<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 September 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 SEPTEMBER 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 October 31, 1999
----- -----------------
<S> <C>
Common Stock, Par Value $0.001.......................... 81,188,843 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 September 30, 1999 and
December 31, 1998................................................... 1
Condensed Consolidated Statements of Income and Comprehensive Income
for the three months and nine months ended September 30, 1999 and
September 30, 1998.................................................. 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998..................... 3
Notes to Condensed Consolidated Financial Statements................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 20
Risk Factors............................................................ 22
<CAPTION>
PART II. OTHER INFORMATON
<C> <S> <C>
Item 1. Legal Proceedings.............................................. 28
Item 6. Exhibits and Reports on Form 8-K............................... 28
Signatures.............................................................. 29
</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>
September 30, December 31,
1999 1998
-------------- --------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 70,741,000 $ 41,487,000
Patient accounts receivable, less allowance
for doubtful accounts of $113,416,000 and
$61,848,000, respectively................... 457,780,000 416,472,000
Deferred income taxes........................ 55,177,000 31,917,000
Other current assets......................... 74,175,000 50,395,000
-------------- --------------
Total current assets....................... 657,873,000 540,271,000
Property and equipment, net.................... 285,821,000 233,337,000
Notes receivable and other long-term assets.... 76,521,000 57,578,000
Intangible assets, net of accumulated
amortization of $162,255,000 and $114,982,000,
respectively.................................. 1,176,766,000 1,084,395,000
-------------- --------------
Total assets............................... $2,196,981,000 $1,915,581,000
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term obligations..... $ 23,702,000 $ 21,847,000
Other current liabilities.................... 216,484,000 152,617,000
-------------- --------------
Total current liabilities.................. 240,186,000 174,464,000
Long term debt and other....................... 1,434,166,000 1,227,671,000
Deferred income taxes.......................... 14,403,000 8,212,000
Minority interests............................. 26,607,000 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; 81,189,000
and 81,030,000 shares issued and
outstanding, respectively).................. 81,000 81,000
Additional paid-in capital................... 416,633,000 413,095,000
Notes receivable from stockholders........... (188,000) (356,000)
Accumulated other comprehensive loss......... (4,718,000)
Retained earnings............................ 69,811,000 68,992,000
-------------- --------------
Total stockholders' equity................. 481,619,000 481,812,000
-------------- --------------
Total liabilities and stockholders'
equity.................................... $2,196,981,000 $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 nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three months Nine months
-------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Net operating revenues.. $366,968,000 $318,585,000 $1,072,405,000 $865,684,000
Operating expenses:
Facilities............ 250,765,000 200,925,000 734,528,000 551,244,000
General and
administrative....... 32,725,000 18,274,000 86,003,000 52,789,000
Provision for doubtful
accounts............. 17,002,000 8,997,000 63,187,000 23,539,000
Depreciation and
amortization......... 29,750,000 24,205,000 84,167,000 66,604,000
Write-off of
investments and
loans................ 16,600,000
Merger and related
costs................ 79,435,000
------------ ------------ -------------- ------------
Total operating
expenses............ 330,242,000 252,401,000 984,485,000 773,611,000
Operating income...... 36,726,000 66,184,000 87,920,000 92,073,000
Interest expense, net of
capitalized interest... (28,862,000) (19,805,000) (75,999,000) (50,866,000)
Other financing costs... (629,000) (629,000) (9,823,000)
Interest income and
other.................. 1,241,000 963,000 4,505,000 3,627,000
Other losses............ (2,745,000) (2,945,000)
------------ ------------ -------------- ------------
Income before income
taxes, minority
interests,
extraordinary item
and cumulative effect
of change in
accounting
principle............ 5,731,000 47,342,000 12,852,000 35,011,000
Income taxes............ 2,285,000 18,102,000 5,608,000 31,062,000
------------ ------------ -------------- ------------
Income before minority
interests,
extraordinary item
and cumulative effect
of change in
accounting principle
of change in
accounting
principle............ 3,446,000 29,240,000 7,244,000 3,949,000
Minority interests in
income of consolidated
subsidiaries........... 1,586,000 1,859,000 6,425,000 4,817,000
------------ ------------ -------------- ------------
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ 1,860,000 27,381,000 819,000 (868,000)
Extraordinary loss, net
of tax of $ 7,668,000.. (12,744,000)
Cumulative effect of
change in accounting
principle, net of tax
of $4,300,000.......... (6,896,000)
------------ ------------ -------------- ------------
Net income (loss)....... $ 1,860,000 $ 27,381,000 $ 819,000 $(20,508,000)
============ ============ ============== ============
Earnings (loss) per
common share:
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ $ 0.02 $ 0.34 $ 0.01 $ (0.01)
Extraordinary loss,
net of tax........... (0.16)
Cumulative effect of
change in accounting
principle, net of
tax.................. (0.09)
------------ ------------ -------------- ------------
Net income (loss)..... $ 0.02 $ 0.34 $ 0.01 $ (0.26)
============ ============ ============== ============
Weighted average number
of common shares
outstanding............ 81,165,000 80,858,000 81,148,000 79,982,000
============ ============ ============== ============
Earnings (loss) per
common share--assuming
dilution:
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ $ 0.02 $ 0.33 $ 0.01 $ (0.01)
Extraordinary loss,
net of tax........... (0.16)
Cumulative effect of
change in accounting
principle, net of
tax.................. (0.09)
------------ ------------ -------------- ------------
Net income (loss)..... $ 0.02 $ 0.33 $ 0.01 $ (0.26)
============ ============ ============== ============
Weighted average number
of common shares and
equivalents
outstanding--assuming
dilution............... 81,561,000 87,052,000 81,600,000 79,982,000
============ ============ ============== ============
STATEMENTS OF
COMPREHENSIVE INCOME
Net income (loss)..... $ 1,860,000 $ 27,381,000 $ 819,000 $(20,508,000)
Other comprehensive
income:
Foreign currency
translation......... (659,000) (4,718,000)
------------ ------------ -------------- ------------
Comprehensive income
(loss)............... $ 1,201,000 $ 27,381,000 $ (3,899,000) $(20,508,000)
============ ============ ============== ============
</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
Nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Nine months
------------------------------
1999 1998
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ 819,000 $ (20,508,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 84,167,000 66,604,000
Extraordinary item, net of tax............. 12,744,000
Provision for doubtful accounts............ 63,187,000 23,539,000
Write-off of investments and loans......... 16,600,000
Other losses............................... 2,577,000
Change in accounting principle, net of
tax....................................... 6,896,000
Stock-based compensation................... 1,155,000 16,000,000
Changes in working capital................. (67,583,000) (98,423,000)
------------- ---------------
Total adjustments........................ 100,103,000 27,360,000
------------- ---------------
Net cash provided by operating
activities............................ 100,922,000 6,852,000
------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment.......... (85,245,000) (64,767,000)
Cash paid for acquisitions, net of cash
acquired.................................... (152,619,000) (276,075,000)
Other........................................ (35,238,000) (42,388,000)
------------- ---------------
Net cash used in investing activities.. (273,102,000) (383,230,000)
------------- ---------------
Cash flows from financing activities:
Borrowings from bank credit facility......... 209,289,000 1,499,825,000
Principal payments on long-term obligations.. (10,174,000) (1,122,180,000)
Net proceeds from sale of common stock....... 2,033,000 20,347,000
Other........................................ 3,113,000 5,092,000
------------- ---------------
Net cash provided by financing
activities............................ 204,261,000 403,084,000
Effect of exchange rate changes on cash........ (2,827,000)
------------- ---------------
Net increase in cash........................... 29,254,000 26,706,000
Cash at beginning of period.................... 41,487,000 6,143,000
------------- ---------------
Cash at end of period.......................... $ 70,741,000 $ 32,849,000
============= ===============
</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/A 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 nine months
ended September 30, 1998 has been restated for certain reclassifications and
adjustments. The accrued merger and related costs initially reported by us in
the first nine 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 each of our second and third quarter 1998
operating expenses of $2,870,000. These reclassifications and adjustments are
more fully described in our Form 10-K/A for the year ended December 31, 1998.
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 nine 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 September 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
Amounts utilized--3rd
quarter 1999........... (99,000) (99,000)
------------ ------------ ------------
Accrual, September 30,
1999................... $ 3,000,000 $ 886,000 $ 3,886,000
============ ============ ============
</TABLE>
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.
4
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. During the nine months ended September 30, 1999, we purchased 44 centers
and additional interests from minority partners in certain of our partnerships.
Total cash consideration for these transactions was approximately $152.6
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 assets and liabilities of the acquired centers were recorded at their
estimated fair market values at the dates of acquisition. The initial
allocations of fair market value are preliminary and subject to adjustment
during the first year following the acquisition. The results of operations of
the facilities have been included in our financial statements from their
respective effective acquisition dates.
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 nine months ended September 30, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Pro forma net operating revenues............... $1,097,101,000 $926,121,000
Pro forma income before extraordinary item and
cumulative effect of change in accounting
principle..................................... $ 2,668,000 $ 3,106,000
Pro forma net income (loss).................... $ 2,668,000 $(16,534,000)
Pro forma income per share before extraordinary
item and cumulative effect of change in
accounting principle:
Basic........................................ $ 0.03 $ 0.04
Assuming dilution............................ $ 0.03 $ 0.04
</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 Nine months ended
September 30, September 30,
------------------------ -------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............... $ 1,860,000 $27,381,000 $ 819,000 $ (868,000)
Interest, net of tax
resulting from dilutive
effect of convertible
debt.................... 1,055,000
----------- ----------- ----------- ------------
Adjusted income (loss)... 1,860,000 28,436,000 819,000 (868,000)
Extraordinary loss, net
of tax.................. (12,744,000)
Cumulative effect of
change in accounting
principle, net of tax (6,896,000)
----------- ----------- ----------- ------------
Income (loss)--assuming
dilution................ $ 1,860,000 $28,436,000 $ 819,000 $(20,508,000)
=========== =========== =========== ============
Applicable common shares
Average outstanding
during the period....... 81,185,000 80,871,000 81,162,000 79,994,000
Reduction in shares in
connection with notes
receivable from
employees............... (20,000) (13,000) (14,000) (12,000)
----------- ----------- ----------- ------------
Weighted average number
of shares outstanding
for use in computing
earnings per share...... 81,165,000 80,858,000 81,148,000 79,982,000
Dilutive effect of
outstanding stock
options................. 396,000 1,315,000 452,000
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....... 81,561,000 87,052,000 81,600,000 79,982,000
=========== =========== =========== ============
Earnings (loss) per
common share:
Income (loss) per
common share before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ 0.02 $ 0.34 $ 0.01 $ (0.01)
Extraordinary loss, net
of tax................ (0.16)
Cumulative effect of
change in accounting
principle, net of
tax................... (0.09)
----------- ----------- ----------- ------------
Net income (loss) per
common share............ $ 0.02 $ 0.34 $ 0.01 $ (0.26)
=========== =========== =========== ============
Earnings (loss) per
common share--assuming
dilution:
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ 0.02 $ 0.33 $ 0.01 $ (0.01)
Extraordinary loss, net
of tax................ (0.16)
Cumulative effect of
change in accounting
principle, net of
tax................... (0.09)
----------- ----------- ----------- ------------
Net income (loss) per
common share--assuming
dilution................ $ 0.02 $ 0.33 $ 0.01 $ (0.26)
=========== =========== =========== ============
</TABLE>
Included in the above calculation for the three months ended September 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 antidilutive. Our 7% convertible notes
due 2009 were also anti-dilutive for all periods presented.
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 and is
presented as other financing costs in the accompanying statement of income for
the nine months ended September 30, 1998.
6
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 cancelation
clauses at the counterparties' option from one to seven years. The underlying
blended rate is fixed at approximately 5.69% plus an applicable margin based
upon our current leverage ratio.
During the quarter ended June 30, 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 cancelation option dates from the years 2001 through 2005 are still in
effect. At September 30, 1999, the effective interest rate for borrowings under
the swap agreements was 9.30%.
In September 1999 we converted approximately $50.0 million of our outstanding
borrowings under our revolving credit facility from U.S. dollar denominated
borrowings to Euro denominated borrowings, primarily as a hedge of our net
investment in European operations.
Further, the amendment and waiver to our credit facilities described in Note
10 resulted in a write-off of $629,000 for the reduction of previously deferred
financing costs. This write-off is included in other financing costs.
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.
The following is summarized financial information of RTC:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Cash and cash equivalents........................ $ 5,396,000
Accounts receivable, net......................... $132,960,000 130,129,000
Other current assets............................. 10,427,000 19,106,000
------------ ------------
Total current assets........................... 143,387,000 154,631,000
Property and equipment, net...................... 88,888,000 75,641,000
Intangible assets, net........................... 406,255,000 406,562,000
Other assets..................................... 7,853,000 9,249,000
------------ ------------
Total assets................................... $646,383,000 $646,083,000
============ ============
Current liabilities (includes intercompany
payable to TRCH of $207,966,000 and
$306,628,000, respectively)..................... $336,368,000 $352,753,000
Long-term debt................................... 128,830,000 125,199,000
Stockholder's equity............................. 181,185,000 168,131,000
------------ ------------
Total liabilities and stockholder's equity..... $646,383,000 $646,083,000
============ ============
</TABLE>
7
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net operating revenues... $129,295,000 $120,178,000 $375,597,000 $358,829,000
Total operating
expenses................ 117,038,000 98,924,000 343,433,000 335,205,000
------------ ------------ ------------ ------------
Operating income......... 12,257,000 21,254,000 32,164,000 23,624,000
Interest expense, net.... 2,194,000 2,074,000 5,741,000 6,863,000
------------ ------------ ------------ ------------
Income before income
taxes................... 10,063,000 19,180,000 26,423,000 16,761,000
Income taxes............. 4,528,000 (431,000) 13,369,000 6,671,000
------------ ------------ ------------ ------------
Income before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ 5,535,000 $ 19,611,000 $ 13,054,000 $ 10,090,000
============ ============ ============ ============
</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.
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 $ 222,000
91-180................... 34,500 665,000
181-270.................. 51,750 1,331,000
271-360.................. 69,000 2,218,000
Thereafter............... 86,250
</TABLE>
Payment of these accrued penalties is due upon the next interest due date.
The accrued penalty as of September 30, 1999 was $428,800.
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 $27 million as of September 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.
8
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-December 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. The court dismissed our complaint because we had not exhausted 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;
. 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.
No provisions or allowances have been recorded for this matter. 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 1998 and the full year 1998, 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 allegedly 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. A consolidated amended complaint was filed
on October 6, 1999. This complaint alleges violations of the federal securities
laws arising from allegedly false and misleading statements during a class
period of March 11, 1997 to July 18, 1999 and seeks unspecified monetary
damages. The primary allegations of this complaint are that we booked revenues
at inflated amounts, failed to disclose that a material portion of our accounts
receivable were uncollectible, reported excessive non-Medicare revenues, billed
for treatments that were never provided, failed to disclose accurately the
basis for suspension of payments to our Florida-based laboratory subsidiary on
Medicare claims, accounted for goodwill to overstate income, and manipulated
the value of intangible assets. We have not yet responded to this complaint,
but we believe that all of the claims are without merit and we intend to defend
ourselves vigorously. We anticipate that the attorney's fees and related costs
of defending this consolidated litigation 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.
9
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. In August 1999 the lenders under our credit facilities waived compliance
with a financial covenant that established a maximum leverage ratio which we
could not exceed. Subsequent to September 30, 1999, this waiver was extended on
revised terms. The revision to the waiver was required because we have exceeded
the maximum leverage ratio allowable under the terms of the original waiver.
