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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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)
<TABLE>
<S> <C>
Delaware 51-0354549
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503-5517
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 792-2600
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par
value $0.001 per share
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant on March 15, 2000, based on the price at
which the common stock was sold as of March 15, 2000, was $218,343,253.
The number of shares of the Registrant's common stock outstanding as of
March 15, 2000 was 81,244,001 shares.
Documents Incorporated by Reference
None.
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PART I
Item 1. Business.
The following should be read in conjunction with our consolidated financial
statements and the related notes contained elsewhere in this Form 10-K. This
Form 10-K contains forward-looking statements which involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements.
Overview
We are the second largest provider of dialysis services in the United States
for patients suffering from chronic kidney failure, also known as end stage
renal disease, or ESRD. As of December 31, 1999, we provided dialysis and
ancillary services to approximately 40,000 patients through a network of 488
outpatient dialysis facilities in the continental United States, including
approximately 3,700 patients and 49 facilities under third party management
agreements. In addition, we provide inpatient dialysis services at
approximately 330 hospitals. We also offer ancillary services, including ESRD
laboratory and ESRD clinical research programs. Outside the continental United
States, we provide dialysis and ancillary services to an additional
approximately 5,300 patients through a network of 84 dialysis facilities in
Argentina, Europe, Hawaii, Puerto Rico and Guam.
The Company was formed in 1994 through the spin-off by Tenet Healthcare
Corporation, formerly National Medical Enterprises, of its dialysis services
business. Prior to 1999 we had an aggressive growth strategy of acquiring
other dialysis businesses. In February 1998 we merged with Renal Treatment
Centers, or RTC, in a stock-for-stock transaction valued at approximately $1.3
billion. After the merger with RTC, we became the second largest provider of
dialysis services in the United States. As a result of this aggressive growth
strategy through acquisitions, we have become highly leveraged.
On October 18, 1999 we hired Kent J. Thiry as our new Chairman and Chief
Executive Officer. Since that time, we have been implementing a new strategy
focused on improving our financial infrastructure and facility operations and
restructuring our balance sheet. During the fourth quarter of 1999, we
announced our intention to sell our dialysis facilities outside the
continental United States as an important first step in restructuring our
balance sheet and reducing our debt burden.
In January 2000 we signed definitive agreements to sell our dialysis
businesses in Argentina, Europe, Puerto Rico and Hawaii for approximately $160
million. The sales are subject to the receipt of required bank and regulatory
approvals, including antitrust approvals and certificate of need transfers,
and other closing conditions. The purchase price will be adjusted for
increases or decreases in the net tangible equity of the Argentina and Europe
businesses. We currently expect more than 80% of the transactions, in terms of
proceeds and asset values, to close during the second quarter of 2000. The
remaining divestures are expected to close later in 2000. The proceeds from
these sales will be available to pay down outstanding debt.
As described further in our financial statements included in this report, we
recorded asset impairment and other valuation losses of $120 million and an
incremental increase in the provisions for aged accounts receivable of
approximately $58 million in the fourth quarter of 1999. As a result of these
charges, we are out of compliance with several financial covenants in our
credit facilities. We are currently incurring higher interest charges because
of our failure to comply with these covenants. As a result of our failure to
comply with these covenants, a majority of our lenders could declare an event
of default, which would allow them to accelerate the payment of all amounts
due under our credit facilities. This event of default would also allow the
holders of our subordinated notes to accelerate payment of their notes.
Accordingly, we have reclassified these long-term debt balances to current
liabilities on our balance sheet. We are currently in discussions with our
banks regarding obtaining a waiver of these covenant violations or
restructuring our current credit facilities. These discussions are ongoing.
The rapid growth through acquisitions over the past several years also had a
significant impact on our administrative functions, including billing and cash
collection processes, which at times operated below optimal
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levels of efficiency and effectiveness. During 1999 we halted our aggressive
growth strategy and applied additional resources toward stabilizing and
improving our business processes.
During 1999 we implemented a number of systems, processes and training
solutions to begin to improve our financial infrastructure problems. Some of
the specific measures we undertook during 1999 include:
. Implementing new general ledger and financial systems;
. Implementing new billing and collection systems;
. Implementing a "data warehouse" to combine all of our financial,
reimbursement and clinical data bases in order to provide more detailed
management information;
. Strengthening the financial management team; and
. Enhancing employee training, particularly in the billing and collection
areas.
During 2000 we will continue to focus on improving our financial
infrastructure.
Our historical growth
The table below shows the results of our aggressive growth strategy over the
past several years. The pace of our growth slowed significantly during the
second half of 1999 and will continue to be limited during 2000.
<TABLE>
<CAPTION>
Managed
Acquisitions Developments Centers Closures
------------ ------------ ------- --------
<S> <C> <C> <C> <C>
1995............................ 23 3
1996............................ 57 9
1997............................ 51 12
1998 (excluding Renal Treatment
Centers merger)................ 70 24 32 10
Renal Treatment Centers merger
(February 27, 1998)............ 185
1999............................ 45 13 18 12
</TABLE>
The dialysis industry
End stage renal disease
ESRD is the state of advanced kidney impairment that is irreversible and
requires routine dialysis treatments or kidney transplantation to sustain
life. Dialysis is the removal of waste from the blood of ESRD patients by
artificial means. Patients suffering from ESRD generally require dialysis
three times per week for their entire lives.
The number of ESRD patients in the United States has increased at an
approximate compounded annual growth rate of 9% from approximately 150,000
patients in 1989 to an estimated 360,000 patients in 1999. However, during the
past three years the ESRD compounded annual patient growth rate slowed to
approximately 7%.
We believe recent slowing in the historical growth rate is primarily
attributable to:
. The number of patients diagnosed with ESRD who are not treated has been
declining, resulting in a more complete capturing of the ESRD patient
population; and
. Better treatment of pre-ESRD patients, particularly those with
hypertension and diabetes.
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We expect the number of ESRD patients to continue to grow at approximately
the recent historical rate for the foreseeable future due to:
. The continued aging of the general population;
. Better treatment and longer survival of patients with diseases that
typically lead to ESRD, including diabetes and hypertension; and
. Improved medical and dialysis technology.
Treatment options for ESRD
Treatment options for ESRD include hemodialysis, peritoneal dialysis and
kidney transplantation. ESRD patients are treated predominantly in outpatient
treatment facilities. HCFA estimates that approximately 88% of the dialysis
patients in the United States receive hemodialysis treatment, with 12% of the
dialysis patients using peritoneal dialysis.
. Hemodialysis
Hemodialysis, the most common form of ESRD treatment, is usually performed
either in a freestanding facility or in a hospital-based facility. A patient
can also perform hemodialysis at home with assistance. Hemodialysis uses an
artificial kidney, called a dialyzer, to remove toxins, fluids and salt from
the patient's blood, combined with a machine to control external blood flow
and monitor vital signs. The dialysis process occurs across a semi-permeable
membrane that divides the dialyzer into two distinct chambers. While blood is
circulated through one chamber, a pre-mixed dialyzer fluid is circulated
through the other chamber. The toxins and excess fluid from the blood
selectively cross the membrane into the dialyzer fluid, allowing cleansed
blood to return into the patient's body. Each hemodialysis treatment typically
lasts approximately three and one-half hours. Hemodialysis usually is
performed three times per week.
. Peritoneal dialysis
The patient generally performs peritoneal dialysis at home. There are
several variations of peritoneal dialysis. The most common are continuous
ambulatory peritoneal dialysis, or CAPD, and continuous cycling peritoneal
dialysis, or CCPD. All forms of peritoneal dialysis use the patient's
peritoneal, or abdominal, cavity to eliminate fluid and toxins from the
patient. Because it does not involve going to a facility three times a week
for treatment, peritoneal dialysis is an attractive alternative to
hemodialysis for patients who desire more freedom in their lifestyle. However,
peritoneal dialysis is not a suitable method of treatment for many patients.
CAPD introduces dialysis solution into the patient's peritoneal cavity
through a surgically placed catheter. Toxins in the blood continuously cross
the peritoneal membrane into the dialysis solution. After several hours, the
patient drains the used dialysis solution and replaces it with fresh solution.
This procedure usually is repeated four times per day.
CCPD is performed in a manner similar to CAPD, but uses a mechanical device
to cycle dialysis solution through the patient's peritoneal cavity while the
patient is sleeping or at rest.
. Transplantation
An alternative treatment that we do not provide is kidney transplantation.
However, we do provide both pre- and post-transplant nursing services.
While transplantation, when successful, is generally the most desirable form
of therapeutic intervention, the shortage of suitable donors, side effects of
immunosuppressive drugs given to transplant recipients and dangers associated
with transplant surgery for some patient populations limit the availability of
this treatment option. Only approximately 5% of all dialysis patients received
a kidney transplant in 1996 and the number of transplants performed annually
has remained relatively stable over the last ten years.
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Historically stable Medicare reimbursement environment
Since 1972, the federal government has provided universal reimbursement for
dialysis under the Medicare Program regardless of age or income. Under this
system, Congress establishes Medicare reimbursement rates for dialysis
patients. Medicare reimbursement rates for dialysis treatments have been
essentially flat since 1983 and have declined over 70% in real dollars since
1972. Effective January 1, 2000, Congress enacted a 1.2% increase in the
dialysis composite rate. An additional 1.2% increase will be effective January
1, 2001. These are the first rate increases since 1991.
Industry consolidation
The domestic dialysis services industry has been consolidating, with the
five largest dialysis providers increasing their share of dialysis facilities
from approximately 30% in 1992 to over 60% in 1999. However, the absolute
number of facilities owned by parties other than the five largest dialysis
providers has not significantly decreased due to the consistent growth in the
patient and facility bases.
We expect consolidation by the largest dialysis providers to continue due to
their ability to leverage corporate and management resources and increase
operating efficiencies. Moreover, the growth of managed care organizations has
led physician owners of private facilities to sell their facilities to the
multi-facility providers, which we believe are better positioned to meet the
challenges of managed care, including the reporting of quality outcomes
measures through clinical information systems and the lowering of overall
healthcare costs through a reduction in hospitalizations.
Location and capacity of our dialysis facilities
We operate 488 outpatient dialysis facilities in the continental United
States. We own, either directly, through wholly-owned subsidiary corporations
or through joint ventures with non-physicians, 412 of these facilities. Of the
remaining facilities, 27 are partially owned by us with physicians, and 49 are
managed by us. As of December 31, 1999, the locations of our facilities were
as follows:
Continental United States
<TABLE>
<CAPTION>
Number of Number of Number of
State Facilities State Facilities State Facilities
----- ---------- ----- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
Alabama 1 Kentucky 2 New York 28
Arizona 7 Louisiana 8 Ohio 3
California 95 Maryland 16 Oklahoma 22
Colorado 15 Michigan 11 Pennsylvania 21
District of Columbia 4 Minnesota 29 South Carolina 2
Delaware 1 Missouri 6 South Dakota 4
Florida 43 North Carolina 28 Texas 43
Georgia 27 Nebraska 1 Utah 4
Illinois 13 New Jersey 7 Virginia 17
Indiana 9 New Mexico 2 Washington 5
Kansas 9 Nevada 4 Wisconsin 1
</TABLE>
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Operations Outside the Continental U.S.
<TABLE>
<CAPTION>
Number of
Facilities
----------
<S> <C>
Argentina.................................................... 49
Italy........................................................ 20
Germany...................................................... 3
United Kingdom............................................... 4
Hawaii....................................................... 5
Puerto Rico.................................................. 2
Guam......................................................... 1
</TABLE>
We also provide acute inpatient dialysis services to approximately 330
hospitals. Throughout our network of outpatient dialysis facilities, we
provide training, supplies and on-call support services to all of our CAPD and
CCPD patients.
We believe we have adequate capacity within our existing facilities network
to accommodate greater patient volume. In addition, we currently are expanding
capacity at some of our facilities by adding additional dialysis stations to
meet growing demand and developing several facilities where existing
facilities cannot be expanded.
We have entered into definitive agreements to sell our dialysis businesses
in Argentina, Europe, Puerto Rico and Hawaii. We also plan to divest our
operations in Guam. These businesses include 84 facilities that provide
services to approximately 5,300 dialysis patients. The sales are subject to
the receipt of required bank and regulatory approvals, including antitrust
approvals and certificate of need transfers, and other closing conditions.
Operation of dialysis facilities
Our dialysis facilities are designed specifically for outpatient
hemodialysis. Many of our facilities also have a designated area for training
patients in home dialysis.
Participation in the Medicare ESRD program requires that each facility has a
qualified medical director. See the subheading "Physician relationships" below
for additional information on our medical directors and referring
nephrologists. Each facility also has an administrator, typically a registered
nurse, who supervises the day-to-day operations of the facility and its staff.
The staff of each facility typically consists of registered nurses, licensed
practical or vocational nurses, patient care technicians, a social worker, a
registered dietician, a unit clerk and bio-medical technicians.
All of our facilities offer high-flux and high-efficiency hemodialysis,
which most physicians practicing at our facilities deem suitable for most of
their patients. High-flux and high-efficiency hemodialysis utilize machinery
and dialyzers that allow patients to dialyze in a shorter period of time per
treatment because they cleanse the blood at a faster rate than conventional
hemodialysis. Many of our facilities also offer conventional hemodialysis. We
consider the equipment installed in our facilities to be among the most
technologically advanced equipment currently available to the dialysis
industry.
Many of our facilities also offer various forms of services for home
dialysis, primarily CAPD and CCPD. Home dialysis services consist of providing
equipment and supplies, training, patient monitoring and follow-up assistance
to patients who prefer and are able to receive dialysis treatments in their
homes. Registered nurses train patients and their families or other patient
assistants to perform either CAPD or CCPD at home. Our training programs for
home dialysis generally last two to three weeks. During 1999 approximately 10%
of our patients were receiving peritoneal dialysis at any one time.
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We believe our reputation for quality care is a factor in attracting
patients and physicians and in securing relationships with managed care
payors. We engage in organized and systematic efforts to measure, maintain and
improve the quality of services we deliver through our quality management
programs. Our quality management programs are under the direction of our chief
medical officer. Our vice president of quality management and over 30 regional
quality management coordinators implement these programs. The programs also
address areas that affect the quality of our service throughout the U.S., such
as education, training and infection control. In addition, our regional
biomedical quality management coordinators audit the technical and biomedical
quality of our facilities. The corporate and regional teams also work with
each facility's multi-disciplinary quality management team, including the
medical director, to implement the programs.
Inpatient dialysis services
We provide inpatient dialysis services, excluding physician professional
services, to patients in approximately 330 hospitals. We render these services
for a per-treatment fee individually negotiated with each hospital. When a
hospital requests our services, we administer the dialysis treatment at the
patient's bedside or in a dedicated treatment room in the hospital. Examples
of cases in which inpatient dialysis services are required are patients with
acute kidney failure resulting from trauma or similar causes, patients in the
early stages of ESRD and ESRD patients who require hospitalization for other
reasons.
Ancillary services
We provide a range of ancillary services to ESRD patients, including:
. EPO and other pharmaceuticals. The most significant ancillary service
that we provide is the administration of pharmaceuticals, including
erythropoietin, or EPO, vitamin D analogs and iron supplements, upon a
physician's prescription. EPO is a genetically-engineered form of a
naturally occurring protein which stimulates the production of red blood
cells. EPO is used in connection with all forms of dialysis to treat
anemia, a medical complication ESRD patients frequently experience.
. ESRD laboratory services. We own two licensed clinical laboratories,
located in Florida and Minnesota, specializing in ESRD patient testing.
Our laboratories provide routine laboratory tests, which are included in
the Medicare composite rate for dialysis, and other laboratory tests.
Our laboratories provide these tests primarily for our own, but also for
other, ESRD patients throughout the United States. These tests are
performed to monitor a patient's ESRD condition, including the adequacy
of dialysis, as well as other diseases a patient may have. In addition,
our Minnesota laboratory provides certain highly-specialized tests,
including therapeutic drug monitoring, bone deterioration and renal
stone monitoring and certain pre- and post-kidney transplant testing.
Our Florida laboratory, which serves most of our dialysis facilities,
utilizes our proprietary KlinLab information system, which provides
extensive reporting and information to our dialysis facilities regarding
critical outcome indicators. These laboratories have additional capacity
available to accommodate our expanding patient base.
. ESRD clinical research programs. Our commitment to improve treatment
outcomes, reduce costs and enhance the quality of life for ESRD patients
includes participating in the research and development of new products
and services. Total Renal Research, or TRR, which operated for over 15
years as the Drug Evaluation Unit, became our subsidiary in 1997. TRR
conducts Phase I through Phase IV clinical trials on devices, drugs and
new technologies in the renal and renal-related fields utilizing over
45 clinical trial sites. This clinical research organization has
conducted over 260 clinical trials, working with more than 70 drug
companies and 12 device companies, over the last 15 years.
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Physician relationships
A key factor in the success of a dialysis facility is our relationship with
local nephrologists. We currently have relationships with more than 800
nephrologists in our continental United States markets. As is often true in
the dialysis industry, one or a few physicians, usually the medical director,
account for all or a significant portion of a dialysis facility's patient
referral base. In the continental United States, our medical directors account
for approximately 80% of our patient referrals. The loss of one or more key
referring physicians at a particular facility could materially reduce the
revenue of that facility. An ESRD patient generally seeks treatment at a
facility that is near to his or her home and at which his or her nephrologist
has practice privileges. Consequently, in order to continue to receive
physician referrals of ESRD patients, we rely on our ability to meet the needs
of referring physicians.
The conditions of participation in the Medicare ESRD program mandate that
treatment at a dialysis facility be "under the general supervision of a
director who is a physician." We have engaged qualified physicians or groups
of qualified physicians to serve as medical directors for each of our
facilities. Generally, the medical director must be board eligible or board
certified in internal medicine or nephrology and have had at least 12 months
of experience or training in the care of patients at dialysis facilities. At
some facilities, we also contract with one or more physicians to serve as
assistant or associate medical directors or to direct specific programs, such
as home dialysis training, or in a few instances, to provide medical director
services for acute dialysis services provided at hospitals.
Medical directors, associate medical directors and assistant medical
directors enter into written contracts with us for a fixed period of time
which specify their duties and establish their compensation. The compensation
of the medical directors and other physicians under contract is separately
negotiated for each facility and generally depends upon competitive factors in
the local market, the physician's professional qualifications, and the
specific duties and responsibilities of the physician. Written agreements with
medical directors and other contracted physicians fix their compensation for
periods of one year or more.
Generally, we have non-competition agreements with our medical directors.
Also, in all cases in which we acquire a facility from one or more physicians,
or where one or more physicians own interests in facilities as partners, co-
shareholders, or members of a limited liability company with us, these
physicians have agreed to refrain from owning interests in competing
facilities within a defined geographic area for various periods.
While infrequent, we have from time to time experienced competition from a
dialysis facility established by a former medical director following the
termination of his or her relationship with us. The agreements with medical
directors at approximately 8% of our facilities will expire over the next
three years. We may not be successful in renewing or extending these
agreements on terms acceptable to us. If we are unable to renew or extend our
agreement with the medical director at a particular facility, the revenues of
that facility could be materially reduced.
We have a Physician Advisory Board, consisting of nephrologists from
facilities located in different regions of the country, which advises
management on our various programs. The Physician Advisory Board has two
components: a Guideline Development Committee, which provides assistance with
clinical guideline development, quality management, and other related issues;
and a Laboratory Advisory Committee, which provides feedback on all matters
concerning our two clinical laboratories. These committees meet periodically
to discuss quality and related operational issues.
Limited growth strategy
We have curtailed our growth strategy during the last part of 1999 and into
2000 as we focus on restructuring our balance sheet and improving our
financial infrastructure and facility operations. As we complete
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our financial restructuring we will again examine selective expansion in order
to achieve local market leadership through acquisitions, opening new
facilities and management agreements.
In the near and medium term we will not be aggressively developing new
facilities until we complete our restructuring efforts. By developing 58
facilities since 1995 we believe that we have gained an expertise in the
design, construction and operation of new dialysis facilities. The development
of a typical outpatient facility generally requires an average of $1.2 million
for initial construction and equipment and $300,000 for working capital in the
first year. Based on our experience, a new facility typically takes six to
nine months to open from the date of the signing of a lease for the property,
achieves operating profitability by the ninth to eighteenth month of operation
and reaches maturity within three years.
Sources of revenue
The following table provides information for the periods indicated regarding
the percentage of our net patient operating revenues provided by the
respective payor category for our continental U.S. operations, which represent
more than 90% of our operating revenues.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Percent of total dialysis revenues for continental U.S.
operations:
Medicare............................................. 54% 53% 59%
Medicaid............................................. 5 4 5
--- --- ---
59 57 64
HMO's, health insurance carriers and private patient
payment............................................. 41 43 36
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Medicare reimburses dialysis providers for the treatment of individuals who
are diagnosed with ESRD and are eligible for participation in the Medicare
ESRD program, regardless of age or financial circumstances. For each
treatment, Medicare pays 80% of the amount set by the Medicare reimbursement
system. In most cases, a secondary payor, usually Medicare supplemental
insurance or a state Medicaid program is responsible for the remaining 20%.
If a patient does not qualify for state provided Medicaid based on financial
need and does not purchase secondary insurance through a private insurer, the
dialysis provider may not be reimbursed for the 20% portion of the ESRD
composite rate that Medicare does not pay. A recent Congressional action will
allow dialysis providers to pay their patients' premiums for secondary
insurance, following the enactment of implementing regulations. These
insurance premiums are generally less than the 20% co-payment that a private
insurer would pay. Dialysis providers could capture, as incremental profit,
the difference between the premiums paid to these secondary insurers and the
reimbursement amounts received from them. We would pay for a patient's
secondary insurance premium only if the patient did not qualify for Medicaid
and the patient demonstrated an inability to pay for this insurance. Dialysis
providers will be able to pay directly their patients' premiums for secondary
insurance only upon the enactment of regulations implementing the
Congressional action. We expect these regulations will be enacted in the
second or third quarter of 2000.
ESRD patients receiving dialysis become eligible for primary Medicare
coverage at various times, depending on their age or disability status, as
well as whether they are covered by an employer group health plan. Generally,
for patients not covered by an employer group health plan, Medicare becomes
the primary payor either immediately or after a three-month waiting period.
For patients covered by an employer group health plan, Medicare generally
becomes the primary payor after 33 months.
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Medicare reimbursement
Under the Medicare reimbursement system, the reimbursement rates are fixed
in advance and have been adjusted from time to time by Congress. Medicare has
established a composite rate set by HCFA that determines the Medicare
reimbursement available for a designated group of dialysis services, including
the dialysis treatment, supplies used for that treatment, some laboratory
tests and some medications. The Medicare composite rate is subject to regional
differences based upon several factors, including regional differences in wage
levels. Other services and items are eligible for separate reimbursement under
Medicare and are not part of the composite rate, including some injectible
drugs like EPO, Calcijex(R), Infed(R), Zemplar(R), and others.
