... $366,883,000 $352,753,000
Long-term debt.................................... 128,495,000 125,199,000
Stockholder's equity.............................. 175,650,000 168,131,000
------------ ------------
Total liabilities and stockholder's equity...... $671,028,000 $646,083,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net operating revenues... $125,900,000 $123,990,000 $246,302,000 $238,651,000
Total operating
expenses................ 112,137,000 99,874,000 226,395,000 236,281,000
------------ ------------ ------------ ------------
Operating income......... 13,763,000 24,116,000 19,907,000 2,370,000
Interest expense, net.... 1,745,000 1,201,000 3,547,000 4,789,000
------------ ------------ ------------ ------------
Income before income
taxes................... 12,018,000 22,915,000 16,360,000 (2,419,000)
Income taxes............. 4,807,000 5,121,000 8,841,000 7,102,000
------------ ------------ ------------ ------------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ 7,211,000 $ 17,794,000 $ 7,519,000 $ (9,521,000)
============ ============ ============ ============
</TABLE>
8. In November 1998, we issued $345,000,000 of 7% convertible subordinated
notes due 2009, or the 7% notes, in a private placement offering. The 7% notes
are convertible, at the option of the holder, at any time into our common stock
at a conversion price of $32.81 per share. We may redeem the 7% notes on or
after November 15, 2001. The 7% notes are general, unsecured obligations junior
to all of our existing and future senior debt and, effectively, all existing
and future liabilities of us and our subsidiaries.
8
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We subsequently filed a registration statement covering the resale of the 7%
notes which has not yet been declared effective by the SEC. As further
described in the registration statement, commencing May 18, 1999, we are
accruing certain monetary penalties on a weekly basis until the registration
statement is declared effective, as follows:
<TABLE>
<CAPTION>
Days following Weekly Cumulative
180 days after closing Penalty Penalty
---------------------- ------- ----------
<S> <C> <C>
0-90..................... $17,250 $ 207,000
91-180................... 34,500 656,000
181-270.................. 51,750 1,328,000
271-360.................. 69,000 2,225,000
Thereafter............... 86,250
</TABLE>
Payment of these accrued penalties is due upon the next interest due date.
The accrued penalty as of June 30, 1999 was $103,500.
9. Contingencies
Our Florida-based laboratory subsidiary is the subject of a third-party
carrier review relating to certain claims submitted by us for Medicare
reimbursement. We understand that similar reviews have been undertaken with
respect to other providers' laboratory activities in Florida and elsewhere. The
carrier has alleged that approximately 97% of the tests performed by this
laboratory for the review periods the carrier has identified, from January 1995
to April 1996, and May 1996 to March 1998, were not properly supported by the
prescribing physicians' medical justification. The carrier has issued formal
overpayment determinations in the amount of $5.6 million for the review period
from January 1995 to April 1996 and $14.2 million for the review period from
May 1996 to March 1998. The carrier also has suspended all payments of claims
related to this laboratory, regardless of when the laboratory performed the
tests. The carrier has withheld approximately $23 million as of June 30, 1999.
In addition the carrier has informed the local offices of the Department of
Justice, or DOJ, and the Department of Health and Human Services, or HHS, of
this matter, and we are cooperating with DOJ and HHS.
We have consulted with outside counsel, reviewed our records, are disputing
the overpayment determinations vigorously and have provided extensive
supporting documentation of our claims. We have cooperated with the carrier to
resolve this matter and have initiated the process of a formal review of the
carrier's determinations. The first step in this formal review process is a
hearing before a hearing officer at the carrier. The hearing regarding the
initial review period from January 1995 to April 1996 was held in late July
1999. We expect the hearing officer to render a decision by mid-November 1999.
We have received minimal responses from the carrier to our repeated requests
for clarification and information regarding the continuing payment suspension.
In February 1999, our Florida-based laboratory subsidiary filed a complaint
against the carrier and HHS seeking a court order to lift the payment
suspension. We initiated this action only after serious consideration and the
unanimous approval of our board of directors, and we believed it was necessary
to bring a prompt resolution to this payment dispute. The court dismissed our
complaint because we did not exhaust all administrative remedies.
We are unable to determine at this time:
. When this matter will be resolved or when this laboratory's payment
suspension will be lifted;
. What, if any, of this laboratory's claims will be disallowed;
9
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. What action the carrier, DOJ or HHS may take with respect to this matter;
. Whether additional periods may be reviewed by the carrier; or
. Any other outcome of this investigation.
Any determination adverse to us could have an adverse impact on our business,
results of operations, financial condition, or cash flows.
Following the announcement on February 18, 1999 of our preliminary results
for the fourth quarter of fiscal 1998 and the full year then ended, several
class action lawsuits were filed against us and certain of our officers in the
U.S. District Court for the Central District of California. The complaints are
similar and allege violations of federal securities laws arising from alleged
false and misleading statements primarily regarding our accounting for the
integration of RTC into TRCH and request unspecified monetary damages. The
lawsuits have been consolidated into a single action. We believe that all of
the claims are without merit and we intend to defend ourselves vigorously. We
anticipate that the attorneys' fees and related costs of defending these
lawsuits should be covered primarily by our directors and officers insurance
policies and we believe that any additional costs will not have a material
impact on our financial condition, results of operations or cash flows.
In addition, we are subject to claims and suits in the ordinary course of
business for which we believe most will be covered by insurance. We do not
believe that the ultimate resolution of these additional pending proceedings,
whether the underlying claims are covered by insurance or not, will have a
material adverse effect on our financial condition, results of operations or
cash flows.
10. Subsequent to June 30, 1999 the lenders under our credit facilities have
waived compliance with a financial covenant that requires us to maintain a
specified leverage ratio. This waiver expires March 15, 2000. The lenders also
have waived our violation of a covenant that placed a limit on our aggregate
borrowings for international acquisitions, which we had exceeded. The terms of
the waiver:
. Reduce our permitted borrowings under the revolving credit facility from
$950,000,000 to $650,000,000 during the waiver period;
. Commencing after July 1, 1999, limit the amount of additional borrowings
that we may use for acquisitions, de novo developments and expansion or
relocation of existing dialysis centers;
. Accelerated the maturity dates on the term loan and revolving credit
facilities by two years, to March 31, 2006 and March 31, 2003,
respectively; and
. Increased the applicable margins used to determine the interest rates for
our borrowings under the credit facilities.
Other than the issues specifically addressed in the waiver agreement, all
other covenants and conditions of the credit facilities remain unchanged.
The outstanding balances on our term loan and revolving credit facilities at
June 30, 1999 were $396,000,000 and $533,500,000, respectively. As modified by
the waiver agreement, borrowings under the credit facilities generally bear
interest at one of two floating rates selected by us:
. 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%, plus a margin ranging
from 0% to 1.5% for borrowings under the revolving credit facility and
1.0% to 1.75% for borrowings under the term loan facility; or
. Adjusted LIBOR, defined as the 30-, 60-, 90- or 180-day London Interbank
Offered Rate, adjusted for statutory reserves, plus a margin ranging from
1.25% to 2.75% for borrowings under the revolving credit facility and
2.25% to 3.00% for borrowings under the term loan facility.
10
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The applicable margin used in determining the interest rate is based on our
leverage ratio. Currently, the applicable margin is at the top of the ranges
listed above.
11. On July 1, 1999, we completed an acquisition of seven dialysis facilities
for consideration of approximately $17,500,000.
12. During the second quarter of 1999, we provided an allowance of
$16,600,000 against loans to, and investments in, several dialysis related
businesses which we are unlikely to recover as a result of recent deterioration
in the financial condition of these businesses.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
As described in Note 2 to our condensed consolidated financial statements, we
acquired Renal Treatment Centers, Inc., or RTC, on February 27, 1998 in a
merger accounted for as a pooling of interests. Accordingly, our condensed
consolidated financial statements have been restated to include RTC for all
periods presented.
The information related to the activity for the three months and six months
ended June 30, 1998 has been restated for certain reclassifications and
adjustments. The accrued merger and related costs initially reported by us in
the first and second quarters of 1998 amounted to $92,835,000. We have revised
our financial reporting relating to certain costs initially included in our
merger and related costs and accrual resulting in a decrease in merger and
related costs of $13,400,000, partially offset by an increase to facilities
operating costs of $1,700,000 and an increase to depreciation and amortization
of $590,000 for a net decrease to our first quarter 1998 operating expenses of
$11,110,000 and a net increase to our second quarter 1998 operating expenses of
$2,870,000. These reclassifications and adjustments are more fully described in
our Form 10-K for the year ended December 31, 1998.
Our Form 10-Q for the three months ended March 31, 1999 will be restated for
adjustments to correct for previously unrecorded amounts due to suppliers. Our
operating expenses and other current liabilities for the three months ended
March 31, 1999 increased by $13,150,000 and net income for the same period is
reduced by $7,890,000, net of tax of $5,260,000. The additional expenses are
reflected in the interim financial information for the six months ended June
30, 1999 in this report.
Net operating revenues
Net operating revenues are derived primarily from five sources: (a)
outpatient facility hemodialysis services; (b) ancillary services, including
the administration of erythropoetin, or EPO, and other intravenous
pharmaceuticals, clinical laboratory services, oral pharmaceutical products and
other ancillary services; (c) home dialysis services and related products; (d)
inpatient hemodialysis services provided to hospitalized patients pursuant to
arrangements with hospitals; and (e) international operations. Additional
revenues are derived from the provision of dialysis facility management
services to certain subsidiaries and affiliated and unaffiliated dialysis
centers. Our dialysis and ancillary services are reimbursed primarily under the
Medicare ESRD program in accordance with rates established by HCFA. Payments
are also provided by other third party payors, generally at rates higher than
those reimbursed by Medicare for up to the first 33 months of treatment as
mandated by law. Rates paid for services provided to hospitalized patients are
negotiated with individual hospitals.
We maintain a usual and customary fee schedule for our dialysis treatment and
other patient services. We often do not realize our usual and customary rates,
however, because of negotiated limitations on the amounts we can bill to or
collect from the payors for our services. We generally bill the Medicare and
Medicaid programs at net realizable rates determined by applicable fee
schedules for these programs, which are established by statute or regulation.
We bill most non-governmental payors, including managed care payors with which
we have contracted, at our usual and customary rates. Since we bill most non-
governmental payors at our usual and customary rates, but often expect to
receive payments at the lower contracted rates, we also record a contractual
allowance in order to record expected net realizable revenue for services
provided. This process involves estimates and we record revisions to these
estimates in subsequent periods as they are determined to be necessary.
Results of operations
Three months ended June 30, 1999 compared to the three months ended June 30,
1998
Net operating revenues. Net operating revenues increased $64,643,000 to
$352,993,000 in the second quarter of 1999 from $288,350,000 in the second
quarter of 1998, representing a 22% increase. Of this increase, $68,087,000 was
due to increased treatments, of which $51,840,000 was from acquisitions
12
<PAGE>
consummated after the second quarter of 1998, $20,354,000 was from de novo
developments commencing operations after the second quarter of 1998 and the
remainder was from existing facilities as of June 30, 1998. The difference
between the $68,087,000 described above and the total change of $64,643,000
resulted from an overall decrease in net operating revenues per treatment which
decreased from $243.01 in the second quarter of 1998 to $240.66 in the second
quarter of 1999. This decrease in net operating revenue per treatment primarily
was attributable to a $17,843,000 overall decline in the rates we receive for
our dialysis services. The decline in rates is the result of increasing our
contractual allowances, primarily related to billings from our Tacoma office,
to reflect recent trends in collection experience. This decline was partially
offset by an increase in ancillary services intensity and pricing of
$11,390,000, primarily in the administration of EPO of $11,160,000, an increase
of $634,000 in corporate and ancillary program fees, primarily from the
expansion of laboratory services to former RTC facilities of $443,000; and an
increase in non-patient services revenue of $2,375,000 from the increase in
dialysis facility management services to facilities that we do not own or
control.
Facility operating expenses. Facility operating expenses consist of costs and
expenses specifically attributable to the operation of dialysis facilities,
including operating and maintenance costs of such facilities, equipment, direct
labor, and supply and service costs relating to patient care. Facility
operating expenses increased $65,206,000 to $248,530,000 in the second quarter
of 1999 from $183,324,000 in the second quarter of 1998 and as a percentage of
net operating revenues, facility operating expenses increased to 70.4% in the
second quarter of 1999 from 63.6% in the second quarter of 1998. This increase
was primarily attributable to increased usage in EPO and other medical supplies
and the impact of a lower net revenue per treatment. Additionally, during the
second quarter of 1999, a provision of $4,500,000 was recorded for the
resolution of claims made by vendors during the quarter for goods and services
provided in earlier periods.
General and administrative expenses. General and administrative expenses
include headquarters expense and administrative, legal, quality assurance,
information systems and centralized accounting support functions. General and
administrative expenses increased $12,936,000 to $30,541,000 in the second
quarter of 1999 from $17,605,000 in the second quarter of 1998 and as a
percentage of net operating revenues, general and administrative expenses
increased to 8.7% in the second quarter of 1999 from 6.1% in the second quarter
of 1998. This increase was primarily attributable to increased staff at both
our business and corporate offices and the impact of a lower net revenue per
treatment. Additionally, general and administrative expense for the second
quarter of 1999 includes approximately $2,500,000 of expenses related to costs
of business purchase transactions we will not consummate and operating costs
associated with a corporate jet we are no longer using.
Provision for doubtful accounts. The provision for doubtful accounts is
influenced by the amount of net operating revenues generated from all payor
sources in addition to the relative percentage of accounts receivable by aging
category and collection trends. The provision for doubtful accounts increased
$27,928,000 to $35,707,000 in the second quarter of 1999 from $7,779,000 in the
second quarter of 1998. As a percentage of net operating revenues, the
provision for doubtful accounts increased to 10.1% in the second quarter of
1999 from 2.7% in the second quarter of 1998. This is primarily a result of a
$24,000,000 increase in the provision for doubtful accounts relating to patient
accounts receivable billed from our Tacoma business office. Our Tacoma office
collection practices have not kept pace with the growth of our business and
receivables have aged, causing them to be more difficult to collect.
Depreciation and amortization. Depreciation and amortization increased
$4,587,000 to $27,392,000 in the second quarter of 1999 from $22,805,000 in the
second quarter of 1998. As a percentage of net operating revenues, depreciation
and amortization decreased slightly to 7.8% in the second quarter of 1999 from
7.9% in the second quarter of 1998.
Write-off of investments. Write-off of investments and loans recorded in the
second quarter of 1999 of $16,600,000 represents allowances provided for loans
to, and investments in, several dialysis related businesses, which we are
unlikely to recover as a result of recent deterioration in the financial
condition of these businesses.
13
<PAGE>
Operating income (loss). Operating results decreased $62,614,000 to an
operating loss of $5,777,000 in the second quarter of 1999 from an operating
income of $56,837,000 in the second quarter of 1998. As a percentage of net
operating revenues, operating results decreased to an operating loss of 1.6% in
the second quarter of 1999 from an operating income of 19.7% in the second
quarter of 1998 primarily due to the increases in both facility operating and
general and administrative expenses and the additions to the valuation
allowances for patient accounts receivables and the write-off of loans to, and
investments in, dialysis related businesses as described above.
Interest expense. Interest expense increased $7,826,000 to $24,370,000 in the
second quarter of 1999 from $16,544,000 in the second quarter of 1998. The
increase in interest expense primarily was due to an increase in borrowings
made under our credit facilities to fund acquisitions.