The revised waiver expires March 15, 2000. The lenders also 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 revised
waiver:
. Permanently reduce the revolving credit facility from $950,000,000 to
$700,000,000;
. Reduce our permitted borrowings under the revolving credit facility to
$650,000,000 during the waiver period;
. Limit the amounts we may spend 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
September 30, 1999 were $392,000,000 and $560,942,000 respectively. As modified
by the most recent 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 1.75% to 2.25% for borrowings under the revolving credit facility
and a margin of 2.50% 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
3.00% to 3.50% for borrowings under the revolving credit facility and a
margin of 3.75% for borrowings under the term loan facility.
The applicable margin used in determining the interest rate for borrowings
under the revolving credit facility is based on our leverage ratio. Currently,
the applicable margin is at the top of the ranges listed above. In addition,
the most recent waiver agreement fixed the applicable margin at 2.25% for
Alternate Base Rate loans and 3.50% for adjusted LIBOR loans for the period
September 30, 1999 through March 15, 2000. The applicable margin used in
determining the interest rate for borrowings under the term loan has been fixed
for the remainder of the loan period.
11. During the nine months ended September 30, 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.
10
<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 nine months
ended September 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 each of our second and third quarter 1998
operating expenses of $2,870,000. These reclassifications and adjustments are
more fully described in our Form 10-K/A for the year ended December 31, 1998.
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 outpatient dialysis and ancillary services are reimbursed
primarily under the Medicare ESRD program in accordance with rates established
by the Health Care Financing Administration, or 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 inpatient dialysis 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 September 30, 1999 compared to the three months ended
September 30, 1998
Net operating revenues. Net operating revenues increased $48,383,000 to
$366,968,000 in the third quarter of 1999 from $318,585,000 in the third
quarter of 1998, representing a 15% increase. Of this increase, $55,987,000 was
due to increased treatments, of which $44,125,000 was from acquisitions
consummated after the third quarter of 1998, $5,144,000 was from de novo
developments commencing operations after the third quarter of 1998 and the
remainder was from existing facilities as of September 30, 1998. The difference
between the $55,987,000 described above and the total change of $48,383,000
resulted from an overall decrease in net operating revenue per treatment which
decreased from $248.17 in the third quarter of 1998 to $243.13 in the third
quarter of 1999. This decrease in net operating revenue per treatment primarily
was attributable to a overall decline in the rates we receive for our dialysis
services. The decline in rates is the
11
<PAGE>
result of increasing our contractual allowances, primarily related to billings
from our Tacoma office, to reflect recent trends in collection experience and
an additional allowance provision of $3,900,000 and an overall decrease of
$2,317,000, mainly attributable to a lower net revenue recognition per
treatment, for services provided by our dialysis laboratory in Minnesota. This
decline was partially offset by an increase in ancillary services intensity and
pricing of EPO of $9,433,000, and an increase in non-patient services revenue
of $2,273,000 resulting from an increase in dialysis facility management
services provided 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 $49,840,000 to $250,765,000 in the third quarter
of 1999 from $200,925,000 in the third quarter of 1998 and as a percentage of
net operating revenues, facility operating expenses increased to 68.3% in the
third quarter of 1999 from 63.1% in the third quarter of 1998. This increase
was primarily attributable to increased usage of EPO and other medical supplies
and the impact of a lower net revenue per treatment.
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 $14,451,000 to $32,725,000 in the third
quarter of 1999 from $18,274,000 in the third quarter of 1998 and as a
percentage of net operating revenues, general and administrative expenses
increased to 8.9% in the third quarter of 1999 from 5.7% in the third 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 third
quarter of 1999 includes approximately $1,719,000 for executive severance, and
$1,081,000 for an employee retention program, primarily for amendments to stock
options extending the period in which the option holders can exercise the
options after their employment is terminated.
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
$8,005,000 to $17,002,000 in the third quarter of 1999 from $8,997,000 in the
third quarter of 1998. As a percentage of net operating revenues, the provision
for doubtful accounts increased to 4.6% in the third quarter of 1999 from 2.8%
in the third quarter of 1998. This is primarily a result of a $4,100,000
increase in the provision for doubtful accounts relating to patient accounts
receivable billed from our dialysis laboratory in Minnesota.
Depreciation and amortization. Depreciation and amortization increased
$5,545,000 to $29,750,000 in the third quarter of 1999 from $24,205,000 in the
third quarter of 1998. As a percentage of net operating revenues, depreciation
and amortization increased to 8.1% in the third quarter of 1999 from 7.6% in
the third quarter of 1998.
Operating income. Operating income decreased $29,458,000 to $36,726,000 in
the third quarter of 1999 from $66,184,000 in the third quarter of 1998. As a
percentage of net operating revenues, operating income decreased to 10.0% in
the third quarter of 1999 from 20.8% in the third quarter of 1998 primarily due
to the increases in both facility operating and general and administrative
expenses, additions to allowances for patient accounts receivable and a lower
overall net revenue per treatment as described above.
Interest expense, net of capitalized interest. Interest expense increased
$9,057,000 to $28,862,000 in the third quarter of 1999 from $19,805,000 in the
third quarter of 1998. The increase in interest expense primarily was due to an
increase in the interest rates on our credit facilities as a term of the bank
waiver as well as an increase in the overall borrowings made under our credit
facilities to fund acquisitions.
Other financing costs. Other financing costs represent the impact of various
debt-related transactions. In the third quarter of 1999, we recognized a write-
off of $629,000 for the reduction of deferred financing costs as a result of
the permanent reduction in our revolving credit facility in connection with the
bank waiver.
12
<PAGE>
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 $278,000 to
$1,241,000 in the third quarter of 1999 from $963,000 in the third quarter of
1998.
Other losses. Other losses in the third quarter of 1999 were primarily a
result of a $2,577,000 loss on the disposition of our corporate jet.
Provision for income taxes. Provision for income taxes decreased to
$2,285,000 for the third quarter of 1999 from $18,102,000 in the third quarter
of 1998. The effective tax rate was 55.1% for the third quarter of 1999
compared to 40.4% in the third quarter of 1998, after minority interest. The
change in the effective tax rate primarily was due to $3.1 million from the
non-deductible amortization of intangible assets spread over a smaller pre-tax
base.
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 decreased $273,000 to $1,586,000 from
$1,859,000 in the third quarter of 1998. As a percentage of net operating
revenues, minority interest decreased to 0.4% in the third quarter of 1999 from
0.6% in the third quarter of 1998.
Nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998
Net operating revenues. Net operating revenues increased $206,721,000 to
$1,072,405,000 in the nine months ended September 30, 1999 from $865,684,000 in
the nine months ended September 30, 1998, representing a 24% increase. Of this
increase, $193,756,000 was due to increased treatments, of which $84,931,000
was from acquisitions consummated after the nine months ended September 30,
1998, $11,250,000 was from de novo developments commencing operations after the
nine months ended September 30, 1998 and $97,575,000 was from existing
facilities as of September 30, 1998. The remaining increase of $12,965,000
resulted from an increase in net operating revenue per treatment which
increased from $242.49 in the nine months ended September 30, 1998 to $245.46
in the nine months ended September 30, 1999. The increase in net operating
revenue per treatment was mainly attributable to an increase in ancillary
services intensity and pricing of $38,064,000, primarily in the administration
of EPO of $35,371,000, an increase in corporate and ancillary program fees of
$1,865,000, primarily from the expansion of laboratory services to former RTC
facilities of $1,001,000, and an increase in non-patient services revenue of
$5,862,000 from the increase in dialysis facility management services to
facilities that we do not own or control, which were partially offset by a
decrease in our net operating revenue per treatment of $28,926,000, as a result
of increasing our contractual allowances primarily related to billings from our
Tacoma office to reflect recent trends in collection experience, and an
additional $3,900,000 in contractual allowances at our dialysis laboratory in
Minnesota.
Facility operating expenses. Facility operating expenses increased
$183,284,000 to $734,528,000 in the nine months ended September 30, 1999 from
$551,244,000 in the nine months ended September 30, 1998 and as a percentage of
net operating revenues, facility operating expenses increased to 68.5% in the
nine months ended September 30, 1999 from 63.7% in the nine months ended
September 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 $33,214,000 to $86,003,000 in the nine months ended September 30,
1999 from $52,789,000 in the nine months ended September 30, 1998 and as a
percentage of net operating revenues, general and administrative expenses
increased to 8.0% in the nine months ended September 30, 1999 from 6.1% in the
nine months ended
13
<PAGE>
September 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
nine months ended September 30, 1999 includes approximately $3,230,000 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, $1,719,000 related to executive severance and $1,081,000 for an employee
retention program.
Provision for doubtful accounts. The provision for doubtful accounts
increased $39,648,000 to $63,187,000 in the nine months ended September 30,
1999 from $23,539,000 in the nine months ended September 30, 1998. As a
percentage of net operating revenues, the provision for doubtful accounts
increased to 5.9% in the nine months ended September 30, 1999 from 2.7% in the
nine months ended September 30, 1998. This is primarily a result of a
$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. Additionally, we increased the provision for doubtful
accounts by $4,100,000 at our dialysis laboratory in Minnesota.
Depreciation and amortization. Depreciation and amortization increased
$17,563,000 to $84,167,000 in the nine months ended September 30, 1999 from
$66,604,000 in the nine months ended September 30, 1998. As a percentage of net
operating revenues, depreciation and amortization was 7.8% in the nine months
ended September 30, 1999 and 7.7% in the nine months ended September 30, 1998.
Write-off of investments. Write-off of investments and loans recorded in the
nine months ended September 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 nine months ended September 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.
A summary of merger and related costs and accrual activity through September
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
Amounts utilized--3rd
quarter 1999........... (99,000) (99,000)
------------ ------------ ------------
Accrual, September 30,
1999................... $ 3,000,000 $ 886,000 $ 3,886,000
============ ============ ============
</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.
14
<PAGE>
Operating income. Operating income before merger and related costs and write-
off of investments decreased $66,988,000 to $104,520,000 in the nine months
ended September 30, 1999 from $171,508,000 in the nine months ended September
30, 1998. As a percentage of net operating revenues, operating income before
merger and related costs and write-off of investments decreased to 9.7% in the
nine months ended September 30, 1999 from 19.8% in the nine months ended
September 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 as described
above.
Interest expense, net of capitalized interest. Interest expense increased
$25,133,000 to $75,999,000 in the nine months ended September 30, 1999 from
$50,866,000 in the nine months ended September 30, 1998. The increase in
interest expense primarily was due to an increase in borrowings made under our
credit facilities to fund acquisitions as well as an increase in the interest
rates on our credit facilities as a term of the bank waiver.
Other financing costs. In the third quarter of 1999 we recognized a write-off
of $629,000 as a result of the permanent reduction in our revolving credit
facility in connection with the bank waiver. 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 cancelation of those swaps was $9,823,000.
Interest income and other. Interest income and other increased $878,000 to
$4,505,000 in the nine months ended September 30, 1999 from $3,627,000 in the
nine months ended September 30, 1998 and as a percentage of net operating
revenues, interest income and other was 0.4% for both periods.
Other losses. Other losses in the nine months ended September 30, 1999 were
primarily a result of a $2,577,000 loss on the disposition of our corporate
jet.
Provision for income taxes. Provision for income taxes decreased $25,454,000
to $5,608,000 for the nine months ended September 30, 1999 from $31,062,000 in
the nine months ended September 30, 1998. The effective tax rate was 87.3% for
the nine months ended September 30, 1999 compared to 40.4% in the nine months
ended September 30, 1998, after minority interest but before merger and related
costs. The change in the effective tax rate primarily was due to $8.9 million
from the non-deductible amortization of intangible assets spread over a smaller
pre-tax income base.
Minority interests. Minority interests increased $1,608,000 to $6,425,000 in
the nine months ended September 30, 1999 from $4,817,000 in the nine months
ended September 30, 1998. As a percentage of net operating revenues, minority
interest was 0.6% in both nine month periods.
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 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 in
the first quarter of 1998.
15
<PAGE>
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 $100.9 million for the first nine months
of 1999 and $6.9 million for the first nine months of 1998. Net cash provided
by operating activities consists of our net income (loss), increased by non-
cash expenses such as depreciation, amortization 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 nine months of 1999 by $41.3 million, of which approximately $16.0
million was due to the payment suspension imposed on our Florida-based
laboratory by its Medicare carrier, which has caused additional working capital
needs, and the remainder mainly was due to an increase in our net operating
revenues.
Net cash used in investing activities was $273.1 million for the first nine
months of 1999 and $383.2 million for the first nine 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 $204.3 million for the first nine months of 1999 and
$403.1 million for the first nine 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 nine months of 1999 as
compared to the first nine months of 1998. As of September 30, 1999, we had
working capital of $417.7 million, including cash of $70.7 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 nine months ended September 30, 1999, we developed 17 new facilities,
8 of which we do not own but we manage, and we expect to develop approximately
8 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 $20 to $25
million in aggregate for the remaining three months of 1999.
During the nine months ended September 30, 1999, we paid cash of
approximately $152.6 million to acquire 44 facilities and additional interests
from minority partners in certain of our partnerships.
Credit facilities
In August 1999 the lenders under our credit facilities waived compliance with
a financial covenant that established a maximum leverage ratio which we could
not exceed. Subsequent to September 30, 1999, this waiver was extended on
revised terms. The revision to the waiver was required because we have exceeded
the maximum leverage ratio allowable under the terms of the original waiver.
The revised waiver expires March 15, 2000. The lenders also 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 revised
waiver:
. Permanently reduce the revolving credit facility from $950.0 million to
$700.0 million;
. Reduce our permitted borrowings under the revolving credit facility to
$650.0 million during the waiver period;
. Limit the amounts we may spend for acquisitions, de novo developments and
expansion or relocation of existing dialysis centers;
16
<PAGE>
. 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.
The applicable margin used in determining the interest rate for borrowings
under the revolving credit facility is based on our leverage ratio. In
addition, the most recent waiver agreement fixed the applicable margin at 2.25%
for Alternate Base Rate loans and 3.50% for adjusted LIBOR loans for the period
September 30, 1999 through March 15, 2000. The applicable margin used in
determining the interest rate for borrowings under the term loan has been fixed
for the remainder of the loan period.
Other than the issues specifically addressed in the waiver agreement, all
other covenants and conditions of the credit facilities remain unchanged.
As of September 30, 1999 the principal amount outstanding under our revolving
facility was $560.9 million and under our term facility was $392.0 million. The
term facility requires annual principal payments of $4.0 million, with the
$368.0 million balance due on maturity. As of September 30, 1999, we had $89.1
million available for borrowing under the revolving facility.
In September 1999 we converted approximately $50.0 million of our outstanding
borrowings under our revolving credit facility from U.S. dollar denominated
borrowings to Euro denominated borrowings, primarily as a hedge of our net
investment in European operations.
Further, the amendment and waiver to our credit facilities described in Note
10 resulted in a write-off of $629,000 for the reduction of previously deferred
financing costs. This write-off is included in other financing costs.
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 cancelation
clauses at the counterparties' option from one to seven years. The underlying
blended interest rate is fixed at approximately 5.69% plus an applicable margin
based upon our current leverage ratio. Currently, the effective interest rate
for these swaps is 9.30%. 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 cancelation option dates from the years
2000 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
17
<PAGE>
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 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 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.
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 re-borrowed, 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.
Corrective action and contingency plans are now in place.
Software applications and hardware. Each component of our software
application portfolio, or SAP, must be examined with respect to its ability to
handle dates properly in the next millennium. As part of our software
assessment plan, we have tested and will continue to validate the testing of
each component of our SAP. These tests are 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 was known to have a significant
Y2K problem. We have already addressed this issue by obtaining a new, Y2K
compliant version of this software. We completed conversion to this Y2K
compliant version in the third quarter of 1999. We will conduct additional
testing of this software in the fourth quarter of 1999.