Claims for Medicare reimbursement must generally be presented within 15 to
27 months of treatment depending on the month in which the service was
rendered. We generally submit claims monthly and are typically paid by
Medicare within 17 days after submission.
We receive reimbursement for outpatient dialysis services provided to
Medicare-eligible patients at composite rates that are currently between $117
and $139 per treatment, with an average rate of $128 per treatment. This rate
is subject to change by legislation. The Medicare ESRD composite rate was
increased effective January 1, 2000 by 1.2%. The same legislation also
included a further 1.2% composite rate increase, which will become effective
January 1, 2001.
Historically, there have been very few changes to the Medicare reimbursement
rate. The rate did not change from commencement of the program in 1972 until
1983. From 1983 through December 1990 numerous Congressional actions resulted
in a net reduction of the average reimbursement rate from a fixed fee of $138
per treatment in 1983 to approximately $125 per treatment in 1990. Congress
increased the ESRD reimbursement rate, effective January 1, 1991, by $1.00 per
treatment. The recent increase was the first change in the rate since 1991.
In January 1996, HCFA announced a three-year demonstration project involving
the enrollment of ESRD patients in managed care organizations. The
demonstration project is evaluating the appropriateness of fixed, or
capitated, reimbursement for dialysis services. There were initially four
demonstration project sites selected. Three sites are now actually
implementing the pilot program and we are participating in the project with
the two largest sites. We expect the ESRD demonstration project and the
analysis of the results of the project to continue over the next three to four
years. The pilot program, if successful, could result in HCFA allowing ESRD
patients to enroll in managed care organizations. The likelihood and timing of
this decision is impossible for us to predict.
Medicaid reimbursement
Medicaid programs are state-administered programs partially funded by the
federal government. These programs are intended to provide health coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. In some states, these programs also serve as supplemental
insurance programs for the Medicare co-insurance portion of the ESRD composite
rate and provide reimbursement for additional services, like oral medications,
that are not covered by Medicare. State regulations generally follow Medicare
schedules for reimbursement levels and coverages. Certain states, however,
require beneficiaries to pay a monthly share of the cost based upon levels of
income or assets. We are a licensed ESRD Medicaid provider in the states in
which we conduct our business.
Private payors
Before Medicare becomes the primary payor, a patient's employer group health
plan or other private insurance, if any, is responsible for payment at its
negotiated rates or, in the absence of negotiated rates, at our usual and
customary rates. The patient is responsible for any deductibles and co-
payments under the terms of the employer group health plan or other insurance.
After Medicare becomes the primary payor, these private payors generally
reimburse us for the 20% of the Medicare reimbursement rates that Medicare
does not pay. Our usual and customary rates are, and the rates we negotiate
with private payors typically are, higher than Medicare
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reimbursement rates. We also have agreements with over 350 managed care
payors, at rates that are generally lower than those negotiated with other
private payors, but above Medicare rates.
Hospital inpatient dialysis services
We provide inpatient dialysis services, excluding physician professional
services, to patients in hospitals pursuant to written agreements with the
hospitals. We provide these services for a per-treatment fee which is
individually negotiated with each hospital. Some of these agreements provide
that we are the exclusive provider of dialysis services to the hospital, but
many of them are non-exclusive. Some of these agreements also allow either
party to terminate the agreement without cause. Competition for the provision
of dialysis services at hospitals with which we have a non-exclusive agreement
and the termination of inpatient dialysis services agreements could have an
adverse effect on us.
Reimbursement for EPO and other drugs
On June 1, 1989, the FDA approved the production and sale of EPO, and HCFA
approved Medicare reimbursement for the use of EPO for dialysis patients. EPO
stimulates the production of red blood cells and is beneficial in the
treatment of anemia, with the effect of reducing or eliminating the need for
blood transfusions for dialysis patients. Physicians began prescribing EPO for
their patients in our dialysis facilities in August 1989. Most of our dialysis
patients receive EPO. Approximately 24% of our net operating revenues in 1999
were generated from the administration of EPO. Therefore, EPO reimbursement
significantly impacts our net income.
The Office of the Inspector General of the Department of Health and Human
Services has recommended that Medicare reimbursement for EPO be reduced from
the current amount of $10 to $9 per 1,000 units. The Department of Health and
Human Services, or HHS, has concurred with this recommendation; however, HHS
has not determined whether it will pursue this change through the rulemaking
process. In addition, President Clinton's proposed budget for fiscal year 2001
includes a reduction in the Medicare reimbursement for EPO by this amount.
President Clinton proposed the same EPO reimbursement reduction in his fiscal
year 2000 budget proposal, but Congress did not pass any EPO reimbursement
reduction. EPO reimbursement programs have been, and in the future may be,
subject to these and other legislative or administrative proposals. We cannot
predict whether future rate or reimbursement method changes will be made. If
such changes are made, they could have a material adverse effect on our
business, results of operations or financial condition.
Furthermore, EPO is produced by a single manufacturer, Amgen Corporation,
and any interruption of supply or product cost increases could adversely
affect our operations. In February 2000, Amgen unilaterally increased its
stated price for EPO by 3.9%, which will likely have an adverse effect on our
net income.
Medicare generally reimburses for EPO only when it is administered to
patients whose hematocrits do not exceed 36%. When the patient's hematocrit
exceeds 36%, Medicare reimbursement is contingent upon the medical
justification. Hematocrit is a measure of red blood cell concentration.
The other intravenous drugs we administer include Calcijex, iron
supplements, various antibiotics and other medications. Medicare currently
reimburses us separately for the intravenous drugs at a rate of 95% of the
average wholesale price of each drug. The Clinton administration has proposed
a reduction in the reimbursement rate for outpatient prescription drugs to 83%
of the average wholesale price in its fiscal year 2001 budget. Congress did
not approve this rate change. However, we do not know whether future rate
changes will be implemented. If rate changes are implemented, it could have a
material adverse effect on our business, results of operations or financial
condition.
Government regulation
Our dialysis operations are subject to extensive federal, state and local
governmental regulations. These regulations require us to meet various
standards relating to, among other things, reimbursement from government
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programs, premises, management of facilities, personnel, the maintenance of
proper records, equipment, and quality assurance programs/patient care.
Our dialysis facilities are subject to periodic inspection by state agencies
and other governmental authorities to determine if we satisfy applicable
standards and requirements. All of our dialysis facilities are certified by
HCFA, as is required for the receipt of Medicare reimbursement.
Our business would be adversely impacted by:
. Any loss or suspension of federal certifications;
. Any loss or suspension of authorization to participate in the Medicare
or Medicaid programs;
. Any loss or suspension of licenses under the laws of any state or
governmental authority in which we generate substantial revenues; or
. Reduction of reimbursement or reduction or elimination of coverage for
dialysis and ancillary services.
To date, we have not had any difficulty in maintaining our licenses or our
Medicare and Medicaid authorizations. However, our industry will continue to
be subject to government regulation, the scope and effect of which are
difficult to predict. This regulation could adversely impact us in a material
way. In addition, various governmental authorities periodically may review or
challenge our operations, which could have an adverse effect on us.
Fraud and abuse under federal law
The "antikickback" statute contained in the Social Security Act imposes
criminal and civil sanctions on persons who receive or make payments in return
for:
. The referral of a patient for treatment; or
. The ordering or purchasing of items or services that are paid for in
whole or in part by Medicare, Medicaid or similar state programs.
Federal penalties for the violation of these laws include imprisonment,
fines and exclusion of the provider from future participation in the Medicare
and Medicaid programs. Civil penalties for violation of these laws include
assessments of $10,000 per improper claim for payment plus twice the amount of
the claim and suspension from future participation in Medicare and Medicaid.
Some state antikickback statutes also include criminal penalties. The federal
statute expressly prohibits traditionally criminal transactions, such as
kickbacks, rebates or bribes for patient referrals. Court decisions have also
said that, under certain circumstances, the statute is also violated when a
purpose of a payment is to induce referrals.
In July 1991, November 1992, and November 1999, the Secretary of HHS
published regulations that create exceptions or "safe harbors" for some
business transactions. Transactions structured within these safe harbors do
not violate the antikickback statute. A business arrangement must satisfy each
and every element of a safe harbor to be protected by that safe harbor.
Transactions that do not satisfy all elements of a relevant safe harbor do not
necessarily violate the antikickback statute but may be subject to greater
scrutiny by enforcement agencies.
We believe our arrangements with referring physicians are in material
compliance with these laws. We seek to structure our various business
arrangements to satisfy as many safe harbor elements as is practical. Some of
our arrangements with referring physicians do not satisfy all elements of a
relevant safe harbor. Although we have never been challenged under these
statutes and believe we materially comply with these and other applicable laws
and regulations, we could in the future be required to change our practices or
experience a material adverse effect as a result of a challenge.
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Because our medical directors and other contract physicians refer patients
to our facilities, the federal antikickback statute may apply. We believe our
arrangements with these physicians materially comply with the antikickback
statute. Among the available safe harbors is one for personal services which
is relevant to our arrangements with our medical directors and the other
physicians under contract. Most of our agreements with our medical directors
or other physicians under contract do not satisfy all seven of the
requirements of the personal services safe harbor. We believe that, except in
cases where a facility is in transition from one medical director to another
or where the term of an agreement with a physician has expired and a new
agreement is in negotiation, our agreements with our medical directors and
other contract physicians satisfy at least six of the seven requirements for
this safe harbor. The requirement typically not satisfied is a requirement
that if the services provided under the agreement are on a part-time basis,
the agreement must specify the schedule of intervals, their precise length and
the exact charge for such intervals. Because of the nature of our medical
directors' duties, we believe it is impractical to meet this requirement.
At some of our dialysis facilities, physicians who refer patients to the
dialysis facilities hold interests in partnerships or limited liability
companies owning the facilities. The antikickback statute may apply in these
situations. Among the available safe harbors with respect to these
arrangements is one for small entity investment interests. While none of our
arrangements satisfy all of the elements of this small entity investment
interests safe harbor, we believe that each of these partnerships and limited
liability companies satisfies a majority of the safe harbor's elements, and
that each of these business arrangements is in material compliance with the
antikickback statute.
We lease some of our facilities from entities in which interests are held by
physicians who refer patients to those facilities, and we also sublease space
to referring physicians at some of our dialysis facilities. The antikickback
statute may apply in these situations. Among the available safe harbors with
respect to these arrangements is one for space rentals. We believe that the
leases we have entered into are in material compliance with the antikickback
statute and that the leases satisfy in all material respects each of the
elements of the space rental safe harbor applicable to these arrangements.
Because we are purchasing and selling items and services in the operation of
our facilities which may be paid in whole, or in part, by Medicare or a state
healthcare program, and because these items and services might be purchased or
sold at a discount, the federal antikickback statute may apply. Among the
available safe harbors is one for discounts which is relevant to our discount
arrangements. We believe that the discount arrangements that we have entered
into are in material compliance with the antikickback statute and that these
arrangements satisfy in all material respects each of the elements of the
discounts safe harbor applicable to these arrangements.
Fraud and abuse under state law
In several states, including California, Florida, Georgia, Kansas,
Louisiana, Maryland, New York, Utah and Virginia, in which we operate dialysis
facilities jointly owned with referring physicians, statutes prohibit
physicians from holding financial interests in various types of medical
facilities to which they refer patients. Some states also have laws similar to
the federal antikickback statute that may affect our ability to receive
referrals from physicians with whom we have financial relationships, such as
our medical directors. Some of these statutes include exemptions applicable to
our medical director and other physician relationships. Some, however, include
no explicit exemption for medical director services or other services for
which we contract with and compensate referring physicians or for joint
ownership interests of the type held by some of our referring physicians. If
these statutes are interpreted to apply to referring physicians with whom we
contract for medical director and similar services or to referring physicians
who hold joint ownership interests, we would be required to restructure some
or all of our relationships with these referring physicians. We cannot predict
the consequences of this type of restructuring. We currently believe that our
financial and joint ownership interests with referring physicians are in
material compliance with these state statutes.
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Stark I / Stark II
The Omnibus Budget Reconciliation Act of 1989 includes certain provisions,
known as Stark I, that restrict physician referrals for clinical laboratory
services to entities with which a physician or an immediate family member has
a "financial relationship." Stark I may be interpreted by HCFA to apply to our
operations. Regulations interpreting Stark I, however, have created an
exception to its applicability regarding services furnished in a dialysis
facility if payment for those services is included in the ESRD composite rate.
We believe that our compensation arrangements with medical directors and other
physicians under contract are in material compliance with Stark I.
The Omnibus Budget Reconciliation Act of 1993, or OBRA 93, contains certain
provisions, known as Stark II, that restrict physician referrals for
"designated health services" to entities with which a physician or immediate
family member has a "financial relationship." The entity is prohibited under
Stark II, as is the case for entities restricted by Stark I, from claiming
payment for such services under the Medicare or Medicaid programs, is liable
for the refund of amounts received pursuant to prohibited claims, is subject
to civil penalties of up to $15,000 per service and can be excluded from
future participation in the Medicare and Medicaid programs. Comparable
provisions applicable to clinical laboratory services became effective in
1992. Stark II provisions which may be relevant to us became effective on
January 1, 1995. Although proposed Stark II regulations were published on
January 9, 1998, we cannot determine what provisions will be contained in the
final Stark II regulations, nor when the final Stark II regulations will
become effective.
A "financial relationship" under Stark II is defined as an ownership or
investment interest in, or a compensation arrangement with, the entity. We
have entered into compensation agreements with our medical directors and with
other referring physicians. Some of our medical directors own equity interests
in entities which operate our dialysis facilities. Some of our dialysis
facilities are leased from entities in which referring physicians hold
interests, and we sublease space to referring physicians at some of our
dialysis facilities. In addition, some of the medical directors and other
physicians from whom we have acquired dialysis facilities own our common stock
or options to acquire our common stock. We believe that the ownership of the
stock and stock options and the other ownership interests and lease
arrangements for such facilities are in material compliance with Stark II. The
proposed Stark II regulations could, however, require us to restructure the
stock and stock option ownership.
Stark II includes certain exceptions. We believe that our compensation
arrangements with medical directors and other contract physicians materially
satisfy the personal services compensation arrangement exception to the Stark
II prohibitions.
Payments made by a lessor to a lessee for the use of premises are also
excepted from Stark II prohibitions if specific requirements are met. We
believe that our leases with referring physicians materially satisfy this
exception to the Stark II prohibitions.
The Stark II exception applicable to physician ownership interests in
entities to which they make referrals does not encompass the kinds of
ownership arrangements that referring physicians hold in several of our
subsidiaries that operate dialysis facilities.
For purposes of Stark II, "designated health services" include clinical
laboratory services, equipment and supplies, home health services, outpatient
prescription drugs and inpatient and outpatient hospital services. We believe
that the language and legislative history of Stark II and the proposed and
related regulations indicate that Congress did not intend to include dialysis
services and the services and items provided incident to dialysis services.
Our provision of, or arrangement and assumption of financial responsibility
for, outpatient prescription drugs, including EPO, clinical laboratory
services, facility dialysis services and supplies, home dialysis supplies and
equipment and services to hospital inpatients and outpatients under our
dialysis services agreements with hospitals, include services and items which
could, however, be construed as designated health services within the meaning
of Stark II. Although we do not bill Medicare or Medicaid for hospital
inpatient and outpatient services, our medical directors may request or
establish a plan of care that includes dialysis services for hospital
inpatients and outpatients that may be considered a referral within the
meaning of Stark II.
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HCFA may interpret Stark II to apply to our operations. Consequently, Stark
II may require us to restructure existing compensation agreements with our
medical directors and to repurchase or to request the sale of ownership
interests in subsidiaries and partnerships held by referring physicians or,
alternatively, to refuse to accept referrals for designated health services
from these physicians. We believe, but cannot assure, that if Stark II is
interpreted to apply to our operations, we will be able to bring our financial
relationships with referring physicians into material compliance with Stark
II. We would be materially impacted if HCFA interprets Stark II to apply to us
and we could not achieve that compliance. A broad interpretation of Stark II
to include items provided incident to dialysis services would apply to our
competitors as well.
Medicare
Because the Medicare program represents a substantial portion of the federal
budget, Congress takes action in almost every legislative session to modify
the Medicare program for the purpose of, or with the result of, reducing the
amounts payable from the program to healthcare providers. Legislation or
regulations may be enacted in the future that may significantly modify the
ESRD program or substantially reduce the amount paid for our services.
Further, statutes or regulations may be adopted which impose additional
requirements for eligibility to participate in the federal and state payment
programs. Any legislation or regulations of this type could adversely affect
our business operations in a material way.
The False Claims Act
The federal False Claims Act, or FCA, is another means of policing false
bills or requests for payment in the healthcare delivery system. In part, the
FCA imposes a civil penalty on any person who:
. Knowingly presents, or causes to be presented, to the federal government
a false or fraudulent claim for payment or approval;
. Knowingly makes, uses, or causes to be made or used, a false record or
statement to get a false or fraudulent claim paid or approved by the
federal government;
. Conspires to defraud the federal government by getting a false or
fraudulent claim allowed or paid; or
. Knowingly makes, uses or causes to be made or used, a false record or
statement to conceal, avoid, or decrease an obligation to pay or
transmit money or property to the federal government.
The penalty for a violation of the FCA ranges from $5,000 to $10,000 for
each fraudulent claim plus three times the amount of damages caused by each
such claim. The federal government has used the FCA to prosecute Medicare
fraud in areas such as coding errors, billing for services not rendered, the
submission of false cost reports, billing services at a higher reimbursement
rate than is appropriate, billing services under a comprehensive code as well
as under one or more component codes, and billing for care which is not
medically necessary. Although subject to some dispute, at least two federal
district courts have also determined that alleged violations of the federal
antikickback statute or Stark I and Stark II are sufficient to state a claim
for relief under the FCA. In addition to the civil provisions of the FCA, the
federal government can use several criminal statutes to prosecute persons who
submit false or fraudulent claims for payment to the federal government.
The Health Insurance Portability and Accountability Act of 1996
The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
among other things, allows individuals who lose or change jobs to transfer
their insurance, limits exclusions for preexisting conditions, and establishes
a pilot program for medical savings accounts. In addition, HIPAA also expands
federal attempts to combat healthcare fraud and abuse by making amendments to
the Social Security Act and the federal criminal code. Among other things,
HIPAA creates a new "Health Care Fraud and Abuse Control Account," under which
"advisory opinions" are issued by the Office of the Inspector General, or OIG,
regarding the application of the antikickback statute, certain criminal
penalties for Medicare and Medicaid fraud are extended to other federal
healthcare programs, the exclusion authority of the OIG is expanded, Medicare
and Medicaid civil monetary penalty provisions are extended to other federal
healthcare programs, the amounts of civil monetary penalties are increased,
and a criminal healthcare fraud statute is established.
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HIPAA also required Congress to enact privacy legislation by August 21,
1999. If legislation was not enacted by this deadline, HIPAA required HHS to
promulgate regulations. Congress failed to enact such legislation, resulting
in recently proposed regulations from HHS regarding privacy rules and security
and electronic signature standards. Based on our review of the proposed
privacy rules, compliance will require the development of extensive policies
and procedures, the designation of privacy officers, and the implementation of
elaborate administrative safeguards with respect to private health information
in our possession. Similarly, based on our review of the proposed security and
electronic signature standards, compliance will require us to develop
information systems, administrative, and electronic safeguards to protect data
integrity. Complying with the proposed privacy rules and the proposed security
and electronic signature standards will require substantial time and may
require us to incur significant expenditures. Under HIPAA, compliance with
these proposed regulations will be required within 24 months after the
regulations become final. It is not known with certainty what provisions will
be contained in the final regulations nor can we determine when the final
regulations will become effective. Additionally, in the event Congress
subsequently enacts privacy legislation, that legislation may preempt any
final privacy regulations HHS may promulgate. We cannot determine the
likelihood of Congress subsequently enacting privacy legislation nor the
provisions of any such legislation.
Other regulations
Our operations are subject to various state hazardous waste and non-
hazardous medical waste disposal laws. Those laws do not classify as hazardous
most of the waste produced from dialysis services. Occupational Safety and
Health Administration regulations require employers to provide workers who are
occupationally subject to blood or other potentially infectious materials with
certain prescribed protections. These regulatory requirements apply to all
healthcare facilities, including dialysis facilities, and require employers to
make a determination as to which employees may be exposed to blood or other
potentially infectious materials and to have in effect a written exposure
control plan. In addition, employers are required to provide or employ
hepatitis B vaccinations, personal protective equipment, infection control
training, post-exposure evaluation and follow-up, waste disposal techniques
and procedures and engineering and work practice controls. Employers are also
required to comply with various record-keeping requirements. We believe that
we are in material compliance with these laws and regulations.
Some states have established certificate of need programs regulating the
establishment or expansion of healthcare facilities, including dialysis
facilities. We believe that we are in material compliance with all applicable
state certificate of need laws.
Although we believe we comply materially with current applicable laws and
regulations, our industry will continue to be subject to substantial
regulation, the scope and effect of which are difficult to predict. We cannot
assure that our activities will not be reviewed or challenged by regulatory
authorities in the future.
Corporate compliance program
We have implemented a company-wide corporate compliance program as part of
our commitment to comply fully with all applicable laws and regulations and to
maintain the high standards of conduct we expect from all of our employees. We
continuously review this program and enhance it as necessary. The primary
purposes of the program include:
. Increasing the awareness of our employees and affiliated professionals
of the importance of complying with all applicable laws and regulations
in an increasingly complicated regulatory environment;
. Auditing our facilities and billing offices on a regular basis to
identify quickly any potential instances of non-compliance; and
. Ensuring that we take steps to resolve instances of non-compliance
promptly as we become aware of them.
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We have adopted a code of conduct that each of our employees and affiliated
professionals must follow, and have implemented a confidential, toll-free
compliance hotline (888-272-7272). Our chief compliance officer administers
the compliance program. The chief compliance officer reports directly to our
president and the audit committee of our board of directors.
Florida laboratory payment dispute
Our Florida-based laboratory subsidiary is the subject of a third-party
carrier review relating to certain claims it submits for Medicare
reimbursement. We understand that carriers have undertaken similar reviews
with respect to other providers' laboratory activities in Florida and
elsewhere. The carrier has alleged that 99.3% of the tests this laboratory
performed during the review period it initially identified, from January 1995
to April 1996, and 96% of the tests performed in a second period, from 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 has also suspended all payments of claims
related to this laboratory, regardless of when the laboratory performed the
tests. The carrier had withheld approximately $30 million in reimbursement as
of December 31, 1999. The carrier has requested additional billing records
with respect to the time period April 1998 to August 1999. In addition, the
carrier has informed the local offices of the Department of Justice, or DOJ,
and HHS of this matter, and we are cooperating with the DOJ and HHS.