Interest rate swap-early termination costs. In conjunction with the
refinancing of our credit facilities, two existing forward interest swap
agreements were canceled in April 1998. The early termination costs associated
with the cancellation of those swaps was $9,823,000.
Interest income and other. Interest income is generated as a result of the
short-term investment of surplus cash from operations and excess proceeds from
borrowings under our credit facilities. Other income is income generated by
unconsolidated partnerships. Interest income and other increased by $912,000 to
$1,934,000 in the second quarter of 1999 from $1,022,000 in the second quarter
of 1998.
Provision for income taxes. Provision for income taxes decreased $21,787,000
to a benefit of $9,699,000 for the second quarter of 1999 from an expense of
$12,088,000 in the second quarter of 1998. The effective tax rate was a benefit
of 31.5% for the second quarter of 1999 compared to 40.4% in the second quarter
of 1998, after minority interest. The change in the effective tax rate
primarily was due to $3.8 million from the non-deductible amortization of
intangible assets spread over a smaller pre-tax base. Before consideration of
these permanent tax differences, the consolidated effective tax rate benefit
was 36.0%, after minority interests.
Minority interests. Minority interests represent the pretax income earned by
minority partners who directly or indirectly own minority interests in our
partnership affiliates and the net income in certain of our corporate
subsidiaries. Minority interests increased $956,000 to $2,521,000 from
$1,565,000 in the second quarter of 1998. As a percentage of net operating
revenues, minority interest increased slightly to 0.7% in the second quarter of
1999 from 0.5% in the second quarter of 1998.
Extraordinary loss. In the second quarter of 1998 in conjunction with
refinancing our credit facilities, we recorded all of the remaining related
unamortized deferred financing costs as an extraordinary loss of $9,932,000,
net of income tax effect.
Six months ended June 30, 1999 compared to the six months ended June 30, 1998
Net operating revenues. Net operating revenues increased $158,138,000 to
$705,237,000 in the six months ended June 30, 1999 from $547,099,000 in the six
months ended June 30, 1998, representing a 29% increase. Of this increase,
$136,865,000 was due to increased treatments, of which $85,845,000 was from
acquisitions consummated after the six months ended June 30, 1998, $35,698,000
was from de novo developments commencing operations after the six months ended
June 30, 1998 and $15,322,000 was from existing facilities as of June 30, 1998.
The remaining increase of $21,273,000 resulted from an increase in net
operating revenues per treatment which increased from $239.30 in the six months
ended June 30, 1998 to $246.75 in the six months ended June 30, 1999. The
increase in net operating revenue per treatment was mainly attributable to an
increase in ancillary services intensity and pricing of $28,999,000, primarily
in the administration of EPO of $26,203,000, an increase in corporate and
ancillary program fees of $4,285,000,
14
<PAGE>
primarily from the expansion of laboratory services to former RTC facilities of
$3,680,000, an increase in non-patient services revenue of $3,381,000 from the
increase in dialysis facility management services to facilities that we do not
own or control, and an offsetting decrease in our net operating revenue per
treatment of $15,392,000, as a result of increasing our contractual allowances
primarily related to billings from our Tacoma office to reflect recent trends
in collection experience.
Facility operating expenses. Facility operating expenses increased
$133,444,000 to $483,763,000 in the six months ended June 30, 1999 from
$350,319,000 in the six months ended June 30, 1998 and as a percentage of net
operating revenues, facility operating expenses increased to 68.6% in the six
months ended June 30, 1999 from 64.0% in the six months ended June 30, 1998.
This increase was primarily attributable to increased usage in EPO and other
medical supplies and the impact of a lower net revenue per treatment.
Additionally, during the second quarter of 1999, a provision of $4,500,000 was
recorded for the resolution of claims made by vendors during the quarter for
goods and services provided in earlier periods.
General and administrative expenses. General and administrative expenses
increased $18,763,000 to $53,278,000 in the six months ended June 30, 1999 from
$34,515,000 in the six months ended June 30, 1998 and as a percentage of net
operating revenues, general and administrative expenses increased to 7.6% in
the six months ended June 30, 1999 from 6.3% in the six months ended June 30,
1998. This increase was primarily attributable to increased staff at both our
business and corporate offices and the impact of a lower net revenue per
treatment. Additionally, general and administrative expense for the six months
ended June 30, 1999 includes approximately $2,500,000 of expenses related to
costs of business purchase transactions which we will not consummate and
operating costs associated with a corporate jet we are no longer using.
Provision for doubtful accounts. The provision for doubtful accounts
increased $31,643,000 to $46,185,000 in the six months ended June 30, 1999 from
$14,542,000 in the six months ended June 30, 1998. As a percentage of net
operating revenues, the provision for doubtful accounts increased to 6.5% in
the six months ended June 30, 1999 from 2.7% in the six months ended June 30,
1998. This is primarily a result of the $24,000,000 increase in the provision
for doubtful accounts relating to collectibility problems of patient accounts
receivable billed from our Tacoma business office. Our Tacoma office collection
practices have not kept pace with the growth of our business and receivables
have aged, causing them to be more difficult to collect.
Depreciation and amortization. Depreciation and amortization increased
$12,018,000 to $54,417,000 in the six months ended June 30, 1999 from
$42,399,000 in the six months ended June 30, 1998. As a percentage of net
operating revenues, depreciation and amortization was 7.7% in both six month
periods.
Write-off of investments. Write-off of investments and loans recorded in the
six months ended June 30, 1999 of $16,600,000 represents allowances provided
for loans to, and investments in, several dialysis related businesses, which we
are unlikely to recover as a result of recent deterioration in the financial
condition of these businesses.
Merger and related costs.
Merger and related costs recorded during the six months ended June 30, 1998
include costs associated with certain integration activities, transaction costs
and costs of employee severance and amounts due under employment agreements and
other compensation programs, in connection with our merger with RTC.
15
<PAGE>
A summary of merger and related costs and accrual activity through June 30,
1999 is as follows:
<TABLE>
<CAPTION>
Direct Transaction Severance and Costs to Integrate
Costs Employment Costs Operations Total
------------------ ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Initial expense......... $ 21,580,000 $ 41,960,000 $ 15,895,000 $ 79,435,000
Amounts utilized in
1998................... (22,885,000) (37,401,000) (13,137,000) (73,423,000)
Adjustment of
estimates.............. 1,305,000 (959,000) (1,593,000) (1,247,000)
------------ ------------ ------------ ------------
Accrual, December 31,
1998................... $ 3,600,000 1,165,000 4,765,000
============
Amounts utilized--1st
quarter 1999........... (600,000) (90,000) (690,000)
------------ ------------ ------------
Accrual, March 31,
1999................... 3,000,000 1,075,000 4,075,000
Amounts utilized--2nd
quarter 1999........... (90,000) (90,000)
------------ ------------ ------------
Accrual, June 30,
1999................... $ 3,000,000 $ 985,000 $ 3,985,000
============ ============ ============
</TABLE>
The remaining balance of severance and employment costs represents tax gross-
up payments expected to be paid by the end of the year. The remaining balance
of costs to integrate operations represents remaining lease payments on RTC's
vacant laboratory lease space.
Operating income. Operating income decreased $54,330,000 to $50,994,000 in
the six months ended June 30, 1999 from $105,324,000, before merger and related
costs, in the six months ended June 30, 1998. As a percentage of net operating
revenues, operating income before merger and related costs decreased to 7.2% in
the six months ended June 30, 1999 from 19.3% in the six months ended June 30,
1998. This decrease was primarily attributable to increases in both facility
operating and general and administrative expenses and the additions to
valuation allowances for patient accounts receivable and the write-off of loans
and investments in dialysis related businesses.
Interest expense. Interest expense increased $16,076,000 to $47,137,000 in
the six months ended June 30, 1999 from $31,061,000 in the six months ended
June 30, 1998. The increase in interest expense primarily was due to an
increase in borrowings made under our credit facilities to fund acquisitions.
Interest rate swap-early termination costs. In conjunction with the
refinancing of our credit facilities, two existing forward interest swap
agreements were canceled in April 1998. The early termination costs associated
with the cancellation of those swaps was $9,823,000.
Interest income and other. Interest income and other increased $600,000 to
$3,264,000 in the six months ended June 30, 1999 from $2,664,000 in the six
months ended June 30, 1998 and as a percentage of net operating revenues,
interest income and other was 0.5% for both periods.
Provision for income taxes. Provision for income taxes decreased $9,637,000
to $3,323,000 for the six months ended June 30, 1999 from $12,960,000 in the
six months ended June 30, 1998. The effective tax rate was 145.6% for the six
months ended June 30, 1999 compared to 40.4% in the six months ended June 30,
1998, after minority interest but before merger and related costs. The change
in the effective tax rate primarily was due to $5.8 million from the non-
deductible amortization of intangible assets spread over a smaller pre-tax
income base. Before consideration of these permanent tax differences, the
consolidated effective tax rate was 41.0%, after minority interests.
Minority interests. Minority interests increased $1,881,000 to $4,839,000 in
the six months ended June 30, 1999 from $2,958,000 in the six months ended June
30, 1998. As a percentage of net operating revenues, minority interest
increased slightly to 0.7% in the six months ended June 30, 1999 from 0.5% in
the six months ended June 30, 1998.
Extraordinary loss. In February 1998, in conjunction with our merger with
RTC, we terminated the RTC revolving credit agreement, and recorded all of the
remaining related unamortized deferred financing costs as
16
<PAGE>
an extraordinary loss of $2,812,000, net of income tax effect. In April 1998,
in conjunction with refinancing our credit facilities, we also recorded all of
the remaining related unamortized deferred financing costs as an extraordinary
loss of $9,932,000, net of income tax effect.
Cumulative effect of change in accounting principle. Effective January 1,
1998, we adopted Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities, or SOP 98-5. SOP 98-5 requires that pre-opening and
organizational costs, incurred in conjunction with our pre-opening activities
on our de novo facilities, which previously had been treated as deferred costs
and amortized over five years, should be expensed as incurred. In connection
with the adoption of SOP 98-5, we recorded a charge of $6,896,000, net of
income tax effect as a cumulative effect of a change in accounting principle.
Liquidity and capital resources
Sources and uses of cash
Our primary capital requirements have been the funding of our growth through
acquisitions and de novo developments, and equipment purchases. Net cash
provided by operating activities was $31.0 million for the first six months of
1999 and net cash used in operating activities was $26.2 million for the first
six months of 1998. Net cash provided by operating activities consists of our
net income (loss), increased by non-cash expenses such as depreciation,
amortization, non-cash interest and the provision for doubtful accounts, and
adjusted by changes in components of working capital, primarily accounts
receivable.
Accounts receivable, net of allowance for doubtful accounts, increased during
the first six months of 1999 by $27.8 million, of which approximately $12.0
million was due to a payment suspension imposed on our Florida-based laboratory
by its Medicare carrier, which has caused additional working capital needs. The
remaining $15.8 million primarily was due to the increase in our net operating
revenues.
Net cash used in investing activities was $227.2 million for the first six
months of 1999 and $286.8 million for the first six months of 1998. Our
principal uses of cash in investing activities have been related to
acquisitions, purchases of new equipment and leasehold improvements for our
facilities, as well as the development of new facilities. Net cash provided by
financing activities was $179.4 million for the first six months of 1999 and
$307.9 million for the first six months of 1998 primarily consisting of
borrowings from our credit facilities. The decreases in net cash used in
investing activities and in net cash provided by financing activities were due
to our completing fewer acquisitions in the first six months of 1999 as
compared to the first six months of 1998. As of June 30, 1999, we had working
capital of $413.4 million, including cash of $24.7 million.
We believe that we will have sufficient liquidity to fund our debt service
obligations over at least the next twelve months.
Expansion
In the six months ended June 30, 1999, we developed ten new facilities, four
of which we do not own but we manage, and we expect to develop approximately 18
additional de novo facilities in the remainder of 1999. We anticipate that our
capital requirements for purchases of equipment and leasehold improvements for
facilities, including de novo facilities, will be approximately $60 to $70
million in aggregate for the remaining six months of 1999.
During the six months ended June 30, 1999, we paid cash of approximately
$127.6 million to acquire 35 facilities and additional interests from minority
partners in certain of our partnerships. On July 1, 1999, we completed an
acquisition of seven dialysis facilities for consideration of approximately
$17.5 million.
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<PAGE>
Credit facilities
Subsequent to June 30, 1999, the lenders under our credit facilities have
waived compliance with a financial covenant that requires us to maintain a
specified leverage ratio. This waiver expires March 15, 2000. The lenders also
have waived our violation of a covenant that placed a limit on our aggregate
borrowings for international acquisitions, which we had exceeded. The terms of
the waiver:
. Reduce our permitted borrowings under the revolving credit facility from
$950.0 million to $650.0 million during the waiver period;
. Commencing after July 1, 1999, limit the amount of additional borrowings
that we may use for acquisitions, de novo developments and expansion or
relocation of existing dialysis centers;
. Accelerated the maturity dates on the term loan and revolving credit
facilities by two years, to March 31, 2006 and March 31, 2003,
respectively; and
. Increased the applicable margins used to determine the interest rates for
our borrowings under the credit facilities.
Other than the issues specifically addressed in the waiver agreement, all
other covenants and conditions of the credit facilities remain unchanged.
As of June 30, 1999 the principal amount outstanding under our revolving
facility was $534.0 million and under our term facility was $396.0 million. The
term facility requires annual principal payments of $4.0 million, with the
$368.0 million balance due on maturity. As of June 30, 1999, we had $116.0
million available for borrowing under the revolving facility.
The credit facilities contain financial and operating covenants including,
among other things, requirements that we maintain certain financial ratios and
satisfy certain financial tests, and impose limitations on our ability to make
capital expenditures, to incur other indebtedness and to pay dividends. As of
the date of this filing, including violations waived by the lenders as
described, we are in compliance with all such covenants.
Interest rate swaps
During the quarter ended June 30, 1998, we entered into forward interest rate
cancelable swap agreements with a combined notional amount of $800.0 million.
The lengths of the agreements are between three and ten years with cancellation
clauses at the swap holder's option from one to seven years. The underlying
blended interest rate is fixed at approximately 5.65% plus an applicable margin
based upon our current leverage ratio. Currently, the effective interest rate
for these swaps is 8.53%. During the second quarter of 1999, we received
notification from two of our swap agreement counterparties that they had
exercised their right to cancel agreements in the aggregate notional amount of
$100.0 million. The remaining $700.0 million of swap agreements with maturities
from the years 2003 through 2008 and cancellation option dates from the years
2001 through 2005 are still in effect.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133.
SFAS 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. Accordingly, for us, SFAS 133 will become effective
January 1, 2001. SFAS 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 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. For fair-value hedge
transactions in which we are hedging changes in an asset's, liability's or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged
item's fair value. For cash-flow hedge transactions, in which we are hedging
the variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. The
18
<PAGE>
gains and losses on the derivative instrument that are reported in other
comprehensive income will be reclassified as earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all hedges will be recognized in current-period
earnings.
We have not yet determined the impact that the adoption of SFAS 133 will have
on our earnings or statement of financial position.
Subordinated notes
The $125.0 million outstanding 5 5/8% convertible subordinated notes due 2006
issued by RTC bear interest at the rate of 5 5/8%, payable semi-annually and
require no principal payments until 2006. The 5 5/8% notes are convertible into
shares of our common stock at an effective conversion price of $25.62 per share
and are redeemable by us beginning in July 1999.
In November 1998 we issued 7% convertible subordinated notes due 2009 in the
aggregate principal amount of $345.0 million. The 7% notes are convertible at
any time, in whole or in part, into shares of our common stock at a conversion
price of $32.81 and will be redeemable after November 16, 2001. We used the net
proceeds from the sale of the 7% notes to pay down debt under the revolving
facility, which may be reborrowed, subject to the modified terms of our credit
facilities.