18
<PAGE>
Operating systems. We have also reviewed 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 was examined with respect to its ability to properly handle
dates in the next millennium. We have tested 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 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 are conducting an inventory of all computer hardware using a
Y2K utility program to determine whether we have a BIOS or a system clock
problem. Where necessary we performed a BIOS upgrade or performed 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 was 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. During the fourth quarter of 1999 each center
will continue to make preparations to minimize potential problems.
Substantially all of our biomedical devices, including dialysis machines that
have a computer chip in them, have been checked for Y2K compliance. We have
contacted each of the vendors of the equipment we use and asked them to provide
us with documentation regarding Y2K compliance. In a few cases we are
continuing to ask for and review additional documentation. A limited number of
vendors have performed Y2K tests on a random sample of 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 fourth quarter of 1999. We have completed all necessary upgrades for our
dialysis machines. The only biomedical devices yet to be upgraded are two
models of dialyzer reprocessing equipment, with respect to which we are in the
process of securing and installing the necessary upgrades.
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 compliant, 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 have contacted the
landlords of each of our facilities to insure that they will provide access to
our staff and any other key service providers. We have also provided 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.
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<PAGE>
To minimize the effect of any Y2K non-compliance on the part of suppliers, we
have:
. Identified our critical suppliers and surveyed each of them to assess
their Y2K compliance status;
. Identified alternative supply sources where necessary;
. Identified Y2K compliant transportation/shipping companies to cover
situations where our current suppliers' delivery systems go down;
. Included language in contracts with new suppliers addressing Y2K
performance obligations, requirements and failures;
. Ordered one week of additional inventory for our dialysis facilities;
. Asked critical distributors to carry additional inventory earmarked for
us; and
. Prepared a critical supplier contact/pager list for Y2K emergency supply
problems and ensured 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 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 refining
contingency plans to prevent the interruption of cash flow. With respect to
Medicare payments, 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. During the fourth quarter of 1999 we
will conclude testing with our two primary fiscal intermediaries. 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/A 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.
20
<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
2000 2001 2002 2003 2004 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................. 6.64% 6.64%
Variable rate........... $ 24 $ 98 $153 $328 $ 4 $372 $979 $979
Average interest
rate................. 9.33% 9.33% 9.33% 9.33% 9.33% 9.33% 9.33%
<CAPTION>
Expected Maturity Date
---------------------------------------- Fair
2000 2001 2002 2003 2004 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% 5.66%
Average receive rate.. 5.53% 5.46% 5.47%
</TABLE>
Our swaps have a one-time call provision for our counter-party 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>
Exchange rate sensitivity
In September 1999 we converted approximately $50.0 million of our outstanding
borrowings under our revolving credit facility from U.S. dollar denominated
borrowings to Euro denominated borrowings, primarily as a hedge of our net
investment in European operations and to assist in our management of foreign
exchange rate risk.
Other than as described above, there have been no material changes in our
market risk exposure from that reported in our Form 10-K/A 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. 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 nine months
of 1999 was generated from patients who had Medicare as the primary payor.
The Department of Health and Human Services, or HHS, had recommended, and the
Clinton administration had 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 nine 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.
22
<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 had 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 nine 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 39% of our net operating revenues in the first nine 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 45%
of our assets and 205% of our stockholders' equity at September 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 continuously review the appropriateness of the amortization periods we are
using and change them as necessary to reflect current expectations. This
information is also reviewed with our independent accountants. 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 $27 million as of September 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 September 30, 1999 we had:
. Total consolidated debt of approximately $1.4 billion;
. Stockholders' equity of approximately $482 million; and
. A ratio of earnings to fixed charges of 1.07.
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:
2000.......................................... $119,833,000 $ 23,702,000
2001.......................................... 110,742,000 97,874,000
2002.......................................... 96,647,000 153,400,000
2003.......................................... 66,576,000 327,901,000
2004.......................................... 66,200,000 4,000,000
</TABLE>
25
<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, 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 to us, such as 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 $143.5 million in 2000 and $208.6 million in 2001, 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;
and
. 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.
26
<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.
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.
27
<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. Please see our quarterly report on Form 10-Q for the
quarter ended June 30, 1999 for additional information.
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 October 18, 1999, by and between
TRCH and Kent J. Thiry.*
10.2 Agreement, dated as of October 6, 1999, by and between TRCH and Victor
M.G. Chaltiel.*
10.3 Agreement, dated as of October 18, 1999, by and between TRCH and John
E. King.*
10.4 Consulting Agreement, dated as of October 1, 1998, by and between
Total Renal Care, Inc. and Shaul G. Massry, M.D.*
10.5 Amendment No. 4 and Waiver, dated as of November 8, 1999, to and under
the Revolving Credit Agreement.
10.6 Limited Waiver and Third Amendment, dated as of November 8, 1999, to
the Term Loan Agreement.
12.1 Statement re computation of ratio of earnings to fixed charges.
27.1 Financial Data Schedule--three months ended September 30, 1999 and
1998.
27.2 Financial Data Schedule--nine months ended September 30, 1999 and nine
months ended September 30, 1998.
</TABLE>
- ---------------------
* Management contract or executive compensation plan or arrangement.
(b) Reports on Form 8-K
None.
28
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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: November 15, 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.
29
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into as of October 18,
1999 by and between Total Renal Care Holdings Corp. (the "Company") and Kent J.
Thiry ("Executive").
In consideration of the mutual covenants and agreements hereinafter set forth
and for other good and valuable consideration, the parties hereto, intending to
be legally bound hereby, agree as follows:
Section 1. Employment and Duties. The Company hereby employs Executive to serve
as Chief Executive Officer and Chairman of the Board of the Company during the
Term (as such term is defined in Section 3). Executive accepts such employment
on the terms and conditions set forth in this Agreement. Executive shall
perform the duties of Chairman of the Board and Chief Executive Officer of the
Company and shall perform such other duties consistent with such positions as
may be assigned to Executive from time to time by the Board of Directors of the
Company (the "Board"). Executive shall devote his best efforts and skills to
the business and interests of the Company on a full-time basis, provided,
however, that from the date hereof through November 22, 1999 or such earlier
date as Executive may determine (the "Transition Period"), Executive shall be
employed on a half-time basis to enable Executive to complete certain other
business activities in which he is currently involved (the "Transition
Activities"). Except for the Transition Activities during the Transition
Period, Executive shall not engage in any other business activity during the
Term; provided, however, that, to the extent such activities do not adversely
affect the performance of his responsibilities to the Company hereunder,
Executive may (i) manage his personal investments and participate in charitable
and civic affairs, (ii) serve on the boards of directors of the three for-
profit corporation boards on which he serves as of the date hereof, and (iii)
serve on such additional for-profit corporate boards as the Board may expressly
approve. Executive shall use his best efforts to establish a residence in the
greater Los Angeles metropolitan area no later than December 31, 1999, but
shall establish such a residence in any event no later than January 31, 2000.
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 the following compensation and
benefits:
2.1 Base Salary. During the Transition Period, Executive shall be paid a base
salary at the rate of $250,000 per annum, payable in installments consistent
with the Company's payroll schedule. From and after the Transition Period and
for the remainder of the Term, Executive shall be paid an annual base salary
(the "Base Salary") which shall be payable in installments consistent with the
Company's payroll schedule. The Base Salary for the period beginning
immediately after the last day of the Transition Period through December 31,
2000 shall be $500,000 per year. The Base Salary shall be subject to increase
by the Board for each calendar year thereafter 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. Commencing on the date hereof and for the remainder of the Term,
Executive shall (i) be provided with employee benefits (including health
insurance, long term disability insurance and dental insurance) on the same
basis as such benefits are generally made available to other senior executives
of the Company, (ii) be eligible to participate in the Company's 401(k) Plan on
the same basis as other senior executives of the Company, (iii) be provided
with $1,500,000 in term life insurance, (iv) receive an automobile allowance of
$1,000 per month, (v) be reimbursed in accordance with the Company's
reimbursement policies (or otherwise as expressly approved by the Board) for
travel and entertainment expenses, cell phone charges and other business
related expenses incurred in the performance of his duties hereunder, (vi) be
reimbursed for
<PAGE>
expenses related to his involvement in the Young President's Organization, and
(vii) be entitled to four (4) weeks paid vacation per year. The Company shall
reimburse Executive for up to $150,000 in moving and related costs incurred in
establishing a residence in the greater Los Angeles metropolitan area as
required by Section 1 (and to the extent that such reimbursement is taxable to
Executive, the Company shall pay to Executive such additional amount as shall
be necessary to pay the taxes thereon on an after tax-basis).
2.3 Bonuses.
(a) For each calendar year commencing with calendar year 2000, Executive
shall be eligible to receive a bonus (the "Bonus") based upon the
achievement of performance goals to be mutually agreed upon by Executive
and the Board from year to year, with the target bonus to be equal to 100%
of the Base Salary for such year and the maximum bonus to be equal to 150%
of such Base Salary; provided, however, that, subject to the provisions of
Section 2.3(b) below, Executive shall be guaranteed a Bonus of at least
$500,000 for calendar year 2000. In addition to the foregoing, the Board
shall develop an appropriate bonus package for Executive for the period
following the Transition Period through December 31, 1999.
(b) The Bonus for each year shall be paid within 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 dies or
is terminated by the Company by reason of Disability (as defined below),
Executive (or his estate) shall be entitled to receive, at such time as
bonuses for such year are otherwise paid, 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; and
provided further, that, in the event Executive is terminated without
Material Cause (as defined below) or resigns following Constructive
Discharge (as defined below) at any time, Executive shall be entitled to
receive a Bonus for the year in which such termination occurs equal to the
Bonus, if any, which he received for the immediately preceding calendar
year (or, if such termination occurs prior to December 31, 2000, Executive
shall be entitled to receive a bonus equal to $500,000), which Bonus shall
be payable within five business days of the effective date of such
termination.
2.4 Stock Options.
(a) Executive shall receive two nonqualified stock options under the
Company's 1997 Equity Compensation Plan (the "Stock Options"), one of which
shall be granted on the date hereof and shall entitle Executive to purchase
up to 500,000 shares of the Company's common stock ("Common Stock") and
shall have an exercise price of $6.00 (the last sale price on October 15,
1999 (i.e., the last trading day prior to the date hereof), and one of
which shall be granted on January 26, 2000 (i.e., 100 days after the date
hereof) and shall entitle Executive to purchase 500,000 shares of Common
Stock and shall have an exercise price equal to the average of the last
sale price for the Common Stock on January 19, 2000 through January 26,
2000, inclusive. Each of the Stock Options shall vest 25% on each
anniversary of the date hereof, such that all of the Stock Options shall be
fully vested on October 18, 2003; provided, however, that the Stock Options
shall become fully vested immediately upon a Change of Control; and
provided further, that the Stock Options shall provide for automatic
acceleration of the vesting of the final annual installment at such time as
the closing price for the Common Stock as reported on the New York Stock
Exchange exceeds $16.89 for any ten days out of any twenty day period.
Section 3. Term.
3.1 Commencement. The term of Executive's employment hereunder shall commence
on the date hereof and, unless sooner terminated as provided herein, shall
continue thereafter until December 31, 2001; provided, however, that such term
shall automatically be extended for an additional period of one year on
December 31, 2001 and on each December 31 thereafter unless the Company
delivers written notice to Executive of the Company's intention not to so
extend the term no later than the September 30 prior to any such December 31.
The term of Executive's employment hereunder is referred to herein as the
"Term."
2
<PAGE>
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, Executive shall have been offered an opportunity to meet
and confer in person with at least two (2) Board members regarding the grounds
for such intended termination. Upon termination for Material Cause, 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 (ii) 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. The Company may terminate the employment of Executive
prior to the expiration of the Term for any reason or for no reason at any time
upon at least thirty (30) days' advance written notice. If the Company
terminates the employment of Executive prior to the expiration of the Term
other than for Material Cause or Disability, or if Executive resigns within
sixty (60) days following Constructive Discharge, Executive shall (i) be
entitled to receive the Base Salary and benefits as set forth in Section 2.1
through the effective date of such termination, (ii) be entitled to receive the
Bonus provided for in Section 2.3(b), (iii) be entitled to continue to receive
the Base Salary in effect as of the date of such termination for the two year
period following the effective date of such termination (the "Severance
Period"), subject to the limitation set forth below, (iv) be entitled to
continue to receive during the Severance Period the employee health insurance
benefits set forth in Section 2.2 to the extent such benefits can be provided
under the Company's health insurance policies and programs in effect at the
effective time of such termination and, to the extent such benefits cannot be
provided under such policies and programs, the Company shall purchase for
Executive reasonably equivalent health insurance benefits during the Severance
Period, subject to the limitation set forth below, and (v) 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. The foregoing
notwithstanding, in the event Executive accepts employment with another
employer during the Severance Period, (x) Executive shall immediately notify
the Company of such employment, (y) the Company's obligation to continue to pay
the Base Salary pursuant to clause (ii) of the immediately preceding sentence
shall be reduced by the amount of any compensation earned by Executive during
the Severance Period in connection with such employment, and (z) the Company's
obligation to continue to provide certain health insurance benefits pursuant to
clause (iii) of the immediately preceding sentence shall terminate.
3.4 Voluntary Resignation. Executive may resign from the Company at any time
upon at least ninety (90) days' written notice. If Executive resigns from the
Company other than within sixty (60) days following Constructive Discharge,
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 (ii) 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. In the event Executive resigns from the Company at any time, the
Company shall have the right to make such resignation effective as of any date
prior to the expiration of any required notice period.
3.5 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 Section 2.1
and Section 2.2, respectively, through the date of Executive's death, (ii) be
entitled to receive the Bonus provided for in Section 2.3(b) pro rated for the
period through the date of Executive's death 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.
3.6 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
3
<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 from the
effective date of such termination.
3.7 Definition. 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 40%
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 40% or less of the voting power of the
Company after such merger or consolidation, and (iv) any transaction in
which more than 40% 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 Executive's
express written consent: (i) the scope of Executive'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 Board of Directors of a subsidiary will not be deemed to
constitute the same corporate and reporting capacity as reporting to the
Board of Directors of the ultimate parent entity) or (C) of the same
general nature as Executive's authority, duties and responsibilities with
the Company immediately prior to such Change of Control; (ii) the failure
by the Company to provide Executive office accommodations and assistance
substantially equivalent to the accommodations and assistance provided to
Executive immediately prior to such Change of Control; (iii) the principal
office to which Executive is required to report is changed to a location
which is more than twenty (20) miles from the principal office to which
Executive is required to report immediately prior to such Change of
Control; or (iv) a reduction by the Company in Executive'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, with or without
accommodation, 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 Executive 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 Executive to follow policies
or directives reasonably established by the Board that goes uncorrected for
a period of thirty (30) consecutive days after written notice has been
provided to Executive; or (iv) a material breach by Executive of this
Agreement that goes uncorrected for a period of thirty (30) consecutive
days after written notice has been provided to Executive.
3.8 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 8.5 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.
4
<PAGE>
3.9 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 this Section 3 or under Section 5, Section 6, Section 7
or Section 8.
Section 4. Board of Directors. By action taken at a special meeting held on
October 14, 1999, the Board increased the authorized number of Directors from
five to seven and elected Executive to fill one of the newly created vacancies,
such election to be subject to the execution of this Agreement and to be
effective as of the date hereof. In connection with the annual meeting of the
Company's stockholders scheduled for December, 1999, the Board shall designate
a nominating committee to recommend to the Board a slate of directors to stand
for election at such annual meeting and shall appoint Executive to serve as one
of the members of such committee, it being understood and agreed that the slate
of Directors to be nominated at such meeting shall be approved by the Board as
a whole. The termination of Executive's employment for any reason shall
constitute Executive's resignation from the Board without any further action on
the part of the Company or Executive. The foregoing notwithstanding, Executive
shall execute upon request a written resignation from the Board following the
termination of his employment for any reason.