We have consulted with outside counsel, reviewed our records, are disputing
the overpayment determinations and have provided 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. We have received minimal responses from the carrier to
our repeated requests for clarification and information regarding the
continuing payment suspension. The hearing regarding the initial review period
from January 1995 to April 1996 was held on July 27 and July 28, 1999. On
January 27, 2000, the hearing officer issued a decision regarding the initial
review period upholding the overpayment determination of $5.6 million. We have
filed an appeal to a federal administrative law judge.
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. In July 1999, 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 the laboratory's payment
suspension will be lifted;
. What, if any, of the laboratory claims will be disallowed;
. What action the carrier, DOJ or HHS may take with respect to this
matter;
. Whether the carrier may review additional periods; or
. Any outcome of this investigation.
Any determination adverse to us could have an adverse impact on our
business, results of operations or financial condition.
Competition
A significant portion of the dialysis industry consists of many small,
independent facilities. The dialysis industry is highly competitive,
particularly in terms of acquiring existing dialysis facilities and developing
relationships with referring physicians. Competition for qualified physicians
to act as medical directors and for inpatient dialysis services agreements is
also vigorous. We have also, from time to time, experienced competition from
former medical directors or referring physicians who have opened their own
dialysis facilities. A portion of our business consists of monitoring and
providing supplies for ESRD treatments in patients' homes. Some
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physicians also provide similar services, and if the number of such physicians
were to increase, our business, results of operations or financial condition
could be adversely affected.
The market share of the large multi-facility providers has increased
significantly over the last several years. However, because of the growth in
the total number of facilities, the absolute number of dialysis facilities
owned by hospitals and independent physicians has remained relatively
constant.
Large multi-facility dialysis providers that we compete with include
Fresenius Medical Care, Gambro, Renal Care Group and Everest Healthcare
Services. Some of our competitors have substantially greater financial
resources than us and may compete with us for acquisitions and the development
of new facilities in markets targeted by us. There are also a number of large
healthcare providers that have entered or may decide to enter the dialysis
business. We cannot assure that our facilities will continue to compete
successfully with the facilities of these other companies.
Our two largest competitors, Fresenius and Gambro, are vertically integrated
dialysis providers. Both companies manufacture a full-line of dialysis
supplies and equipment while also owning and operating dialysis clinics. This
may give them cost advantages over us because of their ability to manufacture
their own products. In addition, Fresenius is our largest supplier of dialysis
products and is also our largest competitor in the dialysis services market.
Insurance
We carry property and general liability insurance, professional liability
insurance and other insurance coverage in amounts deemed adequate by our
management, based on our claims experience. However, we cannot assure that any
future claims will not exceed our applicable insurance coverage. Physicians
practicing at our facilities are required to maintain their own malpractice
insurance, and our medical directors maintain coverage for their individual
private medical practices. We do, however, provide insurance coverage for our
medical directors with respect to the performance of their duties as medical
directors of our facilities.
Employees
As of March 15, 2000, we had more than 12,300 employees, including a
professional staff of approximately 8,500 employees, a corporate and regional
staff of approximately 1,200 employees and a facilities support and
maintenance staff of approximately 2,600 employees. Approximately 8,600 of our
employees are employed on a full-time basis.
Risk factors
If our lenders accelerate payment of the amounts we owe them, we could become
insolvent or be forced to file for bankruptcy.
As a result of charges and expenses we have recorded in the fourth quarter
of 1999, we are not in compliance with several financial covenants in our
credit facilities. Due to our failure to comply with these covenants a
majority of our lenders could declare us in default under our credit
facilities, which would allow them to accelerate payment of all amounts we owe
them. If they accelerated payment, it would force us to file for bankruptcy or
reorganize our business. In addition, we are paying penalties of approximately
$12 million annually to our banks for being out of compliance with these
covenants. We cannot predict what actions our lenders will take while we are
out of compliance with these covenants.
We may not have sufficient cash flow from our business to pay our debt.
The amount of our outstanding debt is large compared to our cash flows and
the net book value of our assets. We have substantial repayment obligations
under our outstanding debt. As of December 31, 1999 we had:
. Total consolidated debt of approximately $1.458 billion, including $960
million outstanding under our credit facilities;
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. Shareholders' equity of approximately $326 million; and
. A ratio of earnings to fixed charges of less than 1:1, due to our loss
in 1999.
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, assuming our lenders do not accelerate payment of the amounts due under
our credit facilities. Also, because the interest rate under our credit
facilities is based upon a variable market rate plus a margin determined by
the amount of debt we incur relative to our earnings before income taxes,
depreciation and amortization, the amount of these interest payments could
fluctuate in the future. In addition, as a result of our failure to comply
with several financial covenants, our lenders could accelerate payment of
substantially all of these amounts.
<TABLE>
<CAPTION>
Scheduled payments
------------------
Interest Principal
-------- ---------
(in thousands)
<S> <C> <C>
For the year ending December 31:
2000....................................................... $135,779 $ 26,585
2001....................................................... 135,255 4,876
2002....................................................... 131,931 109,702
2003....................................................... 110,538 466,986
2004....................................................... 72,784 4,217
</TABLE>
Due to the large amount of these principal and interest payments, we may not
generate enough cash from our operations to meet these obligations.
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, disposing of our
assets, or repurchasing our common stock. These covenants require that we meet
financial ratios including interest coverage, net worth and leverage tests.
Additionally, we are highly leveraged and we are not in compliance with our
covenants. We may be required to renegotiate the terms of our credit
facilities on terms that are more unfavorable, including: higher interest
rates, shorter maturities or more restrictive borrowing terms; all of which
may have an adverse impact on our business prospects and our financial
results. Our lenders may require additional concessions from us before giving
us a waiver or providing us with a new credit facility.
Our current level of debt and the limitations our credit facilities impose
on us could have other important consequences, including:
. Based upon the preceding table, we will have to use much of our cash
flow, approximately $162 million in 2000 and $140 million in 2001, for
scheduled debt service rather than for our operations;
. We may not be able to increase our borrowings under the credit
facilities or obtain other 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.
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If we do not further improve our internal systems and controls soon, our
revenues, cash flows and net income may be adversely affected.
We have experienced rapid growth in the last five years, especially in 1998
and the first half of 1999, as a result of our business strategy to acquire,
develop and manage a large number of dialysis centers. This historical growth
and business strategy has led to a number of adverse consequences, including:
. Our billing and collection processes, systems and personnel were at
times inadequate to collect all amounts owed to us for services we have
rendered, resulting in a failure to achieve expected cash flow and
significant charges for uncollectible accounts receivable;
. A need for additional management, administrative and clinical personnel
to manage and support our expanded operations. We may not be able to
attract and retain sufficient additional personnel to meet these needs;
. Our assessment of the requirements of our growth on our information
systems underestimated our needs, and we have spent, and may continue to
spend, substantial amounts to enhance and replace our information
systems;
. Our expanded operations required cash expenditures in excess of the cash
available to us after paying our debt service obligations and required
us to increase our debt balances;
. We inaccurately assessed the historical and projected results of
operations of some acquired businesses, which caused us to overpay for
these acquisitions; and
. In retrospect we have not integrated acquired facilities as quickly or
smoothly as we expected, which prevented us from achieving the results
of operations expected for these acquired facilities.
If we fail to improve our performance in these areas, it will have a
negative impact on our cash flow and could impact our ability to meet our
substantial debt obligations.
If the percentage of our patients that pay at or near our list prices
declines, then our revenues, cash flows and net income would be substantially
reduced.
Approximately 41% of our net operating revenues in 1999 was generated from
patients who had domestic private payors as the primary payor. A minority of
these patients have insurance policies that reimburse us at or near our list
prices, which are substantially higher than Medicare rates. 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. If the percentage of
patients who have insurance that reimburses us at or near our list prices
changes significantly, it will have a material impact on our revenues, cash
flows and net income.
Future declines, or the lack of further increases, in Medicare reimbursement
rates could substantially decrease our net income and cash flows.
Approximately 54% of our net operating revenues in 1999 were generated from
patients who had Medicare as the primary payor. We are reimbursed for dialysis
services primarily at fixed rates established in advance under the Medicare
ESRD program. Unlike many other Medicare programs, the Medicare ESRD program
has not provided periodic inflation increases in its reimbursement rates.
Congress recently enacted two increases of 1.2% each, effective January 1,
2000 and January 1, 2001, to the Medicare composite reimbursement rate for
dialysis. These were the first increases since 1991, and are significantly
less than the cumulative inflation since 1991. Increases in operating costs
that are subject to inflation, such as labor and supply costs, have occurred
and are expected to 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 the nature
or extent of future rate changes, if any.
19
<PAGE>
HHS has recommended, and the Clinton administration has included in its
fiscal year 2001 budget proposal to the Congress, a 10% reduction in Medicare
reimbursement for erythropoietin, or EPO. We cannot predict whether Congress
will enact this proposal, or whether other future rate or reimbursement method
changes will be made. Approximately 14% of our net operating revenues in 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, cash flows and net
income.
Medicare separately reimburses us for other outpatient prescription drugs
that we administer to dialysis patients at the rate of 95% of the average
wholesale price of each drug. The Clinton administration has also included in
its fiscal year 2001 budget proposal to the Congress a reduction in the
reimbursement rate for outpatient prescription drugs to 83% of the average
wholesale price. We cannot predict whether Congress will enact this proposal,
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, cash flows and net income.
If Medicare changes its ESRD program to a capitated reimbursement system, our
revenues, cash flows and profits could be materially reduced.
Under the current Medicare demonstration project, Medicare is paying managed
care plans a capitated rate equal to 95% of Medicare's current average cost of
treating dialysis patients. 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 fluctuations in the number of services
provided in that period or possibly even the number of patients treated. If
HCFA considers the pilot program successful, HCFA or Congress could implement
such a capitated program more broadly or could lower the average Medicare
reimbursement for dialysis.
Over the long-term, we expect the profit margins in the dialysis industry to
decline, which will have a negative impact on our net income and cash flows.
During the past few years, industry operating margins have increased due to
. Increased provision of ancillary services, particularly the
administration of EPO;
. The extension of the period for which private payors remain the primary
insurer, until Medicare becomes the primary insurer; and
. Pricing increases for private pay patients.
We believe that some of these trends have reached a plateau, particularly
the increases in ancillary services intensity and the additional profits from
the extension of the private insurance coverage period. There are also market
forces that may result in long-term industry margin compression. These forces
include increases in labor and supply costs at a faster rate than
reimbursement rate increases, the potential for Medicare reimbursement cuts
for ancillary services and an inability to achieve future pricing increases
for both private pay and managed care patients.
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 43%
of our assets and 270% of our shareholders' equity at December 31, 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 35 years for our goodwill. 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.
20
<PAGE>
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.
Interruption in the supply of, or cost increases in, EPO could materially
reduce our net income and cash flows and affect our ability to care for our
patients.
In the future, Amgen may be unwilling or unable to supply us with EPO.
Additionally, Amgen is the sole supplier of EPO, and may unilaterally decide
to increase its price for EPO. For example, Amgen unilaterally decided to
increase its price for EPO by 3.9% in February 2000. Interruptions of the
supply of EPO or additional 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.
The cost of our medical supplies on a per treatment basis has been increasing,
and if this trend continues it could impact our net income and cash flows.
During the past two years we have seen an increase in the cost per treatment
of our medical supplies due to an increase in our utilization of supplies and
increases in pricing from suppliers. Two of our major competitors are also
major providers of medical supplies and equipment and our largest supplier,
Fresenius, is also the largest provider of dialysis services in the world. The
number of suppliers of dialysis-specific medical supplies has declined
recently, due to consolidation among these suppliers. If we are not able to
manage our medical supply utilization better or to achieve cost savings from
our suppliers, we may have a reduction in our net income and cash flows due to
higher medical supply costs.
If we sell our non-continental U.S. operations for less than we expect, our
impairment loss of $83 million recorded in the fourth quarter of 1999 may be
understated.
We recently entered into agreements to sell most of our operations outside
of the continental U.S. to a competitor for approximately $160 million in
proceeds, subject to final closing adjustments. We recorded a charge of
$83 million for the impairment of the value of our non-continental operations
in the fourth quarter of 1999, which includes the cost of buying out minority
interests and direct transaction costs of completing the sales. If we do not
complete the sale as we anticipate, then our actual losses may prove higher
than the recorded charge. The agreements are conditioned on the consent of our
lenders under our credit facilities, regulatory approvals and other closing
conditions.
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. Any of the following could adversely impact our
revenues:
. Suspension of payments from government programs;
. 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; and
. Loss of licenses required to operate health care facilities in some of
the states in which we operate.
21
<PAGE>
The regulatory scrutiny of healthcare providers, including dialysis
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. Also, in January 2000 one of our competitors entered
into a $486 million settlement as a result of an Office of Inspector General
of HHS investigation into some of its practices. We expect this regulatory
scrutiny to continue, if not increase.
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. The suspension of payments relates to
all payments due after the suspension started, regardless of when the
laboratory performed the tests. From the beginning of the suspension through
December 31, 1999, the carrier had withheld approximately $30 million, which
has adversely affected our cash flow. We may never recover the amounts
withheld, for which no reserves have been established.
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.
Forward-looking statements
This Form 10-K 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-K. 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.
Item 2. Properties.
Twelve of our dialysis facilities, including five facilities in the
continental United States, are operated on properties that we own. We also own
a 50% interest in a limited liability company that owns an additional property
on which we operate a dialysis facility. The remaining dialysis facilities
that we operate are located on premises leased by us or our general
partnerships, limited liability companies or subsidiary corporations or by
22
<PAGE>
entities that we manage. We lease at fair market value certain facilities from
entities in which referring physicians hold an interest. Our leases generally
cover periods from five to ten years and typically contain renewal options of
five to ten years at the fair rental value at the time of renewal or at rates
subject to consumer price index increases since the inception of the lease.
Our facilities range in size from approximately 500 to 19,500 square feet,
with an approximate average size of 5,900 square feet. We maintain our
corporate headquarters in approximately 35,800 square feet of office space in
Torrance, California, which we currently lease for a term expiring in 2008.
Our business office in Tacoma, Washington, is in an 80,000 square foot
facility leased for a term expiring in 2009. We maintain a 43,000 square foot
facility in Berwyn, Pennsylvania for additional billing and collections
purposes and limited corporate and regional staff. The Berwyn lease expires in
2001. Our Florida-based laboratory is located in a 30,000 square foot facility
owned by us, with a ground lease, and our Minnesota-based laboratory is
located in a 9,500 square foot facility leased by us.
Some of our dialysis facilities are operating at or near capacity. However,
we believe that we have adequate capacity within most of our existing
facilities to accommodate additional patient volume through increased hours
and/or days of operation, or, if additional space is available within an
existing facility, through the addition of dialysis stations at a facility
upon obtaining appropriate governmental approvals. In addition, we can build
de novo facilities if existing facilities reach capacity. With respect to
relocating facilities or building de novo facilities, we believe that we can
generally lease space at economically reasonable rates in the area planned for
each of these facilities. Expansion or relocation of our facilities would be
subject to review for compliance with conditions relating to participation in
the Medicare ESRD program. In states that require a certificate of need or
facility license, approval of our application generally would be necessary for
expansion or relocation.
Item 3. Legal Proceedings.
Following the announcement on February 18, 1999 of our preliminary results
for the 4th quarter of 1998 and the full year then ended, 13 class action
lawsuits were filed against us and certain of our officers in the United
States District Court for the Central District of California. The lawsuits
are:
1. Joseph Lipsky v. Total Renal Care Holdings, Inc., Victor M.G.
Chaltiel, Leonard Frie and John E. King, Central District of California,
Western Division, Case No. CV-99-1745CBM (RCx);
2. Andrew W. Davitt v. Total Renal Care Holdings, Inc., Victor M.G.
Chaltiel and John E. King, Central District of California, Western
Division, Case No. CV-99-01750DT (RCx);
3. Tozour Energy Systems Retirement Plan v. Total Renal Care Holdings,
Inc., Victor M.G. Chaltiel and John E. King, Central District of
California, Western Division, Case No. CV-99-01799DDP (RNBx);
4. Trust Advisors Equity Plus LLC v. Total Renal Care Holdings, Inc.,
Victor M.G. Chaltiel, John E. King and Barbara A. Bednar, Central District
of California, Western Division, Case No. CV-99-01800SVW (AJWx);
5. Alex Goldsleger v. Total Renal Care Holdings, Inc., Victor M.G.
Chaltiel, John E. King and Barbara A. Bednar, Central District of
California, Western Division, Case No. CV-99-01883ER (Ex);
6. Timothy Carlson and Kathleen O. Stack v. Total Renal Care Holdings,
Inc., Victor M.G. Chaltiel and John E. King, Central District of
California, Western Division, Case No. CV-99-01920ER (RZx);
7. Kurt W. Steidle v. Total Renal Care Holdings, Inc., Victor M.G.
Chaltiel and John E. King, Central District of California, Western
Division, Case No. CV-99-02016ABC (RZx);
8. Daniel Petroski v. Total Renal Care Holdings, Inc., Victor M.G.
Chaltiel and John E. King, Central District of California, Western
Division, Case No. CV-99-02022CM (Mcx);
9. Dan Whalen v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel
and John E. King, Central District of California, Western Division, Case
No. CV-99-02146CM (CWx);
10. Daniel K. Bloomfield v. Total Renal Care Holdings, Inc., Victor M.G.
Chaltiel, John E. King and Barbara A. Bednar, Central District of
California, Western Division, Case No. CV-99-02150DT (AIJx);
23
<PAGE>
11. Mary Ann King v. Total Renal Care Holdings, Inc., Victor M.G.
Chaltiel and John E. King, Central District of California, Western
Division, Case No. CV-99-02252ABC (Mcx);
12. Albert Parker and Lawrence G. Maglione v. Total Renal Care Holdings,
Inc., Victor M.G. Chaltiel and John E. King, Central District of
California, Western Division, Case No. CV-99-02337LGB (Shx); and
13. State of Louisiana School Employees' Retirement System v. Total Renal
Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central
District of California, Western Division, Case No. CV-99-03100CAS (Mcx).
The complaints in the lawsuits are similar and allege violations of federal
securities law 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
under the caption, In Re Total Renal Care Securities Litigation, Master File
No. CV-99-1745-CBM (RCx). 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 the 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. On January 24, 2000,
all defendants responded to this complaint by filing a motion to dismiss. The
motion is set to be heard on June 5, 2000, and all discovery is stayed pending
the court's hearing and decision on the motion. We believe that all of the
claims are without merit and we intend to defend ourselves vigorously. We
anticipate that the attorneys' fees and related costs of defending this
consolidated litigation will be covered primarily by our directors and
officers insurance. Any determination adverse to the company could have an
adverse impact on the company's business, results of operations or financial
condition.
See the heading "Florida laboratory payment dispute" in "Item 1. Business"
of this report for information on our pending payment dispute with our Florida
laboratory's Medicare carrier.
In addition, we are subject to claims and suits in the ordinary course of
business for which we believe we 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
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
Our annual meeting of shareholders was held on December 17, 1999. Proposal 1
submitted to our shareholders at the meeting was the election of directors.
The following directors, being all of our directors, were elected at the
meeting, with the number of votes cast for each director or withheld from each
director set forth after the director's respective name.
<TABLE>
<CAPTION>
Votes for Authority
Name Director Withheld
---- ---------- ---------
<S> <C> <C>
Maris Andersons....................................... 72,117,368 2,870,117
Richard B. Fontaine................................... 72,545,000 2,502,485
Peter T. Grauer....................................... 72,171,940 2,875,545
Shaul G. Massry....................................... 72,296,944 2,750,541
Kent J. Thiry......................................... 72,698,703 2,348,782
</TABLE>
24
<PAGE>
Proposal 2 submitted to our shareholders at the meeting was the approval of
our 1999 Equity Compensation Plan. The votes were cast as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
56,971,099 17,953,485 125,401
</TABLE>
Proposal 3 submitted to our shareholders at the meeting was the approval of
an increase in the number of shares authorized for issuance under our Employee
Stock Purchase Plan. The votes were cast as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
73,164,677 1,609,504 276,255
</TABLE>
25
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Our common stock is traded on the New York Stock Exchange under the symbol
"TRL." The following table sets forth, for the periods indicated, the high and
low closing prices for our common stock as reported by the New York Stock
Exchange.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal year ended December 31, 1998
1st quarter.............................................. $35.69 $22.88
2nd quarter.............................................. 36.13 30.31
3rd quarter.............................................. 35.00 19.00
4th quarter.............................................. 30.19 19.50
Fiscal year ended December 31, 1999
1st quarter.............................................. $28.00 $ 7.50
2nd quarter.............................................. 15.94 9.81
3rd quarter.............................................. 15.31 7.06
4th quarter.............................................. 8.56 5.88
</TABLE>
The closing price of our common stock on March 15, 2000 was $2 11/16 per
share. As of March 15, 2000 there were 2,235 holders of our common stock named
as holders of record by The Bank of New York, our registrar and transfer
agent. Since our recapitalization in 1994, we have not declared or paid cash
dividends to holders of our common stock. We do not anticipate paying any cash
dividends in the foreseeable future. We are subject to restrictions on our
ability to pay dividends on our common stock. For more details, see the
heading "Liquidity and capital resources" under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the notes to our consolidated financial statements.
26
<PAGE>
Item 6. Selected Financial Data.