Year 2000 considerations
Since the summer of 1998, all of our departments have been meeting with our
information systems department to determine the extent of our Year 2000, or
Y2K, exposure. Project teams have been assembled to work on correcting Y2K
problems and to perform contingency planning to reduce our total exposure. Our
goal is to have all corrective action and contingency plans in place by the end
of the third quarter of 1999.
Software applications and hardware. Each component of our software
application portfolio, or SAP, must be examined with respect to its ability to
properly handle dates in the next millennium. As part of our software
assessment plan, key users will test each component of our SAP. These tests
will be constructed to make sure each component operates properly with the
system date advanced to the next millennium.
The major phases of our software assessment plan are as follows:
. Complete SAP inventory;
. Implement Y2K compliant software as necessary;
. Analyze which computers have Y2K problems and the cost to repair;
. Test all vendors' representations; and
. Fix any computer-specific problems.
Our billing and accounts receivable software is known to have a significant
Y2K problem. We have already addressed this issue by obtaining a new, Y2K
compliant version of this software. We expect to complete conversion to this
Y2K compliant version by the end of the third quarter of 1999.
Operating systems. We are also reviewing our operating systems to assess
possible Y2K exposure. We use several different network operating systems, or
NOS, for multi-user access to the software that resides on the respective
servers. Each NOS must be examined with respect to its ability to properly
handle dates in the next millennium. Key users will test each component of our
SAP with a compliant version of the NOS. One level beneath the NOS is a special
piece of software that comes into play when the computer is "booted" that
potentially has a Y2K problem and that is the basic input output system
software, or BIOS. The BIOS takes the date from the system clock and uses it in
passing the date to the NOS which in turn passes the date to the desktop
operating system. The system clock poses another problem in that some system
clocks were only
19
<PAGE>
capable of storing a two-digit year while other computer clocks stored a four-
digit year. This issue affects each and every computer we have purchased. To
remedy these problems, we plan to inventory all computer hardware using a Y2K
utility program to determine whether we have a BIOS or a system clock problem.
We then intend to perform a BIOS upgrade or perform a processor upgrade to a
Y2K compliant processor.
Dialysis centers, equipment and suppliers. The operations of our dialysis
centers can be affected by the Y2K problem so a contingency plan must be in
place to prevent the shutdown of these centers. Each center will be responsible
for completing a survey of the possible consequences of a failure of the
information systems of our vendors and formulating a contingency plan by the
end of the third quarter of 1999. Divisional vice presidents will then review
these plans to assure compliance.
All of our biomedical devices, including dialysis machines that have a
computer chip in them, will be checked for Y2K compliance. We have contacted or
will contact each of the vendors of the equipment we use and ask them to
provide us with documentation regarding Y2K compliance. Where it is technically
and financially feasible without jeopardizing any warranties, we will test our
equipment by advancing the clock to a date in the next millennium.
In general, we expect to have all of our biomedical devices Y2K compliant by
the end of the third quarter of 1999. We have not yet been able to estimate the
costs of upgrading or replacing certain of our biomedical devices as we do not
yet know which of these machines, if any, are not currently Y2K compliant.
In addition to factors noted above which are directly within our control,
factors beyond our direct control may disrupt our operations. If our suppliers
are not Y2K complaint, we may experience inventory shortages and run short of
critical supplies. If the utilities companies, transportation carriers and
telecommunications companies which service us experience Y2K difficulties, our
operations will also be adversely affected and some of our facilities may need
to be closed. We are in the process of taking steps to reduce the impact on our
operations in such instances and implementing contingency plans to address any
possible unavoidable effect which these difficulties would have on our
operations.
To address the possibility of a physical plant failure, we are contacting the
landlords of each of our facilities to insure that they will provide access to
our staff and any other key service providers. We are also providing written
notification to our utilities companies of the locations, schedules and
emergency services required of each of our dialysis facilities. In case a
physical plant failure should result in an emergency closure of any of our
facilities, we are currently:
. Confirming that backup hospital affiliation agreements are up-to-date and
complete;
. Reviewing appropriate elements of our disaster preparedness plan with our
staff and patients;
. Adopting/modifying emergency treatment orders and rationing plans with
our medical directors to provide patient safety; and
. Conducting patient meetings with social workers and dieticians.
To minimize the affect of any Y2K non-compliance on the part of suppliers, we
are currently taking steps to:
. Identify our critical suppliers and survey each of them to assess their
Y2K compliance status;
. Identify alternative supply sources where necessary;
. Identify Y2K compliant transportation/shipping companies and establish
agreements with them to cover situations where our current suppliers'
delivery systems go down;
. Include language in contracts with new suppliers addressing Y2K
performance obligations, requirements and failures;
. Stock our dialysis facilities with one week of additional inventory;
20
<PAGE>
. Require critical distributors to carry additional inventory earmarked for
us; and
. Prepare a critical supplier contact/pager list for Y2K emergency supply
problems and ensure that contact persons will be on call 24 hours a day.
Our financial exposure from all sources of SAP and operating system Y2K
issues as well as from dialysis center, equipment and supplier Y2K issues known
to date ranges from approximately $500,000 to $1,200,000, the majority of which
has not been expended.
General. The extent and magnitude of the Y2K problem as it will affect us,
both before, and for some period after, January 1, 2000, are difficult to
predict or quantify for a number of reasons. Among the most important are our
lack of control over systems that are used by the third parties who are
critical to our operations, such as telecommunications and utilities companies,
the complexity of testing interconnected networks and applications that depend
on third-party networks and the uncertainty surrounding how others will deal
with liability issues raised by Y2K-related failures. Moreover, the estimated
costs of implementing our plans for fixing Y2K problems do not take into
account the costs, if any, that might be incurred as a result of Y2K-related
failures that occur despite our implementation of these plans.
With respect to third-party non-governmental payors, we are in the process of
determining where our exposure is and developing contingency plans to prevent
the interruption of cash flow. With respect to Medicare payments, both the
Health Care Financing Administration, or HCFA, and the two primary fiscal
intermediaries we utilize have contingency plans in place. The HCFA mandated
contingency plans have been tested by HCFA to ensure that no interruption of
Medicare payments results from Y2K-related failures of their systems. With
respect to MediCal, the largest of our third-party state payors, we are already
submitting our claims with a four-digit numerical year in accordance with the
current system. We are currently working with our other state payors
individually to determine the extent of their Y2K compliance.
Although we currently are not aware of any material operational issues
associated with preparing our internal computer systems, facilities and
equipment for Y2K, we cannot assure you, due to the overall complexity of the
Y2K issues and the uncertainty surrounding third party responses to Y2K issues,
that we will not experience material unanticipated negative consequences and/or
material costs caused by undetected errors or defects in our or third party
systems or by our failure to adequately prepare for the results of such errors
or defects, including costs of related litigation, if any. The impact of such
consequences could have a material adverse effect on our business, financial
condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate sensitivity
Due to the acceleration of the maturity of our credit facilities, our
repayment requirements have been modified. The table below has been revised
from the one disclosed in our Form 10-K for the fiscal year ended December 31,
1998, to reflect the modified principal repayments on our debt obligations and
the related variable weighted average interest rates by expected maturity
dates.
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<PAGE>
The table also reflects the cancellation of $100,000,000 of interest rate
swaps. For our interest rate swap agreements, the table presents the repayment
of the notional amounts of these swaps at maturity, the fixed weighted average
interest rates we must pay the swap holders according to the swap agreements,
and the weighted average interest rates we will receive from the swap holders,
based upon the current LIBOR. Notional amounts are used to calculate the
contracted payments we will exchange with the swap holders under the swap
agreements. The interest rates we will receive from the swap holders are
variable, and are based on the LIBOR.
<TABLE>
<CAPTION>
Expected Maturity Date
---------------------------------------- Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term debt
Fixed rate.............. $470 $470 $469
Average interest
rate................. 6.6% 6.6%
Variable rate........... $ 20 $ 11 $ 95 $154 $300 $377 $957 $957
Average interest
rate................. 6.88% 6.88% 6.88% 6.88% 6.88% 6.88% 6.88%
<CAPTION>
Expected Maturity Date
---------------------------------------- Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate derivatives
Interest rate swaps
Variable to fixed....... $100 $600 $700 $(29)
Average pay rate...... 5.51% 5.69% 5.75%
Average receive rate.. 5.03% 5.01% 5.01%
</TABLE>
Our swaps have a one-time call provision for our counterparty at varying
times based upon the maturity of the underlying swaps as follows:
<TABLE>
<CAPTION>
Notional
Swap Maturity Call Provision Amount
------------- -------------- --------
<S> <C> <C>
Ten-year swaps: Seven-year $200
Five-year 200
Seven-year swaps: Four-year 100
Three-year 100
Five-year swaps: Two-year 100
----
$700
====
</TABLE>
Other than as described above, there have been no material changes in our
market risk exposure from that reported in our Form 10-K for the fiscal year
ended December 31, 1998.
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<PAGE>
RISK FACTORS
In addition to the other information set forth in this Form 10-Q, you should
note the following risks related to our business.
If we fail to build adequate internal systems and controls then our revenue and
net income may be adversely affected.
We have experienced rapid growth in the last five years, and especially in
1998, as a result of our business strategy to acquire, develop and manage a
large number of dialysis centers. We also intend to continue to acquire,
develop and manage additional dialysis centers, both in the U.S. and
internationally. This historical growth and business strategy subjects us to
the following risks:
. Our billing and collection structures, systems and personnel may prove
inadequate to collect all amounts owed to us for services we have
rendered, resulting in a lack of sufficient cash flow;
. We may require additional management, administrative and clinical
personnel to manage and support our expanded operations, and we may not
be able to attract and retain sufficient personnel;
. Our assessment of the requirements of our growth on our information
systems may prove inaccurate, and we may have to spend substantial
amounts to enhance or replace our information systems;
. Our expanded operations may require cash expenditures in excess of the
cash available to us after paying our debt service obligations;
. We may inaccurately assess the historical and projected results of
operations of acquisition candidates, which may cause us to overpay for
acquisitions;
. We may inaccurately assess the historical and projected results of
operations of existing and recently acquired facilities, which may cause
us not to achieve the results of operations expected for these
facilities; and
. We may not be able to integrate acquired facilities as quickly or
smoothly as we expect, which may cause us not to achieve the results of
operations expected for these acquired facilities.
These risks are enhanced when we acquire entire regional networks or other
national dialysis providers, such as RTC, or enter into multi-facility
management agreements.
Future declines, or the lack of an increase, in Medicare reimbursement rates
could substantially decrease our net income.
We are reimbursed for dialysis services primarily at fixed rates established
in advance under the Medicare end stage renal disease, or ESRD, program. Unlike
many other Medicare programs, which receive periodic cost of living increases,
these rates have not increased since 1991. Increases in operating costs that
are subject to inflation, such as labor and supply costs, have occurred and
continue to occur without a compensating increase in reimbursement rates. In
addition, if Medicare should begin to include in its composite reimbursement
rate any ancillary services that it currently reimburses separately, our
revenue would decrease to the extent there was not a corresponding increase in
that composite rate. We cannot predict whether future rate changes will be
made. Approximately 50% of our net operating revenues in the first six months
of 1999 was generated from patients who had Medicare as the primary payor.
The Department of Health and Human Services, or HHS, has recommended, and the
Clinton administration has included in its fiscal year 2000 budget proposal to
the Congress, a 10% reduction in Medicare reimbursement for erythropoietin, or
EPO. We cannot predict whether this proposal or other future rate or
reimbursement method changes will be made. Approximately 14% of our net
operating revenues in the first six months of 1999 was generated from EPO
reimbursement through Medicare and Medicaid programs. Consequently, any
reduction in the rate of EPO reimbursement through Medicare and Medicaid
programs could materially reduce our revenues and net income.
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<PAGE>
Medicare separately reimburses us for other outpatient prescription drugs
that we administer to dialysis patients at the rate of 95% of the average
wholesale price of each drug. The Clinton administration has also included in
its fiscal year 2000 budget proposal to the Congress a reduction in the
reimbursement rate for outpatient prescription drugs to 83% of average
wholesale price. We cannot predict whether Congress will approve this rate
change, or whether other reductions in reimbursement rates for outpatient
prescription drugs will be made. If such changes are implemented, they could
have a material adverse effect on our revenues and net income.
Many Medicaid programs base their reimbursement rates for the services we
provide on the Medicare reimbursement rates. Any reductions in the Medicare
rates could also result in reductions in the Medicaid reimbursement rates.
Approximately 5% of our net operating revenues in the first six months of 1999
was generated from patients who had Medicaid or comparable state programs as
the primary payer.
If Medicare changes its ESRD program to a capitated reimbursement system, our
revenues and profits could be materially reduced.
HCFA has initiated a pilot demonstration project, expected to end in 2001, to
test the feasibility of allowing managed care plans to participate in the
Medicare ESRD program on a capitated basis. Under a capitated plan we or
managed care plans would receive a fixed periodic payment for servicing all of
our Medicare-eligible ESRD patients regardless of certain fluctuations in the
number of services provided in that period or the number of patients treated.
Under the current demonstration project, Medicare is paying managed care plans
a capitated rate equal to 95% of Medicare's current average cost of treating
dialysis patients. If HCFA considers this pilot program successful, HCFA or
Congress could lower the average Medicare reimbursement for dialysis.
If we charge private payors at rates less than our current rates, then our
revenues and net income could be substantially reduced.
Approximately 35% of our net operating revenues in the first six months of
1999 was generated from patients who had domestic private payors as the primary
payor. Domestic private payors, particularly managed care payors, have become
more aggressive in demanding contract rates approaching or at Medicare
reimbursement rates. We believe that the financial pressures on private payors
to decrease the rates at which they reimburse us will continue to increase and
could have a material impact on our revenues and net income.
If our assumptions regarding the beneficial life of our goodwill prove to be
inaccurate, or subsequently change, our current earnings may be overstated and
future earnings also may be affected.
Our balance sheet has an amount designated as "goodwill" that represents 47%
of our assets and 203% of our stockholders' equity at June 30, 1999. Goodwill
arises when an acquiror pays more for a business than the fair value of the
tangible and separately measurable intangible net assets. Generally accepted
accounting principles require the amortization of goodwill and all other
intangible assets over the period benefited. The current average useful life is
34 years for our goodwill and 21 years for all of our intangible assets that
relate to business combinations. We have determined that most acquisitions
after December 31, 1996 will continue to provide a benefit to us for no less
than 40 years after the acquisition. In making this determination, we have
reviewed with our independent accountants the significant factors that we
considered in arriving at the consideration we paid for, and the expected
period of benefit from, acquired businesses.
We and our independent accountants continuously review the appropriateness of
the amortization periods we are using and change them as necessary to reflect
current expectations. If the factors we considered, and which give rise to a
material portion of our goodwill, result in an actual beneficial period shorter
than our determined useful life, earnings reported in periods immediately
following some acquisitions would be overstated. In addition, in later years,
we would be burdened by a continuing charge against earnings without the
associated benefit to income. Earnings in later years could also be affected
significantly if we subsequently determine that the remaining balance of
goodwill has been impaired.
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<PAGE>
Interruption in the supply of, or cost increases in, EPO could materially
reduce our net income and affect our ability to care for our patients.