Section 5. Certain Covenants of Executive.
5.1 Confidential Information.
(a) Executive acknowledges and agrees that: (i) in the course of his
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 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
<PAGE>
5.2 Competition.
(a) Executive agrees that, during the Term and for a period following the
Term ending on the first to occur of (A) the second anniversary of the
termination of Executive's employment and (B) the period following the Term
which is equal to the length of the Term, 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 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 is conducting any business as of the date on
which Executive's employment hereunder terminates, 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 as of the date on which Executive's employment hereunder
terminates, 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 two (2)
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; (v) 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
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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.
Section 6. 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 (within the meaning of Section 1504 of
the Internal Revenue Code of 1986, as amended (the "Code")) with the Company or
which becomes so affiliated pursuant to the transactions resulting in a Change
of Control (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 within the meaning of Section 280G(b)(1) 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 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, (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.
Section 7. Representations, Warranties and Agreements of Executive. Executive
represents and warrants to the Company that (i) he has resigned as an officer
of VSP Holdings, Inc. and all affiliated companies (except that he has not
resigned as the non-executive Chairman of the Board of VSP Holdings, Inc. and
Vivra Asthma-Allergy, Inc.) and, as of the date hereof, is not an officer of
any other corporation or other entity, (ii) the performance of this Agreement
will not breach any other agreement or obligation by which Executive is bound
to keep in confidence proprietary information acquired by Executive or in
confidence or in trust prior to employment by the Company and or any agreement
restricting or purporting to restrict his right to perform services for the
Company and (iii) he has not taken and does not have in his possession or
control any confidential information or property relating to any former
employer. Executive agrees that he will not use confidential information or
property of any other employer while employed by the Company. Executive shall
indemnify and hold the Company harmless for any breach the representations,
warranties and agreements set forth in this Section 7, including reasonable
attorney's fees and costs of suit.
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Section 8. Miscellaneous.
8.1 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 8.1 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 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.
8.2 Entire Agreement; Amendment. This Agreement and the Stock Options represent
the entire understanding of the parties hereto with respect to the employment
of Executive and supersede all prior agreements with respect thereto. This
Agreement may not be altered or amended except in writing executed by both
parties hereto.
8.3 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.
8.4 Applicable Law. This Agreement shall be governed by the laws of the State
of California, without regard to the principles of conflicts of laws.
8.5 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 Board of Directors 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.
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8.6 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 date and year first above written.
<TABLE>
<S> <C>
TOTAL RENAL CARE HOLDINGS, INC. EXECUTIVE
/s/ Maris Andersons /s/ Kent J. Thiry
By: ____________________________________ ________________________________________
Maris Andersons, Director Kent J. Thiry
</TABLE>
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EXHIBIT 10.2
AGREEMENT
THIS AGREEMENT (this "Agreement") is entered into on October 6, 1999 by and
between Victor M.G. Chaltiel ("Mr. Chaltiel") and Total Renal Care Holdings,
Inc., a Delaware corporation (the "Company").
R E C I T A L S:
A. Mr. Chaltiel has tendered his resignation as an employee and as an officer
of the Company and all of its subsidiaries and affiliated entities effective as
of August 4, 1999 (the "Effective Date").
B. The Company and Mr. Chaltiel desire to provide for certain payments in
connection with his resignation and to provide for certain other agreements
between them as set forth herein.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing recitals and the covenants
contained herein, the parties agree as follows:
1. Confirmation of Resignation. Mr. Chaltiel hereby confirms his resignation as
an employee and as an officer of the Company and all of its subsidiaries and
affiliated entities effective as of the Effective Date. Mr. Chaltiel's
resignation as an employee and officer of the Company shall not affect his
status as a member of the Board of Directors of the Company.
2. Termination of Employment Agreement. The Company and Mr. Chaltiel
acknowledge and agree that, effective as of the Effective Date, all of their
respective rights and obligations under that certain Employment Agreement dated
as of August 11, 1994, as amended through the date hereof, between the Company
and Mr. Chaltiel (the "Employment Agreement"), shall be deemed to have
terminated and to be of no further force or effect.
3. Payment by the Company; Termination of Benefits. The Company shall pay (i)
separation pay by issuing a check in the amount of Seven Hundred and Sixty Six
Thousand Five Hundred and Eighty Dollars and No Cents ($766,580.00) made
payable to Victor M.G. Chaltiel, which check shall be delivered to Mr. Chaltiel
one business day after the expiration of the recission period referred to in
Section 16(k) below at such address as he may request (the "Separation
Payment"), and (ii) Mr. Chaltiel's legal fees in connection with the
negotiation of this Agreement and related matters by issuing a check in the
amount of Nine Thousand Dollars and No Cents ($9,000.00) made payable to
"Munger, Tolles & Olson LLP" for attorneys' fees and costs (the "Attorneys'
Fees Portion"), which check shall be delivered to Munger, Tolles & Olson LLP
one business day after the expiration of the recission period referred to in
Section 16(k) below at 355 South Grand Avenue, Thirty Fifth Floor, Los Angeles,
California 90071-1560. The Company shall report the Separation Payment on a
Form 1099 for federal income tax purposes for Mr. Chaltiel and the Attorneys'
Fees Portion on a Form 1099 for federal income tax purposes for Munger, Tolles
& Olson. Mr. Chaltiel shall be responsible for the payment of any all federal,
state and local taxes due with respect to the Separation Payment and shall
indemnify and hold the Company harmless from any cost, expense or liability
resulting from any failure to pay any such taxes. The Company acknowledges and
agrees that the payments provided for in this Section 3 are being made pursuant
to a negotiated agreement with Mr. Chaltiel and not pursuant to any provision
of the Employment Agreement. Mr. Chaltiel acknowledges and agrees that, except
for the payment to be made as provided in this Section 3 and the expense
reimbursements to be paid as provided in Section 4 below, he has received all
salary and other payments of any kind to which he was entitled through the
Effective Date, including, without limitation, all accrued vacation pay and
similar payments to which he was entitled as an officer or an employee of the
Company. From and after the Effective Date, Mr. Chaltiel shall not be entitled
to participate in any of the Company's employee benefit plans, including but
not limited to its 401(k) plan and its health, disability and life insurance
programs, except to the extent required by law (e.g., pursuant to COBRA) and
except to the extent he is entitled to participate in any such plan by virtue
of his status as a director of the Company.
<PAGE>
4. Expense Reimbursement. Notwithstanding any other provision of this
Agreement, Mr. Chaltiel may submit requests for reimbursement of business
related expenses for which he may be entitled to reimbursement pursuant to
Section 4.6 of the Employment Agreement or otherwise pursuant to any Company
policy (including any payments related to his private use of the Company's
airplane); provided, however, that any and all such reimbursement requests must
be submitted no later than October 29, 1999 in order to be considered for
reimbursement.
5. Amendment of Stock Options. Pursuant to authorization of the Board of
Directors of the Company, the non-qualified stock option held by Mr. Chaltiel
to purchase up to 166,667 shares of common stock of the Company (the "Stock
Option") is hereby amended to provide that the unvested portion of the Stock
Option (covering 55,555 shares) shall be deemed fully vested as of the
Effective Date. The Stock Option shall be exercisable at any time prior to
August 4, 2002, and shall expire on such date to the extent not exercised prior
thereto.
6. No Effect on Indemnification Agreement. This Agreement shall have no effect
on, and shall not limit in any way, the obligations of the Company pursuant to
the terms of that certain Indemnification Agreement dated as of October 25,
1995 by and between the Company and Mr. Chaltiel, a copy of which is attached
hereto as Exhibit A (the "Indemnification Agreement").
7. Assistance and Cooperation. Mr. Chaltiel shall assist the Company and
cooperate in preparing for any and all litigation, arbitration proceedings,
investigations and other legal proceedings (collectively, "Legal Proceedings")
relating to matters which occurred during his tenure with the Company and as to
which the Company may reasonably request his assistance. Without limiting the
generality of the foregoing, Mr. Chaltiel shall (i) make himself available at
such times as may reasonably be requested for depositions in connection with
any Legal Proceedings, (ii) make himself available to testify in any Legal
Proceedings and (iii) assist the Company in preparing responses to requests for
written discovery in any Legal Proceedings. Mr. Chaltiel shall be reimbursed
for all of his out-of pocket expenses in providing such assistance to the
Company.
8. Confidentiality.
(a) Mr. Chaltiel shall not at any time disclose or use for his own benefit
or purposes or for the benefit or purposes of any other person, firm,
partnership, joint venture, association, corporation or other business
organization, entity or enterprise other than the Company and any of its
subsidiaries or affiliates, any trade secrets, information, data, or other
confidential information relating to customers, development programs,
costs, marketing , trading, investment, sales activities, promotion, credit
and financial data, financing methods, plans, or the business and affairs
of the Company generally, or any subsidiary or affiliate of the Company;
provided that the foregoing shall not apply when such information is
lawfully obtainable from other sources and the information is not unique to
the Company or is generally known to the industry or the public other than
as a result of Mr. Chaltiel's breach of this Section 8(a). Mr. Chaltiel
shall not retain or use for his account at any time any trade names,
trademark or other proprietary business designation used or owned in
connection with the business of the Company or its affiliates.
Notwithstanding the foregoing, Mr. Chaltiel shall not be prohibited from
complying with any applicable law, rule or regulation (including complying
with any oral or written questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
process to which he is subject).
(b) The Company shall give Mr. Chaltiel written notice of an event or
circumstances constituting a breach of Section 8(a) and thirty (30) days
from the date of such notice to cure such event or circumstances, if
curable.
(c) Mr. Chaltiel acknowledges and agrees that the Company's remedies at law
for a breach of any of the provisions of Section 8(a) would be inadequate
and, in recognition of this fact, Mr. Chaltiel agrees that, in the event of
such a breach, in addition to any remedies at law, the Company, without
posting any bond, shall be entitled to obtain equitable relief in the form
of specific performance, temporary restraining order, temporary or
permanent injunction or any other equitable remedy which may then be
available.
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9. Release by Mr. Chaltiel. As a material inducement to the Company to enter
into this Agreement, Mr. Chaltiel hereby irrevocably and unconditionally
releases, acquits and forever discharges the Company and each of the Company's
past, present and future owners, stockholders, predecessors, successors,
assigns, agents, directors, officers, employees, representatives, attorneys,
divisions, subsidiaries and affiliates (and all past, present and future
owners, stockholders, predecessors, successors, assigns, agents, directors,
officers, employees, representatives and attorneys of such divisions,
subsidiaries and affiliates), and all persons acting by, through, under or in
concert with any of them (collectively, the "Company Releasees"), from any and
all charges, complaints, claims, liabilities, obligations, promises,
agreements, controversies and expenses (including attorneys' fees and costs
actually incurred) of any nature whatsoever, known or unknown, suspected or
unsuspected, including, but not limited to, any charges, complaints, claims,
liabilities, obligations, controversies and expenses arising out of alleged
violations of any contracts, express or implied, any covenant of good faith and
fair dealing, express or implied, any obligation for compensation, lost wages,
lost benefits, accrued vacation pay, or any other expectation of remuneration
or benefit on the part of Mr. Chaltiel, including but not limited to, any
defamation, intentional or negligent infliction of emotional distress, or any
other tort, or any legal restrictions on the Company's right to terminate
employees, or any federal state or other governmental statute, regulation, or
ordinance (including, without limitation: (i) Title VII of the Civil Rights Act
of 1964 (race, color, religion, sex and national origin discrimination); (ii)
42 U.S.C. (P) 1981 (discrimination); (iii) 29 U.S.C. (P) 206(d)(1) (equal pay);
(iv) the California Fair Employment and Housing Act (discrimination, including
race, color, national origin, ancestry, physical handicap, medical condition,
marital status, sex or age); (v) the California Workers' Compensation Act; (vi)
the California Labor Code; (vii) Executive Order 11246 (race, color, religion,
sex and national origin discrimination); (viii) Executive Order 11141 (age
discrimination); (ix) (P) 503 and (P) 504 of the Rehabilitation Act of 1973
(disability discrimination); (x) the Employee Retirement Income Security Act
(employee benefits); (xi) the Fair Labor Standards Act; (xii) the Americans
with Disabilities Act (discrimination against individuals with a disability);
(xiii) the Age Discrimination in Employment Act (age discrimination), and (xiv)
the Civil Rights Act of 1991), which Mr. Chaltiel now has, owns or holds, or
claims to have, own or hold, or which Mr. Chaltiel at any time heretofore had,
owned, or held, or claimed to have, own or hold, against the Company or any
other Company Releasee; provided, however, that the foregoing shall not release
the Company or any other Company Releasee from any (1) obligations under this
Agreement (including the obligation to make the payments provided for herein
and to reimburse Mr. Chaltiel for business expenses as provided in Section 4)
or under the Indemnification Agreement, (2) claims arising after October 6,
1999 or (3) charges, complaints, claims, liabilities, obligations, promises,
agreements, controversies and expenses arising out of any conduct by the
Company or such other Company Releasee which was knowingly fraudulent or
deliberately dishonest (provided, however, that under no circumstances may Mr.
Chaltiel pursue any claim which would be released in this Section 9 absent this
proviso on the basis that an action taken by any member of the Board of
Directors of the Company on or after the Effective Date and on or prior to
October 6, 1999 was knowingly fraudulent or deliberately dishonest). Mr.
Chaltiel agrees that as of October 6, 1999, he does not know, claim, suspect or
have any evidence whatsoever of facts which would give rise to the assertion
that the Company or any Company Releasee has engaged in any knowingly
fraudulent or deliberately dishonest conduct.
10. Release by the Company. As a material inducement to Mr. Chaltiel to enter
into this Agreement, the Company, on its own behalf and on behalf of the
subsidiaries and affiliated entities which it controls, hereby irrevocably and
unconditionally releases, acquits and forever discharges Mr. Chaltiel, his
personal and legal representatives, executors, administrators, heirs,
distributees, devisees and legatees (collectively, the "Chaltiel Releasees")
from any and all charges, complaints, claims, liabilities, obligations,
promises, agreements, controversies and expenses (including attorneys' fees and
costs actually incurred) of any nature whatsoever, known or unknown, suspected
or unsuspected, including, but not limited to, any charges, complaints, claims,
liabilities, obligations, controversies and expenses arising out of alleged
violations of any contracts, express or implied, or any covenant of good faith
and fair dealing, express or implied, which the Company or any of such
subsidiaries or affiliated entities now has, owns or holds, or claims to have,
own or hold, or which the Company or any of such subsidiaries or affiliated
entities at any time heretofore had, owned, or held, or claimed to have, own or
hold, against Mr. Chaltiel or any other Chaltiel Releasee relating to the
performance of
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Mr. Chaltiel's duties as an officer, director or employee of the Company or any
of its divisions, subsidiaries or affiliates; provided, however, that the
foregoing shall not release Mr. Chaltiel or any Chaltiel Releasee from any (1)
obligations under this Agreement or under the Indemnification Agreement, (2)
claims arising after October 6, 1999 or (3) charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies and expenses
arising out of any conduct by Mr. Chaltiel which was knowingly fraudulent or
deliberately dishonest. The Company agrees that as of October 6, 1999, neither
it nor any Company Releasee knows, claims, suspects or has any evidence
whatsoever of facts which would give rise to the assertion that Mr. Chaltiel
has engaged in any knowingly fraudulent or deliberately dishonest conduct.