The following table presents selected consolidated financial and operating
data for the periods indicated. The consolidated financial data for the year
ended December 31, 1995 is unaudited but includes all adjustments consisting
solely of normal recurring adjustments necessary to present fairly our results
of operations for that period. The following financial and operating data
should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements filed as part of this report.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- -------- -------- --------
(in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Income statement data:
Net operating revenues.. $ 1,445,351 $1,203,738 $758,403 $496,651 $299,411
Total operating
expenses(1)............ 1,509,333 1,068,825 646,816 428,698 247,834
------------ ---------- -------- -------- --------
Operating income
(loss)................. (63,982) 134,913 111,587 67,953 51,577
Other income (loss)..... (1,895) 4,894 3,175 3,858 1,029
Debt expense(2)......... 110,797 84,003 29,082 13,670 12,921
Minority interests in
income of consolidated
subsidiaries........... (5,152) (7,163) (4,502) (3,578) (2,544)
------------ ---------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle.............. (181,826) 48,641 81,178 54,563 37,141
Income tax expense
(benefit).............. (34,570) 38,449 35,654 22,031 13,841
------------ ---------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. $ (147,256) $ 10,192 $ 45,524 $ 32,532 $ 23,300
============ ========== ======== ======== ========
Net income (loss)(3).... $ (147,256) $ (9,448) $ 45,524 $ 24,832 $ 20,745
============ ========== ======== ======== ========
Earnings (loss) per
common share:
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ $ (1.81) $ 0.12 $ 0.59 $ 0.43 $ 0.43
============ ========== ======== ======== ========
Net income (loss)(3).. $ (1.81) $ (0.12) $ 0.59 $ 0.33 $ 0.38
============ ========== ======== ======== ========
Earnings (loss) per
common share--assuming
dilution:
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ $ (1.81) $ 0.12 $ 0.57 $ 0.42 $ 0.40
============ ========== ======== ======== ========
Net income (loss)(3).. $ (1.81) $ (0.12) $ 0.57 $ 0.32 $ 0.36
============ ========== ======== ======== ========
Ratio of earnings to
fixed charges (4)...... (See note 5) 1.50 3.18 3.88 3.28
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital(6)......... $(1,043,796) $ 388,064 $ 205,798 $185,904 $ 98,071
Total assets............... 2,056,718 1,911,619 1,279,261 664,799 338,866
Long-term debt(7).......... 5,696 1,225,781 731,192 233,126 96,979
Shareholders' equity....... 326,404 473,864 422,446 358,677 193,162
</TABLE>
- --------
(1) Total operating expenses include impairments and valuation losses of
$139,805 in 1999 and merger related costs of $78,188 in 1998.
27
<PAGE>
(2) Debt expense includes a write-off of deferred financing costs of $1,601 in
1999 and loss on termination of interest rate swap agreements related to
refinanced debt of $9,893 in 1998.
(3) Extraordinary losses associated with early extinguishment of debt were
$12,744 ($0.16 per share) in 1998, $7,700 ($0.10 per share) in 1996, and
$2,555 ($0.09 per share) in 1995.
In 1998 we adopted Statement of Position No. 98-5, Reporting on the Costs
for Start-up Activities, or SOP 98-5, which requires that pre-opening and
organization costs be expensed as incurred. As a result, unamortized
deferred pre-opening and organizational costs of $6,896 ($0.08 per share)
were written-off as a cumulative effect of a change in accounting
principle, in 1998.
(4) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings. Earnings for this purpose is defined as pretax
income from continuing operations adjusted by adding fixed charges and
excluding interest capitalized during the period. Fixed charges is defined
for this purpose as the total of interest expense, amortization of
deferred financing costs and the estimated interest component of rental
expense on operating leases.
(5) Due to the company's loss in 1999, the ratio coverage in 1999 is less than
1:1. The company would have had to generate additional earnings of
$181,826 to achieve a coverage of 1:1.
(6) The working capital calculation as of December 31, 1999 includes long-term
debt potentially callable under covenant provisions of $1,425,610
(7) Long-term debt excludes $1,425,610 as of December 31, 1999 that is
potentially callable under covenant provisions.
28
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following should be read in conjunction with our consolidated financial
statements (pages F-2 through F-32) and Item 1.
Prior to mid 1999 the company had a very aggressive growth strategy of
acquiring other dialysis businesses, and in early 1998 merged with RTC in a
stock-for-stock transaction valued at approximately $1.3 billion. After the
merger with RTC, the company became the second largest provider of dialysis
services in the United States. In addition to operating approximately 490
dialysis facilities in the continental United States, the company currently
operates 84 facilities outside the continental United States.
This aggressive growth strategy through acquisitions has resulted in the
company becoming highly leveraged. During the fourth quarter of 1999 we
announced our intention to sell our dialysis facilities outside the
continental United States as an important first step in restructuring our
balance sheet and reducing the debt burden. In January 2000 we signed
definitive agreements to sell substantially all of the company's operations
outside the continental U.S.
The rapid growth through acquisitions over the past several years also has
had a significant impact on the company's administrative functions, including
billing and cash collection processes, which at times operated below optimal
levels of efficiency and effectiveness. During the second half of 1999, the
aggressive growth strategy was halted, and additional resources were applied
toward stabilizing and improving the business processes.
In 2000, we plan to focus on improving our business processes and capital
structure. There are no plans for significant future acquisitions until the
company is well positioned to manage such a growth strategy, and then only if
it will clearly increase our shareholder value.
Results of operations
Operating results for the non-continental U.S. operations, which the company
has committed to selling or otherwise discontinuing, were as follows (in
millions):
Non-continental U.S. operations
<TABLE>
<CAPTION>
Year ended
December 31,
---------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net operating revenues..................................... $124 $89 $48
Operating expenses:
Dialysis and lab facilities.............................. 100 71 34
General and administrative............................... 7 4 4
Depreciation and amortization............................ 13 7 5
Provision for uncollectible accounts..................... 6 3 1
---- --- ---
126 85 44
---- --- ---
Operating income (loss).................................... $ (2) $ 4 $ 4
==== === ===
</TABLE>
29
<PAGE>
Consolidated operating results, excluding the non-continental U.S.
operations to be divested, were as follows (in millions):
Continental U.S. operations
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenue.................. $1,321 100% $1,115 100% $710 100%
Operating expenses:
Dialysis and lab facilities.......... 893 68% 709 64% 480 68%
General and administrative........... 124 9% 72 6% 46 6%
Depreciation and amortization........ 99 7% 83 7% 49 7%
Provision for uncollectible
accounts............................ 127 10% 42 4% 27 4%
------ --- ------ --- ---- ---
1,243 94% 906 81% 602 85%
------ ------ ----
Operating income before impairment
losses and merger costs............... $ 78 6% $ 209 19% $108 15%
====== === ====== === ==== ===
Impairment losses and merger costs:
Non-continental U.S. operations...... $ 83
Continental U.S. operations.......... 57
Merger costs......................... $ 78
------ ------
$ 140 $ 78
====== ======
</TABLE>
Because all operations outside the U.S. are being divested, the non-
continental U.S. operating results are excluded from the revenue and cost
trends discussed below.
Revenues. Operating revenues consist of revenues from dialysis services, lab
and pharmacy services, and facility management fees.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------
1999 1998 1997
------ ------ ----
<S> <C> <C> <C>
Total net operating revenues ($ in millions).............. $1,445 $1,204 $758
Percent of total revenues:
Continental U.S. operations:
Dialysis services..................................... 87% 89% 90%
Lab and pharmacy services............................. 3 3 3
Management fee income................................. 1 1 1
------ ------ ----
91 93 94
Non-continental U.S. operations......................... 9 7 6
------ ------ ----
100% 100% 100%
====== ====== ====
</TABLE>
The significant increases in revenues from 1997 through 1999 reflect the
company's aggressive acquisition strategy that existed until the latter part
of 1999.
Dialysis services. Dialysis services include outpatient facility
hemodialysis (approximately 85% of total dialysis treatments), home dialysis,
inpatient hemodialysis with contracted hospitals, the administration of EPO
and other pharmaceuticals, and other ancillary dialysis services.
Dialysis services are paid for primarily by Medicare and by state Medicaid
programs in accordance with rates established by HCFA and other third party-
payors such as HMOs and health insurance carriers. Services provided to
patients covered by third party insurance companies are normally reimbursed at
rates higher than Medicare or Medicaid rates. Patients covered by employer
group health plans generally convert to Medicare after 33 months of treatment.
30
<PAGE>
The majority of earnings from dialysis services are derived from payors
other than Medicare and Medicaid. The average revenue per treatment rates for
these other payor categories is under continued pressure as we negotiate
contract rates with large HMO's and insurance carriers and as patients
transition from private coverage or private payment to Medicare coverage.
Dialysis services revenue by payor type were as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Percent of total dialysis revenues for continental U.S.
operations:
Medicare................................................... 54% 53% 59%
Medicaid................................................... 5 4 5
--- --- ---
59 57 64
HMO's, health insurance carriers and private patient
payment................................................... 41 43 36
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The percent of Medicare and Medicaid revenues to total revenues declined in
1998 compared to 1997 due to the mix of payors associated with newly acquired
facilities and an increase in the Medicare coordination period that became
effective in the latter part of 1997. The coordination period, which is the
period that private health insurers are responsible for dialysis reimbursement
before Medicare coverage becomes available, was extended from 18 months to 33
months for the primary method of dialysis treatment. This had the result of
delaying the transition from non-Medicare rates to the generally lower
Medicare rates for a significant percentage of dialysis patients during 1998
and the first part of 1999, as compared to 1997.
The number of equivalent hemodialysis treatments associated with the
continental U.S. operations totaled 5.1 million, 4.4 million, and 3.1 million
for 1999, 1998, and 1997, respectively. The increases in the number of
treatments accounted for approximately 97% and 72% of the total growth in
dialysis services revenue for 1999 and 1998. These increases were principally
due to the acquisition and development of new dialysis facilities. The
treatment growth rate for facilities in place for at least one year was
approximately 5% for 1999 and 1998.
The average reimbursement rates per equivalent hemodialysis treatment were
$246, $245 and $220 for 1999, 1998, and 1997 respectively. The significant
rate increase for 1998 compared with 1997 was primarily attributable to the
increase in the Medicare coordination period discussed above and the payor mix
associated with acquired facilities during that time. Another significant
factor in average revenue per treatment is the level of medication
administered, which varies depending on medical need and medical practices
among the various dialysis facilities and patient demographics. We have
experienced a general flattening in the growth trend for the administration of
pharmaceuticals, which has additionally constrained revenue per treatment
growth. Approximately 3% of the increase in revenue for 1999 and 28% in 1998
was attributable to the increase in the average rate per treatment.
As of year-end 1999, the Medicare ESRD composite rates were between $117 and
$139 per treatment, with an overall average of $128 per treatment. Effective
January 1, 2000, the Medicare ESRD composite rate was increased by 1.2%, and
is scheduled to increase another 1.2% effective January 1, 2001.
Lab and pharmacy services. The company operates two licensed clinical
laboratories specializing in ESRD patient testing, principally for its own
patients. Routine lab tests are included in the Medicare composite treatment
rates and do not generate incremental revenue. See Note 15 regarding revenue
collection contingencies associated with our laboratory operations.
Management fee income. We currently manage 49 third-party dialysis
facilities utilizing our existing infrastructure. The management fee income is
typically based on a percentage of revenue of the managed facility.
31
<PAGE>
Dialysis and lab facilities expenses. Facility operating expenses consist of
costs and expenses specifically attributable to the operations of dialysis and
lab facilities, including direct labor, drugs, medical supplies, and other
patient care service costs. Total facility operating expenses as a percentage
of dialysis, lab and pharmacy services revenues, excluding non-continental
U.S. operations, were 68%, 64% and 68% for 1999, 1998 and 1997, respectively.
The lower percentage for facility costs in 1998 reflects the effect of the
higher average revenue rate per treatment realized in 1998 as compared to
1997. This effect was partially offset by cost increases and lower margins
associated with new facilities acquired during that time. The higher
percentage for 1999 facility costs reflects cost growth in excess of the
average revenue increases realized. Cost increases as a percentage of revenues
for 1999 were principally associated with compensation expense and medical
supply costs.
General and administrative expenses. General and administrative expenses
consist of those costs not specifically attributable to the dialysis and lab
facilities and include expenses for corporate and regional administration,
centralized accounting, billing and cash collection functions, quality
improvement programs and information systems.
General and administrative expenses as a percentage of total revenues,
excluding non-continental U.S. operations, were 9%, 6%, and 6% for 1999, 1998,
and 1997, respectively. The higher level of general and administrative
expenses in 1999 was principally associated with compensation costs (including
severance and retention payments), legal and other professional fees, and
consulting fees. Compensation costs increased in 1999 as additional management
and staff were added to address the process problems that had developed
following the merger with RTC in early 1998. Shortly after the merger, many of
the RTC general and administrative departments were eliminated in an attempt
to achieve integration synergies more quickly, as discussed below. While the
actions in 1998 lowered some general administrative costs during 1998, the
resulting process inefficiencies impacted the company's revenue collections
and other business processes. The significant increase in general
administrative expense as a percent of revenue for 1999 compared to 1998
reflects both the reductions in staffing in 1998 and the increases in staffing
in 1999. In addition to the increases during 1999 in staffing levels for
centralized business processes, there were increases in the operations
management structure to accommodate the growth through acquisitions and
penetration in new geographic markets. Also included in 1999 were special
retention and severance compensation costs. Professional and consulting fees
were similarly higher in 1999 due to the numerous business issues encountered
during the year.
Provisions for uncollectible accounts receivable. The provision for
uncollectible accounts receivable as a percentage of revenue was approximately
4% for both 1997 and 1998, and approximately 9% for 1999. The higher level of
provisions for uncollectible amounts in 1999, which amounted to approximately
$80 million, compared to the levels in 1998 and 1997 when measured as a
percentage of revenue, resulted from our inability to achieve our projected
cash collection trends during 1999.
As discussed above, the rapid growth through acquisitions and the merger
with RTC in 1998 had a significant impact on the company's administrative
functions, including billing and cash collection processes, which at times
operated below optimal levels of efficiency and effectiveness. The backlog of
aged accounts receivable continued to increase during the first half of 1999
due to high turnover of billing and collection personnel and process
inefficiencies. For the second quarter of 1999, an increase in the provision
of $24 million was recorded based on historical collection trend projections
developed at that time. Although subsequent collection experience with respect
to current billings was generally tracking as anticipated through the second
half of 1999, the collection rates for the older billings did not match our
earlier projections and estimates. Those earlier estimates had been based on
prior collection experience, but the build-up of the backlog of aged accounts
not processed on a timely basis created collection difficulties at a level not
previously experienced or anticipated. As of December 31, 1999 the net balance
of domestic accounts receivable aged more than six months amounted to
approximately $37 million, which we believe will be substantially collected by
the middle of 2000. This amount does not include amounts related to the
Florida lab contingency discussed in Note 15.
32
<PAGE>
Impairment and valuation losses. Impairment and valuation losses for the
year ended December 31, 1999 consisted of the following (in millions):
<TABLE>
<CAPTION>
Quarter ended:
-------------------------------- Total
June 30 September 30 December 31 1999
------- ------------ ----------- -----
<S> <C> <C> <C> <C>
Operations outside the continental
U.S................................. $ 83 $ 83
Facility closures and other
impairments associated with
continental U.S. facilities......... 21 21
Investments in and advances to third-
party dialysis related businesses... $15 13 28
Physical inventory of capital
assets.............................. 3 3
Abandoned software acquisition....... 2 2
Termination of corporate jet lease
agreement........................... $ 3 3
--- --- ---- ----
$17 $ 3 $120 $140
=== === ==== ====
</TABLE>
During the fourth quarter of 1999, the company announced its intention to
sell its dialysis operations outside the continental United States as an
important first step in reducing its debt burden and allowing management to
focus its attention on the core operations in the continental U.S. Definitive
agreements to sell the principal operations outside the U.S. were signed in
January 2000. More than 80% of the divestitures, in terms of proceeds and
asset values, are currently expected to close during the second quarter of
2000, and the remaining divestitures are expected to close later in 2000. The
sales are subject to required bank and regulatory approvals.
Gross cash proceeds will be approximately $160 million, subject to changes
in the tangible net worth of the operations being sold until the sales are
complete. The impairment charge of $83 million associated with the divestiture
of the company's non-continental U.S. operations represents the losses on the
sales of these operations including the costs of buying out minority interests
and the direct transaction costs of completing the sales. The $83 million
impairment charge was principally recorded as a reduction to goodwill. Future
operating results for the non-continental U.S. will continue to be included in
the Consolidated Statement of Income until the divestitures are completed.
The impairment and valuation losses associated with dialysis facilities
within the continental U.S. similarly relate to actions taken and decisions
made during the fourth quarter of 1999. In addition to divesting non-
continental U.S. operations, the company took immediate actions to curtail new
facility acquisitions and developments and to close facilities not supporting
the company's new strategic direction. The losses principally relate to
facilities identified for closure or sale during the first half of 2000.
Additionally, certain new facility plans were terminated and certain projects
abandoned. The impairment losses were determined based on estimated net
realizable values and projections of cash flows. The closure and abandonment
losses averaged less than $1 million per facility, and were principally
associated with the impairment of leasehold improvements and intangible assets
specifically identified with these facilities.
The company's new strategic direction and curtailed new facility acquisition
plans also affected the valuation of several partnership investments,
resulting in investment write-offs in the fourth quarter of 1999.
Additionally, an investment in a third party dialysis business, which was in
the form of a loan with equity conversion rights, was determined to be
substantially impaired based on the borrower's missed commitments, operating
difficulties and liquidity concerns. This third-party dialysis business is now
formally in default of its loan agreement with us.
The investment losses recorded in the second quarter of 1999 were similarly
associated with impairments of loans to and investments in third-party
dialysis related businesses that experienced serious operating difficulties
and liquidity problems.
The impairment losses associated with the investments and loans were
determined based on estimated net realizable values and projections of net
cash flows. We do not expect recovery of the impairment losses even
33
<PAGE>
through potential bankruptcy processes. With respect to impaired loans, we
will not accrue interest receivable unless the estimated recovery amounts
justify such accruals in the future.
We perform impairment reviews for our investments in and advances to third-
party dialysis businesses whenever a change in condition occurs, including
changes in our business strategy and plans, or when the third-party dialysis
business experiences deteriorating operating performance or liquidity
problems. With regard to the potential impairment of goodwill balances, we
routinely review cash flows for the specific facility operations associated
with the respective goodwill balances that resulted from the acquisition of
that specific group of facilities. Other than in connection with the
impairment losses discussed above, we determined that there were no goodwill
impairments as of year-end 1999.
Merger related costs. Merger related costs were incurred in 1998 in
connection with the RTC merger, which is reported under the pooling-of-
interests method of accounting. These costs included merger transaction costs,
integration costs, employee severance costs and other directly associated
compensation expenses. Transaction costs associated with all other
acquisitions, which were accounted for under the purchase method of
accounting, were capitalized as goodwill.
The merger related costs and remaining unpaid balances were as follows (in
millions):
<TABLE>
<CAPTION>
Direct transaction Severance and Integration
costs employment costs costs Total
------------------ ---------------- ----------- -----
<S> <C> <C> <C> <C>
Cost recognized in
1998................... $21 $42 $16 $79
Amounts utilized during
1998................... 21 38 15 74
--- --- --- ---
Liability balance as of
December 31, 1998...... 4 1 5
Amounts utilized during
1999................... 1 1
--- --- --- ---
Liability balance as of
December 31, 1999...... $-- $ 3 $ 1 $ 4
=== === === ===
</TABLE>
Direct transaction costs consisted primarily of investment banking fees,
legal and accounting costs and other costs, including the costs of
consultants, printing and registration, which were incurred by both TRCH and
RTC in connection with the merger.
Severance and other compensation costs directly resulting from the merger
included a constructive termination of pre-existing employment contracts with
RTC executive officers (approximately $6 million); severance payments to
approximately 80 RTC employees (approximately $2 million); the exercise of RTC
stock options with tendered shares (less than six months from exercise date)
permitted under pre-existing terms of RTC stock option grants (approximately
$16 million); and special merger bonuses awarded (approximately $16 million).
Integration costs of the combined operations were principally associated
with the elimination of redundant overhead functions and business processes.
We eliminated the following RTC departments: human resources, managed care,
laboratory, and all finance functions, with the exception of patient
accounting. In addition, RTC's laboratory, located in Las Vegas, Nevada, was
closed prior to its commencement of operation.
Integration costs included termination of a long-term laboratory management
service agreement (approximately $4 million), write-off of leasehold
improvements and other capitalized costs associated with the RTC lab closure
(approximately $5 million), and incremental costs of integrating operations,
including training and travel expenses (approximately $5 million).
Debt expense
Debt expense for 1999 consisted of interest expense of approximately $107
million and amortization and write-off of deferred financing costs of
approximately $4 million. As a result of the company not being in compliance
with certain formula-based debt covenants at December 31, 1999 as discussed
below, the company
34
<PAGE>
is currently incurring interest charges at rates significantly higher than the
interest rates in effect during 1999. We are currently in discussions with our
banks regarding obtaining a waiver of these violations or restructuring our
current credit facilities.
Debt expense for 1998 included a charge of approximately $10 million
associated with early termination of interest rate swaps.
Provision for income taxes
The provision for income taxes for 1999 was a tax benefit (negative expense)
of $35 million, reflecting current and deferred tax benefits resulting from
the 1999 pre-tax loss. The 1999 tax benefit was reduced by a deferred tax
asset valuation allowance for impairment and valuation losses that are capital
in nature. For tax purposes, such losses may only be offset against capital
gains within a limited carryback and carryforward period. Due to the company's
limited ability to generate capital gains from operations, a tax benefit
cannot be recorded for these losses.
The provision for income taxes for 1998 was $38 million, resulting in an
effective tax rate of 79%. This high effective rate was primarily due to non-
deductible merger expenses. The provision for income taxes for 1997 was $36
million or an effective rate of 44%.
Based on current plans and projections, non-deductible expenses for the year
2000 are estimated at approximately $2 million per quarter, and the marginal
tax rate (applied to pre-tax income plus non-deductible expenses) is expected
to be approximately 40%.
Extraordinary items
In conjunction with our merger with RTC in 1998, we terminated RTC's
revolving credit agreement and recorded all of the remaining unamortized
deferred financing costs as an extraordinary loss of $2.8 million, net of
income tax effect. In conjunction with replacing our senior credit facilities,
we also recognized as an extraordinary loss the remaining $9.9 million of
unamortized deferred financing costs in connection with obtaining new senior
credit facilities.
Cumulative effect of change in accounting principle
Effective January 1, 1998 we adopted SOP 98-5, which requires that pre-
opening and organizational costs incurred in conjunction with our new
facilities be expensed as incurred. Previously we had amortized such costs
over five years. We recorded a 1998 charge of $6.9 million, net of income tax
effect, representing the cumulative effect of this change in accounting.
Projections for 2000
Based on current conditions and recent experience, our current projections
for the year 2000 are for normal operating earnings before debt expense and
taxes to be in the range of $130 million to $150 million for our ongoing
operations in the continental U.S. ($240 million to $260 million excluding
non-cash depreciation and amortization expense). These projections assume
minimal acquisitions, an internal annual growth rate of the number of dialysis
treatments of approximately 5 percent, continued downward pressure on the
average revenue per treatment rate, limited opportunities to improve the mix
of non-Medicare treatments, and cost growth trends for medical supplies and
compensation expense consistent with recent years. These and other underlying
assumptions involve significant risks and uncertainties, and actual results
may vary significantly from these current projections. Refer to the liquidity
and capital resources discussion and contingencies discussion regarding
additional risks and uncertainties that may impact these forward looking
estimates.