A single manufacturer, Amgen Corporation, produces EPO. In the future, Amgen
may be unwilling or unable to supply us with EPO. Additionally, shortages in
the raw materials or other resources necessary to manufacture EPO, or simply an
arbitrary decision on the part of this sole supplier, may increase the
wholesale price of EPO. Interruptions of the supply of EPO or increases in the
price we pay for EPO could have a material adverse effect on our financial
condition as well as our ability to provide appropriate care to our patients.
If we fail to identify, assess and respond successfully to the unique
attributes of each of our foreign operations, our net income could be adversely
affected.
We only recently commenced operations outside the U.S., and expect to enter
additional foreign markets in the next few years. Our failure to identify,
understand and respond to the unique attributes of any of the foreign markets
that we enter could cause us to:
. Overpay for acquisitions of foreign dialysis centers;
. Fail to integrate foreign acquisitions into our operations successfully;
and
. Assess the performance of our foreign operations incorrectly.
The unique attributes of our foreign operations include:
. Differences in payment and reimbursement rules and procedures, including
unanticipated slowdowns in payments from large payors in Argentina;
. Differences in accepted clinical standards and practices;
. Differences in management styles and practices;
. The unfamiliarity of foreign companies with U.S. financial reporting
standards; and
. Local laws that restrict or limit employee discharges and disciplinary
actions.
If we fail to adhere to all of the complex government regulations that apply to
our business, we could incur substantial fines or be excluded from
participating in government reimbursement programs.
Our dialysis operations are subject to extensive federal, state and local
government regulations in the U.S. and to extensive government regulation in
every foreign country in which we operate. Any of the following could adversely
impact our revenues:
. Loss of required government certifications;
. Loss of authorizations to participate in or exclusion from government
reimbursement programs, such as the Medicare ESRD Program and Medicaid
programs;
. Suspension of payments from government programs;
. Loss of licenses required to operate health care facilities in some of
the states in which we operate; and
. Any challenge to the relationships we have structured in some foreign
countries to comply with barriers to direct foreign ownership of
healthcare businesses.
The regulatory scrutiny of healthcare providers has increased significantly
in recent years. For example, the Office of Inspector General of HHS has
reported that it recovered $1.2 billion in fiscal year 1997 and $480 million in
fiscal year 1998 from health care fraud investigations.
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<PAGE>
. We may never collect the revenues from the payments suspended as a result
of an investigation of our laboratory subsidiary
Our Florida-based laboratory subsidiary is the subject of a third-party
carrier review relating to claims the laboratory submitted for Medicare
reimbursement. In May 1998, the carrier suspended all further Medicare payments
to this laboratory. Medicare revenues from this laboratory represent
approximately 2% of our net revenues. For the review periods the carrier has
identified, January 1995 to April 1996, and May 1996 to March 1998, the carrier
has alleged that the prescribing physician's medical justification did not
properly support approximately 97% of the tests this laboratory performed. The
carrier has determined that it overpaid this laboratory $5.6 million for the
period from January 1995 to April 1996, and $14.2 million for the period from
May 1996 to March 1998. The suspension of payments relates to all payments due
after the suspension started, regardless of when this laboratory performed the
tests. The carrier has withheld approximately $23 million as of June 30, 1999,
which has adversely affected our cash flow. We may never recover the amounts
withheld.
. Our failure to comply with federal and state fraud and abuse statutes
could result in sanctions
Neither our arrangements with the medical directors of our facilities nor the
minority ownership interests of referring physicians in some of our dialysis
facilities meet all of the requirements of published safe harbors to the anti-
kickback provisions of the Social Security Act and similar state laws. These
laws impose civil and criminal sanctions on anyone who receives or makes
payments for referring a patient for any service reimbursed by Medicare,
Medicaid or similar federal and state programs. Arrangements within published
safe harbors are deemed not to violate these provisions. Enforcement agencies
may subject arrangements that do not fall within a safe harbor to greater
scrutiny. If we are challenged under these statutes, we may have to change our
relationships with our medical directors and with referring physicians holding
minority ownership interests.
The laws of several states in which we do business prohibit a physician from
making referrals for laboratory services to entities with which the physician,
or an immediate family member, has a financial interest. We currently operate a
large number of facilities in these states, which account for a significant
percentage of our business. These state statutes could apply to laboratory
services incidental to dialysis services. If so, we may have to change our
relationships with referring physicians who serve as medical directors of our
facilities or hold minority interests in any of our facilities.
We may not have sufficient cash flow from our business to service our debt.
The amount of our outstanding debt is large compared to the net book value of
our assets, and we have substantial repayment obligations under our outstanding
debt. As of June 30, 1999 we had:
. Total consolidated debt of approximately $1.4 billion;
. Stockholders' equity of approximately $479 million; and
. A ratio of earnings to fixed charges of 1.04.
The following chart shows our aggregate interest and principal payments due
on all of our currently outstanding debt for each of the next five fiscal
years. Under interest swap agreements covering $700 million of debt, the
interest rate under our credit facilities varies based on the amount of debt we
incur relative to our assets and equity. Accordingly, the amount of these
interest payments could fluctuate in the future.
<TABLE>
<CAPTION>
Interest Principal
Payments Payments
------------ ------------
<S> <C> <C>
For the year ending December 31:
1999.......................................... $110,023,000 $ 19,561,000
2000.......................................... 108,927,000 10,534,000
2001.......................................... 100,860,000 94,580,000
2002.......................................... 87,782,000 153,567,000
2003.......................................... 72,391,000 300,059,000
</TABLE>
26
<PAGE>
Due to the large amount of these principal and interest payments, we may not
have enough cash to pay the interest on our debt as it becomes due.
The large amount and terms of our outstanding debt may prevent us from taking
actions we would otherwise consider in our best interest.
Our credit facilities contain numerous financial and operating covenants that
limit our ability, and the ability of most of our subsidiaries, to engage in
activities such as incurring additional senior debt and disposing of our
assets. These covenants require that we meet interest coverage, net worth and
leverage tests.
Additionally, as we are highly leveraged and if we are not in compliance with
our covenants, we may be required to renegotiate the terms of our credit
facilities on terms that are more unfavorable including: higher interest rates,
shorter maturities or more restrictive borrowing terms; all of which may have
an adverse impact on net income. Currently, as a result of the waivers granted
by our lenders, we are in compliance with our credit facility covenants.
Our level of debt and the limitations our credit facilities impose on us
could have other important consequences to you, including:
. We will have to use a portion of our cash flow from operations,
approximately $129.6 million in 1999 and $119.5 million in 2000, for debt
service rather than for our operations;
. We may not be able to obtain additional debt financing for future working
capital, capital expenditures, acquisitions or other corporate purposes;
. We could be less able to take advantage of significant business
opportunities, including acquisitions, and react to changes in market or
industry conditions.
If a change of control occurs, we may not have sufficient funds to repurchase
our outstanding notes.
Upon a change of control, generally the sale or transfer of a majority of our
voting stock or almost all of our assets, our noteholders may require us to
repurchase all or a portion of their notes. If a change of control occurs, we
may not be able to pay the repurchase price for all of the notes submitted for
repurchase. In addition, the terms of our credit facilities generally prohibit
us from purchasing any notes until we have repaid all debt outstanding under
these credit facilities. Future credit agreements or other agreements relating
to debt may contain similar provisions. We may not be able to secure the
consent of our lenders to repurchase our outstanding notes or refinance the
borrowings that prohibit us from repurchasing our outstanding notes. If we do
not obtain a consent or repay the borrowings, we could not repurchase these
notes.
We may experience material unanticipated negative consequences beginning in the
year 2000 due to undetected computer defects.
The Y2K issue concerns the potential exposures related to the automated
generation of incorrect information from the use of computer programs which
have been written using two digits, rather than four, to define the applicable
year of business transactions. Due to the overall complexity of the Y2K issues
and the uncertainty surrounding third party responses to Y2K issues, we cannot
assure you that undetected errors or defects in our or third party systems or
our failure to prepare adequately for the results of those errors or defects
will not cause us material unanticipated problems or costs.
The extent and magnitude of the Y2K problem as it will affect us, both
before, and for some period after, January 1, 2000, are difficult to predict or
quantify for a number of reasons. Among the most important are:
. Our lack of control over third party systems that are critical to our
operations, including those of telecommunications and utilities companies
and governmental and non-governmental payors;
. The complexity of testing interconnected internal and external computer
networks, software applications and dialysis equipment; and
. The uncertainty surrounding how others will deal with liability issues
raised by Y2K-related failures.
27
<PAGE>
Moreover, the estimated costs of implementing our plans for fixing Y2K
problems do not take into account the costs, if any, that we might incur as a
result of Y2K-related failures that occur despite our implementation of these
plans.
While we are developing contingency plans to address possible computer
failure scenarios, we recognize that there are "worst case" scenarios which may
occur. We may experience the extended failure of external and internal computer
networks and equipment that control
. Medicare, Medicaid and other third party payors' ability to reimburse us;
. Regional infrastructures, such as power, water and telecommunications
systems;
. Equipment and machines that are essential for the delivery of patient
care; and
. Computer software necessary to support our billing process.
If any one of these events occurs, our cash flow could be materially reduced.
Even in the absence of a failure of these networks and equipment, we will
likely continue to incur costs related to remediation efforts, the replacement
or upgrade of equipment, continued efforts regarding contingency planning,
increased staffing for the periods immediately preceding and after January 1,
2000 and the possible implementation of alternative payment schemes with our
payors.
Provisions in our charter documents may deter a change of control which our
stockholders may otherwise determine to be in their best interests.
Our certificate of incorporation and bylaws and the Delaware General
Corporation Law include provisions which may deter hostile takeovers, delay or
prevent changes in control or changes in our management, or limit the ability
of our stockholders to approve transactions that they may otherwise determine
to be in their best interests. These provisions include:
. A provision requiring that our stockholders may take action only at a
duly called annual or special meeting of our stockholders and not by
written consent;
. A provision requiring a stockholder to give at least 60 days' advance
notice of a proposal or director nomination that the stockholder desires
to present at any annual or special meeting of stockholders; and
. A provision granting our board of directors the authority to issue up to
five million shares of preferred stock and to determine the rights and
preferences of the preferred stock without the need for further
stockholder approval. The existence of this "blank-check" preferred stock
could discourage an attempt to obtain control of us by means of a tender
offer, merger, proxy contest or otherwise. Furthermore, this "blank-
check" preferred stock may have other rights, including economic rights,
senior to our common stock. Therefore, issuance of the preferred stock
could have an adverse effect on the market price of our common stock.
We may, in the future, adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a
change in control were at a premium price or favored by a majority of
unaffiliated stockholders. We may adopt certain of these measures without any
further vote or action by our stockholders.
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Forward-looking statements
We believe that this Form 10-Q contains statements that are forward-looking
statements within the meaning of the federal securities laws. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which we indicate by words or phrases such as "anticipate," "expect,"
"intend," "plan," "will," "believe" and similar language. These statements
involve known and unknown risks, including risks resulting from economic and
market conditions, the regulatory environment in which we operate, competitive
activities and other business conditions, and are subject to uncertainties and
assumptions set forth elsewhere in this Form 10-Q. Our actual results may
differ materially from results anticipated in these forward-looking statements.
We base our forward-looking statements on information currently available to
us, and we assume no obligation to update these statements.
29
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Procedings
The information in Note 9 of the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this report is incorporated by this reference
in response to this item.
Items 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
10.1 Employment Agreement, dated as of May, 6 1999, by and between TRCH and
George DeHuff.*
10.2 Amendment No. 3 and Waiver, dated as of August 9, 1999, to and under
the Revolving Credit Agreement.
10.3 Limited Waiver and Second Amendment, dated as of August 9, 1999, to
the Term Loan Agreement.
27.1 Financial Data Schedule--three months ended June 30, 1999 and three
months ended June 30, 1998.
27.2 Financial Data Schedule--six months ended June 30, 1999 and six months
ended June 30, 1998.
</TABLE>
- ---------------------
* Management contract or executive compensation plan or arrangement.
(b) Reports on Form 8-K
None.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOTAL RENAL CARE HOLDINGS, INC.
/s/ John J. McDonough
By: _________________________________
John J. McDonough
Vice President and
Chief Accounting Officer
Date: August 16, 1999
John J. McDonough is signing in the dual capacities as the registrant's
principal accounting officer and a duly authorized officer of the registrant.
31
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.1 Employment Agreement, dated as of May, 6 1999, by and between TRCH and
George DeHuff.*
10.2 Amendment No. 3 and Waiver, dated as of August 9, 1999, to and under
the Revolving Credit Agreement.
10.3 Limited Waiver and Second Amendment, dated as of August 9, 1999, to
the Term Loan Agreement.
27.1 Financial Data Schedule--three months ended June 30, 1999 and three
months ended June 30, 1998.
27.2 Financial Data Schedule--six months ended June 30, 1999 and six months
ended June 30, 1998.
</TABLE>
- ---------------------
*Management contact or executive compensation plan or arrangement.
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into effective as of
May 6, 1999 (the "Effective Date") by and between Total Renal Care Holdings,
Inc. (the "Company") and George DeHuff ("Executive").
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and for other good and valuable consideration, the
receipt of which the parties hereby acknowledge, the parties hereto, intending
to be legally bound hereby, agree as follows:
Section 1. Employment and Duties. The Company shall employ Executive, and
Executive accepts such employment, for the Term set forth in Section 3 hereof
on the terms and conditions set forth in this Agreement. During the Term,
Executive shall serve as President and Chief Operating Officer of the Company
and shall perform the duties of such office, as well as such other duties as
may be assigned to Executive from time to time during the Term by the Chief
Executive Officer of the Company or his designee. Executive shall devote
Executive's best efforts and skills to the business and interests of the
Company on a full-time basis. Executive shall not engage in any other business
activity during the Term; provided, however, that Executive may manage personal
investments and participate in charitable and civic affairs to the extent that
such activities do not adversely affect the performance of Executive's
responsibilities to the Company hereunder. Executive shall at all times observe
and abide by the Company's policies and procedures as in effect from time to
time.
Section 2. Compensation. In consideration of the services to be performed by
Executive hereunder, Executive shall receive:
2.1 Base Salary. A salary at the rate of $310,000 per year (the "Base
Salary"), effective as of the Effective Date. The Base Salary shall be payable
in installments consistent with the Company's payroll schedule. The Base Salary
shall be subject to adjustment annually by the Board for increases, if any, in
the Consumer Price Index for the most proximate geographic area in which
Executive is then employed (as published by the United States Department of
Labor for the immediately preceding calendar year) and will be reviewed each
year during the Company's annual salary review and the Company may, in its sole
discretion, increase the Base Salary as a result of any such review.
2.2 Benefits. Executive shall be provided employee benefits (including life,
health, accident and disability insurance, stock options and an auto allowance)
on the same basis as such benefits are generally made available to other senior
executives of the Company. Executive will be entitled to four (4) weeks paid
vacation for each twelve (12) month period following the Effective Date.
2.3 Bonuses.
(a) Executive shall be eligible to receive such bonuses as are approved
by the Compensation Committee of the Board of Directors of the Company;
provided that Executive shall be eligible to receive a bonus of up to 100%
of the Base Salary each year pursuant to such bonus plans as may be
approved by the Compensation Committee (the "Bonus"). Except as otherwise
provided herein, up to 50% of the Bonus will be awarded in connection with
the achievement of a Company earnings per share ("EPS") target (the "EPS
Bonus") and the remainder of the Bonus shall be subject to the absolute
discretion of the Committee based upon the Committee's subjective judgment.
During the first year of the term (defined below) hereof, Executive shall
be guaranteed a bonus equal to $155,000.