11. Knowing and Voluntary Waiver. The parties expressly waive and relinquish
all rights and benefits afforded by Section 1542 of the Civil Code of the State
of California with respect to the releases provided herein, and do so
understanding and acknowledging the significance of such specific waiver of
Section 1542. Section 1542 of the Civil Code of the State of California states
as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
Thus, notwithstanding the provisions of Section 1542, and for the purpose of
implementing the releases provided herein, the parties expressly acknowledge
that this Agreement is intended to include in its effect, without limitation
other than the express limitations set forth herein, all claims which either
party does not know or suspect to exist in such party's favor at the time of
execution hereof, and that this Agreement contemplates the extinguishment of
any such claims. The parties acknowledge and agree that the foregoing waiver of
the provisions of Section 1542 has been expressly bargained for by each of the
parties in the negotiation of this Agreement.
12. No Claims; Covenant Not to Sue. Mr. Chaltiel represents and covenants that
(i) he has not filed any complaints, charges or lawsuits, nor commenced any
arbitration or similar proceedings, against the Company or any other Company
Releasee in connection with any claim or potential claim released hereunder,
including any claims under the Employment Agreement, and (ii) he will not do so
at any time hereafter; provided, however, that this Section 12 shall not limit
Mr. Chaltiel from commencing appropriate proceedings for the purpose of
enforcing any claims not released hereunder. The Company represents and
covenants that (i) neither it nor any subsidiary or other affiliated entity
which it controls has filed any complaints, charges or lawsuits nor commenced
any arbitration or similar proceedings against Mr. Chaltiel or any other
Chaltiel Releasee in connection with any claim or potential claim released
hereunder, including any claims under the Employment Agreement, and (ii)
neither it nor any such subsidiary or affiliated entity will do so at any time
hereafter; provided, however, that this Section 12 shall not limit the Company
from commencing appropriate proceedings for the purpose of enforcing any claims
not released hereunder.
13. Non-Admission of Liability. This Agreement shall not in any way be
construed as an admission by the Company that it or any subsidiary or
affiliated entity has acted wrongfully with respect to Mr. Chaltiel or that Mr.
Chaltiel has any rights whatsoever against the Company or any other Company
Releasee, and the Company specifically disclaims any liability to or wrongful
acts against Mr. Chaltiel. This Agreement shall not in any way be construed as
an admission by Mr. Chaltiel that he has acted wrongfully with respect to the
Company, or that the Company or any subsidiary or affiliated entity has any
rights whatsoever against Mr. Chaltiel or any other Chaltiel Releasee, and Mr.
Chaltiel specifically disclaims any liability to or wrongful acts against the
Company.
14. Non-Disparagement. From and after the date hereof, the Company shall not
make, and shall not permit any subsidiary or affiliated entity which it
controls to make, any untrue, defamatory or disparaging statements concerning
Mr. Chaltiel, and Mr. Chaltiel shall not make any untrue, defamatory or
disparaging statements concerning the Company or any other Company Releasee.
The foregoing notwithstanding, under no
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circumstances shall testimony given under oath in any lawsuit, deposition or
other legal proceeding be held to constitute disparagement of any person or
entity in violation of this Section 14.
15. No Confidentiality. Mr. Chaltiel acknowledges that the Company intends to
file a copy of this Agreement as an exhibit to a future filing with the
Securities and Exchange Commission. Consequently, Mr. Chaltiel acknowledges and
agrees that the contents of this Agreement will be made publicly available and
confirms that he has no expectation of confidentiality with respect to the
terms hereof.
16. Miscellaneous.
(a) Return of Company Property. Mr. Chaltiel hereby confirms that he has
delivered and returned to the Company any and all memoranda, books, papers,
plans, information, letters and other data, and all copies thereof or
therefrom, in any way relating to the business of the Company and its
affiliates; provided, however, that Mr. Chaltiel may retain personal notes,
notebooks, diaries, Rolodexes and addresses and phone numbers; and provided
further, that, so long as Mr. Chaltiel remains a member of the Board of
Directors of the Company, Mr. Chaltiel may retain such Company property and
related materials as are necessary for him to perform his duties as a
director of the Company or as have been or may be provided to him
specifically in his capacity as a director of the Company.
(b) Arbitration of Disputes. All controversies, claims, disputes and
matters in question arising out of, or relating to, this Agreement or the
breach hereof (but not including controversies, claims, disputes and
matters in question arising out of, or relating to, the Indemnification
Agreement or the breach thereof), shall be decided by binding arbitration
conducted in Los Angeles, California under the applicable rules of the
American Arbitration Association (the "AAA") or its successor in effect at
the time a demand for arbitration is made. The arbitration will be
conducted by a single arbitrator chosen from the AAA's Commercial, Large
Complex Cases panel pursuant to the rules of the AAA then in effect. The
decision of the arbitrator shall be conclusive, final, and binding on the
parties hereto and on their respective heirs, legal representatives,
successors, and assigns. The arbitrator shall have no power to award
punitive, exemplary or similar damages to any party.
(c) Notices. Any notice or demand which, by the provisions hereof, is
required or which may be given to or served upon the parties hereto shall
be in writing and shall be deemed to have been validly served, given or
delivered (i) upon confirmation of transmission, if sent by telecopy, (ii)
upon actual delivery, if delivered by personal delivery, and (iii) three
business days after deposit in the United States mail, as registered or
certified mail, with proper postage prepaid and addressed to the party or
parties to be notified, if sent by mail. All notices shall be sent or
delivered to the following addresses or facsimile numbers (or such other
address(es) or facsimile number(s) as a party may designate by like
notice):
<TABLE>
<S> <C>
If to the Company: Total Renal Care Holdings, Inc.
21250 Hawthorne Boulevard, Suite 800
Torrance, California 90503
Attention: General Counsel
Facsimile No.: (310) 792-0044
If to Mr. Chaltiel: Victor M.G. Chaltiel
The Estates at Spanish Trail
13 Vintage Court
Las Vegas, NV 89113
Facsimile No.: (702) 247-6454
</TABLE>
(d) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties and, in the case of the Company, its
successors and assigns, and, in the case of Mr. Chaltiel, his personal and
legal representatives, executors, administrators, heirs, distributees,
devisees and legatees. The parties hereto acknowledge that the Company
shall have the right to assign, with absolute discretion, any or all of its
rights and obligations under this Agreement to any of its affiliates,
successors and assigns. This Agreement shall be deemed to be personal to
Mr. Chaltiel and shall not be assignable by Mr. Chaltiel.
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(e) Governing Law. This Agreement shall be governed by, and construed and
interpreted in accordance with, the laws of the State of California
(without regard to choice of law principles).
(f) Amendment; Waiver. This Agreement may be amended only by an instrument
in writing executed by the parties hereto. No waiver, express or implied,
of any breach of any covenant, agreement or duty shall be held or construed
as a waiver of any other breach of the same or any other covenant,
agreement or duty.
(g) Entire Agreement. This Agreement and the Indemnification Agreement
constitute the entire agreement of the parties hereto and fully supersede
and replace any and all prior agreements (including the Employment
Agreement) and understandings, whether oral or written, express or implied,
between the parties pertaining to the subject matter of this Agreement.
(h) Captions. The captions of the several sections and paragraphs of this
Agreement are used for convenience only and shall not be considered or
referred to in resolving questions of interpretation with respect to this
Agreement.
(i) Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed an original, and both of which together shall
constitute one and the same Agreement.
(j) Negotiation. Mr. Chaltiel acknowledges that (i) he has had an
opportunity to negotiate the terms of this Agreement and to receive advice
of counsel with regard thereto, (ii) he has carefully read and considered
this Agreement, (iii) he fully understands the extent and impact of the
provisions of this Agreement, and (iv) he has executed this Agreement
voluntarily and without coercion, undue influence, threats, or intimidation
of any kind or type whatsoever.
(k) Time Periods. Mr. Chaltiel understands that he has the right to be
given twenty-one (21) days to consider whether or not to execute this
Agreement and that, if he chooses to execute this Agreement before that
time period expires, he will be deemed to have voluntarily waived and
forfeited such right. Mr. Chaltiel also understands that he has up to seven
(7) days after executing this Agreement to rescind this Agreement by
notifying the Company of such recission in writing.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first above written.
TOTAL RENAL CARE HOLDINGS, INC.
<TABLE>
<S> <C>
/s/ Maris Andersons /s/ Victor M.G. Chaltiel
By: ______________________________________ __________________________________________
Maris Andersons Victor M.G. Chaltiel
Director
</TABLE>
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<PAGE>
EXHIBIT 10.3
AGREEMENT
THIS AGREEMENT (this "Agreement") is entered into on October 18, 1999 by and by
and between John E. King ("Mr. King") and Total Renal Care Holdings, Inc., a
Delaware corporation (the "Company").
RECITALS:
A. Mr. King has tendered his resignation as an employee and as an officer of
the Company and all of its subsidiaries and affiliated entities effective as of
the close of business on July 16, 1999 (the "Effective Date").
B. The Company and Mr. King desire to provide for certain payments in
connection with his resignation and to provide for certain other agreements
between them as set forth herein.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing recitals and the covenants
contained herein, the parties agree as follows:
1.Confirmation of Resignation. Mr. King hereby confirms his resignation as an
employee and as an officer of the Company and all of its subsidiaries and
affiliated entities effective as of the Effective Date.
2.Severance Pay; Termination of Benefits. On January 3, 2000, the Company shall
pay to Mr. King a severance payment equal to One Hundred and Eighty Thousand
Dollars and No Cents ($180,000.00) in one lump sum payment, subject to all
required federal, state and local tax and other withholdings. Mr. King
acknowledges and agrees that, except for certain unpaid expense reimbursements
provided for in Section 4 below, he has received all salary and other payments
of any kind to which he was entitled through the Effective Date, including,
without limitation, all accrued vacation pay and similar payments to which he
was entitled. From and after the Effective Date (including during the
Consulting Period, as such term is defined in Section 5(b)), Mr. King shall not
be entitled to participate in any of the Company's employee benefit plans,
including but not limited to its 401(k) plan and its health, disability and
life insurance programs, except to the extent required by law (e.g., pursuant
to COBRA).
3.Termination of Employment Agreement. The Company and Mr. King acknowledge and
agree that, effective as of the Effective Date, all of their respective rights
and obligations under that certain Employment Agreement effective as of March
2, 1998, between the Company and Mr. King (the "Employment Agreement"), shall
be deemed to have terminated and to be of no further force or effect; provided,
however, that the amendment of the stock options held by Mr. King set forth in
clause (i) of Section 6.1 of the Employment Agreement (i.e., the amendment of
such stock options to permit the payment of the exercise price by the delivery
of shares of Common Stock of the Company held by Mr. King) shall not terminate
and shall continue in full force and effect.
4.Expense Reimbursement. Notwithstanding any other provision of this Agreement,
Mr. King may submit requests for reimbursement of business related expenses for
which he may be entitled to reimbursement pursuant to any Company policy;
provided, however, that any and all such reimbursement requests must be
submitted no later than October 29,1999 in order to be considered for
reimbursement.
5.Consulting and Other Services.
(a) From and after the Effective Date through August 18, 1999 (the "Initial
Consulting Period"), Mr. King served as a consultant to the Chief Executive
Officer of the Company (the "CEO") and the Board of Directors on a full-
time, exclusive basis and received compensation for such services at the
rate of Five Thousand Dollars ($5,000) per week (pro-rated for any partial
weeks).
(b) From September 13, 1999 through the first to occur of (i) December 31,
1999 and (ii) one week after the Company hires a Chief Financial Officer
(such period, together with the Initial Consulting Period
<PAGE>
is referred to herein as the "Consulting Period"), Mr. King shall serve as
a consultant to the Chief Executive Officer of the Company or the Interim
Chief Executive Officer of the Company (the "CEO") and the Board of
Directors on an as-needed, non-exclusive basis on the terms set forth in
this Section 5(b). For such consulting services, Mr. King shall be
compensated at the rate of One Thousand Dollars ($1,000) per day (subject
to pro rata reduction for partial days, based on an eight hour day), such
payments to be made in accordance with the Company's regular payroll
schedule. In no event shall Mr. King be required to provide consulting
services during such period in excess of eighty (80) hours per month.
Notwithstanding the foregoing, in the event Mr. King accepts full-time
employment with another company or organization during this period, the
Company shall not request that he perform consulting services hereunder
that would interfere with his ability to perform his obligations as an
employee of such company or organization.
(c) The Company shall promptly reimburse Mr. King, upon receipt of proper
documentation, for such reasonable out-of-pocket expenses incurred by him
in providing consulting services hereunder as may be approved by the CEO.
Except as expressly provided herein, Mr. King shall not be entitled to
receive any additional compensation or benefits from the Company for
providing consulting services as provided herein.
(d) Any consulting services provided by Mr. King hereunder shall be
provided by Mr. King as an independent contractor and not as an employee of
the Company, and nothing contained herein shall be construed to create a
continuing employment relationship between Mr. King and the Company. Except
as otherwise expressly authorized by the Board of Directors of the Company,
Mr. King shall have no power hereunder to act in the name of or on behalf
of the Company or in any way to bind the Company in any regard. Mr. King
shall indemnify and hold the Company harmless against any claims, losses,
damages, liabilities, costs or expenses, including attorneys' fees, arising
out of any violation of the restrictions on his authority set forth in this
Agreement.
(e) Nothing in this Section 5 shall be construed to supersede or replace
Mr. King's obligation pursuant to Section 4 of the Employment Agreement
with the Company to provide up to one hundred and twenty (120) hours per
year of consulting services during the two year period following the
Effective Date. It is the understanding of the parties Mr. King shall be
obligated to provide such consulting services beginning after the
expiration of the Consulting Period and ending on the second anniversary of
the Effective Date.
6.Amendment of Stock Options. Pursuant to authorization of the Board of
Directors of the Company, all stock options held by Mr. King to purchase common
stock of the Company (each, a "Stock Option") are hereby amended to (i) provide
that they shall continue to vest for one (1) year following the Effective Date
in the same manner as if Mr. King were employed by the Company during such
period, (ii) extend the exercise period of that portion of each Stock Option
that was vested as of July 19, 1999 such that Mr. King may exercise such Stock
Option to the extent vested as of July 19, 1999 at any time during the one year
period ending on the first anniversary of the Effective Date, (iii) provide
that, with respect to any portion of any Stock Option which vests during the
one year period ending on the first anniversary of the Effective Date, Mr. King
may, after the date on which such Stock Option vests, exercise such portion of
such Stock Option during the period provided for in such Stock Option for the
exercise of the vested portion of such Stock Option following a termination of
employment without cause (as if the date on which such Stock Option vests were
the effective date of such termination without cause), and (iv) provide that,
upon the consummation of a Change of Control (as such term was defined in
Section 3.6(a) of the Employment Agreement) at any time during the one (1) year
period ending on the first anniversary of the Effective Date, such portion of
each Stock Option as would have vested during such one (1) year period shall,
to the extent not vested as of the date on which such Change of Control is
consummated, be accelerated and shall be deemed to have vested immediately
prior to such Change of Control and Mr. King may, after the date on which such
Change of Control is consummated, exercise such portion of such Stock Option
during the period provided for in such Stock Option for the exercise of the
vested portion of such Stock Option following a termination of employment
without cause (as if the date on such Change of Control is consummated were the
effective date of such termination without cause).
2
<PAGE>
7. No Effect on Indemnification Agreement. This Agreement shall have no effect
on, and shall not limit in any way, the obligations of the Company pursuant to
the terms of that certain Indemnification Agreement dated as of October 25,
1995 by and between the Company and Mr. King, a copy of which is attached
hereto as Exhibit A (the "Indemnification Agreement").