35
<PAGE>
Non-operating charges that we believe are reasonably likely to occur in 2000
include
. the write-off of deferred financing costs associated with long-term debt
that is refinanced or otherwise restructured; and
. foreign currency exchange losses previously recognized in comprehensive
income that will be realized with the divestiture of the non-continental
U.S. operations in 2000.
These anticipated losses could not be recorded as of December 31, 1999 under
current generally accepted accounting principles. Also, see Note 15 regarding
contingencies.
Liquidity and capital resources
Our primary capital requirements have been the funding of an aggressive
growth strategy through acquisitions and the opening of new facilities,
equipment purchases and working capital needs. The rapid growth through
acquisitions over the past several years was funded through increases in long-
term debt. Long-term debt increased by $706 million over the three years ended
December 31, 1999. During the second half of 1999, the aggressive growth
strategy was halted.
At December 31, 1999 long-term debt consisted of outstanding borrowings
under the revolving credit facility of $568 million, outstanding borrowings
under our fixed term loan credit facility of $392 million, $345 million of 7%
convertible subordinate notes due 2009, $125 million of 5 5/8% convertible
subordinate notes due 2006, deferred acquisition payments of $21 million, and
capital lease obligations of $7 million.
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 the covenants impose limitations on our
ability to make capital expenditures, to incur other indebtedness and to pay
dividends.
In August 1999 the lenders under the credit facilities waived compliance
with a financial covenant that established a maximum leverage ratio. In
November 1999 this waiver was extended on revised terms because we exceeded
the maximum leverage ratio allowed under the terms of the original waiver.
When measured as of December 31, 1999, we are not in compliance with the
maximum leverage ratio established in the November 1999 waiver and other
covenants under our credit facilities.
If our lenders do not waive this failure to comply, a majority of the
lenders could declare an event of default, which would allow the lenders to
accelerate payment of all amounts due under our credit facilities. In the
event of default under the credit facilities, the holders of our convertible
subordinated notes could also declare us to be in default. We are highly
leveraged, and we would be unable to pay the accelerated amounts that would
become immediately payable if a default is declared. As a result of this non-
compliance, all debt as of December 31, 1999 that is potentially due within
one year, including the subordinated convertible notes, has been reclassified
from long-term debt to a current classification. Under these conditions we are
also unable to draw additional amounts under the credit facilities.
Additionally, this noncompliance will result in higher interest costs.
We are currently in discussions with the lenders regarding obtaining a
waiver of these violations or restructuring our current credit facilities.
Actions we have taken and are taking to ensure our ongoing ability to cover
our scheduled debt servicing include divestiture of our operations outside the
continental U.S., curtailment of new facility acquisitions and developments,
improvements in our billing and cash collections processes, increased
management controls over expenditures, and evaluations of alternative capital
sources, as well as pursuing debt restructuring with our lenders. Prior to
March 2000, we focused our attention primarily on those actions that would
improve our operating performance and cash flows, as well as filling key
senior management positions. Given the progress we have made in these areas,
we are now entering into more active discussions with our lenders for an
acceptable restructuring arrangement. We believe it is unlikely that an event
of default will be declared because of the company's substantial cash balance
and because we believe that cash flows will be sufficient to cover operating
requirements and scheduled debt servicing through 2000.
36
<PAGE>
Under the $400 million fixed term loan credit facility, principal payments
of $4 million are scheduled to be due annually on September 30 and the
remaining balance of $368 million is due when the facility is scheduled to
terminate, on March 31, 2006. Under the revolving credit facility, principal
payments of $105 million are scheduled to be due in September 2002, and the
balance is scheduled to be due in March 2003. Scheduled maturities of long-
term debt in 2000, including deferred acquisition price payments, amount to
$27 million.
Net cash provided by operating activities amounted to $169 million, $11
million and $31 million for 1999, 1998 and 1997. Net cash provided by
operating activities consists of our net income (loss), increased by non-cash
expenses such as depreciation, amortization, impairment and valuation losses,
deferred income taxes, cumulative change in accounting principle, and
extraordinary loss, and adjusted by changes in components of working capital.
Net cash used in investing activities amounted to $297 million, $469 million
and $530 million for 1999, 1998, and 1997, respectively. Our principal uses of
cash in investing activities have been for acquisitions, purchases of new
equipment and leasehold improvements for our facilities, and the development
of new facilities. Net cash provided by financing activities was $200 million
for 1999, $493 million for 1998, and $484 million in 1997 primarily consisting
of borrowings under our credit facilities and the proceeds from our 7%
convertible subordinated notes offering.
As of December 31, 1999 we had working capital, before considering the
reclassification of long-term debt to current liabilities described below, of
$382 million, including cash of $108 million. We believe that we will have
sufficient liquidity and operating cash flows to fund our scheduled debt
service and other obligations over the next twelve months unless the lenders
were to declare an event of default and accelerate the payment of amounts due
under our credit facilities and other long-term debt.
Contingencies
The company's Florida based laboratory subsidiary is the subject of a third-
party carrier review relating to claims for Medicare reimbursement. The
carrier has issued formal overpayment determinations in the amount of $5.6
million for the period from January 1, 1995 to April 1996 and $14.2 million
for the period from May 1996 to March 1998. The carrier has also suspended all
payments of claims related to this laboratory, regardless of when the
laboratory performed the tests. The carrier has requested additional billing
records with respect to the time period April 1998 to August 1999. The
cumulative amount withheld was approximately $30 million as of December 31,
1999.
We are disputing the overpayment determinations and have provided supporting
documentation for our claims. We 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 July
1999. In January 2000 the hearing officer issued a decision regarding the
initial review period upholding the overpayment determination of $5.6 million.
We have filed an appeal to a federal administrative law judge. 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 or
financial condition.
Following the announcement on February 18, 1999 of the Company's preliminary
results for the fourth quarter of 1998 and the full year then ended, several
class action lawsuits were filed against the company and several of its
officers in the U.S. District Court for the Central District of California.
The lawsuits have been consolidated into a single action. The consolidated
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 the company 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 the suspension of payments to our Florida-based laboratory subsidiary on
37
<PAGE>
Medicare claims, accounted for goodwill to overstate income, and manipulated
the value of intangible assets. On January 24, 2000, all defendants responded
to this complaint by filing a motion to dismiss. The motion is set to be heard
on June 5, 2000, and all discovery is stayed pending the court's hearing and
decision on the motion. Management believes that all of the claims are without
merit. It is anticipated that the attorneys' fees and related costs of
defending these lawsuits will be covered primarily under insurance policies.
Any determination adverse to us could have an adverse impact on our business,
results of operations or financial condition.
Year 2000 considerations
During 1998 and 1999 we established project teams to address Y2K programming
issues and develop contingency plans. Our planning and preparation addressed
the following areas:
. Software applications and hardware, with a particular focus on our
billing and accounts receivable;
. Operating systems;
. Dialysis centers and equipment with a particular focus on our bio-
medical equipment and devices, including dialysis machines; and
. External parties such as our suppliers and our third party payors,
including the two primary fiscal intermediaries that we utilize to
process Medicare claims and non-governmental payors.
As of the date of this report, we have not experienced any significant Y2K
problems. We incurred approximately $1.2 million of Y2K related costs,
primarily in 1999. Due to the overall complexity of Y2K issues, we may still
experience unanticipated negative consequences or material costs caused by
undetected errors or defects during the remainder of 2000.
Quarterly results of operations
The following table sets forth selected unaudited quarterly financial data
and operating information for 1999 and 1998.
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1999 1999 1999 1999 1998 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(in thousands, except per share and per treatment data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial data:
Net operating revenues.. $352,244 $352,819 $367,168 $ 373,120 $257,833 $288,350 $318,585 $338,970
Facility operating
expenses............... 229,640 250,548 250,433 262,618 168,440 184,399 200,773 226,128
General and
administrative
expenses............... 23,608 29,559 32,725 44,663 16,622 18,087 18,292 22,685
Operating income
(loss)................. 62,128 (6,353) 35,107 (154,864) (33,016) 55,725 66,684 45,520
Income before
extraordinary item and
cumulative effect of
change in accounting
principle.............. 23,207 (22,059) 2,259 (150,664) (47,959) 16,841 28,058 13,252
Net income (loss)....... 23,207 (22,059) (2,259) (150,664) (57,667) 6,909 28,058 13,252
Per Share data:
Income (loss) per share
before extraordinary
item and cumulative
effect of change in
accounting principle... $ 0.28 $ (0.27) $ 0.03 $ (1.86) $ (0.61) $ 0.20 $ 0.33 $ 0.16
Income (loss) per
share.................. 0.28 (0.27) 0.03 (1.86) (0.73) 0.08 0.33 0.16
Selected operating
statistics:
Outpatient facilities... 541 564 569 572 391 423 477 508
Treatments.............. 1,393 1,467 1,510 1,541 1,100 1,187 1,284 1,342
Net operating revenues
per treatment.......... $ 253 $ 241 $ 243 $ 242 $ 234 $ 243 $ 248 $ 253
Operating income
margin................. 17.6% (1.8)% 9.6% (41.5)% (12.8)% 19.3% 20.9% 13.4%
</TABLE>
Certain reclassifications have been made to conform with the 1999 year-end
presentation.
38
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate sensitivity
The table below provides information about our derivative financial
instruments and other financial instruments, primarily borrowings under our
credit facilities, that are sensitive to a change in interest rates. The
interest rates of our financial instruments that are sensitive to changes in
interest rates are partially hedged through interest rate swap agreements for
fixed rates.
For our debt obligations, the table presents principal repayments and
current weighted average interest rates on these obligations as of December
31, 1999. For our debt obligations with variable interest rates, the rates
presented reflect the current rates in effect as a result of the company's
non-compliance with debt covenants. These rates are based on the prime rate
plus a margin of 2.25% and 2.5% for the revolving and term debt, respectively.
The table shows expected maturity without giving effect to the potential
acceleration of amounts due resulting from our failure to comply with all of
the financial covenants in our credit facilities.
<TABLE>
<CAPTION>
Expected maturity date Average
----------------------------------- Fair interest
2000 2001 2002 2003 2004 Thereafter Total value rate
---- ---- ---- ---- ---- ---------- ----- ----- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
Fixed rate ......... $470 $470 $307 6.63%
Variable rate ...... $26 $ 5 $110 $467 $ 4 $376 $988 $988 10.87%
</TABLE>
For our interest rate swap agreements, the table below presents the
expiration 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. The fair value of the swap
agreements was approximately $17 million at December 31, 1999.
Some of our swaps have a one-time cancellation provision for our
counterparty at varying times based upon the maturity of the underlying swaps
as presented in the table below.
<TABLE>
<CAPTION>
Weighted average
----------------
Swap Cancellation Fixed pay Variable
maturity date option date Notional amount rate receive rate
------------- ------------ --------------- --------- ------------
(in millions)
<S> <C> <C> <C> <C>
May 2008 May 2005 $200 5.84% 6.08%
May 2008 May 2003 200 5.65% 5.93%
June 2005 June 2002 100 5.61% 6.12%
June 2005 June 2001 100 5.52% 5.82%
June 2003 June 2000 100 5.51% 6.12%
---- ---- ----
$700 5.66% 6.01%
==== ==== ====
</TABLE>
The average interest rate on our variable rate long-term debt has increased
from 1998 because of changes in the terms of our credit facilities in
connection with the waivers of the covenant violations that occurred in 1999.
The expected maturity dates for substantial amounts of the variable debt were
accelerated in connection
39
<PAGE>
with the waivers. In addition, during 1999 two of our swap agreement
counterparties exercised their right to cancel agreements in the aggregate
notional amount of $100 million. The cancelled swap agreements would have
otherwise matured in 2001.
The total outstanding amount of our debt obligations exceeds the aggregate
notional amount of our swap agreements.
Exchange rate sensitivity
We have foreign operations in Argentina, Germany, Italy and the United
Kingdom. Because the Argentine peso trades evenly with the U.S. dollar and
because our operations in Germany, Italy and the United Kingdom are new and
relatively small, we have not experienced significant foreign exchange rate
risk. Through December 31, 1999 we have not utilized any derivative financial
instruments to manage foreign exchange rate risk. In September 1999, however,
we converted approximately $50 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. As
of December 31, 1999, $43 million of total outstanding debt is denominated in
Euros.
Item 8. Financial Statements and Supplementary Data.
See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
40
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning members of our board of directors
The following table sets forth certain information concerning members of our
board of directors as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Kent J. Thiry............. 43 Chairman of the Board and Chief Executive
Officer
Maris Andersons........... 63 Director
Richard B. Fontaine....... 56 Director
Peter T. Grauer........... 54 Director
C. Raymond Larkin, Jr. ... 51 Director
Shaul G. Massry........... 69 Director
</TABLE>
Kent J. Thiry became our Chairman of the Board and Chief Executive Officer
on October 18, 1999. From June 1997 until he joined us, Mr. Thiry served as
Chairman of the Board and Chief Executive Officer of Vivra Holdings, Inc.,
which was formed to operate the non-dialysis business of Vivra Incorporated,
or Vivra, after Gambro AB acquired the dialysis services business of Vivra in
June 1997. At the time, Vivra was the second largest provider of dialysis
services in the United States. From September 1992 to June 1997, Mr. Thiry was
the President and Chief Executive Officer of Vivra. From April 1992 to August
1992, Mr. Thiry served as President and co-Chief Executive Officer of Vivra,
and from September 1991 to March 1992, as President and Chief Operating
Officer of Vivra. From 1983 to 1991, Mr. Thiry was associated with Bain &
Company, first as a Consultant, and then as Vice President. Mr. Thiry is also
a director of Oxford Health Plans, Inc.
Maris Andersons has been one of our directors since August 1994. Mr.
Andersons was a Senior Vice President and Senior Advisor, Corporate Finance,
of Tenet Healthcare Corporation, or Tenet, until his retirement in 1997. Mr.
Andersons also has held various senior executive offices with Tenet since
1976. Prior to joining Tenet, Mr. Andersons served as a Vice President of Bank
of America.
Richard B. Fontaine has been one of our directors since November 1999. Mr.
Fontaine has been an independent health care consultant since 1992. Mr.
Fontaine has also been an adjunct instructor at Westminster College since
1992. From June 1995 to September 1995, he served as interim Chief Executive
Officer of Health Advantage, Inc., a subsidiary of VIVRA Specialty Partners,
Inc. In 1993, he served as interim Chief Executive Officer of Vivocell
Therapy, Inc. From 1988 to 1992, he served as Senior Vice President of CR&R
Incorporated. From 1984 to 1988, he served as Vice President, Business
Development, of Caremark, Inc. Mr. Fontaine is also a director of Celeris
Corp.
Peter T. Grauer has been one of our directors since August 1994. Mr. Grauer
has been a Managing Director of DLJ Merchant Banking, Inc., or DLJMB, since
September 1992. From April 1989 to September 1992, he was a Co-Chairman of
Grauer & Wheat, Inc., an investment firm specializing in leveraged buyouts.
Prior thereto Mr. Grauer was a Senior Vice President of Donaldson, Lufkin &
Jenrette Securities Corporation, or DLJ. Mr. Grauer is also a director of
Ameriserv Food Distribution, Inc., DecisionOne Holdings Corporation, Doane Pet
Care Enterprises, Inc., Formica Corporation, Nebco Evans Holding Co., and
Thermadyne Holdings Corporation.
C. Raymond Larkin, Jr. has been one of our directors since December 1999.
Mr. Larkin has been a principal of 3x NELL, which invests in and provides
consulting services to the medical device, biotechnology and pharmaceutical
industries, since July 1998. From 1983 to March 1998, he held various
executive positions with Nellcor Incorporated, a medical products company, for
which he served as President and Chief Executive Officer from 1989 until
August 1995, when he became President and Chief Executive Officer of Nellcor
Puritan Bennett
41
<PAGE>
Incorporated upon the merger of Nellcor Incorporated with Puritan-Bennett
Corporation. Mr. Larkin is also a director of Arthrocare Corporation and
Neuromedical Systems, Inc.
Shaul G. Massry has been one of our directors since April 1997. Dr. Massry
has been a Professor of Medicine, Physiology and Biophysics and Chief,
Division of Nephrology, at the University of Southern California School of
Medicine since 1974. Dr. Massry served as the president of the National Kidney
Foundation from 1990 through 1992.
No arrangement or understanding exists between any director and any other
person or persons pursuant to which any director was or is to be selected as a
director other than pursuant to the shareholders agreement described in "Item
13. Certain Relationships and Related Transactions." None of the directors has
any family relationship among themselves or with any of our executive
officers. Each director is elected to hold office until the next annual
meeting of shareholders and until his or her respective successor is elected
and qualified.
Information concerning our executive officers
The following table sets forth certain information concerning our executive
officers as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kent J. Thiry........... 43 Chairman of the Board and Chief Executive Officer
George B. DeHuff........ 46 President and Chief Operating Officer
Barry C. Cosgrove....... 42 Senior Vice President, General Counsel and Secretary
Stan M. Lindenfeld...... 52 Senior Vice President and Chief Medical Officer
John J. McDonough....... 36 Vice President and Chief Accounting Officer
</TABLE>
Our executive officers are elected by and serve at the discretion of our
board of directors. Set forth below is a brief description of the business
experience of all executive officers other than Mr. Thiry, who is also a
director. See "Information concerning members of our board of directors"
above.
George B. DeHuff was our President and Chief Operating Officer from May 1999
until February 2000, when he resigned. He also served as our interim Chief
Executive Officer from August 1999 to October 1999. Prior to joining us, Mr.
DeHuff served as an executive officer of American Medical Response, including
President and Chief Executive Officer from September 1997 to March 1999, Chief
Operating Officer from August 1995 to August 1997 and Chief Executive Officer
of American Medical Response West from September 1994 to July 1995. From July
1991 to July 1994, he was President and Chief Operating Officer of LifeFleet,
Inc. From 1989 to 1991, he was President and Chief Executive Officer of EECO,
Inc. Prior to 1989, Mr. DeHuff held executive positions with Price Waterhouse
and HI-TEK Corporation.
Barry C. Cosgrove was promoted to Senior Vice President in October 1998 from
Vice President, a position he held since August 1994. Mr. Cosgrove served as
our Secretary from August 1994 to March 2000. From August 1994 until February
2000, he also served as our General Counsel. In February 2000 he became
Special Counsel to TRC. Prior to joining us, from May 1991 to April 1994, Mr.
Cosgrove served as Vice President, General Counsel and Secretary of Total
Pharmaceutical Care, Inc. From February 1988 to 1991, Mr. Cosgrove served as
Vice President and General Counsel of McGaw Laboratories, Inc. (a subsidiary
of the Kendall Company). Prior to February 1988, Mr. Cosgrove was with the
Kendall Company for seven years in numerous corporate, legal and management
positions, including Assistant to the General Counsel.
Stan M. Lindenfeld, a nephrologist, was promoted to Senior Vice President,
Quality Management in October 1998 from Vice President, Quality Management and
Integrated Programs, a position he held since August 1994. Dr. Lindenfeld has
also served as our Chief Medical Officer since January 1995 and as one of our
medical directors since 1981. Since 1988 he has held the position of Clinical
Professor of Medicine at the University of
42
<PAGE>
California Medical Center in San Francisco. Dr. Lindenfeld developed the
Office of Clinical Resources Management at the University of California
Medical Center in San Francisco and served as its director from July 1993
until July 1997.
John J. McDonough became our Vice President and Chief Accounting Officer in
March 1999. From August 1998, when Mr. McDonough joined us, to March 1999, Mr.
McDonough served as Divisional Vice President of Finance and Accounting.
During 1996, Mr. McDonough served as Vice President and Chief Financial
Officer of Palatin Technologies, Inc. From 1992 through 1995, Mr. McDonough
held a variety of positions, including Vice President and Chief Financial
Officer, at MedChem Products, Inc.
In January 2000, we announced the appointment of David P. Barry as our
President and Chief Operating Officer, to be effective in March 2000. On March
2, 2000, Mr. Barry resigned for personal reasons. Mr. Barry has agreed to work
through a transition period while we conduct a search for his replacement.
From March 1999 to February 2000 Mr. Barry served as Chief Executive Officer
of Accentcare, Inc. From August 1995 to June 1997, Mr. Barry served as
President of Vivra Renal Care, the dialysis services business of Vivra. From
May 1992 to August 1995, he served as a Vice President of Vivra Renal Care.
In February 2000, Richard K. Whitney became our Chief Financial Officer.
From September 1998 until his appointment as Chief Financial Officer, Mr.
Whitney served as Vice President and General Manager of our International
Operations. Mr. Whitney joined us in June 1995 and has also served as Director
of Corporate Development and Vice President of Corporate Development. Prior to
joining us, Mr. Whitney was associated with RFE Investment Partners, a private
equity investment firm, and Deloitte & Touche.
None of the executive officers has any family relationship with any other
executive officer or with any of our directors.
Section 16(a) beneficial ownership reporting compliance
Section 16(a) of the Exchange Act requires "insiders," including our
executive officers, directors and beneficial owners of more than 10% of our
common stock, to file reports of ownership and changes in ownership of our
common stock with the Securities and Exchange Commission and the New York
Stock Exchange, and to furnish us with copies of all Section 16(a) forms they
file. We became subject to Section 16(a) in conjunction with the registration
of our common stock under the Exchange Act effective October 31, 1995. Based
solely on our review of the copies of such forms received by us, or written
representations from certain reporting persons that no Form 5's were required
for those persons, we believe that our insiders complied with all applicable
Section 16(a) filing requirements during 1999.
43
<PAGE>
Item 11. Executive Compensation.