(b) Except as set forth below, the Company EPS target for determination
of Executive's EPS Bonus shall be determined in the sole discretion of the
Committee, provided that the EPS target used to determine Executive's EPS
Bonus shall be identical to the EPS target used to determine the EPS
Bonuses for the other executive officers of the Company.
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(c) The Bonus for any year shall be paid within a reasonable period of
time after the EPS for such year has been determined, but in no event later
than 75 days after the last day of such year. Executive must be employed by
the Company (or an affiliate) on the date any Bonus is paid to be eligible
to receive such Bonus and, if Executive is not employed by the Company (or
an affiliate) on the date any Bonus is paid for any reason whatsoever,
Executive shall not be entitled to receive such Bonus; provided, however,
that in the event Executive (i) dies, (ii) is terminated by the Company by
reason of Disability (as defined below), (iii) is terminated without
Material Cause (as defined below) following a Change of Control (as defined
below), or (iv) resigns following Constructive Discharge (as defined below)
following a Change of Control, Executive shall be entitled to receive a pro
rated Bonus for that portion of any year prior to such termination (or for
the whole year and a portion of a year if such termination occurs after
December 31 of any year and prior to the date on which the Bonus for such
year is paid) regardless of whether Executive is employed on the date such
Bonus is paid. Any such prorated Bonus shall be paid at such time as
bonuses for such year are otherwise paid.
Section 3. Term.
3.1 Commencement. The term (the "Term") of Executive's employment hereunder
shall commence on the Effective Date and, unless sooner terminated as provided
herein, shall continue thereafter until May 16, 2001; provided, however, that
the Term shall automatically renew for additional periods of one (1) year each
unless either party shall deliver written notice to the other of its intention
not to renew the Term not later than ninety (90) days prior to the applicable
renewal date.
3.2 Termination for Material Cause. The Company may terminate Executive's
employment for Material Cause (as defined below) upon at least thirty (30)
days' advance written notice specifying in detail the cause for termination and
the intended termination date. Prior to the effective date of any termination
for Material Cause, Employee shall have been offered an opportunity to meet and
confer in person with the Chairman of the Board and at least two (2) additional
Board members regarding the grounds for such intended termination. Upon
termination for Material Cause, Executive (i) shall be entitled to receive the
Base Salary and benefits as set forth in Section 2.1 and Section 2.2,
respectively, through the effective date of such termination and (ii) shall not
be entitled to receive any other compensation, benefits or payments of any
kind, except as otherwise required by law or by the terms of any benefit or
retirement plan or other arrangement that would, by its terms, apply.
3.3 Other Termination. If the Company terminates the employment of Executive
for any reason other than Material Cause or Disability, or if Executive resigns
following Constructive Discharge following a Change of Control, Executive shall
(i) be entitled to receive the Base Salary and benefits as set forth in Section
2.1 and Section 2.2, respectively, through the effective date of such
termination, and, to the extent applicable, the bonus provided for in Section
2.3(c), (ii) be obligated to provide consulting services to the Company as
provided in Section 4 and for which services Executive shall be entitled to
receive, within two business days of the effective date of such termination, a
lump sum amount equal to one (1) times Executive's then current Base Salary and
(iii) not be entitled to receive any other compensation, benefits or payments
of any kind, except as otherwise required by law or by the terms of any benefit
or retirement plan or other arrangement that would, by its terms, apply.
3.4 Death. In the event of Executive's death, Executive's estate shall (i) be
entitled to receive the Base Salary and benefits as set forth in Sections 2.1
and 2.2, respectively, through the effective date of Executive's death, (ii) be
entitled to receive a pro rated bonus as set forth in Section 2.3 and (iii) not
be entitled to receive any other compensation, benefits or payments of any
kind, except as otherwise required by law or by the terms of any benefit or
retirement plan or other arrangement that would, by its terms, apply.
3.5 Disability. Upon thirty (30) days' notice (which notice may be given
prior to the completion of the periods described herein), the Company may
terminate Executive's employment for Disability, provided that either (i)
immediately upon the effective date of such termination, Executive shall be
eligible to receive full disability benefits under the disability insurance, if
any, provided to Executive by the Company, or (ii) the
2
<PAGE>
Company shall continue to pay the Base Salary to Executive until the first to
occur of (A) full disability benefits are received or (B) one (1) year.
3.6 Definitions. For the purposes of this Section 3, the following terms
shall have the meanings indicated:
(a) "Change of Control" shall mean (i) any transaction or series of
transactions in which any person or group (within the meaning of Rule 13d-5
under the Exchange Act and Sections 13(d) and 14(d) of the Exchange Act)
becomes the direct or indirect "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), by way of a stock issuance, tender offer, merger,
consolidation, other business combination or otherwise, of greater than 50%
of the total voting power (on a fully diluted basis as if all convertible
securities had been converted and all warrants and options had been
exercised) entitled to vote in the election of directors of the Company
(including any transaction in which the Company becomes a wholly owned or
majority owned subsidiary of another corporation), (ii) any merger or
consolidation or reorganization in which the Company does not survive,
(iii) any merger or consolidation in which the Company survives, but the
shares of the Company's Common Stock outstanding immediately prior to such
merger or consolidation represent 50% or less of the voting power of the
Company after such merger or consolidation, and (iv) any transaction in
which more than 50% of the Company's assets are sold.
(b) "Constructive Discharge" shall mean the occurrence of any of the
following events after the date of a Change of Control without Employee's
express written consent: (i) the scope of Employee's authority, duties and
responsibilities are materially diminished or are not (A) in the same area
of operations, (B) in the same corporate and reporting capacity (and
standing in the same relationship to the ultimate parent entity, e.g.,
reporting to the chief executive officer of a subsidiary will not be deemed
to constitute the same corporate and reporting capacity as reporting to the
chief executive officer of the ultimate parent entity) or (C) of the same
general nature as Employee's authority, duties and responsibilities with
the Company immediately prior to such Change of Control; (ii) the failure
by the Company to provide Employee office accommodations and assistance
substantially equivalent to the accommodations and assistance provided to
Employee immediately prior to such Change of Control; (iii) the principal
office to which Employee is required to report is changed to a location
which is more than twenty (20) miles from the principal office to which
Employee is required to report immediately prior to such Change of Control;
or (iv) a reduction by the Company in Employee's Base Salary, bonus
arrangement or other material benefits as in effect on the date of such
Change of Control or as the same may be increased thereafter.
(c) "Disability" shall mean the inability, for a period of six (6) months
to adequately perform Executive's regular duties due to a physical or
mental illness, condition or disability.
(d) "Material Cause" shall mean: (i) conviction of a felony involving
moral turpitude relating to the business of the Company and which does, in
fact, adversely and directly affect the business of the Company; (ii) the
adjudication by a court of competent jurisdiction that Employee has
committed any act of fraud or dishonesty resulting or intended to result
directly or indirectly in personal enrichment at the expense of the
Company; (iii) repeated failure or refusal by Employee to follow policies
or directives reasonably established by the Chief Executive Officer of the
Company or his designee that goes uncorrected for a period of thirty (30)
consecutive days after written notice has been provided to Employee; or
(iv) intentional breach by Employee of Section 5.1 or Section 5.2 of this
Agreement.
3.7 Notice of Termination. Any purported termination of Executive's
employment by the Company or by Executive shall be communicated by a written
Notice of Termination to the other party hereto in accordance with Section 7.5
hereof. A "Notice of Termination" shall mean a written notice that indicates
the specific termination provision in this Agreement relied upon and sets forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment.
3.8 Rights and Obligations Upon Termination. The termination of Executive's
employment shall not modify or affect the rights and obligations of the
parties, if any, under Section 2.3(c), Section 3, Section 4, Section 5, Section
6 and Section 7.
3
<PAGE>
Section 4. Consulting Services. If Executive is entitled to receive a lump
sum payment upon the termination of employment pursuant to Section 3.3 and
receives such payment, acceptance of such payment shall be deemed to constitute
an agreement by Executive to provide consulting services to the Company for a
period of two years after the termination of employment (the "Consulting
Period") on an "as needed" basis (which shall not exceed 120 hours per year).
The consulting services to be provided during the Consulting Period will
include advising the Company as to those matters which were within the scope of
Executive's responsibilities while employed by the Company and such other
consulting services as may be mutually agreed upon by the Company and
Executive. The times and locations at which such consulting services will be
provided will be mutually agreed upon by Executive and the Company. During the
Consulting Period, Executive will not provide any similar consulting services
in any manner, directly or indirectly, to any Person described in clause (i) or
(ii) of Section 5.2(a).
Section 5. Information and Competition.
5.1 (a) Executive acknowledges and agrees that: (i) in the course of
Executive's employment or continued employment by the Company, it will or
may be necessary for Executive to create, use or have access to (A)
technical, business, or customer information, materials, or data relating
to the Company's present or planned business which has not previously been
released to the public with the Company's authorization, including, but not
limited to, confidential information, materials or proprietary data
belonging to the Company or relating to the Company's affairs
(collectively, "Confidential Information") and (B) information and
materials that concern the Company's business that come into Executive's
possession by reason of employment with the Company (collectively,
"Business Related Information"); (ii) all Confidential Information and
Business Related Information are the property of the Company; (iii) the
use, misappropriation or disclosure of any Confidential Information or any
Business Related Information would constitute a breach of trust and could
cause serious and irreparable injury to the Company; and (iv) it is
essential to the protection of the Company's goodwill and to the
maintenance of the Company's competitive position that all Confidential
Information and Business Related Information be kept confidential and that
Executive not disclose any Confidential Information or Business Related
Information to others or use any Confidential Information or Business
Related Information to Executive's own advantage or the advantage of
others.
(b) In recognition of the acknowledgments contained in Section 5.1(a)
above, Executive agrees that, during the Term and thereafter until the
Confidential Information and Business Related Information becomes publicly
available (otherwise than through breach by Executive), Executive shall:
(i) hold and safeguard all Confidential Information and Business Related
Information in trust for the Company, its successors and assigns; (ii) not
appropriate or disclose or make available to anyone for use outside of the
Company's organization at any time, either during employment with the
Company or subsequent to the termination of employment with the Company for
any reason, any Confidential Information or Business Related Information,
whether or not developed by Executive, except as required in the
performance of Executive's duties to the Company; (iii) keep in strictest
confidence any Confidential Information or Business Related Information;
and (iv) not to disclose or divulge, or allow to be disclosed or divulged
by any person within Executive's control, to any person, firm or
corporation, or use directly or indirectly, for Executive's own benefit or
the benefit of others, any Confidential Information or Business Related
Information.
5.2 Competition.
(a) Executive agrees that, during the Term and for a period of two (2)
years from the date Executive's employment terminates for any reason,
Executive shall not: (i) directly or indirectly, on Executive's behalf or
as an officer, director, consultant, partner, owner, stockholder, employee,
creditor, agent, trustee or advisor of any individual, partnership or
limited liability company, corporation, independent practice association or
management services organization or other entity ("Person") that is in the
business of, or directly or indirectly derives any economic benefit from,
providing, arranging, offering, managing or
4
<PAGE>
subcontracting dialysis services or renal care services; or (ii) in any
other capacity, own, manage, control, operate, invest or acquire an
interest in or otherwise engage in or act for or on behalf of any Person
(other than the Company and its subsidiaries and affiliates) engaged in any
activity in the United States and those countries outside the United States
in which the Company or any of its subsidiaries or affiliates had conducted
any business during Executive's employment hereunder, where such activity
is similar to or competitive with the activities carried on by the Company
or any of its subsidiaries or affiliates. As used herein, the term
"dialysis services" or "renal care services" includes, but shall not be
limited to, all dialysis services and nephrology-related services provided
by the Company at any time during the period, including, but not limited
to, hemodialysis, acute dialysis, apheresis services, peritoneal dialysis
of any type, staff-assisted hemodialysis, home hemodialysis, dialysis-
related laboratory and pharmacy services, access-related services, Method
II dialysis supplies and services, and any other service or treatment for
persons diagnosed as having end stage renal disease ("ESRD") or pre-end
stage renal disease, as well as any dialysis services provided in an acute
hospital. To the extent such regulation is changed or amended, the term
"ESRD" shall have the same meaning as set forth in Title 42, Code of
Federal Regulations 405.2101 et seq. or any successor thereto. Executive
acknowledges that the nature of the Company's activities is such that
competitive activities could be conducted effectively regardless of the
geographic distance between the Company's place of business and the place
of any competitive business. Notwithstanding anything herein to the
contrary, such activity shall not include the ownership of 5% or less of
the issued and outstanding stock of a public company.
(b) Executive agrees that, during the Term and for a period of five (5)
years from the date Executive's employment terminates for any reason,
Executive shall not, directly or indirectly: (i) induce any patient or
customer of the Company, either individually or collectively, to patronize
any competing dialysis facility; (ii) request or advise any patient,
customer or supplier of the Company to withdraw, curtail or cancel such
person's business with the Company; (iii) enter into any contract the
purpose or result of which would benefit Executive if any patient or
customer of the Company were to withdraw, curtail or cancel such person's
business with the Company; (iv) solicit, induce or encourage any physician
(or former physician) affiliated with the Company or induce or encourage
any other person employed by or under contract with the Company to curtail
or terminate such person's affiliation or employment or contractual
relationship with the Company; (iv) disclose to any Person the names or
physician addresses of any customer of the Company; or (vi) disparage the
Company or any of its agents, employees or affiliate physicians in any
fashion.
5.3 Enforcement. In the event that any part of this Section 5 shall be held
unenforceable or invalid, the remaining parts hereof shall nevertheless
continue to be valid and enforceable as though the invalid portions had not
been a part hereof. In the event that the area, period of restriction, activity
or subject established in accordance with this Section 5 shall be deemed to
exceed the maximum area, period of restriction, activity or subject that a
court of competent jurisdiction deems enforceable, such area, period of
restriction, activity or subject shall, for the purpose of this Section 5, be
reduced to the extent necessary to render them enforceable.
5.4 Equitable Relief. Executive agrees that any violation by Executive of any
covenant in this Section 5 may cause such damage to the Company as will be
serious and irreparable and the exact amount of which will be difficult to
ascertain, and for that reason, Executive agrees that the Company shall be
entitled, as a matter of right, to a temporary, preliminary and/or permanent
injunction and/or other injunctive relief, ex parte or otherwise, from any
court of competent jurisdiction, restraining any further violations by
Executive. Such injunctive relief shall be in addition to and in no way in
limitation of, any and all other remedies the Company shall have in law and
equity for the enforcement of such covenants and provisions.
5.5 Documents. Upon the termination of Executive's employment with the
Company for any reason, Executive shall promptly deliver to the Company all
materials and documents belonging to or concerning the Company or relating to
its affairs and, without limiting the foregoing, will promptly deliver to the
Company any and all other documents or materials containing or constituting
Confidential Information or Business Related Information.
5
<PAGE>
Section 6. Change of Control.