8. Assistance and Cooperation. In addition to the consulting services to be
provided pursuant to Section 5, Mr. King shall assist the Company and cooperate
in preparing for any and all litigation, arbitration proceedings,
investigations and other legal proceedings (collectively, "Legal Proceedings")
relating to matters which occurred during his tenure with the Company and as to
which the Company may reasonably request his assistance. Without limiting the
generality of the foregoing, Mr. King shall (i) make himself available at such
times as may reasonably be requested for depositions in connection with any
Legal Proceedings, (ii) make himself available to testify in any Legal
Proceedings and (iii) assist the Company in preparing responses to requests for
written discovery in any Legal Proceedings. To the extent such assistance is
rendered during the Consulting Period, Mr. King shall be compensated in
accordance with the provisions of Section 5(b) of this Agreement. To the extent
such assistance is rendered after the expiration of the Consulting Period, Mr.
King shall only be entitled to be reimbursed for his out-of-pocket expenses in
providing such assistance to the Company. The Company shall work with Mr. King
in good faith and otherwise use reasonable efforts to ensure that the
assistance requested of Mr. King pursuant to this Section 8 will not unduly
interfere with Mr. King's other personal and professional commitments at the
time any such request is made.
9.Confidentiality and Non-Solicitation.
(a) Mr. King agrees that (i) in the course of his employment by the Company
he has created, used and had access to, and that, in the course of
providing consulting services to the Company during the Consulting Period,
he may 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, the "Confidential
Information") and (B) other non-public information and materials that
concern the Company's business (collectively, "Business Related
Information"), (ii) the Confidential Information and the Business Related
Information are the property of the Company, (iii) any misappropriation or
disclosure of the Confidential Information or the 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 good will and to the maintenance of the
Company's competitive position that the Confidential Information and the
Business Related Information be kept secret and that Mr. King not disclose
the Confidential Information or the Business Related Information to others
or use same to his own advantage or the advantage of others;
(b) In consideration of the payments being made pursuant hereto, Mr. King
agrees that, except to the extent that any Confidential Information or
Business Related Information becomes publicly available (otherwise than
through a breach of this Section 9 by Mr. King), he will (i) hold and
safeguard the Confidential Information and the 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 any of the Confidential Information or the
Business Related Information, whether or not developed by Mr. King, (iii)
at all times keep in strictest confidence all Confidential Information and
all Business Related Information, and (iv) not disclose or divulge, or
allow to be disclosed or divulged by any person within his control, to any
person, firm or corporation, or use directly or indirectly, for his own
benefit or the benefit of others, any Confidential Information or Business
Related Information.
(c) In consideration of the payments being made pursuant hereto, Mr. King
agrees that, during the period from the Effective Date through the second
anniversary of the Effective Date, he will not, directly or indirectly,
without the prior written consent of the Company (which consent shall not
be unreasonably withheld) (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
3
<PAGE>
contract the purpose or result of which would benefit Mr. King 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, or (v) disclose to any provider
of dialysis services the names or physician addresses of any customer of
the Company.
(d) The provisions of this Section 9 notwithstanding, the Company hereby
consents to Mr. King's serving as a consultant to Scripps Memorial Hospital
with respect to two ESRD facilities located in San Diego County.
(e) Mr. King agrees that any violation of any covenant in this Section 9
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, Mr. King 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 Mr. King. 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. In the event that any
provision of this Section 9 is held unenforceable or invalid by any court
or other governmental body, the remaining parts hereof shall nevertheless
continue to be valid and enforceable as though the invalid portions had not
been a part hereof.
10. Release by Mr. King. As a material inducement to the Company to enter into
this Agreement, Mr. King hereby irrevocably and unconditionally releases,
acquits and forever discharges the Company and each of the Company's past,
present and future owners, stockholders, predecessors, successors, assigns,
agents, directors, officers, employees, representatives, attorneys, divisions,
subsidiaries and affiliates (and all past, present and future owners,
stockholders, predecessors, successors, assigns, agents, directors, officers,
employees, representatives and attorneys of such divisions, subsidiaries and
affiliates), and all persons acting by, through, under or in concert with any
of them (collectively, "Company Releasees"), from any and all charges,
complaints, claims, liabilities, obligations, promises, agreements,
controversies and expenses (including attorneys' fees and costs actually
incurred) of any nature whatsoever, known or unknown, suspected or unsuspected,
including, but not limited to, any charges, complaints, claims, liabilities,
obligations, controversies and expenses arising out of alleged violations of
any contracts, express or implied, any covenant of good faith and fair dealing,
express or implied, any obligation for compensation, lost wages, lost benefits,
accrued vacation pay, or any other expectation of remuneration or benefit on
the part of Mr. King, including but not limited to, any defamation, intentional
or negligent infliction of emotional distress, or any other tort, or any legal
restrictions on the Company's right to terminate employees, or any federal
state or other governmental statute, regulation, or ordinance (including,
without limitation: (i) Title VII of the Civil Rights Act of 1964 (race, color,
religion, sex and national origin discrimination); (ii) 42 U.S.C. (P) 1981
(discrimination); (iii) 29 U.S.C. (P) 206(d)(1) (equal pay); (iv) the
California Fair Employment and Housing Act (discrimination, including race,
color, national origin, ancestry, physical handicap, medical condition, marital
status, sex or age); (v) the California Workers' Compensation Act; (vi) the
California Labor Code; (vii) Executive Order 11246 (race, color, religion, sex
and national origin discrimination); (viii) Executive Order 11141 (age
discrimination); (ix) (P) 503 and (P) 504 of the Rehabilitation Act of 1973
(disability discrimination); (x) the Employee Retirement Income Security Act
(employee benefits); (xi) the Fair Labor Standards Act; (xii) the Americans
with Disabilities Act (discrimination against individuals with a disability);
(xiii) the Age Discrimination in Employment Act (age discrimination), and (xiv)
the Civil Rights Act of 1991), which Mr. King now has, owns or holds, or claims
to have, own or hold, or which Mr. King at any time heretofore had, owned, or
held, or claimed to have, own or hold, against each or any of the Company
Releasees; provided, however, that the foregoing shall not release the Company
from (1) any of its obligations under this Agreement (including the obligation
to make the payments provided for herein and to reimburse Mr. King for business
expenses as provided in Section 4) or under the Indemnification Agreement, or
(2) any claims arising after October 18, 1999.
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11. Release by the Company. As a material inducement to Mr. King to enter into
this Agreement, the Company, on its own behalf and on behalf of the
subsidiaries and affiliated entities which it controls, hereby irrevocably and
unconditionally releases, acquits and forever discharges Mr. King, his personal
and legal representatives, executors, administrators, heirs, distributees,
devisees and legatees (collectively, the "King Releasees") from any and all
charges, complaints, claims, liabilities, obligations, promises, agreements,
controversies and expenses (including attorneys' fees and costs actually
incurred) of any nature whatsoever, known or unknown, suspected or unsuspected,
including, but not limited to, any charges, complaints, claims, liabilities,
obligations, controversies and expenses arising out of alleged violations of
any contracts, express or implied, or any covenant of good faith and fair
dealing, express or implied, which the Company or any of such subsidiaries or
affiliated entities now has, owns or holds, or claims to have, own or hold, or
which the Company or any of such subsidiaries or affiliated entities at any
time heretofore had, owned, or held, or claimed to have, own or hold, against
Mr. King or any other King Releasee relating to the performance of Mr. King's
duties as an officer or employee of the Company or any of its divisions,
subsidiaries or affiliates; provided, however, that the foregoing shall not
release Mr. King or any King Releasee from (1) any obligations under this
Agreement or under the Indemnification Agreement, (2) any claims arising after
October 18, 1999 or (3) any claims arising out of any conduct by Mr. King which
was knowingly fraudulent or deliberately dishonest or for which Mr. King would
not be entitled to indemnification by the Company under the Indemnification
Agreement.
12. Knowing and Voluntary Waiver. The parties expressly waive and relinquish
all rights and benefits afforded by Section 1542 of the Civil Code of the State
of California, and do so understanding and acknowledging the significance of
such specific waiver of Section 1542. Section 1542 of the Civil Code of the
State of California states as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
Thus, notwithstanding the provisions of Section 1542, and for the purpose of
implementing the releases provided herein, each party expressly acknowledges
that this Agreement is intended to include in its effect, without limitation,
all claims, other than the claims expressly not released as provided above,
which such party does not know or suspect to exist in such party's favor at the
time of execution hereof, and that this Agreement contemplates the
extinguishment of any such claims. The parties acknowledge and agree that they
have expressly bargained for the foregoing waiver of the provisions of Section
1542.
13. No Claims; Covenant Not to Sue. Mr. King represents and covenants that (i)
he has not filed any complaints, charges or lawsuits, nor commenced any
arbitration or similar proceedings, against the Company or any other Company
Releasee in connection with any claim or potential claim released hereunder,
including any claims under the Employment Agreement, and (ii) he will not do so
at any time hereafter; provided, however, that this Section 13 shall not limit
Mr. King from commencing arbitration proceedings for the purpose of enforcing
his rights under this Agreement or from commencing litigation for the purpose
of enforcing any of his rights under the Indemnification Agreement. The Company
represents and covenants that (i) it has not filed any complaints, charges or
lawsuits, nor commenced any arbitration or similar proceedings, against Mr.
King or any other King Releasee in connection with any claim or potential claim
released hereunder, and (ii) it will not do so at any time hereafter; provided,
however, that this Section 13 shall not limit the Company from commencing
arbitration proceedings for the purpose of enforcing its rights under this
Agreement or from commencing litigation for the purpose of enforcing any of its
rights under the Indemnification Agreement.
14. Non-Admission of Liability. This Agreement shall not in any way be
construed as an admission (i) by the Company that it has acted wrongfully with
respect to Mr. King or that Mr. King has any rights whatsoever against the
Company or any other Company Releasee, and the Company specifically disclaims
any liability to or wrongful acts against Mr. King or (ii) by Mr. King that he
has acted wrongfully with respect to the Company or any other Company Releasee
or that the Company has any rights whatsoever against him or
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<PAGE>
any other King Releasee, and Mr. King specifically disclaims any liability to
or wrongful acts against the Company or any other Company Releasee.
15. Non-Disparagement. From and after the date hereof, the Company shall not
make any untrue, defamatory or disparaging statements concerning Mr. King, and
Mr. King shall not make any untrue, defamatory or disparaging statements
concerning the Company or any other Company Releasee. The foregoing
notwithstanding, under no circumstances shall testimony given under oath in any
lawsuit, deposition or other legal proceeding be held to constitute
disparagement of any person or entity in violation of this Section 15.
16. No Confidentiality. Mr. King acknowledges that the Company intends to file
a copy of this Agreement as an exhibit to a future filing with the Securities
and Exchange Commission. Consequently, Mr. King acknowledges and agrees that
the contents of this Agreement will be made publicly available and confirms
that he has no expectation of confidentiality with respect to the terms hereof.
17. Miscellaneous.
(a) Return of Company Property. Mr. King hereby confirms that he has
delivered and returned to the Company any and all property, including
without limitation, any and all books, records, computer records, files and
other materials, documents and similar property, belonging to or concerning
the Company or any subsidiary or affiliate of the Company which may be in
his possession or control, including any and all documents or other
materials containing or constituting Confidential Information or Business
Related Information.
(b) Arbitration of Disputes. All controversies, claims, disputes, and
matters in question arising out of, or relating to, this Agreement or the
breach hereof, shall be decided by binding arbitration conducted in Los
Angeles, California under the applicable rules of the American Arbitration
Association or its successor in effect at the time a demand for arbitration
is made. The arbitration panel will consist of three arbitrators, one
chosen by the Company, one chosen by Mr. King and one chosen by the two
arbitrators so chosen. The decision of the majority of the arbitrators,
including the determination of the amount of any damages suffered, shall be
conclusive, final, and binding on the parties hereto, and their respective
heirs, legal representatives, successors, and assigns. The arbitrators
shall have no power to award punitive, exemplary or similar damages to any
party. Each party shall bear such party's own attorneys' fees and costs in
any such arbitration. The costs of the arbitrators and the fees and charges
of the American Arbitration Association shall be shared equally by the
Company and Mr. King. The arbitrators shall be bound to follow California
law and case precedent.
(c) Notices. Any notice or demand which, by the provisions hereof, is
required or which may be given to or served upon the parties hereto shall
be in writing and shall be deemed to have been validly served, given or
delivered (i) upon confirmation of transmission, if sent by telecopy, (ii)
upon actual delivery, if delivered by personal delivery, and (iii) three
business days after deposit in the United States mail, as registered or
certified mail, with proper postage prepaid and addressed to the party or
parties to be notified, if sent by mail. All notices shall be sent or
delivered to the following addresses or facsimile numbers (or such other
address(es) or facsimile number(s) as a party may designate by like
notice):
<TABLE>
<S> <C>
If to the Company: Total Renal Care Holdings, Inc.
21250 Hawthorne Boulevard, Suite 800
Torrance, California 90503
Attention: General Counsel
Facsimile No.: (310) 792-0044
If to Mr. King: John E. King
610 Faye Lane
Redondo Beach, California 90277
Facsimile No.: (310) 540-7886
</TABLE>
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(d) Successors and Assigns. The parties hereto acknowledge that the Company
shall have the right to assign, with absolute discretion, any or all of its
rights and obligations under this Agreement to any of its affiliates,
successors and assigns, and this Agreement shall inure to the benefit of,
and be binding upon, such respective affiliates, successors and assigns of
the Company, in the same manner and to the same extent as if such
affiliates, successors and assigns were original parties hereto. This
Agreement shall be deemed to be personal to Mr. King and shall not be
assignable by Mr. King.
(e) Governing Law. This Agreement shall be governed by, and construed and
interpreted in accordance with, the laws of the State of California
(without regard to choice of law principles).
(f) Amendment; Waiver. This Agreement may be amended only by an instrument
in writing executed by the parties hereto. No waiver, express or implied,
of any breach of any covenant, agreement or duty shall be held or construed
as a waiver of any other breach of the same or any other covenant,
agreement or duty.
(g) Entire Agreement. This Agreement and the Indemnification Agreement
constitute the entire agreement of the parties hereto and fully supersede
and replace any and all prior agreements (including the Employment
Agreement) and understandings, whether oral or written, express or implied,
between the parties pertaining to the subject matter of this Agreement.
(h) Captions. The captions of the several sections and paragraphs of this
Agreement are used for convenience only and shall not be considered or
referred to in resolving questions of interpretation with respect to this
Agreement.
(i) Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed an original, and both of which together shall
constitute one and the same Agreement.
(j) Negotiation. Mr. King acknowledges that (i) he has had an opportunity
to negotiate the terms of this Agreement and to receive advice of counsel
with regard thereto, (ii) he has carefully read and considered this
Agreement, (iii) he fully understands the extent and impact of the
provisions of this Agreement, and (iv) he has executed this Agreement
voluntarily and without coercion, undue influence, threats, or intimidation
of any kind or type whatsoever.
(k) Time Periods. Mr. King understands that he has the right to be given
twenty-one (21) days to consider whether or not to execute this Agreement
and that, if he chooses to execute this Agreement before that time period
expires, he will be deemed to have voluntarily waived and forfeited such
right. Mr. King also understands that he has up to seven (7) days after
executing this Agreement to rescind this Agreement by notifying the Company
of such recission in writing.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
TOTAL RENAL CARE HOLDINGS, INC.