The following table sets forth the compensation paid or accrued by us for
each of the fiscal years in the three-year period ended December 31, 1999 to
the following persons:
. each individual who served as our chief executive officer or acted in a
similar capacity during 1999;
. our four most highly compensated executive officers other than our chief
executive officer at December 31, 1999; and
. two former executive officers who would have been among the four most
highly compensated executive officers at December 31, 1999 if they were
still serving as executive officers at December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Awards Payouts
--------------------- -------
Annual Compensation All
---------------------------------------- Restricted Securities Other
Other Annual Stock Underlying LTIP Compen-
Name and Principal Salary Bonus Compensation Award(s) Options* Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
------------------ ---- ------- ---------- ------------ ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kent J. Thiry........... 1999 $83,074 -- -- -- 500,000 -- --
Chairman of the
Board and
Chief Executive Officer
George B. DeHuff, III... 1999 190,768 -- -- -- 450,000 -- --
President and Chief
Operating Officer(1)
Barry C. Cosgrove....... 1999 184,374 $ 456,000(2) -- -- 200,000 -- $ 8,320(3)
Senior Vice President, 1998 182,309 490,004(4) -- -- 200,000 -- 40,293(5)
General Counsel and 1997 149,817 115,004 -- -- 111,916 -- 11,582(6)
Secretary
Stan M. Lindenfeld...... 1999 262,028 375,000(7) -- -- 200,000 -- 30,883(8)
Senior Vice President 1998 273,883 382,211(9) -- -- 150,000 -- 425(10)
and Chief Medical
Officer 1997 214,791 169,020 -- -- 58,333 -- --
John J. McDonough....... 1999 152,692 32,500 -- -- 100,000 -- 35,000(11)
Vice President and 1998 49,561 -- -- -- 80,000 -- --
Chief Accounting
Officer
Victor M.G. Chaltiel.... 1999 190,912 279,209 -- -- -- -- 786,161(12)
Former Chairman 1998 315,026 8,250,000(13) 3,536(14) -- 1,000,000(15) -- 5,598(16)
of the Board, 1997 288,652 890,409(17) -- -- 333,334(15) -- 5,522(18)
Chief Executive Officer
President and Director
John E. King............ 1999 100,385 456,000(19) -- -- 100,000 -- 40,566(20)
Former Senior Vice
President; 1998 181,154 487,500(21) -- -- 200,000 -- 8,620(22)
Finance and Chief 1997 130,504 112,500 -- -- 111,916 -- 14,089(23)
Financial Officer
Leonard W. Frie......... 1999 122,250 276,390(24) -- -- 100,000 -- 285,584(25)
Former Executive Vice 1998 200,410 321,254(26) -- -- 150,000 -- 13,197(27)
President and Chief 1997 182,245 143,754 -- -- 111,916 -- 14,153(28)
Operations Officer,
West
</TABLE>
- --------
* Includes options repriced in April 1997.
(1) Mr. DeHuff served as our interim Chief Executive Officer from August 1999
to October 1999.
(2) Includes the second installment, in the amount of $375,000, related to a
special bonus received for services rendered in connection with the merger
with RTC.
(3) Includes (a) an automobile allowance of $7,800 and (b) $520 paid by us for
an umbrella insurance policy.
(4) Includes the first installment, in the amount of $375,000, related to a
special bonus received for services rendered in connection with the merger
with RTC.
44
<PAGE>
(5) Includes (a) an automobile allowance of $8,100, (b) $520 paid by us for
an umbrella insurance policy, and (c) $31,673 in the payment of cash
value of accrued paid time off.
(6) Includes (a) an automobile allowance of $7,800, (b) $520 paid by us for
an umbrella insurance policy, and (c) $3,262 in deferred interest income.
(7) Includes the second installment, in the amount of $375,000, related to a
special bonus received for services rendered in connection with the
merger with RTC.
(8) Includes (a) $850 for a waiver of medical insurance premiums and (b)
$30,033 in payment of cash value of accrued paid time off.
(9) Includes the first installment, in the amount of $187,500, related to a
special bonus received for services rendered in connection with the
merger with RTC.
(10) Consists entirely of a waiver of medical insurance premiums.
(11) Consists entirely of a relocation allowance.
(12) Include (a) $520 paid by us for an umbrella insurance policy, (b) $19,061
in payment of cash value of accrued paid time off and (c) $766,580 in
severance.
(13) Consists entirely of a special bonus received for services rendered in
connection with the merger with RTC.
(14) Paid as a gross-up adjustment to offset the personal income tax resulting
from Mr. Chaltiel's personal use of our leased corporate jet.
(15) In February 1999, Mr. Chaltiel voluntarily cancelled all 1,000,000 of the
options granted to him in 1998 and 166,667 of the options granted to him
in 1997 to increase the number of options available for grant under our
existing stock option plans.
(16) Includes (a) $520 paid by us for an umbrella insurance policy, and (b)
$5,078 representing imputed income from Mr. Chaltiel's personal use of
our leased corporate jet.
(17) Mr. Chaltiel's 1997 bonus of $451,776 was prepaid in December 1997.
(18) Includes (a) an automobile allowance of $5,002, and (b) $520 paid by us
for an umbrella insurance policy.
(19) Includes the second installment, in the amount of $375,000, related to a
special bonus received for services rendered in connection with the
merger with RTC.
(20) Includes (a) an automobile allowance of $4,500, (b) $520 paid by us for
an umbrella policy and (c) $35,546 in payment of cash value of accrued
paid time off. Mr King also received a severance payment of $180,000 in
January 2000.
(21) Includes the first installment, in the amount of $375,000, related to a
special bonus received for services rendered in connection with the
merger with RTC.
(22) Includes (a) an automobile allowance of $8,100 and (b) $520 paid by us
for an umbrella insurance policy.
(23) Includes (a) an automobile allowance of $7,800, (b) $520 paid by us for
an umbrella insurance policy, and (c) $5,769 in payment of cash value of
accrued paid time off.
(24) Includes the second installment, in the amount of $187,500, related to a
special bonus received for services rendered in connection with the
merger with RTC.
(25) Includes (a) an automobile allowance of $5,231, (b) $520 paid by us for
an umbrella insurance policy, (c) $197,423 in severance, (d) $27,277 in
payment of cash value of accrued paid time off and (e) $5,133 in deferred
compensation.
(26) Includes the first installment, in the amount of $187,500, related to a
special bonus received for services rendered in connection with the
merger with RTC.
(27) Includes (a) an automobile allowance of $8,827, (b) $520 paid by us for
an umbrella insurance policy, and (c) $3,850 in deferred compensation.
(28) Includes (a) an automobile allowance of $8,500, (b) $520 paid by us for
an umbrella insurance policy, and (c) $5,133 in deferred compensation.
45
<PAGE>
The following table sets forth information concerning options granted to
each of the named executive officers during 1999:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------
Number of % of Total Grant
Securities Options/SARs Exercise Date
Underlying Granted to or Base Present
Options/SARs Employees in Price Expiration Value
Name Granted(#)(1) Fiscal Year ($/Sh) Date ($)(2)
- ---- ------------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Kent J. Thiry......... 500,000 10.9 6.00 10/18/09 1,966,650
George B. DeHuff,
III.................. 300,000(3) 6.6 14.875 5/17/09 2,839,770
150,000 3.3 8.3125 8/26/09 817,379
Barry C. Cosgrove .... 200,000 4.4 9.0625 3/11/09 891,060
Stan M. Lindenfeld ... 200,000 4.4 9.0625 3/11/09 891,060
John J. McDonough..... 100,000 2.2 9.0625 3/11/09 445,530
Victor M.G. Chaltiel.. -- -- -- -- --
John E. King ......... 100,000(4) 2.2 9.0625 3/11/09 445,530
Leonard W. Frie ...... 100,000(3) 2.2 9.0625 3/11/09 445,530
</TABLE>
- --------
(1) All options are nonqualified stock options and were granted under our 1997
Equity Compensation Plan. The options vest over four year periods at an
annual rate of 25% beginning on the first anniversary of the date of
grant.
(2) The estimated grant date present value reflected in the above table was
determined using the Black-Scholes model. The material assumptions and
adjustments incorporated in the Black-Scholes model in estimating the
value of the options reflected in the above table include the following:
(a) the respective option exercise price for each individual grant, equal
to the fair market value of the underlying stock on the date of grant; (b)
the exercise of options within six years of the date that they become
exercisable; (c) a risk-free interest rate of 5.50% to 6.17%% per annum;
(d) volatility of 41.64% to 68.22% calculated using the daily prices of
our common stock; (e) a dividend yield of 0%, and (f) an assumed
forfeiture rate of 5.0% for all periods. The ultimate values of the
options will depend on the future market price of our common stock, which
cannot be forecasted with reasonable accuracy. The actual value, if any,
an optionee will realize upon exercise of an option will depend on the
excess of the market value of our common stock over the exercise price on
the date the option is exercised. We cannot assure that the value realized
by an optionee will be at or near the value estimated by the Black-Scholes
model or any other model applied to value the options.
(3) These options were cancelled upon resignation of employment and are no
longer outstanding.
(4) Pursuant to the terms of Mr. King's severance agreement, 25,000 option
shares vested on March 11, 2000 and will remain exercisable for 90 days
after March 11, 2000. The remaining 75,000 option shares were cancelled,
and are no longer outstanding.
46
<PAGE>
The following table sets forth information concerning the aggregate number
of options exercised by and year-end option values for each of the named
executive officers during 1999:
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised In-the-
Options at FY- Money Options at
End FY-End
---------------- -------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable(#) Unexercisable($)(1)
---- --------------- ----------- ---------------- -------------------
<S> <C> <C> <C> <C>
Kent J. Thiry........... -- -- --/500,000 --/343,750
George B. DeHuff, III... -- -- 150,000/300,000 --/--
Barry C. Cosgrove ...... -- -- 127,388/247,028 361,718/--
Stan M. Lindenfeld ..... -- -- 141,277/274,805 120,570/--
John J. McDonough....... -- -- 20,000/160,000 --/--
Victor M.G. Chaltiel.... -- -- 166,667/-- --/--
John E. King ........... -- -- 135,721/107,445 120,570/--
Leonard W. Frie ........ -- -- 141,227/-- 610,899/--
</TABLE>
- --------
(1) Value is determined by subtracting the exercise price from the fair market
value of $6.6875 per share, the closing price for our common stock as
reported by the New York Stock Exchange as of December 31, 1999, and
multiplying the remainder by the number of underlying shares of common
stock.
Employment agreements
On October 18, 1999, we entered into an employment agreement with Kent J.
Thiry. The employment agreement provides for an initial term through December
31, 2001 and will continue thereafter with no further action by either party
for successive one year terms. Mr. Thiry's annual compensation will be subject
to annual increases consistent with the California consumer price index. Mr.
Thiry will be entitled to receive a bonus of up to 150% of his base salary
each year, based upon our achievement of performance goals to be mutually
agreed upon by Mr. Thiry and our compensation committee. For the year 2000,
Mr. Thiry is guaranteed a minimum bonus of $500,000. In the event of a
constructive discharge following a change in control or a termination for any
reason other than material cause, Mr. Thiry will be entitled to a lump sum
payment equal to his then-current base salary. Any additional compensation
payable to Mr. Thiry upon a change in control of TRCH would not be reduced by
tax obligations possibly imposed by sections 280G or 4999 of the Internal
Revenue Code of 1986.
On March 2, 1998 we entered into new employment agreements with each of
Barry C. Cosgrove and Stan M. Lindenfeld. These employment agreements provide
for an initial term through December 31, 1998 and will continue thereafter
with no further action by either party for successive one year terms. Each of
these executive officers' base salaries will be subject to annual increases
consistent with the California consumer price index. Each of these executive
officers also will be entitled to receive a bonus of up to 75% of his base
salary each year. Fifty percent of this bonus will be based upon our
achievement of earnings per share targets and 50% will be granted at the
discretion of our compensation committee. In the event of a constructive
discharge following a change in control of TRCH or a termination for any
reason other than material cause, each of these executive officers will be
entitled to a lump sum payment equal to his then-current base salary. Any
additional compensation payable to these executive officers upon a change in
control would not be reduced by tax obligations possibly imposed by sections
280G or 4999 of the Internal Revenue Code of 1986.
On March 1, 1998 we entered into an employment agreement with John J.
McDonough. The agreement continues until either party terminates the
agreement. Mr. McDonough's employment with the Company can be terminated by
either the Company or Mr. McDonough with or without cause at any time. Mr.
McDonough's base salary will be subject to annual increases consistent with
the consumer price index for the most proximate
47
<PAGE>
geographic area in which Mr. McDonough is employed. Mr. McDonough will also be
entitled to receive a bonus of up to 50% of his base salary each year. Fifty
percent of this bonus will be based upon our achievement of earnings per share
targets and 50% will be granted at the discretion of our compensation
committee. In the event of discharge for any reason other than material cause,
disability or death, Mr. McDonough will be entitled to a lump sum payment
equal to one-half his then-current base salary and any bonus provided for
under his employment agreement.
In September 1999 we implemented a key employee retention program approved
by our board of directors. Messrs. Cosgrove, McDonough, and Dr. Lindenfeld
were selected to participate in this program. The program guaranteed each
executive a stay bonus, $100,000 for Mr. Cosgrove, $75,000 for Dr. Lindenfeld,
and $50,000 for Mr. McDonough, if he continued his employment with us through
January 1, 2000. The program also guaranteed payment of 50% of each
executive's target bonus amount for 1999, if he continued his employment with
us through March 1, 2000. In order to be eligible to participate in this plan,
each key employee was required to relinquish voluntarily his or her stock
options with an exercise price in excess of $30.00 per share, if any. Messrs
Cosgrove, McDonough, and Dr. Lindenfeld received these bonus amounts in 2000.
George B. DeHuff resigned as our President and Chief Operating Officer
effective March 15, 2000. Mr. DeHuff will receive, as severance, twelve months
of base salary, payable in bi-weekly installments. This severance will be
offset by Mr. DeHuff's earnings from other employment or consulting services
during this twelve-month period.
On May 17, 1999 we had entered into an employment agreement with Mr. DeHuff.
The employment agreement provided for an initial term through May 16, 2001, to
continue thereafter with no further action by either party for successive one
year terms. Mr. DeHuff's annual compensation was subject to annual increases
consistent with the California consumer price index. Mr. DeHuff was entitled
to receive a bonus of up to 100% of his base salary each year. Fifty percent
of this bonus was to be based upon our achievement of earnings per share
targets and 50% was to be granted at the discretion of the compensation
committee. In the first year of Mr. DeHuff's employment agreement he was
guaranteed a minimum bonus of $155,000 which was paid on March 1, 2000. In the
event of a constructive discharge following a change in control of TRCH or a
termination for any reason other than material cause, Mr. DeHuff was entitled
to a lump sum payment equal to his then-current base salary.
Victor M.G. Chaltiel resigned as our Chairman of the Board and Chief
Executive Officer effective August 4, 1999. On October 6, 1999, we entered
into a severance agreement with Mr. Chaltiel. The severance agreement provided
for a separation payment to Mr. Chaltiel of $766,580, which was paid to Mr.
Chaltiel on October 26, 1999, and the payment of $9,000 to Mr. Chaltiel to
reimburse him for his legal fees incurred in connection with the negotiation
of the severance agreement and related matters. Also, Mr. Chaltiel's option to
purchase up to 166,667 shares of common stock was amended so that the unvested
portion of the option, covering 55,555 shares, became fully vested as of
August 4, 1999, and to provide that the option will remain exercisable until
August 4, 2002.
Mr. Chaltiel had entered into an employment agreement with us on August 14,
1994, pursuant to which he was employed for an initial term of three years,
with one year automatic extensions at the end of each year. We could terminate
this agreement at any time, subject, among other things, to severance payments
as provided in the employment agreement. His base salary paid during 1998 was
$315,026 and was subject to annual review by our board for possible increases,
with a minimum increase tied to the California consumer price index. Until May
31, 1999, Mr. Chaltiel was entitled to a yearly bonus of up to 150% of his
base salary based upon our achieving certain EBITDA performance targets. He
also could be awarded an additional bonus at the discretion of our board of
directors if EBITDA targets were exceeded by more than 15%. After May 31,
1999, Mr. Chaltiel would be awarded bonuses in a manner as determined in the
sole discretion of the board, on a basis reasonably consistent with past
bonuses for similar performance.
On March 2, 1998 we amended Mr. Chaltiel's employment agreement to ensure
that any additional compensation payable to Mr. Chaltiel upon a change in
control of TRCH would not be reduced by tax obligations possibly imposed by
sections 280G or 4999 of the Internal Revenue Code of 1986.
48
<PAGE>
Pursuant to Mr. Chaltiel's employment agreement and our 1994 Equity
Compensation Plan, Mr. Chaltiel purchased 1,855,557 shares of common stock at
$0.90 per share during the fiscal year ended May 31, 1995. Mr. Chaltiel paid
$835,000 of the purchase price in cash, with the remainder evidenced by a
four-year promissory note bearing interest at the lesser of the prime rate or
8% per annum. This note was secured by a pledge of shares of our stock owned
by Mr. Chaltiel. In July 1995, the board approved a one-year deferral of all
scheduled principal and accrued interest payments under all outstanding
promissory notes from our officers, including this four-year promissory note.
Mr. Chaltiel also was granted options pursuant to our 1994 Equity Compensation
Plan representing a total of approximately 1,477,778 shares of common stock.
The options had an exercise price of $0.90. By their terms, half of the
options were to vest over a four-year period and the other half were to vest
on the ninth anniversary of the date of grant, subject to accelerated vesting
in the event that we satisfied EBITDA performance targets. In September 1995
our board and our shareholders approved an agreement with Mr. Chaltiel
pursuant to which the vesting schedule for these options was accelerated so
that all of Mr. Chaltiel's outstanding options became vested and exercisable
immediately. In connection with this agreement, Mr. Chaltiel agreed to
exercise at that time all of his options to purchase 1,477,778 shares of
common stock. Mr. Chaltiel paid the exercise price pursuant to a $1,330,000
four-year promissory note bearing interest at the lesser of the prime rate or
8%. This note was subject to prepayment, in part or in full, to the extent of
the receipt of any proceeds received by Mr. Chaltiel upon disposition of such
shares of common stock, and Mr. Chaltiel pledged these shares as collateral
for repayment of this note. We also agreed to advance Mr. Chaltiel funds of up
to $1,521,520 relating to Mr. Chaltiel's tax liability in connection with the
exercise of such options. The amount advanced was evidenced by two additional
promissory notes executed by Mr. Chaltiel. The first note for $1,348,447 was
executed concurrently with Mr. Chaltiel's exercise of his options. The second
note for $173,073 was executed in April 1996. Simultaneously with the
execution of the agreement, we entered into a Release and Pledge Agreement
with Mr. Chaltiel whereby we released 1,855,555 shares of common stock owned
by Mr. Chaltiel from the previous pledge agreement and substituted the newly
acquired 1,477,778 shares of common stock. On March 31, 1998, Mr. Chaltiel
repaid his outstanding loan balances with us and we released those shares held
as collateral under the Release and Pledge Agreement.
John E. King resigned as our Senior Vice President, Finance and Chief
Financial Officer effective July 16, 1999. On October 18, 1999 we entered into
a severance agreement with Mr. King. The severance agreement provided for a
severance payment to Mr. King of $180,000, to be paid on January 3, 2000, and
for Mr. King to provide services to us on the following terms. From July 16,
1999 through August 18, 1999, Mr. King provided services to us on a full-time,
exclusive basis and received compensation for his services at the rate of
$5,000 per week. From September 13, 1999 until December 31, 1999 Mr. King
continued to provide services to us on an as-needed, non-exclusive basis.
During this period, Mr. King was compensated at the rate of $1,000 per day for
services rendered. We were also required to reimburse Mr. King for his
reasonable out-of-pocket expenses incurred in providing these services,
subject to our Chief Executive Officer's approval. Mr. King also remains
obligated under his employment agreement with us to provide up to 120 hours
per year of additional services until July 16, 2001. Furthermore, Mr. King's
options to purchase our common stock were amended: to allow them to continue
to vest for one year following his resignation as if Mr. King was still our
employee during that period; to extend until July 16, 2000 the exercise period
of his options that were already vested on July 19, 1999; to allow him to
exercise any portion of his options that vests after his resignation as if he
had been terminated for cause effective on the date on which the options vest,
and to accelerate the vesting of his options that would otherwise vest before
July 16, 2000 in the event of a change in control of TRCH before July 16,
2000.
In connection with the termination of his employment effective August 9,
1999, Leonard W. Frie received a lump sum payment of $197,423, the amount of
his then-current base annual salary. Mr. Frie was entitled to receive this
payment under his employment agreement.
The terms of the employment agreements we had with Messrs. King and Frie
were similar to our employment agreements with Mr. Cosgrove and Dr.
Lindenfeld, which are described above.
Each of Messrs. Thiry, Cosgrove, DeHuff, Frie, King, McDonough and Dr.
Lindenfeld also have been granted options pursuant to our equity compensation
plans. These options generally vest at a rate of 25% per year over four years.
The exercise prices of the options range from $0.90 per share to $32.1875 per
share.
49
<PAGE>
Options granted to our executive officers provide for the immediate vesting
of all of their stock options at any time following the sale of 50% or more of
our stock or assets, or upon a merger, consolidation or reorganization in
which we do not survive, if their employment is terminated for any reason.
Compensation of directors
Directors who are our employees or officers do not receive compensation for
service on our board of directors or any committee of the board. Effective in
December 1999 each of our directors who is not one of our officers or
employees is entitled to receive $30,000 per year and additional compensation
of $2,500 for each board meeting attended in person and $1,000 for each
meeting held via telephone conference. For committee meetings, additional
compensation is paid as follows: $1,500 if attended in person, and $1,000 per
telephone meeting for committee members; $2,500 if attended in person, and
$2,500 per telephone meeting for committee chairpersons. Committee
chairpersons also receive an additional $10,000 per year. Prior to December
1999, each of our directors who was not one of our officers or employees was
entitled to receive $60,000 per year and $2,500 per meeting attended,
including telephone conference meetings. We also reimburse our directors for
their reasonable out-of-pocket expenses in connection with their travel to and
attendance at the meetings of the board.
In addition, each director who is not one of our officers or employees is
entitled to receive options to purchase 25,000 shares of our common stock each
year they are elected to serve on our board. These options have an exercise
price equal to the fair market value of our common stock on the date of grant
and generally vest over four years at an annual rate of 25% beginning on the
first anniversary of the date of grant, with acceleration of vesting upon a
change in control of TRCH. All options granted prior to December 1999,
however, were accelerated and became fully vested upon the hiring of Mr. Thiry
as our new Chief Executive Officer in October 1999.
In addition to these standard arrangements, in August 1999 Mr. Andersons,
Regina E. Herzlinger, who is no longer a director, and Dr. Massry each
received additional options to purchase 25,000 shares of our common stock at
an exercise price of $8.50 per share, the fair market value of our common
stock on the date of grant. Ms. Herzlinger's and Dr. Massry's options fully
vested upon the hiring of Mr. Thiry as our new Chief Executive Officer. Mr.
Andersons' options vested over four years at an annual rate of 25% beginning
on the first anniversary of the date of grant, but were accelerated and became
fully vested when we hired a new Chief Financial Officer in February 2000.
Also, in October 1999 Ms. Herzlinger received an additional option to purchase
25,000 shares at an exercise price of $6.06 per share, the fair market value
of our common stock on the date of grant. This option was fully vested on the
date of grant.
Each member of the board of directors is also required to purchase at least
$50,000 of our stock in the open market by December 17, 2000.
For additional information regarding amounts received by Mr. Andersons and
Dr. Massry, in addition to compensation received as a board member, see "Item
13. Certain Relationships and Related Transactions."
Compensation committee interlocks and insider participation
None of our executive officers or directors serves as a member of the board
of directors or compensation committee of any other entity which has one or
more executive officers serving as a member of our board. During 1999, Messrs.
Thiry, Chaltiel and Andersons and Dr. Massry were our officers, employees or
consultants. Messrs. Andersons, Fontaine, Grauer, and Larkin and Ms.