6.1 Excess Parachute Payment. In the event that any payment or benefit
received or to be received by Executive in connection with a Change of Control,
whether payable pursuant to the terms of this Agreement or any other plan,
arrangement or agreement by the Company, any predecessor or successor to the
Company or any corporation affiliated with the Company or which becomes so
affiliated pursuant to the transactions resulting in a Change of Control, both
within the meaning of Section 1504 of the Internal Revenue Code of 1986, as
amended (the "Code") (collectively all such payments are hereinafter referred
to as the "Total Payments") is deemed to be an "Excess Parachute Payment" (in
whole or in part) to Executive as a result of Section 280G and/or 4999 of the
Code, as in effect at such time, no change shall be made to the Total Payments
to be made in connection with the Change of Control, except that, in addition
to all other amounts to be paid to Executive by the Company hereunder, the
Company shall, within thirty (30) days of the date on which any Excess
Parachute Payment is made, pay to Executive, in addition to any other payment,
coverage or benefit due and owing hereunder, an amount determined by (i)
multiplying the rate of excise tax then imposed by Code Section 4999 by the
amount of the "Excess Parachute Payment" received by Executive (determined
without regard to any payments made to Executive pursuant to this Section 6.2)
and (ii) dividing the product so obtained by the amount obtained by subtracting
(A) the aggregate local, state and Federal income tax rates (including the
value of the loss of itemized deductions under Section 68 of the Internal
Revenue Code) applicable to the receipt by Executive of the "Excess Parachute
Payment" (taking into account the deductibility for Federal income tax purposes
of the payment of state and local income taxes thereon) from (B) the amount
obtained by subtracting from 1.00 the rate of excise tax then imposed by
Section 4999 of the Code. It is the Company's intention that Executive's net
after-tax position be identical to that which would have obtained had Sections
280G and 4999 not been part of the Code. For purposes of implementing this
Section 6.2, (i) no portion, if any, of the Total Payments, the receipt or
enjoyment of which Executive shall have effectively waived in writing prior to
the date of payment of the Total Payments, shall be taken into account, and
(ii) the value of any non-cash benefit or any deferred cash payment included in
the Total Payments shall be determined by the Company's independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the Code.
6.2 Expense Reimbursement. In the event that any person, other than
Executive, asserts the invalidity of all or any part of this Agreement and
Executive incurs legal fees or out-of-pocket expenses in connection with
defending the validity of all or a portion of this Agreement, the Company shall
reimburse Executive for all legal fees and out-of-pocket expenses Executive so
incurs.
Section 7. Miscellaneous.
7.1 Mediation of Disputes Concerning Employment. In the event of any dispute
concerning Executive's employment by the Company, whether or not relating to
this Agreement, Executive and the Company shall first attempt to resolve such
dispute through mediation as provided in this Section 7.1 before instituting
any legal action or other proceedings with respect thereto; provided, however,
that neither party shall be required to utilize such mediation procedures to
the extent that equitable relief is being sought by a party in the good faith
belief that an immediate remedy is required to avoid irreparable injury to such
party. Except as otherwise provided in the proviso to the immediately preceding
sentence, in the event that either party desires to institute litigation or
other legal proceedings to resolve a dispute concerning Executive's employment
by the Company, such party shall first give written notice to the other party
setting forth in detail the nature of the dispute and the facts which such
party believes supports such party's position in such dispute. The parties
shall then promptly (and, in any event, within ten (10) business days of the
giving of notice of a dispute) engage the services of an impartial, experienced
employment mediator (the "Mediator") under the auspices of JAMS/Endispute (or
such other mediation service as the parties may mutually select) in Los Angeles
County, California and shall promptly schedule a mediation session with the
Mediator for a date which is not later than forty five (45) days after the date
of the selection of the Mediator. The Mediator shall conduct a one-day
mediation session, attended by both parties and their counsel, in an attempt to
informally resolve the dispute. By oral or written agreement of both parties,
follow-up or additional mediation sessions may be scheduled, but neither party
shall be required to participate in more than one day of mediation. Neither
party shall be required to submit briefs or position papers
6
<PAGE>
to the Mediator, but both parties shall have the right to do so, subject to
such rules and procedures as the Mediator may establish in his or her sole
discretion. Except as otherwise agreed by the parties, all written submissions
to the Mediator shall remain confidential as between the submitting party and
the Mediator. The mediation process shall be treated as a settlement
negotiation and no evidence introduced in the mediation process may be used in
any way by either party or any other person in connection with any subsequent
litigation or other legal proceedings (except to the extent independently
obtained through discovery in such litigation or proceedings) and the
disclosure of any privileged information to the Mediator shall not operate as a
waiver of privilege with respect to such information. Each party shall bear all
of its own costs, attorneys' fees and expenses related to preparing for and
attending any mediation conducted under this Agreement. The fees and expenses
of the Mediator and the mediation service used, if any, shall be borne equally
by the Company and Executive.
7.2 Entire Agreement; Amendment. This Agreement represents the entire
understanding of the parties hereto with respect to the employment of Executive
and supersedes all prior agreements with respect thereto; provided, however,
that except as set forth in Section 6.1, this Agreement shall not affect any
stock option agreement or similar agreement relating to equity incentives
between the Company and Executive. This Agreement may not be altered or amended
except in writing executed by both parties hereto.
7.3 Assignment; Benefit. This Agreement is personal and may not be assigned
by Executive. This Agreement may be assigned by the Company and shall inure to
the benefit of and be binding upon the successors and assigns of the Company.
7.4 Applicable Law. This Agreement shall be governed by the laws of the State
of California, without regard to the principles of conflicts of laws.
7.5 Notice. Notices and all other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the Company at its principal office and to
Executive at Executive's principal residence as shown in the Company's
personnel records, provided that all notices to the Company shall be directed
to the attention of the Chief Executive Officer with a copy to the Secretary of
the Company, or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
7.6 Waiver. The waiver by any party of a breach of any provision of this
Agreement by the other shall not operate or be construed as a waiver of any
other or subsequent breach of such or any provision.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective
as of the 6th day of May, 1999.
<TABLE>
<S> <C>
TOTAL RENAL CARE HOLDINGS, INC. GEORGE DEHUFF
By: Barry C. Cosgrove ________________________________________
________________________________________ Signature
Its: Sr. Vice President and General
Counsel ________________________________________
________________________________________ George DeHuff
</TABLE>
7
<PAGE>
EXHIBIT 10.2
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
AMENDMENT NO. 3 AND WAIVER (this "Amendment"), dated as of August 9, 1999, to
and under the Amended and Restated Revolving Credit Agreement, as amended by
Amendment No. 1 and Consent No. 1, dated as of August 5, 1998, and Amendment
No. 2, dated as of November 12, 1998 (the "Revolving Credit Agreement"), dated
as of April 30, 1998, by and among TOTAL RENAL CARE HOLDINGS, INC., a Delaware
corporation (the "Borrower"), the lenders party thereto (the "Lenders"), DLJ
CAPITAL FUNDING, INC., as Syndication Agent, FIRST UNION NATIONAL BANK, as
Documentation Agent, and THE BANK OF NEW YORK, as administrative agent (in such
capacity, the "Administrative Agent").
RECITALS
I. Capitalized terms used herein which are not otherwise defined herein shall
have the respective meanings ascribed thereto in the Revolving Credit
Agreement.
II. The Borrower has requested that the Administrative Agent and the Lenders
agree to amend and waive certain provisions under the Revolving Credit
Agreement upon the terms and conditions contained herein, and the
Administrative Agent and the Required Lenders are willing to so agree.
Accordingly, in consideration of the Recitals and the covenants and
conditions hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. The Administrative Agent and the Required Lenders hereby waive compliance
with Section 7.15 of the Revolving Credit Agreement from March 31, 1999 through
and including March 15, 2000 (the "Waiver Period"), provided that each of the
following conditions (the "Waiver Conditions") shall be, and shall at all times
remain, satisfied:
(a) the Leverage Ratio (calculated so as to exclude, to the extent
included therein, certain one-time charges related to the fiscal quarters
of the Borrower ended on March 31, 1999 and June 30, 1999, as disclosed in
the July 18, 1999 press release of the Borrower, in an aggregate amount not
to exceed $60,000,000 on a pre-tax basis (the "One-Time Charges")) during
the Waiver Period shall not exceed 4.40:1.00 at any time,
(b) the Aggregate Credit Exposure of all Lenders during the Waiver Period
shall not exceed $650,000,000 at any time,
(c) in addition to the terms, conditions and restrictions contained in
the Revolving Credit Agreement, the use by the Borrower and any of its
Subsidiaries of cash (including, without limitation, the proceeds of all
Loans) during the period from July 1, 1999 through and including March 15,
2000 shall be solely for: (i) the ordinary working capital purposes of the
Borrower and its Subsidiaries, (ii) Permitted Acquisitions, and (iii) other
capital expenditures and corporate purposes of the Borrower and its
Subsidiaries in amounts that do not materially exceed those outlined in the
cash flow forecast of the Borrower distributed to the Lenders on July 30,
1999,
(d) the total consideration for (i) all Permitted Acquisitions made after
July 1, 1999 through and including March 15, 2000 shall not exceed in the
aggregate $30,000,000, and (ii) all Foreign Acquisitions made after July 1,
1999 through and including March 15, 2000 shall not exceed in the aggregate
$10,000,000,
1
<PAGE>
(e) for purposes of determining the Applicable Margin (including, without
limitation, for purposes of calculating the LC Rate) and the Commitment Fee
during the Waiver Period, the Leverage Ratio shall be calculated without
excluding the One-Time Charges, and
(f) during the period from July 1, 1999 through and including March 15,
2000 capital expenditures of the Borrower and its Subsidiaries (on a
Consolidated basis determined in accordance with GAAP) attributable to the
creation of new renal treatment centers or the relocation or expansion of
existing renal treatment centers shall not exceed in the aggregate
$60,000,000.
2. Provided that (i) each of the Waiver Conditions shall be, and shall at all
times remain, satisfied during the Waiver Period, and (ii) the total
consideration paid in connection with all Foreign Acquisitions made after
October 24, 1997 through August 9, 1999 (other than the merger of RTC into the
Borrower pursuant to the RTC Merger Agreement as permitted by Amendment No. 1
and Consent No. 1, dated as of December 1, 1997, to the Existing Credit
Agreement) does not exceed $73,000,000, the Administrative Agent and the
Required Lenders hereby (A) waive any Default or Event of Default that occurred
under Section 8.5(f)(C) through and including August 9, 1999, (B) amend Section
8.5(f)(C) by replacing the amount "$60,000,000" contained therein with the
amount "$83,000,000", and (C) amend Section 8.5(f)(C) by inserting immediately
after the date "October 24, 1997" contained therein the phrase "(other than the
merger of RTC into the Borrower pursuant to the RTC Merger Agreement as
permitted by Amendment No. 1 and Consent No. 1, dated as of December 1, 1997,
to the Existing Credit Agreement)".
3. Provided that each of the Waiver Conditions shall be, and shall at all
times remain, satisfied, the Administrative Agent and the Required Lenders
hereby waive any Default or Event of Default that may have occurred prior to
the effectiveness of this Amendment (a) under or in connection with Section
4.21, 7.1(b) or 7.2(a), (b) due to any misrepresentation or miscertification
made in (i) any Borrowing Request, Notice of Conversion/Continuation or Letter
of Credit Request delivered to the Administrative Agent during the period from
March 31, 1999 to but excluding the effective date of this Amendment or (ii)
the Compliance Certificate delivered on May 17, 1999, in each case, with regard
to clauses (a) and (b) above, due solely to the failure of the Borrower to
incorporate the effects of the One-Time Charges in the financial statements
delivered on May 17, 1999 in respect of the fiscal quarter of the Borrower
ended on March 31, 1999, or (c) under or in connection with Section 9.1(g)(iii)
or 9.1(k)(ii) as a result of any defaults that may have arisen under the Term
Loan Facility that will be and remain waived pursuant to the Term Loan Waiver
(as defined below).
4. Effective at all times on and after August 9, 1999, clause (a) of the
definition of "Applicable Margin" contained in Section 1.1 of the Revolving
Credit Agreement is hereby amended and restated as follows:
(a) at all times during the applicable periods set forth below and based
on the most recently delivered Compliance Certificate of the Borrower: (i)
with respect to the unpaid principal amount of Eurodollar Advances and
Alternate Currency Advances, the percentage set forth below under the
heading "Eurodollar Margin" and adjacent to such period, and (ii) with
respect to the unpaid principal amount of ABR Advances, the percentage set
forth below under the heading "ABR Margin" and adjacent to such period:
<TABLE>
<CAPTION>
Eurodollar ABR
Period Margin Margin
------ ---------- ------
<S> <C> <C>
When the Leverage Ratio is greater than 4.00:1.00........ 2.75% 1.50%
When the Leverage Ratio is less than or equal to
4.00:1.00 but greater than 3.50:1.00.................... 2.50% 1.25%
When the Leverage Ratio is less than or equal to
3.50:1.00 but greater than 3.00:1.00.................... 2.25% 1.00%
When the Leverage Ratio is less than or equal to
3.00:1.00 but greater than 2.50:1.00.................... 2.00% 0.75%
When the Leverage Ratio is less than or equal to
2.50:1.00 but greater than 2.00:1.00.................... 1.75% 0.50%
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Eurodollar ABR
Period Margin Margin
------ ---------- ------
<S> <C> <C>
When the Leverage Ratio is less than or equal to
2.00:1.00 but greater than 1.50:1.00................... 1.50% 0.25%
When the Leverage Ratio is less than or equal to
1.50:1.00.............................................. 1.25% 0.00%
</TABLE>
5. The definitions of "Maturity Date" and "Special Counsel" contained in
Section 1.1 of the Revolving Credit Agreement are hereby amended and restated
in their entirety as follows:
"Maturity Date": March 31, 2003, or such earlier date on which the Notes
shall become due and payable, whether by acceleration or otherwise.
"Special Counsel": Bryan Cave LLP, special counsel to the Administrative
Agent.
6. Section 2.6(b) of the Revolving Credit Agreement is hereby amended and
restated as follows:
(b) Mandatory Periodic Reductions. The Aggregate Revolving Credit
Commitments shall be reduced on each of the following dates by the amount
set forth next to such date:
<TABLE>
<CAPTION>
Aggregate Revolving
Credit Commitments
Dates Reductions
----- -------------------
<S> <C>
September 30, 2001................................... $ 89,100,000
September 30, 2002................................... $148,400,000
</TABLE>
7. Section 2.10 of the Revolving Credit Agreement is hereby amended by (i)
deleting the phrase "Alternate Base Rate" each time it appears in clause (a)
thereof under the heading "RATE" and replacing it with the phrase "Alternate
Base Rate plus the Applicable Margin" in each such instance, and (ii) deleting
the phrase "Alternate Base Rate plus 2%" each time it appears in clause (b)
thereof and replacing it with the phrase "Alternate Base Rate plus the
Applicable Margin plus 2%" in each such instance.
8. Effective at all times on and after August 9, 1999, Section 3.1(a) of the
Revolving Credit Agreement is hereby amended by replacing the table contained
therein with the following:
<TABLE>
<CAPTION>
Commitment Fee
Pricing Level Percentage
------------- --------------
<S> <C>
When the Leverage Ratio is equal to or greater than
3.75:1.00.................................................. 0.500%
When the Leverage Ratio is less than 3.75:1.00 but equal to
or greater than 3.50:1.00.................................. 0.350%
When the Leverage Ratio is less than 3.50:1.00 but equal to
or greater than 3.00:1.00.................................. 0.300%
When the Leverage Ratio is less than 3.00:1.00 but equal to
or greater than 2.00:1.00.................................. 0.250%
When the Leverage Ratio is less than 2.00:1.00 but equal to
or greater than 1.50:1.00.................................. 0.200%
When the Leverage Ratio is less than 1.50:1.00.............. 0.175%
</TABLE>
9. Section 7.2 of the Revolving Credit Agreement is hereby amended by adding
to the end thereof the following new clauses (j) and (k):
(j) A certificate no later than five Business Days prior to the
consummation of any Permitted Acquisition made after July 1, 1999 through
and including March 15, 2000: (i) identifying such Permitted Acquisition,
(ii) specifying the total consideration to be paid with respect to such
Permitted Acquisition, the
3
<PAGE>
aggregate total consideration paid with respect to all Permitted
Acquisitions (including such proposed Permitted Acquisition) made after
July 1, 1999 through and including March 15, 2000 and such other
information as the Administrative Agent shall reasonably require, and (iii)
certifying that immediately before and after giving effect thereto no
Default or Event of Default shall exist.