<TABLE>
<S> <C>
/s/ George B. Dehuff, III /s/ John E. King
By: ____________________________________ ________________________________________
George B. Dehuff, III John E. King
President
</TABLE>
7
<PAGE>
EXHIBIT 10.4
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Consulting Agreement") effective as of October 1,
1998, (the "Effective Date") by and between Total Renal Care, Inc., a
California corporation having offices at 21250 Hawthorne Blvd., Suite 800,
Torrance, CA 90503-5517 (hereinafter "TRC") and, Shaul G. Massry, M.D.
(hereinafter "Consultant").
RECITALS
A. TRC and Consultant are parties to an agreement entered into on December 30,
1994 (hereinafter the "Agreement"); and
B. TRC and Consultant are parties to the First Amendment to the Agreement dated
July 1, 1996 (hereinafter the "First Amendment"); and
C. TRC and Consultant are parties to the Second Amendment to the Agreement
dated October 1, 1997 (hereinafter the "Second Amendment") (The Agreement, the
First Amendment and the Second Amendment are referred to herein jointly as the
"Agreements"); and
D. Under the Agreements, Consultant had initiated discussions with certain
acquisition and affiliation targets in specific markets which are listed on
Exhibit 1 attached hereto ("Targets"); and
E. TRC and Consultant wish to terminate the Agreements and enter into this new
Consulting Agreement which shall govern the continued work Consultant shall
perform for TRC in the future and compensation that Consultant shall be paid
for said work;
NOW THEREFORE, in consideration of the premises and the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Recitals. The Recitals of this Consulting Agreement shall be included and
incorporated herein as if fully set forth below.
2. Term and Termination
A. Term. The term of this Agreement shall commence on October 1, 1998, and
shall terminate on September 30, 2003 (the "Term"). After the initial Term,
this Consulting Agreement shall continue on a month-to-month basis without
any further action by the parties.
B. Termination. This Agreement may be terminated upon ninety (90) days
prior written notice by either party for no cause. Furthermore, this
Agreement may be terminated upon thirty (30) days prior written notice for
cause upon a material breach by either party. The notice provided by the
party alleging the breach shall describe the breach with reasonable
specificity and the alleged breaching party shall utilize said thirty
(30) days to cure the alleged breach. If the alleged breach is cured during
the thirty (30) day period or the alleged breaching party commences curing
and continues to diligently pursue a cure, the Agreement shall continue. In
the event TRC terminates Consultant without cause during the Term,
Consultant shall be entitled to receive, as his sole and exclusive remedy
for such a termination, nine (9) months worth of the Cash Fee (defined
below) payable on a monthly basis during said year.
C. Effect of Termination. Upon any termination of this Agreement in
accordance with any provision hereof, or upon expiration of this Agreement
at the end of the Term or any applicable renewal term, all obligations of
TRC to Consultant shall immediately terminate, including without limitation
all obligations to compensate Consultant as set forth in Section 5 hereof
except that the Options granted to Consultant in Section 5 shall continue
to vest pursuant to the Stock Option Agreements. Upon any such termination,
TRC shall have no further liability or obligation to Consultant of any kind
in connection with this Agreement or any relationship established hereby,
except for payment of any unpaid compensation due with respect to periods
prior to such termination. Consultant's obligations under Sections 10 and
11 shall survive any termination or expiration of this Agreement for a
period of one (1) years.
<PAGE>
3. No Agency. At all times during the performance of any services hereunder,
Consultant shall be acting and discharging his duties and responsibilities as
an independent contractor. TRC shall have no responsibility for withholding
taxes or employee benefits of any kind. Consultant shall indemnify and hold TRC
harmless from, and shall pay to TRC upon demand the amount of, all taxes,
interest and penalties that TRC is required to pay because of a determination
that Consultant is not an independent contractor. Consultant shall allow TRC to
participate in any audit proceeding with respect to each instance in which a
taxing authority asserts that Consultant is not an independent contractor under
this Agreement. The relationship between TRC and Consultant established by this
Agreement is solely that of an independent contractor, and neither party is in
any way the legal representative or agent of the other. Neither party is
authorized or empowered to assume any obligation of any kind, implied or
expressed, on behalf of the other party, without the express written consent of
the other.
4. Duties. Consultant shall assist TRC in developing and closing acquisitions
domestically, in Sicily, Italy and other regions of Europe and Asia as are
mutually agreed upon in writing by Consultant and the Chief Executive Officer
of TRC. Consultant shall also assist TRC in developing alliances with and the
acquiring of, dialysis centers affiliated with academic institutions in the
United States. Furthermore, Consultant shall function as a senior advisor to
the Chief Executive Officer of TRC and shall provide selected strategic and
clinical consultative services as mutually agreed upon by Consultant and the
Chief Executive Officer of TRC. Finally, Consultant shall be expected to work
at least three hundred (300) hours per year.
5. Compensation. Upon confirmation of Consultant's performance of services
related to those acquisitions which are mutually agreed upon in advance and in
writing by Consultant and the Chief Executive Officer of TRC and where, in the
sole discretion of the Chief Executive Officer of TRC, Consultant introduces
potential targets and materially assists TRC with closing a transaction with
said potential target, Consultant shall be paid the following commission:
A. 1.5% of the purchase price of an acquisition with a purchase price of
$3,000,000 or less;
B. 1.2% of the purchase price of an acquisition with a purchase price of
between $3,000,001 and $7,500,000; and
C. 1.0% of the purchase price of an acquisition with a purchase price of
greater than 7,500,000 (the "Commission").
Consultant shall not receive a Commission in excess of $100,000 per
transaction nor shall Consultant receive any Commission on a transaction where
only limited services were performed, such as merely making an introduction and
only limited further involvement. Consultant acknowledges that for such limited
services on a particular transaction and where a particular transaction is not
pre-approved in writing by the Chief Executive Officer of TRC, the compensation
shall be limited to the Cash Fee and the Stock Options provided for below.
Consultant shall also be paid an annual aggregate compensation of One Hundred
and Twenty Thousand dollars ($120,000) payable in twelve monthly installments
of Ten Thousand dollars ($10,000) (the "Cash Fee'). However, Seventy Thousand
dollars ($70,000) of the Cash Fee shall be deemed an advance payable to against
the future payment of a Commission for closing deals which are not Targets,
(the "Advance") and no Commission shall be paid to Consultant until the entire
amount of the Advance is repaid to TRC. For example, if Consultant had been
paid $35,000 of the Advance before closing the first non-Target acquisition and
the purchase price for said non-Target acquisition was $3,000,000, thereby
entitling Consultant to a $45,000 Commission, he would only actually receive
$10,000 once the $35,000 Advance was repaid.
Furthermore, on the Effective Date and on each anniversary of the Effective
Date during the Term, Consultant shall receive Twenty-Two Thousand Five Hundred
(22,500) options to purchase Common Stock of Total Renal Care Holding, Inc.
(the "Options"). The strike price of the Options shall be the closing price on
E-2
<PAGE>
the Effective Date and each subsequent granting shall be priced as of the close
of market on each anniversary of the Effective Date. If the Effective Date or
any anniversary of the Effective Date falls on a day when the New York Stock
Exchange is closed, the strike price of the Options will be the closing price
on the next full day of trading. The initial grant of Options shall be pursuant
to the terms set forth in the Non-Qualified Stock Option Agreement Attached
hereto as Exhibit 1.
No additional compensation shall be paid without the express written
authorization by the CEO or any duly authorized officer of TRC.
6. Taxes. Consultant shall maintain responsibility for paying all Federal,
State and Local Income Taxes arising out of Consultant's earnings from TRC. TRC
shall provide the Consultant with a Federal Form 1099.
7. Non-Assignability. This Agreement is entered into in consideration of the
personal qualifications of Consultant and may not be, nor may any right or
interest hereunder be, assigned by her without the prior written consent of
TRC. TRC shall be permitted, without the consent of Consultant, to assign or
otherwise transfer this Agreement or any of its rights hereunder: (a) upon the
purchase or sale of all or substantially all of the assets or stock of TRC or
Total Renal Care Holdings, Inc. ("TRCH"), the parent of TRC, or the transfer
(by operation of law or otherwise) of the ownership or control of TRC or TRCH,
to the purchaser of such assets or stock, or the transferee of such interests;
or (b) to any affiliate (within the meaning of such term as set forth in Rule
501 of Regulation D under the federal Securities Act of 1933) of TRC.
8. Entire Agreement. Except as set forth in Section 4 above, this Agreement
supersedes any and all other agreements, either oral or in writing between the
parties in any manner whatsoever. Each party to this Agreement acknowledges
that no representation, inducements, promises, or agreements, orally or
otherwise, have been made by any party or anyone acting on behalf of any party,
which are not embodied herein, and that no other agreement, statement, or
promise not contained in this Agreement or attached as an exhibit shall be
valid or binding on either party.
9. Modification. Any modification of this Agreement will be effective only if
it is in writing and signed by the party to be charged.
10. Exclusivity and Confidential Information. Except for Consultant's current
position as Chief of the Division of Nephrology at County USC Medical Center,
Consultant understands that during the Term, he shall not provide the same or
similar services as are provided to TRC hereunder, directly or indirectly, as a
consultant or otherwise, to a competitor of TRC both domestically and abroad.
Furthermore, all information not disclosed to the public by TRC regarding the
business of TRC which is compiled by, obtained by or furnished to Consultant,
or any of it's agents or employees, while performing services hereunder, is
acknowledged to be confidential information, trade secrets and the exclusive
property of TRC. During and after the term hereof, Consultant agrees that he
will not, directly or indirectly, divulge in any manner contrary to the
interests of TRC or use or cause or suffer to be used in competition with TRC,
any such information or trade secrets. TRC acknowledges that the breach, or
threatened breach of the provisions of this Section would cause irreparable
injury to TRC that could not be adequately compensated by money damages.
Accordingly, TRC may obtain a restraining order and/or injunction prohibiting a
breach or threatened breach of the provisions of this Section, in addition to
any other legal or equitable remedies that may be available.
11. Termination of Agreements. The Agreements are hereby terminated as of the
Effective Date and shall have no further force or effect except that the Stock
Options granted to Consultant pursuant to the Agreement shall continue and vest
according to the terms of the agreement granting said options.
E-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
effective as of the day and year first above written.
TOTAL RENAL CARE, INC. CONSULTANT
/s/ Victor M.G. Chaltiel /s/ Shaul G. Massry, M.D.
By: ___________________________ By: _________________________________
Victor M.G. Chaltiel Shaul G. Massry, M.D.
Its: President, Chief
Executive Officer and
Chairman of the Board
E-4
<PAGE>
EXHIBIT I
TARGETS
1.Napoli
Dr. Del Pretta
Tora Del Greco & Tora Annuziatta
Dr. De Santo Group
Dr. Bellini Unit and laboratory
2.Sicily
Dr. Figara Laboratory and Nephrologico
Amos
Santagata
Unit of Mariano Cocco
Unit of Dr. Galione
Unit of Dr. Janni in Seracusa
Unit of Dr Jenarti in Caltinesta
Dr. Angelo Giammaressi-Palermo
Dr. Figura-Catania
3.Rome
Dr. Vinceguerra
4.Japan
Kurakawa & Kai
The above listed transactions are considered Targets for purpose of the
Agreement and therefore are not subject to the Advance adjustments. The deals
listed below which we to be updated quarterly are considered non-Targets and
are therefore subject to the Advance adjustments.
New as of 3/15/99
1.Sicily
Dr. Leone-Catania
Dr. Aliffe-Noto
Dr. Leonardo-Caltagione
2.Japan
Dr. Ohno-Osaka
Dr. Ishikawa-Tokyo
Approval of March 15, 1999:
/s/ Rich Whitney /s/ Shaul Massry, M.D.
_______________________________ _________________________________
Rich Whitney Shaul Massry, M.D.
Vice President-- Consultant
International
E-5
<PAGE>
EXHIBIT I
TARGETS
1.Napoli
Dr. Del Pretta
Tora Del Greco & Tora Annuziatta
Dr. De Santo Group
Dr. Bellini Unit and laboratory
2.Sicily
Dr. Figara Laboratory and Nephrologico
Amos
Santagata
Unit of Mariano Cocco
Unit of Dr. Galione
Unit of Dr. Janni in Seracusa
Unit of Dr Jenarti in Caltinesta
3.Rome
Dr. Vinceguerra
The above listed transactions are considered Targets for purpose of the
Agreement and therefore are not subject to the Advance adjustments.
E-6
<PAGE>
EXHIBIT 10.5
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
AMENDMENT NO. 4 AND WAIVER (this "Amendment"), dated as of November 8, 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, Amendment No. 2,
dated as of November 12, 1998, and Amendment No. 3 and Waiver, dated as of
August 9, 1999 (the "Third Amendment and Waiver") (as so amended, 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 and
including September 30, 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
quarter of the Borrower ended on September 30, 1999 (consisting of
approximately: $10,000,000 relating to the write-off of certain
accounts receivable at the Borrower's Minnesota laboratory, $3,200,000
relating to certain fees and expenses paid in connection with the
August 9, 1999 amendments and waivers to the Revolving Credit Agreement
and the Term Loan Facility, $2,580,000 relating to certain severance
charges; $730,000 relating to certain aircraft, $540,000 relating to
the settlement of a certain workers compensation claim in respect of
RTC, and $130,000 relating to certain employment retention bonuses) in
an aggregate amount not to exceed $17,200,000 on a pre-tax basis (the
"One-Time Charges")) during the Waiver Period shall not exceed
4.80:1.00 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 October 27, 1999,
<PAGE>
(d) in addition to the terms, conditions and restrictions contained in
the Revolving Credit Agreement, the total consideration for (i) all
Permitted Acquisitions made after July 1, 1999 through and including
March 15, 2000 (excluding the Permitted Acquisitions set forth in Annex
I attached hereto) shall not exceed in the aggregate $10,000,000, and
(ii) all Foreign Acquisitions made after July 1, 1999 through and
including March 15, 2000 shall not exceed in the aggregate $5,000,000,
(e) for purposes of determining the Commitment Fee during the Waiver
Period, the Leverage Ratio shall be calculated without excluding the
One-Time Charges as defined in the Third Amendment and Waiver (prior to
giving effect to this Amendment) and as defined in this Amendment, 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 $40,000,000.
2. 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 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 and including September 30,
1999 to but excluding the effective date of this Amendment, 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
waived pursuant to the Term Loan Waiver (as defined below).
3. Effective at all times on and after September 30, 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) (i) for the period from and including September 30, 1999 through
and including March 15, 2000, (A) with respect to the unpaid principal
amount of Eurodollar Advances and Alternate Currency Advances, 3.50%,
and (B) with respect to the unpaid principal amount of ABR Advances,
2.25%, and (ii) thereafter, at all times during the applicable periods
set forth below and based on the most recently delivered Compliance
Certificate of the Borrower: (A) 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 (B) 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 4.40:1.00...... 3.50% 2.25%
When the Leverage Ratio is less than or equal to
4.40:1.00 but greater than 4.00....................... 3.25% 2.00%
When the Leverage Ratio is less than or equal to
4.00:1.00............................................. 3.00% 1.75%
</TABLE>
4. Simultaneously with the delivery to the Administrative Agent of the
Compliance Certificate for the fiscal quarter of the Borrower ended on
September 30, 1999 and in no event later than November 15, 1999 (the "CC
Delivery Date"), 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 September
30, 1999 to and including the CC Delivery Date, as a result of any increase
in the Applicable Margin or Commitment Fee caused by the amendment to the
definition of "Applicable Margin" effected
2
<PAGE>
hereby, 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 September 30, 1999 but that have not been paid on or before
the CC Delivery Date, 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
September 30, 1999, shall continue to govern the calculation of interest,
Commitment Fees and Letter of Credit Fees payable thereunder for periods
prior to such date.
5. The Administrative Agent and the Required Lenders hereby consent to the
Term Loan Waiver.