Herzlinger, who is no longer a director, each served as a member of the
compensation committee of our board of directors during 1999.
50
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding the ownership of our
common stock as of March 15, 2000 by (a) all those persons known by us to own
beneficially more than 5% of our common stock, (b) each of our directors and
executive officers, (c) all directors and executive officers as a group and
(d) each of the executive officers named in the "Summary Compensation Table"
included in "Item 11. Executive Compensation." Except as otherwise noted under
"Item 13. Certain Relationships and Related Transactions," we know of no
agreements among our shareholders which relate to voting or investment power
over our common stock or any arrangement the operation of which may at a
subsequent date result in a change of control of us.
<TABLE>
<CAPTION>
Number of shares Percentage of shares
Name of beneficial owner beneficially owned beneficially owned
------------------------ ------------------ --------------------
<S> <C> <C>
Massachusetts Financial Services
Company(1) ....................... 10,478,067 12.9%
500 Boylston Street
Boston, Massachusetts 02116
Maverick Capital Ltd(2)............ 5,528,200 6.8%
300 Crescent Court, Suite 1850
Dallas, Texas 75201
Ardsley Advisory Partners and
Philip J. Hempleman(3)............ 4,752,500 5.8%
646 Steamboat Road
Greenwich, Connecticut 06836
Kent J. Thiry(4)................... 12,500 *
George B. DeHuff(5) ............... 150,000 *
Barry C. Cosgrove(6)............... 256,426 *
Stan M. Lindenfeld(7) ............. 269,971 *
John J. McDonough(8)............... 46,189 *
Maris Andersons(9) ................ 134,055 *
Shaul G. Massry(10)................ 124,862 *
Peter T. Grauer(11)................ 72,500 *
Richard B. Fontaine................ -- --
C. Raymond Larkin Jr............... -- --
All directors and executive
officers as a group
(12 persons)(12).................. 1,146,762 1.4%
Victor M.G. Chaltiel(13)........... 1,200,857 1.5%
Leonard W. Frie(14)................ 287,488 *
John E. King(15) .................. 260,495 *
</TABLE>
- --------
*Amount represents less than 1% of our common stock.
(1) Based upon information contained in Amendment No. 1 to Schedule 13G filed
with the SEC on February 11, 2000. The number of shares beneficially
owned includes 60,957 shares which may be acquired upon the conversion of
our convertible notes.
(2) Based upon information contained in a Schedule 13G filed with the SEC on
February 23, 2000.
(3) Based upon information contained in a Schedule 13G filed with the SEC on
February 14, 2000. By virtue of his position as managing partner of
Ardsley Advisory Partners, Mr. Hempleman may be deemed to have the shared
power to vote or dispose of these shares held by the discretionary
accounts managed by Ardsley and Mr. Hempleman. Therefore, Mr. Hempleman
may be deemed the beneficial owner of these shares.
(4) All shares are held in a family trust.
(5) Includes 150,000 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000.
(6) Includes 209,832 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000.
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<PAGE>
(7) Includes 251,498 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000.
(8) Includes 45,000 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000.
(9) Includes 121,417 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000.
(10) Includes 124,862 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000.
(11) Includes 72,500 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000.
(12) All directors and executive officers in office on March 15, 2000.
Includes 930,109 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of,
March 15, 2000.
(13) Includes 166,667 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000. Based on information available to us at the time of the
employee's resignation.
(14) Includes 141,247 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000. Based on information available to us at the time of the
employee's resignation.
(15) Includes 243,165 shares issuable upon the exercise of options which are
exercisable as of, or will become exercisable within 60 days of, March
15, 2000. Based on information available to us at the time of the
employee's resignation.
Item 13. Certain Relationships and Related Transactions.
Mr. Chaltiel has received loans from us as described above under "Employment
Agreements." Certain of our other officers and employees also have received
loans from us in connection with the purchase of shares of our common stock.
All of the loans have similar terms. The loans bear interest at the lower of
8% or the prime rate, and are secured by all of the borrower's interests in
our common stock, including all vested stock options. When made, the loans had
a four-year term and one quarter of the original principal amount thereof plus
all accrued interest thereon had to be paid annually, subject to the
limitation that the borrower was not required to make any payment that
exceeded 50% of the after-tax proceeds of such borrower's bonus from us, based
on maximum tax rates then in effect. To date, our board has approved deferrals
of all scheduled principal and accrued interest payments under all such loans.
No other terms of the loans have been changed.
As of March 2000, Barry C. Cosgrove had a loan outstanding from us with a
principal amount of $50,000.
Maris Andersons, one of our directors, serves as a consultant to us. In
addition to receiving compensation as a member of the board, Mr. Andersons has
been granted options, vesting over four years, to purchase an aggregate of
76,972 shares of our common stock in consideration for these services. As of
March 15, 2000, Mr. Andersons had exercised 55,555 of these options leaving a
balance of 21,417 options to purchase shares of our common stock. Mr.
Andersons is also receiving consulting fees from us of $25,000 per month in
consideration of the substantial time and energy required of him in overseeing
our financial operations and his role in negotiations with our senior lenders.
These additional fees commenced in September 1999 and continued until we hired
a new chief financial officer in February 2000.
Shaul G. Massry, one of our directors, serves as a consultant to us. In
addition to receiving compensation as a member of the board, Dr. Massry also
receives $120,000 per year, $70,000 of which is an advance against the
commissions described below, and has been granted options, vesting over four
years, to purchase an aggregate
52
<PAGE>
of 87,222 shares of our common stock in consideration for these services. As
of March 15, 2000, Dr. Massry had exercised 11,110 of these options leaving a
balance of 76,112 options to purchase shares of our common stock. Also, for
acquisitions that he introduces to us and materially assists in closing the
transaction, Dr. Massry receives a commission of 1.0% to 1.5% of the purchase
price, depending on the amount of the purchase price. The commission on any
single transaction cannot exceed $100,000.
DLJ and certain of its affiliates from time to time perform various
investment banking and other services for us, for which we pay customary
consideration. In addition, affiliates of DLJMBP are included in the syndicate
of lenders under our credit facilities. An affiliate of DLJMBP, Peter T.
Grauer, serves on our board.
We have entered into indemnity agreements with each of our directors and all
of our officers, which agreements require us, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
service as our directors, officers, employees or agents, other than
liabilities arising from conduct in bad faith or which is knowingly fraudulent
or deliberately dishonest, and, under certain circumstances, to advance their
expenses incurred as a result of proceedings brought against them.
53
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Report:
(1) Index to Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-1
Consolidated Balance Sheets as of December 31, 1998 and December 31,
1999.................................................................... F-2
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 1997, December 31, 1998 and December 31, 1999........ F-3
Consolidated Statements of Cash Flows for the years ended December 31,
1997, December 31, 1998 and December 31, 1999........................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, December 31, 1998 and December 31, 1999.............. F-5
Notes to Consolidated Financial Statements............................... F-6
(2) Index to Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule........ S-1
Schedule II--Valuation and Qualifying Accounts........................... S-2
</TABLE>
(3) Exhibits:
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of TRCH, dated
December 4, 1995.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of TRCH, dated
February 26, 1998.(2)
3.3 Bylaws of TRCH, dated October 6, 1995.(3)
4.1 Shareholders Agreement, dated August 11, 1994, between DLJMBP and
affiliates, NME Properties, Continental Bank, as voting trustee, and
TRCH.(4)
4.2 Agreement and Amendment, dated as of June 30, 1995, between DLJMBP and
affiliates, Tenet, TRCH, Victor M.G. Chaltiel, the Putnam Purchasers,
the Crescent Purchasers and the Harvard Purchasers, relating to the
Shareholders Agreement dated as of August 11, 1994.(4)
4.3 Indenture, dated June 12, 1996 by RTC to PNC Bank including form of RTC
Note.(5)
4.4 First Supplemental Indenture, dated as of February 27, 1998, among RTC,
TRCH and PNC Bank under the 1996 Indenture.(2)
4.5 Second Supplemental Indenture, dated as of March 31, 1998, among RTC,
TRCH and PNC Bank under the 1996 Indenture.(2)
4.6 Indenture, dated as of November 18, 1998, between TRCH and United
States Trust Company of New York, as trustee, and Form of Note.(6)
4.7 Registration Rights Agreement, dated as of November 18, 1998, between
TRCH and DLJ, BNY Capital Markets, Inc., Credit Suisse First Boston
Corporation and Warburg Dillon Read LLC, as the initial purchasers.(6)
4.8 Purchase Agreement, dated as of November 12, 1998, between TRCH and the
initial purchasers.(6)
10.1 Noncompetition Agreement, dated August 11, 1994, between TRCH and
Tenet.(4)
10.2 Employment Agreement, dated as of August 11, 1994, by and between TRCH
and Victor M.G. Chaltiel (with forms of Promissory Note and Pledge and
Stock Subscription Agreement attached as exhibits thereto).(4)*
</TABLE>
54
<PAGE>
<TABLE>
<C> <S>
10.3 Amendment to Mr. Chaltiel's employment agreement, dated as of August
11, 1994.(4)*
10.4 Second Amendment to Mr. Chaltiel's employment agreement, dated as of
March 2, 1998.(7)*
10.5 Employment Agreement, dated as of March 2, 1998, by and between TRCH
and Barry C. Cosgrove.(8)*
10.6 Employment Agreement, dated as of March 2, 1998, by and between TRCH
and Leonard W. Frie.(8)*
10.7 Employment Agreement, dated as of March 2, 1998, by and between TRCH
and John E. King.(8)*
10.8 Employment Agreement, dated as of March 2, 1998, by and between TRCH
and Stan M. Lindenfeld.(8)*
10.9 Amendment to Dr. Lindenfeld's employment agreement, dated September 1,
1998.(7)*
10.10 Employment Agreement, dated as of May 6, 1999, by and between TRCH and
George DeHuff.(9)*
10.11 Employment Agreement, dated as of October 18, 1999, by and between
TRCH and Kent J. Thiry.(10)*
10.12 Employment Agreement, dated as of March 1, 1998, by and between TRCH
and John J. McDonough.[X]*
10.13 Agreement, dated as of October 6, 1999, by and between TRCH and Victor
M.G. Chaltiel.(10)*
10.14 Agreement, dated as of October 18, 1999, by and between TRCH and John
E. King.(10)*
10.15 Consulting Agreement, dated as of October 1, 1998, by and between
Total Renal Care, Inc. and Shaul G. Massry, M.D.(10)*
10.16 Second Amended and Restated 1994 Equity Compensation Plan.[X]*
10.17 Form of Stock Subscription Agreement relating to the 1994 Equity
Compensation Plan.(4)*
10.18 Form of Promissory Note and Pledge Agreement relating to the 1994
Equity Compensation Plan.(4)*
10.19 Form of Purchased Shares Award Agreement relating to the 1994 Equity
Compensation Plan.(4)*
10.20 Form of Nonqualified Stock Option relating to the 1994 Equity
Compensation Plan.(4)*
10.21 First Amended and Restated 1995 Equity Compensation Plan.[X]*
10.22 Employee Stock Purchase Plan, 1999 Amendment and Restatement.[X]*
10.23 Option Exercise and Bonus Agreement, dated as of September 18, 1995
between TRCH and Victor M.G. Chaltiel.(3)*
10.24 First Amended and Restated 1997 Equity Compensation Plan.[X]*
10.25 First Amended and Restated Special Purpose Option Plan.[X]*
10.26 1999 Equity Compensation Plan.(11)*
10.27 Amended and Restated Revolving Credit Agreement, dated as of April 30,
1998, by and among TRCH, the lenders party thereto, DLJ Capital
Funding, Inc., as Syndication Agent, First Union National Bank, as
Documentation Agent, and The Bank of New York, as Administrative
Agent.(12)
10.28 Amendment No. 1 and Consent No. 1, dated as of August 5, 1998, to the
Revolving Credit Agreement.(7)
10.29 Amendment No. 2, dated as of November 12, 1998, to the Revolving
Credit Agreement.(7)
10.30 Amendment No. 3 and Waiver, dated as of August 9, 1999, to and under
the Revolving Credit Agreement.(9)
</TABLE>
55
<PAGE>
<TABLE>
<C> <S>
10.31 Amendment No. 4 and Waiver, dated as of November 8, 1999, to and under
the Revolving Credit Agreement.(10)
10.32 Amendment No. 5 and Consent, dated as of February 22, 2000, to and
under the Revolving Credit Agreement.[X]
10.33 Amended and Restated Term Loan Agreement, dated as of April 30, 1998,
by and among TRCH, the lenders party thereto, DLJ Capital Funding,
Inc., as Syndication Agent, First Union National Bank, as
Documentation Agent, and The Bank of New York, as Administrative
Agent.(12)
10.34 First Amendment, dated as of August 5, 1998, to the Term Loan
Agreement.(13)
10.35 Limited Waiver and Second Amendment, dated as of August 9, 1999, to
the Term Loan Agreement.(9)
10.36 Limited Waiver and Third Amendment, dated as of November 8, 1999, to
the Term Loan Agreement.(10)
10.37 Subsidiary Guaranty dated as of October 24, 1997 by Total Renal Care,
Inc., TRC West, Inc. and Total Renal Care Acquisition Corp. in favor
of and for the benefit of The Bank of New York, as Collateral Agent,
the lenders to the Revolving Credit Agreement, the lenders to the
Term Loan Agreement, the Term Agent (as defined therein), the
Acknowledging Interest Rate Exchangers (as defined therein) and the
Acknowledging Currency Exchangers (as defined therein).(14)
10.38 Borrower Pledge Agreement dated as of October 24, 1997 and entered
into by and between the Company, and The Bank of New York, as
Collateral Agent, the lenders to the Revolving Credit Agreement, the
lenders to the Term Loan Agreement, the Term Agent (as defined
therein), the Acknowledging Interest Rate Exchangers (as defined
therein) and the Acknowledging Currency Exchangers (as defined
therein).(14)
10.39 Amendment to Borrower Pledge Agreement, dated February 27, 1998,
executed by TRCH in favor of The Bank of New York, as Collateral
Agent.(7)
10.40 Form of Subsidiary Pledge Agreement dated as of October 24, 1997 by
Total Renal Care, Inc., TRC West, Inc. and Total Renal Care
Acquisition Corp., and The Bank of New York, as Collateral Agent, the
lenders to the Revolving Credit Agreement, the lenders to the Term
Loan Agreement, the Term Agent (as defined therein), the
Acknowledging Interest Rate Exchangers (as defined therein) and the
Acknowledging Currency Exchangers (as defined therein).(14)
10.41 Subsidiary Pledge Agreement, dated as of February 27, 1998, by RTC and
The Bank of New York, as Collateral Agent, the lenders to the
Revolving Credit Agreement, the lenders to the Term Loan Agreement,
the Term Agent (as defined therein), the Acknowledging Interest Rate
Exchangers (as defined therein) and the Acknowledging Currency
Exchangers (as defined therein).(7)
10.42 Form of First Amendment to Borrower/Subsidiary Pledge Agreement, dated
April 30, 1998, by and among TRCH, RTC, TRC and The Bank of New York,
as Collateral Agent.(12)
10.43 Form of Acknowledgement and Confirmation, dated April 30, 1998, by
TRCH, RTC, TRC West, Inc., Total Renal Care, Inc., Total Renal Care
Acquisition Corp., Renal Treatment Centers--Mid-Atlantic, Inc., Renal
Treatment Centers--Northeast, Inc., Renal Treatment Centers--
California, Inc., Renal Treatment Centers--West, Inc., and Renal
Treatment Centers--Southeast, Inc. for the benefit of The Bank of New
York, as Collateral Agent and the lenders party to the Term Loan
Agreement or the Revolving Credit Agreement.(12)
10.44 First Amendment to the Subsidiary Guaranty dated February 17, 1998.(2)
10.45 Guaranty, entered into as of March 31, 1998, by TRCH in favor of and
for the benefit of PNC Bank.(2)
12.1 Statement re Computation of Ratios of Earnings to Fixed Charges.[X]
21.1 List of our subsidiaries.[X]
</TABLE>
56
<PAGE>
<TABLE>
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP.[X]
24.1 Powers of Attorney with respect to TRCH (included on page II-1).
27.1 Financial Data Schedule.[X]
</TABLE>
- --------
[X] Included in this filing.
* Management contract or executive compensation plan or arrangement.
(1) Filed on March 18, 1996 as an exhibit to our Transitional Report on Form
10-K for the transition period from June 1, 1995 to December 31, 1995.
(2) Filed on March 31, 1998 as an exhibit to our Form 10-K for the year ended
December 31, 1997.
(3) Filed on October 24, 1995 as an exhibit to Amendment No. 2 to our
Registration Statement on Form S-1 (Registration Statement No. 33-97618).
(4) Filed on August 29, 1995 as an exhibit to our Form 10-K for the year
ended May 31, 1995.
(5) Filed as an exhibit to RTC's Form 10-Q for the quarter ended June 30,
1996.
(6) Filed on December 18, 1998 as an exhibit to our Registration Statement on
Form S-3 (Registration Statement No. 333-69227).
(7) Filed on March 31, 1999 as an exhibit to our Form 10-K for the year ended
December 31, 1998.
(8) Filed as an exhibit to our Form 10-Q for the quarter ended September 30,
1998.
(9) Filed on August 16, 1999 as an exhibit to our Form 10-Q for the quarter
ended June 30, 1999.
(10) Filed on November 15, 1999 as an exhibit to our Form 10-Q for the quarter
ended September 30, 1999.
(11) Filed on February 18, 2000 as an exhibit to our Registration Statement on
Form S-8 (Registration Statement No. 333-30736).
(12) Filed on May 18, 1998 as an exhibit to Amendment No. 1 to our annual
report for the year ended December 31, 1997 on Form 10-K/A.
(13) Filed on October 8, 1999 as an exhibit to our Form 10-K/A (Amendment No.
1) for the year ended December 31, 1998.
(14) Filed on December 19, 1997 as an exhibit to our Current Report on Form 8-
K.
57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Total Renal Care Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of shareholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Total Renal Care Holdings, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10, the Company
is not in compliance with certain debt covenants which raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
PricewaterhouseCoopers LLP
Seattle, Washington
March 22, 2000
F-1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 107,981 $ 41,487
Accounts receivable, less allowance of $67,315 and
$61,848............................................... 390,329 416,822
Inventories............................................ 32,916 23,470
Other current assets................................... 32,082 45,721
Income tax receivable.................................. 45,645
Deferred income taxes.................................. 45,795 39,014
---------- ----------
Total current assets............................... 654,748 566,514
Property and equipment, net............................ 285,449 233,337
Intangible assets, net................................. 1,069,672 1,073,500
Investments in third-party dialysis businesses......... 35,552 31,360
Deferred taxes......................................... 6,553
Other long-term assets................................. 4,744 6,908
---------- ----------
$2,056,718 $1,911,619
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable....................................... $ 121,561 $ 45,710
Accrued compensation and benefits...................... 47,647 34,778
Other liabilities...................................... 77,141 69,432
Current portion of long-term debt...................... 26,585 21,847
Income taxes payable................................... 6,683
Long-term debt potentially callable under covenant
provisions............................................ 1,425,610
---------- ----------
Total current liabilities.......................... 1,698,544 178,450
Long-term debt, less $1,425,610 and $0 potentially
callable classified as current........................ 5,696 1,225,781
Deferred income taxes.................................. 8,212
Other long-term liabilities............................ 3,497 1,890
Minority interests..................................... 22,577 23,422
Commitments and contingencies (Notes 10, 11, 13 and 15)
Shareholders' equity
Preferred stock ($0.001 par value; 5,000,000 shares
authorized; none issued or outstanding).............