(k) On August 16, 1999 and thereafter within ten days after the end of
each calendar month through March 15, 2000, a report specifying (in a
format reasonably acceptable to the Administrative Agent): (i) Permitted
Acquisitions made (A) during such immediately preceding calendar month and
(B) made after July 1, 1999 through the end of the immediately preceding
calendar month, (ii) capital expenditures of the Borrower and its
Subsidiaries (on a Consolidated basis determined in accordance with GAAP)
attributable to the creation of new renal treatment centers or the
relocation or expansion of existing renal treatment centers made (A) during
such immediately preceding calendar month and (B) made from July 1, 1999
through the end of the immediately preceding calendar month, and (iii) an
accounts receivable aging summary by account debtor group.
10. On or before August 16, 1999, the Borrower shall deliver to the
Administrative Agent a revised Compliance Certificate for the fiscal quarter of
the Borrower ended on March 31, 1999, which shall recalculate the Leverage
Ratio to reflect the One-Time Charges. The Applicable Margin and the Commitment
Fee for the period from May 17, 1999 (the date the Borrower delivered the
original Compliance Certificate for the fiscal quarter of the Borrower ended on
March 31, 1999), to and including the date the next Compliance Certificate is
delivered or is required to be delivered shall be based on such revised
Leverage Ratio. On or before August 20, 1999, the Borrower shall pay to the
Administrative Agent, for distribution to the Lenders, any additional interest,
Commitment Fees and Letter of Credit Fees that accrued under the Revolving
Credit Agreement and the Revolving Credit Notes during the period from and
including May 17, 1999, to and including August 19, 1999, as a result of any
increase in the Applicable Margin or Commitment Fee caused by the One-Time
Charges, to the extent that any such accrued additional interest, Commitment
Fees or Letter of Credit Fees would have been payable on any Interest Payment
Date or other applicable payment date during such period. All such additional
interest, Commitment Fees and Letter of Credit Fees that have accrued under the
Revolving Credit Agreement and the Revolving Credit Notes on and after May 17,
1999 but that have not been paid on or before August 19, 1999, shall continue
to be owed under the Revolving Credit Agreement and the Revolving Credit Notes,
and shall be paid in accordance with the Revolving Credit Agreement on the next
applicable Interest Payment Date or other applicable payment date. Section
3.1(a) of the Revolving Credit Agreement and the definition of "Applicable
Margin" in Section 1.1 of the Revolving Credit Agreement, each as in effect
immediately prior to August 9, 1999, shall continue to govern the calculation
of interest, Commitment Fees and Letter of Credit Fees payable thereunder for
periods prior to such date.
11. The Administrative Agent and the Required Lenders hereby consent to the
Term Loan Waiver.
12. Exhibit D to the Credit Agreement is hereby amended and restated in the
form of Exhibit D attached hereto.
13. Paragraphs 1--12 of this Amendment shall not become effective until the
satisfaction of all of the following conditions precedent:
(a) The Administrative Agent shall have received this Amendment, duly
executed by a duly authorized officer or officers of the Borrower, the
Guarantors, the Pledgors, the Administrative Agent and the Required
Lenders.
(b) Receipt by the Administrative Agent, for the account of each Lender
that shall have executed and delivered this Amendment (without any
reservation or condition) to the Administrative Agent before 5:00 p.m. (New
York City time) on August 9, 1999, of a non-refundable fee in an amount
equal to 0.25% of the Revolving Credit Commitment of such Lender.
4
<PAGE>
(c) The Limited Waiver and Second Amendment to Amended and Restated Term
Loan Agreement, dated as of the date hereof and substantially in the form
of Annex I hereto (the "Term Loan Waiver"), shall have become effective
prior to or simultaneously herewith, and the Administrative Agent shall
have received an executed copy thereof.
(d) The Administrative Agent shall have received a certificate, dated the
effective date of this Amendment, of the Secretary or Assistant Secretary
of the Borrower (i) attaching a true and complete copy of the resolutions
of its Board of Directors and of all documents evidencing other necessary
corporate action (in form and substance satisfactory to the Administrative
Agent) taken by it to authorize this Amendment and the transactions
contemplated hereby, and (ii) setting forth the incumbency of its officer
or officers (including therein the signature specimen of such officer or
officers) who may sign this Amendment, any Loan Document or any other
document, notice or certificate executed and delivered in connection with
any Loan Document.
(e) The Administrative Agent shall have received an opinion of general
counsel of the Borrower, the Guarantors and the Pledgors, dated the
effective date of this Amendment and addressed to the Administrative Agent,
the Collateral Agent, the Documentation Agent, the Syndication Agent and
the Lenders, in form and substance reasonably satisfactory to the
Administrative Agent.
14. Without limiting the generality of the provisions of Section 11.1 of the
Revolving Credit Agreement, the waivers set forth in this Amendment shall be
limited precisely as written and nothing in this Amendment shall be deemed to:
(a) constitute a waiver of any Defaults or Events of Default arising in any
other instance or a waiver of any other term, provision or condition of the
Revolving Credit Agreement or any other instrument or agreement referred to
therein; or (b) prejudice any right or remedy that the Administrative Agent,
the Collateral Agent, the Swing Line Lender, the Letter of Credit Issuer or any
Lender may now have (except to the extent such right or remedy was based upon
any existing defaults that will not exist after giving effect to this
Amendment) or may have in the future under or in connection with the Revolving
Credit Agreement or any other instrument or agreement referred to therein.
15. The Borrower hereby acknowledges and agrees that all costs, fees and
expenses as described in Section 11.5 of the Revolving Credit Agreement
incurred by the Administrative Agent, the Syndication Agent, the Co-Arrangers,
and Special Counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of the Borrower and
shall be promptly paid by the Borrower following the submission of an invoice
therefor.
16. On the date hereof, each Credit Party hereby (a) reaffirms and admits the
validity and enforceability of the Loan Documents (as amended by this
Amendment) and all of its obligations thereunder, (b) agrees and admits that it
has no defenses to or offsets against any such obligation, and (c) represents
and warrants that, after giving effect to the effectiveness of this Amendment,
no Default or Event of Default has occurred and is continuing, and that each of
the representations and warranties made by it in the Loan Documents (as amended
by this Amendment) to which it is a party is true and correct with the same
effect as though such representation and warranty had been made on the date
hereof.
17. In all other respects, the Loan Documents shall remain in full force and
effect, and no amendment in respect of any term or condition of any Loan
Document contained herein shall be deemed to be an amendment in respect of any
other term or condition contained in any Loan Document.
18. This Amendment may be executed in any number of counterparts all of
which, taken together, shall constitute one Amendment. In making proof of this
Amendment, it shall only be necessary to produce the counterpart executed and
delivered by the party to be charged.
5
<PAGE>
19. THIS AMENDMENT IS BEING EXECUTED AND DELIVERED IN, AND IS INTENDED TO BE
PERFORMED IN, THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCEABLE IN
ACCORDANCE WITH, AND BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
[Remainder of page intentionally left blank]
6
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused this Amendment to be
executed on its behalf.
TOTAL RENAL CARE HOLDINGS, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE BANK OF NEW YORK, Individually,
as the Letter of Credit Issuer, as
the Swing Line Lender and as
Administrative Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
DLJ CAPITAL FUNDING, INC.,
Individually and as Syndication
Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
FIRST UNION NATIONAL BANK,
Individually and as Documentation
Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ABN AMRO BANK N.V.
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ALLIED IRISH BANKS, P.L.C., CAYMAN
ISLANDS BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BANCO ESPIRITO SANTO E COMERCIAL DE
LISBOA, NASSAU BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BANK LEUMI TRUST COMPANY OF NEW YORK
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE BANK OF NOVA SCOTIA
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BANQUE NATIONALE DE PARIS
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BHF (USA) CAPITAL CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
CITY NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BANK OF AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
CREDIT LYONNAIS NEW YORK BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
FLEET NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE FUJI BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
HIBERNIA NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE INDUSTRIAL BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
KBC BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
GE CAPITAL CORP.
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
MELLON BANK, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
MICHIGAN NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
NATIONAL CITY BANK OF KENTUCKY
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
PARIBAS
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A, "RABOBANK
NEDERLAND", NEW YORK BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ROYAL BANK OF CANADA
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE ROYAL BANK OF SCOTLAND PLC
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE SANWA BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
SOCIETE GENERALE
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
STB DELAWARE FUNDING TRUST I
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
SUNTRUST BANK, NASHVILLE, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE TOKAI BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE TOYO TRUST & BANKING CO., LTD.,
Los Angeles Agency
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
UNION BANK OF CALIFORNIA, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
U.S. BANK NATIONAL ASSOCIATION
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
AMENDMENT NO. 3 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
AGREED AND CONSENTED TO:
TOTAL RENAL CARE, INC.
TOTAL RENAL CARE ACQUISITION CORP.
RENAL TREATMENT CENTERS, INC.
RENAL TREATMENT CENTERS--MID-ATLANTIC, INC.
RENAL TREATMENT CENTERS--NORTHEAST, INC.
RENAL TREATMENT CENTERS--CALIFORNIA, INC.
RENAL TREATMENT CENTERS--WEST, INC.
RENAL TREATMENT CENTERS--SOUTHEAST, INC.
Each by: ____________________________
Name: _______________________________
Title: ______________________________
TRC WEST, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
<PAGE>
EXHIBIT 10.3
TOTAL RENAL CARE HOLDINGS, INC.
LIMITED WAIVER AND SECOND AMENDMENT
TO AMENDED AND RESTATED TERM LOAN AGREEMENT
This LIMITED WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED TERM LOAN
AGREEMENT (this "Amendment") is dated as of August 9, 1999, and entered into by
and among TOTAL RENAL CARE HOLDINGS, INC., a Delaware corporation (the
"Borrower"), the financial institutions listed on the signature pages hereof
(the "Lenders", each a "Lender"), DLJ CAPITAL FUNDING, INC., as Syndication
Agent (the "Syndication Agent"), THE BANK OF NEW YORK, as collateral agent and
as administrative agent for the Lenders (in such capacity, the "Administrative
Agent"), and, for purposes of Section 5 hereof, the Credit Support Parties (as
defined in Section 5 hereof) listed on the signature pages hereof, and is made
with reference to that certain Amended and Restated Term Loan Agreement dated
as of April 30, 1998, as amended to the date hereof (as so amended, the "Term
Loan Agreement"), by and among the Borrower, Lenders, Syndication Agent and
Administrative Agent. Capitalized terms used herein without definition shall
have the same meanings herein as set forth in the Term Loan Agreement.
RECITALS
WHEREAS, the Borrower, the undersigned Lenders, constituting Required
Lenders, the Administrative Agent, and the Syndication Agent desire to amend
the Term Loan Agreement for the purpose of increasing the interest rates
payable on the Loans and shortening the maturity from March 31, 2008 to March
31, 2006;
WHEREAS, the Borrower may need to adjust its financial statements for the
fiscal period ending on March 31, 1999, in order to increase certain charges
and decrease its net income reported for such period (the "Prior Period
Adjustments"), and the Borrower has requested Lenders to waive any Defaults or
Events of Default that may have arisen under the Term Loan Agreement as a
direct or indirect result of the failure of the financial statements,
Compliance Certificates and other documents delivered by the Borrower under the
Term Loan Agreement and the Revolving Credit Facility to reflect the Prior
Period Adjustments or to incorporate the effects of such Prior Period
Adjustments in calculations based on Borrower's financial position and results
of operations for such period, and Lenders are willing to waive any such
Defaults and Events of Default, subject to the terms and conditions hereof;
WHEREAS, Borrower has requested the lenders that are parties to the Revolving
Credit Facility to enter into an Amendment No. 3 and Waiver to and Under
Amended and Restated Revolving Credit Agreement substantially in the form of
Annex I hereto (the "Revolving Credit Facility Waiver"), pursuant to which such
lenders would waive certain defaults that may have arisen under the Revolving
Credit Facility resulting from, among other things, the Borrower's failure to
comply with subsection 7.15 thereof;
WHEREAS, the Borrower has requested Lenders to waive any Defaults or Events
of Default that may have arisen under subsection 9.1(g) of the Term Loan
Agreement as a result of any defaults that may have arisen under the Revolving
Credit Facility that will be waived pursuant to the Revolving Credit Facility
Waiver, and Lenders are willing to waive any such Defaults and Events of
Default, subject to the terms and conditions hereof;
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
1
<PAGE>
Section 1. AMENDMENTS TO THE TERM LOAN AGREEMENT
1.1 Amendments to Section 1: Definitions and Principals of Construction
A. Section 1.1 of the Term Loan Agreement is hereby amended effective as of
August 9, 1999, by deleting clause (a) of the definition of "Applicable Margin"
in its entirety and substituting the following therefor:
"(a) at all times, with respect to the unpaid principal amount of
Eurodollar Advances and ABR Advances, and based on the most recently
delivered Compliance Certificate of the Borrower, the percentage set forth
below under the heading "Applicable Margin for Eurodollar Advances" or
"Applicable Margin for ABR Advances", as applicable, next to the applicable
period:
<TABLE>
<CAPTION>
Applicable Applicable
Margin for Margin for
Eurodollar ABR
Period Advances Advances
------ ---------- ----------
<S> <C> <C>
When the Leverage Ratio is greater than 4.00:1.00.... 3.00% 1.75%
When the Leverage Ratio is equal to or less than
4.00:1.00 but greater than 3.50:1.00................ 2.75% 1.50%
When the Leverage Ratio is equal to or less than
3.50:1.00 but greater than 3.00:1.00................ 2.50% 1.25%
When the Leverage Ratio is equal to or less than
3.00:1.00........................................... 2.25% 1.00%"
</TABLE>
B. Section 1.1 of the Term Loan Agreement is hereby further amended by
deleting the reference to the date "March 31, 2008" in the definition of
"Maturity Date" contained therein and substituting "March 31, 2006" therefor.
1.2 Amendment to Section 2: Amount and Terms of Loans
A. Section 2.4(b) of the Term Loan Agreement is hereby amended by (i)
deleting the reference to "$4,000,000" opposite the reference to "September 30,
2006" contained therein and substituting "$368,000,000" therefor; (ii) deleting
the last two lines in the table of Scheduled Repayments of Term Loans contained
therein; and (iii) deleting the final reference to the date "March 31, 2008"
contained in the proviso therein and substituting "the Maturity Date" therefor.
Section 2. LIMITED WAIVER TO TERM LOAN AGREEMENT
A. Subject to the terms and conditions set forth herein and in reliance on
the representations and warranties of the Borrower herein contained, Lenders
hereby waive any Defaults and Events of Default that may have arisen under the
Term Loan Agreement as a direct or indirect result of the failure of the
financial statements, Compliance Certificates and other documents delivered by
the Borrower under the Term Loan Agreement and the Revolving Credit Facility to
reflect the Prior Period Adjustments or to incorporate the effects of such
Prior Period Adjustments in calculations based on Borrower's financial position
and results of operations for the fiscal period ending on March 31, 1999.
B. Subject to the terms and conditions set forth herein and in reliance on
the representations and warranties of the Borrower herein contained,
simultaneously with the effectiveness of the Revolving Credit Facility Waiver,
Lenders hereby waive any Defaults and Events of Default that may have arisen
under subsection 9.1(g) of the Term Loan Agreement as a result of any defaults
that may have arisen under the Revolving Credit Facility that will be and
remain waived pursuant to the Revolving Credit Facility Waiver.