6. The Aggregate Revolving Credit Commitments are hereby permanently
reduced to $700,000,000 and Exhibit A to the Credit Agreement is hereby
amended and restated in the form of Exhibit A attached hereto.
7. Paragraphs 1--6 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 November 8, 1999, of a non-refundable fee in an
amount equal to 0.250% of the Revolving Credit Commitment (as set forth
on Exhibit A attached hereto) of such Lender.
(c) The Limited Waiver and Third Amendment to Amended and Restated Term
Loan Agreement, dated as of the date hereof and substantially in the
form of Annex II 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 and the Syndication Agent.
8. 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
3
<PAGE>
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.
9. 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.
10. 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.
11. 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.
Notwithstanding anything to the contrary contained herein, the terms,
provisions and conditions of the Third Amendment and Waiver shall remain
and continue in full force and effect; provided that, for the period from
September 30, 1999 through and including March 15, 2000, the Waiver
Conditions as defined in the Third Amendment and Waiver shall be deemed
replaced in their entirety by the Waiver Conditions as defined in this
Amendment, except that the references to "One-Time Charges" contained in
Paragraphs 3 and 10 of the Third Amendment and Waiver shall continue to be
as defined under the Third Amendment and Waiver prior to giving effect to
this Amendment.
12. 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.
13. 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]
4
<PAGE>
AMENDMENT NO. 4 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: ______________________________
5
<PAGE>
AMENDMENT NO. 4 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: ______________________________
6
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
DLJ CAPITAL FUNDING, INC.,
Individually and as Syndication
Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
7
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
FIRST UNION NATIONAL BANK,
Individually and as Documentation
Agent
By: _________________________________
Name: _______________________________
Title: ______________________________
8
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ABN AMRO BANK N.V.
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
9
<PAGE>
AMENDMENT NO. 4 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: ______________________________
10
<PAGE>
AMENDMENT NO. 4 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: ______________________________
11
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BANK LEUMI TRUST COMPANY OF NEW YORK
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
12
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE BANK OF NOVA SCOTIA
By: _________________________________
Name: _______________________________
Title: ______________________________
13
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BANQUE NATIONALE DE PARIS
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
14
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BHF (USA) CAPITAL CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
15
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
CITY NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
16
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
BANK OF AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
17
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
CREDIT LYONNAIS NEW YORK BRANCH
By: _________________________________
Name: _______________________________
Title: ______________________________
18
<PAGE>
AMENDMENT NO. 4 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: ______________________________
19
<PAGE>
AMENDMENT NO. 4 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: ______________________________
20
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ERSTE BANK DER OESTERREICHISCHEN
SPARKASSEN AG--NEW YORK
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
21
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
FLEET NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
22
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE FUJI BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
23
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
HIBERNIA NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
24
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE INDUSTRIAL BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY
By: _________________________________
Name: _______________________________
Title: ______________________________
25
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
KBC BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
26
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
GENERAL ELECTRIC CAPITAL CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
27
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
MELLON BANK, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
28
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
MICHIGAN NATIONAL BANK
By: _________________________________
Name: _______________________________
Title: ______________________________
29
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
30
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
NATIONAL CITY BANK OF KENTUCKY
By: _________________________________
Name: _______________________________
Title: ______________________________
31
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
PARIBAS
By: _________________________________
Name: _______________________________
Title: ______________________________
By: _________________________________
Name: _______________________________
Title: ______________________________
32
<PAGE>
AMENDMENT NO. 4 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: ______________________________
33
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ROYAL BANK OF CANADA
By: _________________________________
Name: _______________________________
Title: ______________________________
34
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE ROYAL BANK OF SCOTLAND PLC
By: _________________________________
Name: _______________________________
Title: ______________________________
35
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ROYALTON COMPANY
By: Pacific Investment Management
company,
as its Investment Advisor
By: _________________________________
Name: _______________________________
Title: ______________________________
36
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE SANWA BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
37
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
SOCIETE GENERALE
By: _________________________________
Name: _______________________________
Title: ______________________________
38
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
STB DELAWARE FUNDING TRUST I
By: _________________________________
Name: _______________________________
Title: ______________________________
39
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
SUNTRUST BANK, NASHVILLE, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
40
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE TOKAI BANK, LIMITED
By: _________________________________
Name: _______________________________
Title: ______________________________
41
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THE TOYO TRUST & BANKING CO., LTD.,
New York Branch
By: _________________________________
Name: _______________________________
Title: ______________________________
42
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
UNION BANK OF CALIFORNIA, N.A.
By: _________________________________
Name: _______________________________
Title: ______________________________
43
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
U.S. BANK NATIONAL ASSOCIATION
By: _________________________________
Name: _______________________________
Title: ______________________________
44
<PAGE>
AMENDMENT NO. 4 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: _________________________________
45
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ANNEX I
LIST OF PERMITTED ACQUISITIONS--PUT OBLIGATIONS
46
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
ANNEX II
FORM OF TERM LOAN WAIVER
47
<PAGE>
AMENDMENT NO. 4 AND WAIVER
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
TRCH EXHIBIT A
LIST OF COMMITMENTS
48
<PAGE>
EXHIBIT 10.6
EXECUTION VERSION
TOTAL RENAL CARE HOLDINGS, INC.
LIMITED WAIVER AND THIRD AMENDMENT
TO AMENDED AND RESTATED TERM LOAN AGREEMENT
This LIMITED WAIVER AND THIRD AMENDMENT TO AMENDED AND RESTATED TERM LOAN
AGREEMENT (this "Amendment") is dated as of November 8, 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;
WHEREAS, the Borrower has requested the lenders that are parties to the
Revolving Credit Facility to enter into an Amendment No. 4 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(f) of the Term Loan Agreement
as a direct or indirect result of the delivery to the Administrative Agent of a
Notice of Conversion/Continuation dated October 5, 1999;
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 or cured upon the effectiveness of 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:
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
September 30, 1999, by deleting the definition of "Applicable Margin" in its
entirety and substituting the following therefor:
"Applicable Margin": at all times, 3.75% with respect to the unpaid
principal amount of Eurodollar Advances and 2.50% with respect to the
unpaid principal amount of ABR Advances."
<PAGE>
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 subsection
9.1(f) the Term Loan Agreement as a direct or indirect result of the delivery
to the Administrative Agent of a Notice of Conversion/Continuation dated
October 5, 1999.
B. 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 during the period
from and including September 30, 1999, to and including the Third Amendment
Effective Date 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 or cured upon the effectiveness of 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 under
subsections 9.1(f) or 9.1(g) of the Term Loan Agreement in any other
instance, or a waiver of 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 "Third
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 paid to Administrative Agent, for distribution to each
Approving Lender (as defined in Section 7C hereof), the fees set forth in
Section 7C hereof.
C. The Administrative Agent shall have received a certificate, dated the Third
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.
D. The Administrative Agent shall have received the opinion of the general
counsel of the Borrower, the Guarantors and the Pledgors, dated the Third
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.
2
<PAGE>
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").
B. Authorization of Agreements. The execution and delivery of this Amendment
have been duly authorized by all necessary corporate action on the part of each
Credit Party. The performance of the Amended Agreement has been duly authorized
by all necessary corporate action on the part of each Credit Party.
C. No Conflict. The execution and delivery by each Credit Party of this
Amendment, and the performance by each Credit Party of the Amended Agreement do
not and will not (i) violate any provision of any law or any governmental rule
or regulation applicable to Borrower or any of its Subsidiaries, the
Certificate or Articles of Incorporation or Bylaws of Borrower or any of its
Subsidiaries or any order, judgment or decree of any court or other agency of
government binding on Borrower or any of its Subsidiaries, (ii) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both)
a default under any contractual obligation of Borrower or any of its
Subsidiaries, (iii) result in or require the creation or imposition of any Lien
upon any of the properties or assets of Borrower or any of its Subsidiaries
(other than Liens created under any of the Loan Documents in favor of
Administrative Agent on behalf of Lenders), or (iv) require any approval of
stockholders or any approval or consent of any Person under any contractual
obligation of Borrower or any of its Subsidiaries.
D. Governmental Consents. The execution and delivery by each Credit Party of
this Amendment and the performance by each Credit Party of the Amended
Agreement, do not and will not require any registration with, consent or
approval of, or notice to, or other action to, with or by, any federal, state
or other governmental authority or regulatory body.
E. Binding Obligation. This Amendment and the Amended Agreement have been duly
executed and delivered by each Credit Party and are the legally valid and
binding obligations of each Credit Party, enforceable against each Credit Party
in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally or by equitable principles relating to
enforceability.
F. Incorporation of Representations and Warranties From Term Loan
Agreement. The representations and warranties contained in Section 4 of the
Term Loan Agreement (after giving effect to this Amendment) are and will be
true, correct and complete in all material respects on and as of the Third
Amendment Effective Date to the same extent as though made on and as of that
date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete
in all material respects on and as of such earlier date.
G. Absence of Default. No event has occurred and is continuing or will result
from the consummation of the transactions contemplated by this Amendment that
would constitute an Event of Default, 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
3
<PAGE>
Subsidiary Guaranty pursuant to which such Guarantor has guarantied the
Obligations. Borrower and the 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
Third Amendment Effective Date to the same extent as though made on and as of
that date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that (i) notwithstanding the
conditions to effectiveness set forth in this Amendment, such Credit Support
Party is not required by the terms of the Term Loan Agreement or any other Loan
Document to consent to the amendments to the Term Loan Agreement effected
pursuant to this Amendment and (ii) nothing in the Term Loan Agreement, this
Amendment or any other Loan Document shall be deemed to require the consent of
such Credit Support Party to any future amendments to the Term Loan Agreement.
Section 6. PAYMENT OF ADDITIONAL INTEREST
Simultaneously with the delivery to the Administrative Agent of the Compliance
Certificate for the fiscal quarter of the Borrower ended on September 30, 1999
and in any event no later than November 15, 1999 (the "CC Delivery Date"), 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 September 30, 1999, to and including the CC Delivery Date,
as a result of any increase in the Applicable Margin caused by the amendment to
the definition of "Applicable Margin" effected hereby, 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 September 30, 1999, that is not paid on or
before the CC Delivery Date, 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. The definition of
"Applicable Margin" in the Term Loan Agreement as in effect immediately prior
to September 30, 1999, shall continue to govern the calculation of interest
payable thereunder for periods prior to such date.
Section 7. MISCELLANEOUS
A. Reference to and Effect on the Term Loan Agreement and the Other Loan
Documents.
(i) On and after the Third Amendment Effective Date, each reference in the
Term Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import referring to the Term
4
<PAGE>
Loan Agreement, and each reference in the other Loan Documents to the "Term
Loan Agreement", "thereunder", "thereof" or words of like import referring
to the Term Loan Agreement shall mean and be a reference to the Amended
Agreement.
(ii) Except as specifically amended by this Amendment, the Term Loan
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall not,
except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of Administrative
Agent or any Lender under, the Term Loan Agreement or any of the other Loan
Documents.
B. Fees and Expenses. Borrower acknowledges that all costs, fees and expenses
as described in Section 11.5 of the Term Loan Agreement incurred by
Administrative Agent, Syndication Agent, Co-Arrangers, 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. On the Third Amendment Effective Date, 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
November 8, 1999 (each, an "Approving Lender"), non-refundable fees in the
amount of 1/4 of 1% of the aggregate amount of the Loans of each such Approving
Lender (immediately prior to the effectiveness hereof).
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]
5
<PAGE>
ANNEX I
REVOLVING CREDIT FACILITY WAIVER
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: ______________________________
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: ______________________________
6
<PAGE>
EXHIBIT 12.1
TOTAL RENAL CARE HOLDINGS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings. Earnings is defined as pretax income from continuing operations
adjusted by adding fixed charges and excluding interest capitalized during the
period. Fixed charges means the total of interest expense, amortization of
financing costs and the estimated interest component of rental expense on
operating leases. In 1995, we changed our fiscal year end to December 31 from
May 31.
<TABLE>
<CAPTION>
Seven months
Years ended ended
May 31, December 31, Years ended December 31, Nine months ended
---------------- ---------------- ------------------------------------ September 30,
1994 1995 1994 1995 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- ------- -------- -------- -----------------
(in thousands, except for ratio data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before income
taxes, minority
interest, extraordinary
items and cumulative
effect of a charge in
accounting principle .. $18,753 $24,323 $14,174 $26,436 $39,685 $60,945 $99,741 $64,085 $12,852
Minority interest....... (1,046) (1,593) (878) (1,784) (2,544) (3,578) (4,502) (7,163) (6,425)
------- ------- ------- ------- ------- ------- -------- -------- -------
17,707 22,730 13,296 24,652 37,141 57,367 95,239 56,922 6,427
------- ------- ------- ------- ------- ------- -------- -------- -------
Fixed Charges:
Interest expense and
amortization of debt
issuance costs and
discounts on all
indebtedness........... 1,575 9,087 4,676 8,007 13,375 14,075 30,289 83,710 75,999
Interest portion of
rental expense......... 1,926 2,475 1,438 1,950 3,347 5,301 8,196 12,992 12,379
------- ------- ------- ------- ------- ------- -------- -------- -------
Total fixed charges..... 3,501 11,562 6,114 9,957 16,722 19,376 38,485 96,702 88,378
------- ------- ------- ------- ------- ------- -------- -------- -------
Earnings before income
taxes, extraordinary
items, cumulative
effect of a change in
accounting principle
and fixed charges...... $21,208 $34,292 $19,410 $34,609 $53,863 $76,743 $133,724 $153,624 $94,805
======= ======= ======= ======= ======= ======= ======== ======== =======
Ratio of earnings to
fixed charges.......... 6.06 2.97 3.17 3.48 3.22 3.96 3.47 1.59 1.07
======= ======= ======= ======= ======= ======= ======== ======== =======
</TABLE>
<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> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 70,741,000 0
<SECURITIES> 0 0
<RECEIVABLES> 571,196,000 0
<ALLOWANCES> 113,416,000 0
<INVENTORY> 26,750,000 0
<CURRENT-ASSETS> 657,873,000 0
<PP&E> 285,821,000 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,196,981,000 0
<CURRENT-LIABILITIES> 240,186,000 0
<BONDS> 0 0
0 0
0 0
<COMMON> 81,000 0
<OTHER-SE> 481,538,000 0
<TOTAL-LIABILITY-AND-EQUITY> 2,196,981,000 0
<SALES> 366,968,000 318,585,000
<TOTAL-REVENUES> 366,968,000 318,585,000
<CGS> 0 0
<TOTAL-COSTS> 330,242,000 252,401,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 17,002,000 8,997,000
<INTEREST-EXPENSE> 28,862,000 19,805,000
<INCOME-PRETAX> 4,145,000 45,483,000
<INCOME-TAX> 2,285,000 18,102,000
<INCOME-CONTINUING> 1,860,000 27,381,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,860,000 27,381,000
<EPS-BASIC> 0.02 0.34
<EPS-DILUTED> 0.02 0.33
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 0
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 1,072,405,000 865,684,000
<TOTAL-REVENUES> 1,072,405,000 865,684,000
<CGS> 0 0
<TOTAL-COSTS> 984,485,000 773,611,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 63,187,000 23,539,000
<INTEREST-EXPENSE> 75,999,000 50,866,000
<INCOME-PRETAX> 6,427,000 30,194,000
<INCOME-TAX> 5,608,000 31,062,000
<INCOME-CONTINUING> 819,000 (868,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 12,744,000
<CHANGES> 0 6,896,000
<NET-INCOME> 819,000 (20,508,000)
<EPS-BASIC> 0.01 (0.26)
<EPS-DILUTED> 0.01 (0.26)
</TABLE>