Without limiting the generality of the provisions of subsection 11.1 of the
Term Loan Agreement, the waivers set forth above shall be limited precisely as
written and nothing in this Amendment shall be deemed to:
(a) constitute a waiver of any Defaults or Events of Default arising as a
result of any inaccuracy in financial statements of the Borrower other than
the failure of such statements to reflect the Prior Period
2
<PAGE>
Adjustments, or arising under subsection 9.1(g) of the Term Loan Agreement
in any other instance, or a waiver any other term, provision or condition
of the Term Loan Agreement or any other instrument or agreement referred to
therein; or
(b) prejudice any right or remedy that Agents or any Lender may now have
(except to the extent such right or remedy was based upon any existing
defaults that will not exist after giving effect to this Waiver) or may
have in the future under or in connection with the Term Loan Agreement or
any other instrument or agreement referred to therein.
Section 3. CONDITIONS TO EFFECTIVENESS
Sections 1 and 2 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "Second
Amendment Effective Date"):
A. Required Lenders (as such term is defined in the Revolving Credit
Agreement) shall have entered into the Revolving Credit Facility Waiver,
Administrative Agent and Syndication Agent shall have received an executed copy
thereof, and such Revolving Credit Facility Waiver shall have become effective
simultaneously with the effectiveness hereof.
B. Borrower shall have executed and delivered to Administrative Agent
Allonges to Promissory Notes substantially in the form of Annex II hereto
(each, an "Allonge"), duly completed for each outstanding Term Loan Note.
C. Borrower shall have paid to Administrative Agent, for distribution to each
Approving Lender (as defined in Section 7C hereof), the fees set forth in
Section 7C hereof.
D. The Administrative Agent shall have received a certificate, dated the
Second Amendment Effective Date, of the Secretary or Assistant Secretary of the
Borrower (i) attaching a true and complete copy of the resolutions of its Board
of Directors and of all documents evidencing other necessary corporate action
(in form and substance satisfactory to the Administrative Agent and the
Syndication Agent) taken by it to authorize this Amendment and the transactions
contemplated hereby, and (ii) setting forth the incumbency of its officer or
officers (including therein the signature specimen of such officer or officers)
who may sign this Amendment, any Loan Document or any other document, notice or
certificate executed and delivered in connection with any Loan Document..
E. The Administrative Agent shall have received the opinion of the general
counsel of the Borrower, the Guarantors and the Pledgors, dated the Second
Amendment Effective Date and addressed to the Administrative Agent, the
Collateral Agent, the Documentation Agent, the Syndication Agent and the
Lenders, in form and substance reasonably satisfactory to the Administrative
Agent and the Syndication Agent.
Section 4. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend the Term
Loan Agreement in the manner provided herein, Borrower represents and warrants
to each Lender that the following statements are true, correct and complete:
A. Corporate Power and Authority. Each Credit Party has all requisite
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Term Loan
Agreement as amended by this Amendment (the "Amended Agreement") and, in the
case of Borrower, the Term Loan Notes as amended by the Allonges (the "Amended
Notes").
B. Authorization of Agreements. The execution and delivery of this Amendment
have been duly authorized by all necessary corporate action on the part of each
Credit Party and the execution and delivery of
3
<PAGE>
the Allonges have been duly authorized by all necessary corporate action on the
part of Borrower. The performance of the Amended Agreement has been duly
authorized by all necessary corporate action on the part of each Credit Party
and the performance and payment of the Amended Notes has been duly authorized
by all necessary corporate action on the part of Borrower.
C. No Conflict. The execution and delivery by each Credit Party of this
Amendment, the execution and delivery by Borrower of the Allonges, the
performance by each Credit Party of the Amended Agreement, and the performance
and payment by Borrower of the Amended Notes do not and will not (i) violate
any provision of any law or any governmental rule or regulation applicable to
Borrower or any of its Subsidiaries, the Certificate or Articles of
Incorporation or Bylaws of Borrower or any of its Subsidiaries or any order,
judgment or decree of any court or other agency of government binding on
Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of
or constitute (with due notice or lapse of time or both) a default under any
contractual obligation of Borrower or any of its Subsidiaries, (iii) result in
or require the creation or imposition of any Lien upon any of the properties or
assets of Borrower or any of its Subsidiaries (other than Liens created under
any of the Loan Documents in favor of Administrative Agent on behalf of
Lenders), or (iv) require any approval of stockholders or any approval or
consent of any Person under any contractual obligation of Borrower or any of
its Subsidiaries.
D. Governmental Consents. The execution and delivery by each Credit Party of
this Amendment, the execution and delivery by Borrower of the Allonges, the
performance by each Credit Party of the Amended Agreement, and the performance
and payment by Borrower of the Amended Notes do not and will not do not and
will not require any registration with, consent or approval of, or notice to,
or other action to, with or by, any federal, state or other governmental
authority or regulatory body.
E. Binding Obligation. This Amendment and the Amended Agreement have been
duly executed and delivered by each Credit Party and are the legally valid and
binding obligations of each Credit Party, enforceable against each Credit Party
in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally or by equitable principles relating to
enforceability. The Allonges have been duly executed and delivered by Borrower
and the Allonges and the Amended Notes are the legally valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors'
rights generally or by equitable principles relating to enforceability.
F. Incorporation of Representations and Warranties From Term Loan
Agreement. The representations and warranties contained in Section 4 of the
Term Loan Agreement (after giving effect to this Amendment) are and will be
true, correct and complete in all material respects on and as of the Second
Amendment Effective Date to the same extent as though made on and as of that
date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete
in all material respects on and as of such earlier date.
G. Absence of Default. No event has occurred and is continuing or will result
from the consummation of the transactions contemplated by this Amendment that
would constitute an Event of Default, other than any Events of Default that
will be cured or waived upon the effectiveness of this Amendment.
Section 5. ACKNOWLEDGEMENT AND CONSENT
Borrower is a party to the Borrower Pledge Agreement pursuant to which
Borrower has pledged certain Collateral to Administrative Agent to secure the
Obligations. TRC is a party to the Subsidiary Guaranty and the Subsidiary
Pledge Agreement pursuant to which TRC has (i) guarantied the Obligations and
(ii) pledged certain Collateral to Administrative Agent to secure the
Obligations and to secure the obligations of TRC under the Subsidiary Guaranty.
Each of the other Guarantors listed on the signature pages hereof is a party to
the Subsidiary Guaranty pursuant to which such Guarantor has guarantied the
Obligations. Borrower and the
4
<PAGE>
Guarantors are collectively referred to herein as the "Credit Support Parties",
and the Borrower Pledge Agreement, the Subsidiary Pledge Agreement and the
Subsidiary Guaranty are collectively referred to herein as the "Credit Support
Documents".
Each Credit Support Party hereby acknowledges that it has reviewed the terms
and provisions of the Term Loan Agreement and this Amendment and consents to
the amendment of the Term Loan Agreement effected pursuant to this Amendment.
Each Credit Support Party hereby confirms that each Credit Support Document to
which it is a party or otherwise bound and all Collateral encumbered thereby
will continue to guaranty or secure, as the case may be, to the fullest extent
possible the payment and performance of all "Guarantied Obligations" and
"Secured Obligations," as the case may be (in each case as such terms are
defined in the applicable Credit Support Document), including without
limitation the payment and performance of all such "Guarantied Obligations" and
"Secured Obligations," as the case may be, in respect of the Obligations of
Borrower now or hereafter existing under or in respect of the Amended Agreement
and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of the Credit
Support Documents to which it is a party or otherwise bound shall continue in
full force and effect and that all of its obligations thereunder shall be valid
and enforceable and shall not be impaired or limited by the execution or
effectiveness of this Amendment. Each Credit Support Party represents and
warrants that all representations and warranties contained in the Amended
Agreement and the Credit Support Documents to which it is a party or otherwise
bound are true, correct and complete in all material respects on and as of the
Second Amendment Effective Date to the same extent as though made on and as of
that date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that (i) notwithstanding
the conditions to effectiveness set forth in this Amendment, such Credit
Support Party is not required by the terms of the Term Loan Agreement or any
other Loan Document to consent to the amendments to the Term Loan Agreement
effected pursuant to this Amendment and (ii) nothing in the Term Loan
Agreement, this Amendment or any other Loan Document shall be deemed to require
the consent of such Credit Support Party to any future amendments to the Term
Loan Agreement.
Section 6. PAYMENT OF ADDITIONAL INTEREST
On or before August 16, 1999, the Borrower shall deliver to Administrative
Agent a revised Compliance Certificate for the fiscal quarter of Borrower ended
on March 31, 1999, which shall recalculate the Leverage Ratio to reflect the
Prior Period Adjustments. The Applicable Margin for the period from May 17,
1999 (the date the Borrower delivered the original Compliance Certificate for
the fiscal quarter of Borrower ended on March 31, 1999), to and including the
date the next Compliance Certificate is delivered or is required to be
delivered shall be based on such revised Leverage Ratio. On or before August
20, 1999, the Borrower shall pay to Administrative Agent, for distribution to
Lenders (including assignors of Notes to Lenders, as applicable) any additional
interest that accrued under the Term Loan Agreement and Notes during the period
from and including May 17, 1999, to and including August 19, 1999, as a result
of any increase in the Applicable Margin caused by the Prior Period
Adjustments, to the extent that such accrued interest would have been payable
on any Interest Payment Date during such period. All such additional interest
that accrued under the Term Loan Agreement and the Notes on and after May 17,
1999, that is not paid on August 19, 1999, shall continue to be owed under the
Term Loan Agreement and the Notes, and shall be paid in accordance with the
Term Loan Agreement on the next applicable Interest Payment Date.
Section 7. MISCELLANEOUS
A. Reference to and Effect on the Term Loan Agreement and the Other Loan
Documents.
(i) On and after the Second Amendment Effective Date, each reference in
the Term Loan Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Term Loan
5
<PAGE>
Agreement, and each reference in the other Loan Documents to the "Term Loan
Agreement", "thereunder", "thereof" or words of like import referring to
the Term Loan Agreement shall mean and be a reference to the Amended
Agreement.
(ii) Except as specifically amended by this Amendment and the Allonges,
the Term Loan Agreement and the other Loan Documents shall remain in full
force and effect and are hereby ratified and confirmed.
(iii) The definition of "Applicable Margin" in the Term Loan Agreement as
in effect immediately prior to August 9, 1999, shall continue to govern the
calculation of interest payable thereunder for periods prior to such date.
(iv) The execution, delivery and performance of this Amendment shall and
the Allonges not, except as expressly provided herein, constitute a waiver
of any provision of, or operate as a waiver of any right, power or remedy
of Administrative Agent or any Lender under, the Term Loan Agreement or any
of the other Loan Documents.
B. Fees and Expenses. Borrower acknowledges that all costs, fees and expenses
as described in Section 11.5 of the Term Loan Agreement incurred by
Administrative Agent, Syndication Agent, Co-Arrangers, and Special Counsel,
with respect to this Amendment and the documents and transactions contemplated
hereby shall be for the account of Borrower and shall be promptly paid by
Borrower following the submission of an invoice therefor.
C. Consent Fee. Borrower shall pay to Administrative Agent, for distribution
to each Lender that shall have executed and delivered (without any reservation
or condition) a counterpart of this Amendment to Administrative Agent before
5:00 p.m. (New York City time) on August 9, 1999 (each, an "Approving Lender"),
non-refundable fees in the amount of 1/8 of 1% of the aggregate amount of the
Loans of each such Approving Lender (immediately prior to the effectiveness
hereof).
D. Consent to Revolving Credit Facility Waiver. The Lenders hereby consent to
the Revolving Credit Facility Waiver.
E. Headings. Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose or be given any substantive effect.
F. Applicable Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
G. Counterparts; Effectiveness. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are physically
attached to the same document. This Amendment (other than the provisions of
Sections 1 and 2 hereof, the effectiveness of which is governed by Section 3
hereof) shall become effective upon the execution of a counterpart hereof by
Borrower, Required Lenders, Administrative Agent, and each of the Credit
Support Parties and receipt by Borrower and Administrative Agent of written or
telephonic notification of such execution and authorization of delivery
thereof.
[Remainder of page intentionally left blank]
6
<PAGE>
ANNEX I
REVOLVING CREDIT FACILITY WAIVER
<PAGE>
ANNEX II
[FORM OF ALLONGE]
ALLONGE TO PROMISSORY NOTE
By this Allonge to Promissory Note (this "Allonge"), the undersigned, Total
Renal Care Holdings, Inc. ("Borrower"), hereby acknowledges that pursuant to
that certain Limited Waiver and Second Amendment to Amended and Restated Term
Loan Agreement dated as of August 9, 1999, by and among Borrower, the financial
institutions listed on the signature pages thereof as lenders, DLJ Capital
Funding, Inc., as Syndication Agent, The Bank of New York, as Administrative
Agent, and the Credit Support Parties named therein, the final scheduled
maturity date of all amounts owed under Borrower's Promissory Note to which
this Allonge is attached has been amended to March 31, 2006, and that each
reference in such Promissory Note to "March 31, 2008" is hereby amended to be a
reference to "March 31, 2006".
Date: August , 1999 TOTAL RENAL CARE HOLDINGS, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective officers thereunto duly authorized
as of the date first written above.
BORROWER: TOTAL RENAL CARE HOLDINGS, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
S-1
<PAGE>
CREDIT SUPPORT PARTIES: TOTAL RENAL CARE, INC.,
TOTAL RENAL CARE ACQUISITION CORP.
RENAL TREATMENT CENTERS, INC.,
RENAL TREATMENT CENTERS-
MID-ATLANTIC, INC.
RENAL TREATMENT CENTERS-
NORTHEAST, INC.
RENAL TREATMENT CENTERS-
CALIFORNIA, INC.
RENAL TREATMENT CENTERS-WEST, INC.
RENAL TREATMENT CENTERS-
SOUTHEAST, INC. (for purposes of
Section 5 only) each as a Credit
Support Party
Each by: ____________________________
Name: _______________________________
Title: ______________________________
TRC WEST, INC., (for purposes of
Section 5 only) as a Credit Support
Party
By: _________________________________
Name: _______________________________
Title: ______________________________
AGENTS: THE BANK OF NEW YORK, Individually
and as
Administrative Agent and Collateral
Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
DLJ CAPITAL FUNDING, INC.,
Individually and as Syndication
Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
LENDERS: [omitted]
S-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 24,673,000 0
<SECURITIES> 0 0
<RECEIVABLES> 547,817,000 0
<ALLOWANCES> 103,578,000 0
<INVENTORY> 25,506,000 0
<CURRENT-ASSETS> 592,513,000 0
<PP&E> 273,785,000 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,106,401,000 0
<CURRENT-LIABILITIES> 179,119,000 0
<BONDS> 0 0
0 0
0 0
<COMMON> 81,000 0
<OTHER-SE> 479,486,000 0
<TOTAL-LIABILITY-AND-EQUITY> 2,106,401,000 0
<SALES> 352,993,000 228,350,000
<TOTAL-REVENUES> 352,993,000 228,350,000
<CGS> 0 0
<TOTAL-COSTS> 358,770,000 231,513,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 35,707,000 7,779,000
<INTEREST-EXPENSE> 24,370,000 16,544,000
<INCOME-PRETAX> (30,734,000) 29,927,000
<INCOME-TAX> (9,699,000) 12,088,000
<INCOME-CONTINUING> (21,035,000) 17,839,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 9,932,000
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