Common stock ($0.001 par value, 195,000,000 shares
authorized; 81,193,011 and 81,029,560 shares issued
and outstanding).................................... 81 81
Additional paid-in capital........................... 426,025 421,675
Notes receivable from shareholders .................. (192) (356)
Accumulated other comprehensive loss................. (4,718)
Retained earnings (deficit).......................... (94,792) 52,464
---------- ----------
Total shareholders' equity......................... 326,404 473,864
---------- ----------
$2,056,718 $1,911,619
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Net operating revenues........................ $1,445,351 $1,203,738 $758,403
Operating expenses
Dialysis and lab facilities................. 993,239 779,740 514,372
General and administrative.................. 130,555 75,686 49,934
Depreciation and amortization............... 112,481 90,353 53,611
Provision for uncollectible accounts........ 133,253 44,858 28,899
Impairment and valuation losses............. 139,805
Merger related costs........................ 78,188
---------- ---------- --------
Total operating expenses................... 1,509,333 1,068,825 646,816
---------- ---------- --------
Operating income (loss)....................... (63,982) 134,913 111,587
Other income (loss)........................... (1,895) 4,894 3,175
Debt expense.................................. 110,797 84,003 29,082
Minority interests in income of consolidated
subsidiaries................................. (5,152) (7,163) (4,502)
---------- ---------- --------
Income (loss) before income taxes,
extraordinary item and
change in accounting principle............. (181,826) 48,641 81,178
Income tax expense (benefit).................. (34,570) 38,449 35,654
---------- ---------- --------
Income (loss) before extraordinary item and
change in accounting principle............. (147,256) 10,192 45,524
Extraordinary loss related to early
extinguishment of debt, net of tax of
$7,668....................................... (12,744)
Cumulative effect of change in accounting
principle, net of tax of $4,300.............. (6,896)
---------- ---------- --------
Net income (loss)........................... $ (147,256) $ (9,448) $ 45,524
========== ========== ========
Earnings (loss) per common share:
Income (loss) before extraordinary item and
change in accounting principle............. $ (1.81) $ 0.12 $ 0.59
Extraordinary loss, net of tax.............. (0.16)
Cumulative effect of change in accounting
principle, net of tax...................... (0.08)
---------- ---------- --------
Net income (loss)........................... $ (1.81) $ (0.12) $ 0.59
========== ========== ========
Weighted average number of common shares
outstanding.................................. 81,152 80,143 77,524
========== ========== ========
Earnings (loss) per common share--assuming
dilution:
Income (loss) before extraordinary item and
change in accounting principle............. $ (1.81) $ 0.12 $ 0.57
Extraordinary loss, net of tax.............. (0.16)
Cumulative effect of change in accounting
principle, net of tax...................... (0.08)
---------- ---------- --------
Net income (loss)........................... $ (1.81) $ (0.12) $ 0.57
========== ========== ========
Weighted average number of common shares and
equivalents outstanding--assuming dilution... 81,152 81,701 79,975
========== ========== ========
STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)........................... $ (147,256) $ (9,448) $ 45,524
Other comprehesive income:
Foreign currency translation............... (4,718)
---------- ---------- --------
Comprehensive income (loss)................. $ (151,974) $ (9,448) $ 45,524
========== ========== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1999 1998 1997
---------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)........................ $ (147,256) $ (9,448) $ 45,524
Non-cash items included in net income
(loss):
Depreciation and amortization.......... 112,481 90,353 53,611
Impairment and valuation losses........ 139,805
Deferred income taxes.................. (21,546) (17,577) (9,689)
Stock option expense and tax benefits.. 2,280 33,912 8,994
Equity investment losses (income)...... 140 (157) (40)
Minority interests in income of
consolidated subsidiaries............. 5,152 7,163 4,502
Extraordinary loss..................... 20,412
Cumulative effect of change in
accounting principle.................. 11,196
---------- ----------- ---------
91,056 135,854 102,902
Changes in operating assets and
liabilities, net of effect of
acquisitions:
Accounts receivable.................... 28,486 (155,393) (80,912)
Inventories............................ (8,742) (7,152) (1,843)
Other current assets................... 14,171 (30,104) (143)
Other long-term assets................. 5,503 8,414 (9,166)
Accounts payable....................... 72,694 10,131 (992)
Accrued compensation and benefits...... 11,541 8,933 8,539
Other liabilities...................... 5,200 36,580 2,791
Income taxes........................... (52,464) 11,004 2,329
Other long-term liabilities............ 1,498 (7,725) 7,423
---------- ----------- ---------
Net cash provided by operating
activities.......................... 168,943 10,542 30,928
---------- ----------- ---------
Cash flows from investing activities
Additions of property and equipment,
net..................................... (106,657) (82,820) (61,592)
Acquisitions, net........................ (154,226) (338,164) (455,090)
Intangible assets........................ (11,167) (30,810) (38,939)
Investments in affiliates, net........... (25,380) (16,785) 25,765
---------- ----------- ---------
Net cash used in investing
activities.......................... (297,430) (468,579) (529,856)
---------- ----------- ---------
Cash flows from financing activities
Proceeds from bank credit facilities..... 2,337,790 1,567,225 505,000
Payments on bank credit facilities....... (2,127,590) (1,407,650)
Proceeds from convertible notes.......... 345,000
Proceeds from other long-term
borrowings.............................. 188 3,395 4,511
Payments on other long-term obligations.. (8,683) (35,675) (26,269)
Net proceeds from issuance of common
stock................................... 2,046 24,157 3,827
Distributions to minority interests...... (4,052) (3,628) (2,768)
---------- ----------- ---------
Net cash provided by financing
activities.......................... 199,699 492,824 484,301
Effect of exchange rate changes on cash.... (4,718)
---------- ----------- ---------
Net increase (decrease) in cash ........... 66,494 34,787 (14,627)
Cash and cash equivalents at beginning of
year ..................................... 41,487 6,700 21,327
---------- ----------- ---------
Cash and cash equivalents at end of year... $ 107,981 $ 41,487 $ 6,700
========== =========== =========
Supplemental cash flow information:
(Note 18)
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Notes Accumulated
Common stock Additional receivable other Retained
------------- paid-in from comprehensive earnings
Shares Amount capital shareholders income (deficit) Total
------ ------ ---------- ------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 76,686 $77 $345,039 $(2,827) $ 16,388 $358,677
Shares issued in
acquisitions........... 18 273 273
Shares issued to
employees and others... 175 1,773 1,773
Options exercised....... 447 2,019 2,019
Shares issued to repay
debt................... 665 1 5,147 5,148
Interest accrued on
notes receivable, net
of payments............ (203) (203)
Income tax benefit
related to stock
options exercised...... 5,453 5,453
Grant of stock options.. 235 235
Issuance of treasury
stock to repay debt.... 1 6 6
Stock option expense.... 3,541 3,541
Net income.............. 45,524 45,524
------ --- -------- ------- ------- --------- --------
Balance at December 31,
1997................... 77,992 78 363,486 (3,030) 61,912 422,446
Shares issued in
acquisitions........... 99 2,796 2,796
Shares issued to
employees and others... 49 1,085 1,085
Options exercised....... 2,890 3 36,396 36,399
Repayment of notes
receivable, net of
interest accrued....... 2,674 2,674
Income tax benefit
related to stock
options exercised...... 14,199 14,199
Grant of stock options.. 128 128
Stock option expense.... 3,585 3,585
Net loss................ (9,448) (9,448)
------ --- -------- ------- ------- --------- --------
Balance at December 31,
1998................... 81,030 81 421,675 (356) 52,464 473,864
Shares issued to
employees and others... 77 1,937 1,937
Options exercised....... 86 109 109
Repayment of notes
receivable, net of
interest accrued....... 164 164
Income tax benefit
related to stock
options exercised...... 375 375
Grant of stock options.. 813 813
Stock option expense.... 1,116 1,116
Foreign currency
translation............ $(4,718) (4,718)
Net loss................ (147,256) (147,256)
------ --- -------- ------- ------- --------- --------
Balance at December 31,
1999................... 81,193 $81 $426,025 $ (192) $(4,718) $ (94,792) $326,404
====== === ======== ======= ======= ========= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Organization and summary of significant accounting policies
Organization
TRCH operates kidney dialysis facilities and provides related medical
services in dialysis facilities in the United States, and also in Argentina,
Puerto Rico, Europe and Guam. These operations represent a single business
segment. See Note 2 regarding the company's plans to divest of its operations
outside of the continental United States.
Basis of presentation
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 10 to the
financial statements, the company is not in compliance with certain formula-
based debt covenants. Because of this non-compliance with covenant formulas,
the majority of the lenders could declare an event of default and an
acceleration of amounts due. The company would be unable to pay the
accelerated amounts becoming immediately payable. The ability of the lenders
to accelerate the loans raises uncertainty about the company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The
company is currently in discussions with the lenders regarding obtaining a
waiver to these covenant violations or restructuring the credit facilities.
Management believes it is unlikely that an event of default will be declared
because of the company's substantial cash balance and because cash flows are
expected to be sufficient to cover operating requirements and scheduled debt
service through 2000. See Note 10.
The long-term debt that could potentially become immediately due and payable
has been classified as a current liability in accordance with requirements of
generally accepted accounting principles.
Our consolidated financial statements include wholly-owned and majority-
owned subsidiaries and partnerships. Other non-consolidated equity investments
are recorded under the equity method of accounting, unless TRCH's equity
interest is less than 20%. For all periods presented, the results of our
operations outside the U.S. are based on the twelve-month period ended
November 30 to accommodate our consolidated reporting time schedules.
Net operating revenues
Revenues are recognized as services are provided to patients. Operating
revenues consist primarily of reimbursement for dialysis and ancillary
services to patients. A usual and customary fee schedule is maintained for our
dialysis treatment and other patient services, however, actual billable
revenue is normally at a discount to the fee schedule. Medicare and Medicaid
programs are billed at pre-determined net realizable rates per treatment that
are established by statute or regulation. Most non-governmental payors,
including contracted managed care payors, are billed at our usual and
customary rates, but a contractual allowance is recorded to reflect the
expected net realizable revenue for services provided. Contractual and bad
debt allowances are established based upon credit risk of specific third-party
payors, contractual terms and collection experience. Net revenue recognition
and allowances for uncollectible billings require the use of estimates, and
any changes in these estimates are reflected as they become known.
Management services are provided to dialysis facilities not owned by the
company. The management fees are typically determined as a percentage of the
facilities' patient revenues and are included in net operating revenues as
earned. Any costs incurred in performing these management services are
recognized in facility operating and general and administrative expenses.
Other Income
Other income includes interest income on cash investments, earnings and
losses of non-consolidated equity investments and gains and losses on the
disposition of assets.
F-6
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Cash and cash equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist principally of drugs and dialysis related supplies.
Property and equipment
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation and amortization expense are
computed using the straight-line method over the useful lives of the assets
estimated as follows: buildings, 20 to 40 years; leaseholds and improvements,
over the shorter of their estimated useful life or the lease term; and
equipment, 3 to 15 years. Upon disposition of an asset, its accumulated
depreciation is deducted from the original cost, and any gain or loss is
reflected in current earnings.
Capitalized interest
Applicable interest charges incurred during significant facility expansion
and construction are capitalized as one of the elements of cost and are
amortized over the assets' useful lives. Interest capitalized was $709, $804
and $685 for 1999, 1998, and 1997, respectively.
Intangible assets
The excess of aggregate purchase price over the fair value of the net assets
of businesses acquired is recorded as goodwill. Goodwill is amortized over 15
to 40 years using the straight-line method. As of December 31, 1999, the
blended average life of our goodwill is 35 years. Business acquisition costs
allocated to patient lists are amortized generally over five to eight years
using the straight-line method. Business acquisition costs allocated to
covenants not to compete are amortized over the terms of the agreements,
typically three to ten years, using the straight-line method. Deferred debt
issuance costs are amortized over the term of the debt using the effective
interest method. After 1997, pre-opening and development costs for new
dialysis facilities are expensed as incurred.
Impairment of long-lived assets
Goodwill, other intangible assets, property and equipment, and investment
balances are reviewed for possible impairment whenever significant events or
changes in circumstances indicate a potential impairment may have occurred, or
when the sum of the expected future undiscounted net cash flows identifiable
to that asset or group of assets is less than book value. With regard to
potential impairment of goodwill balances, cash flows are reviewed for the
specific facility operations compared to the respective goodwill balance that
resulted from the acquisition of that specific group of facilities. Impairment
losses are determined based on net realizable values or projections of net
cash flows.
Income taxes
Federal, state and foreign income taxes are computed at current tax rates,
less tax credits. Taxes are adjusted both for items that do not have tax
consequences and for the cumulative effect of any changes in tax rates from
those previously used to determine deferred tax assets or liabilities. Tax
provisions include amounts that are
F-7
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
currently payable, plus changes in deferred tax assets and liabilities that
arise because of temporary differences between the times when items of income
and expense are recognized for financial reporting and income tax purposes.
Minority interests
Minority interests represent the proportionate equity interest of other
partners and shareholders in consolidated entities which are not wholly-owned.
As of December 31, 1999, these included 17 active partnerships and
corporations.
Stock-based compensation
Stock-based compensation for employees is determined in accordance with APB
No. 25. Stock options do not result in an expense if the exercise price is at
least equal to the market price at the date of grant.
Stock options issued to contract labor, outside consultants and medical
directors under contract are valued using the Black-Scholes model and
attributed to the respective vesting periods using the FIN 28 expense
attribution method, except that for options granted prior to the second
quarter of 1997 (effective date of EITF 96-18) such expense was a fixed
amortization of the grant date fair value.
Earnings per share
Basic earnings per share is calculated by dividing net income before
extraordinary items and the cumulative effect of changes in accounting
principle by the weighted average number of shares of common stock
outstanding. Earnings per common share assuming dilution includes the dilutive
effects of stock options and warrants, using the treasury stock method, in
determining the weighted average number of shares of common stock outstanding.
The convertible debt has been antidilutive and therefore not included in the
diluted EPS calculation.
Interest rate swap agreements
The company has entered into interest rate swap agreements (see Note 10) as
a means of managing interest rate exposure. These agreements are not for
trading or speculative purposes, and have the effect of converting a portion
of our variable rate debt to a fixed rate. Net amounts paid or received are
reflected as adjustments to interest expense. The counterparties to these
agreements are large international financial institutions. These interest rate
swap agreements subject the company to financial risk that will vary during
the life of the agreements in relation to prevailing market interest rates.
The company is also exposed to credit loss in the event of non-performance by
these counterparties. However, the company does not anticipate non-performance
by the other parties, and no material loss would be expected from non-
performance by the counterparties.
Foreign currency translation
The company's principal operations outside of the United States are in
Argentina and are relatively self-contained and integrated within Argentina.
The currency in Argentina, which is considered the functional currency, is
tied to the U.S. dollar. Other operations outside the U.S. are translated at
year-end exchange rates and any unrealized gains and losses are accounted for
as a component of other comprehensive income. Unrealized gains or losses on
debt denominated in foreign currency, which is considered a hedge of the net
investment in foreign operations, are accounted for as a component of other
comprehensive income.
F-8
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Derivative instruments and hedging activities
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, SFAS 133 will be implemented
effective January 1, 2001. SFAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. For fair-
value hedge transactions in which we are hedging changes in an asset's,
liability's, or firm commitment's fair value, changes in the fair value of the
derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. For cash-flow hedge transactions,
which 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.
The company has not yet determined the impact that the adoption of SFAS 133
will have on earnings or the statement of financial position.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on reported earnings.
2. Impairments and valuation losses
Impairment and valuation losses for the year ended December 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
Quarter ended:
-------------------------------- Total
June 30 September 30 December 31 1999
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Operations outside the continental
U.S.............................. $ 82,812 $ 82,812
Facility closures and other
impairments associated with
continental U.S. facilities...... 20,943 20,943
Investments in, and advances to
third-party dialysis related
businesses....................... $15,000 13,200 28,200
Physical inventory of capital
assets........................... 3,305 3,305
Abandoned software acquisition.... 1,600 $ 368 1,968
Termination of corporate jet lease
agreement........................ 2,577 2,577
------- ------ -------- --------
$16,600 $2,945 $120,260 $139,805
======= ====== ======== ========
</TABLE>
F-9
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
During the fourth quarter of 1999, the company announced its intention to
sell its dialysis operations outside the continental United States as an
important first step in reducing its debt burden and allowing management to
focus its attention on the company's core operations in the continental U.S.
Definitive agreements to sell substantially all of the company's principal
operations outside the U.S. were signed in January 2000. More than 80% of the
sales, in terms of proceeds and asset values, are currently expected to close
during the second quarter of 2000 and the remaining sales are expected to
close later in 2000. The sales are subject to required bank and regulatory
approvals.
Gross cash proceeds associated with these sales agreements will be
approximately $160,000, subject to changes in tangible net worth of the
operations being sold until the sales are complete. The impairment charge of
$82,812 associated with the divestiture of the company's non-continental U.S.
operations includes the losses on the sales of the operations to be sold under
the definitive agreements entered into in January 2000, including the costs of
buying out minority interests and the direct transaction costs of completing
the sales. The impairment has been principally recorded as a reduction of
goodwill. Future operating results of the non-continental U.S. operations will
continue to be included in the consolidated statement of income until the
divestitures are completed.
Assets and liabilities for the non-continental U.S. operations as of
December 31, 1999 were as follows, excluding impairment loss for divestiture:
<TABLE>
<S> <C>
Assets
Cash............................................................. $ 5,182
Accounts receivable.............................................. 49,379
Inventories...................................................... 2,895
Other current assets............................................. 9,558
Property and equipment, net...................................... 30,787
Intangible assets, net........................................... 156,583
Other long-term assets........................................... 5,212
--------
$259,596
========
Liabilities and minority interests
Accounts payable................................................. $ 15,975
Accrued compensation and benefits................................ 4,285
Other current liabilities........................................ 12,528
Other long-term liabilities...................................... 390
Minority interests............................................... 1,116
--------
$ 34,294
========
</TABLE>
F-10
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Operating results for the non-continental U.S. operations excluding
impairment charges were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net operating revenue............................. $124,410 $88,978 $48,137
Operating expenses
Dialysis and lab facilities..................... 100,204 70,873 33,665
General and administrative...................... 7,396 3,940 4,212
Depreciation and amortization................... 12,629 7,531 4,670
Provision for uncollectible accounts............ 5,717 2,734 1,239
-------- ------- -------
125,946 85,078 43,786
-------- ------- -------
Operating income (loss)........................... $ (1,536) $ 3,900 $ 4,351
======== ======= =======
</TABLE>
The impairment and valuation losses associated with dialysis facilities
within the continental U.S. similarly relate to actions taken and decisions
made during the fourth quarter of 1999. In addition to divesting operations
outside the continental U.S., the company took aggressive actions to curtail
new facility acquisitions and developments, and to close facilities not
supporting the company's new strategic direction. The losses principally
related to facilities identified for closure or sale during the first half of
2000. Additionally, several new facility plans were terminated and several
projects abandoned. The impairment losses were determined based on estimated
net realizable values and projections of cash flows. The closure and
abandonment losses averaged less than $1,000 per facility, and were
principally associated with the impairment of leasehold improvements and
intangible assets specifically identified with these facilities.
The company's new strategic direction and curtailment of new facility
acquisition plans also affected the valuation of certain partnership
investments, resulting in investment write-offs in the fourth quarter of 1999.
Additionally, an investment in a third party dialysis business, which was in
the form of a loan with equity conversion rights, was determined to be
substantially impaired based on the borrower's missed commitments, operating
difficulties and liquidity concerns. This third-party dialysis business is now
formally in default of its loan agreement.
The investment losses recorded in the second quarter of 1999 were similarly
associated with impairments of loans to and investments in third-party
dialysis-related businesses that experienced serious operating difficulties
and liquidity problems.
The impairment losses associated with the investments and loans were
determined based on estimated net realizable values and projections of net
cash flows. The company does not expect recovery of the impairment losses even
through potential bankruptcy processes. With respect to impaired loans,
interest receivable will not accrue unless the estimated recovery amounts
justify such accruals in the future.
Impairment reviews are performed for investments in and advances to third-
party dialysis businesses whenever a change in condition occurs, including
changes in our business strategy and plans, or when a third-party dialysis
business experiences deteriorating operating performance or liquidity
problems.
With regard to potential impairment of goodwill balances, cash flows are
routinely reviewed for the specific facility operations associated with the
goodwill resulting from the acquisition of that specific group of facilities.
Other than in connection with the impairment losses discussed above, there
were no goodwill impairments as of December 31, 1999.
F-11
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
3. Accounts receivable
The total provisions for uncollectible accounts were $133,253, $44,858 and
$28,899 for 1999, 1998 and 1997, respectively. The company's rapid growth
through acquisitions through 1998 and the merger with RTC in 1998 had a
significant impact on the company's administrative functions, including
billing and cash collection processes, which at times operated below optimal
levels of efficiency and effectiveness. The backlog of aged accounts
receivable continued to increase during the first half of 1999 due to high
turnover of billing and collection personnel and process inefficiencies. The
subsequent collection rates for the older billings did not match our earlier
projections and estimates. Those earlier estimates had been based on prior
collection experience, but the build-up of the backlog of aged accounts not
processed on a timely basis created collection difficulties at a level not
previously experienced or anticipated. As of December 31, 1999, the net
balance of domestic accounts receivable aged more than six months amounted to
approximately $37 million, excluding the Florida lab withhold contingency
discussed in Note 15.
During 1999, 1998 and 1997, the company received approximately 59%, 57% and
64%, respectively, of dialysis revenues in the continental U.S. from Medicare
and Medicaid programs. Accounts receivable from Medicare and Medicaid were
approximately $150,000 and $190,000, excluding the Florida lab withhold
contingency, as of December 31, 1999 and 1998, respectively. Medicare
historically pays approximately 80% of government established rates for
services provided. The remaining 20% typically is paid by state Medicaid
programs, private insurance companies or directly by the patients receiving
the services.
4. Other current assets
Other current assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Supplier rebates and other non-trade receivables............ $19,043 $17,222
Operating advances to managed facilities.................... 8,310 20,695
Prepaid expenses............................................ 4,391 7,165
Deposits.................................................... 338 639
------- -------
$32,082 $45,721
======= =======
</TABLE>
Operating advances to managed facilities are generally unsecured and
interest bearing under the terms of the applicable management agreements.
5. Property and equipment
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Land................................................... $ 1,193 $ 1,410
Buildings.............................................. 9,846 10,622
Leasehold improvements................................. 150,067 113,409
Equipment.............................................. 248,428 204,156
Construction in progress............................... 17,575 11,849
--------- ---------
427,109 341,446
Less accumulated depreciation and amortization......... (141,660) (108,109)
--------- ---------
Property and equipment, net............................ $ 285,449 $ 233,337
========= =========
</TABLE>
F-12
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Depreciation and amortization expense on property and equipment was $51,045,
$40,032, and $22,160 for 1999, 1998, and 1997, respectively.
6. Intangible assets
Intangible assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Goodwill............................................. $ 971,344 $ 939,989
Patient lists........................................ 137,469 132,048
Noncompetition agreements............................ 112,378 96,670
Deferred debt issuance costs......................... 24,524 19,329
---------- ----------
1,245,715 1,188,036
Less accumulated amortization........................ (176,043) (114,536)
---------- ----------
$1,069,672 $1,073,500
========== ==========
</TABLE>
Amortization expense applicable to intangible assets was $61,436, $50,321
and $31,451 for 1999, 1998, and 1997, respectively.
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 ($6,896 net of tax) were recognized as the
cumulative effect of a change in accounting principle in 1998.
7. Investments in third-party dialysis businesses
During 1997 and 1998, the company entered into various agreements to provide
funding for expansion to companies that provide dialysis related services.
Investments in third-party dialysis businesses and related advances were as
follows:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Investments in non-consolidated businesses.................. $ 3,782 $ 7,991
Acquisition advances and loans generally convertible to
equity investments, less allowance of $14,000 in 1999...... 31,770 23,369
------- -------
$35,552 $31,360
======= =======
</TABLE>
Non-consolidated equity investments are recorded under the equity method of
accounting unless TRCH's constructive equity interest is less than 20%.
The loans to third-party dialysis businesses are in the form of notes
receivable that are secured by the assets and operations of these companies,
and are convertible to equity investments. The notes receivable as of
F-13
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
December 31, 1999 bear interest at the prime rate plus 1.5%. The valuation
assessments assume that the conversion options will be exercised in most
instances.
8. Other liabilities
Other accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Payor accounts.............................................. $40,505 $22,483
Acquisition price payable................................... 15,223
Accrued interest............................................ 14,664 10,986
Merger accrual (Note 16).................................... 3,788 4,765
Other....................................................... 18,184 15,975
------- -------
$77,141 $69,432
======= =======
</TABLE>
9. Income taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C> <C>
Current
Federal................................... $(11,497) $ 46,061 $35,128
State..................................... (2,527) 8,913 6,430
Foreign................................... 1,000 1,052 1,070
Deferred
Federal................................... (18,199) (15,557) (6,054)
State..................................... (3,347) (2,020) (920)
-------- -------- -------
$(34,570) $ 38,449 $35,654
======== ======== =======
</TABLE>
F-14
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Receivables, primarily
allowance for doubtful
accounts................. $ 34,991 $27,143
Unrealized asset
impairment losses........ 46,291
Merger costs.............. 5,323 6,159
Accrued benefits payable.. 7,664 2,821
Stock compensation........ 2,855 2,800
Foreign NOL carryforward.. 1,207 1,742
Foreign tax credit
carryforward............. 210 210
Other..................... 572 314
-------- -------
Gross deferred tax
assets................... 99,113 41,189
Fixed assets.............. (4,134) (4,115)
Intangible assets......... (10,842) (4,330)
Other..................... (1,197)
-------- -------
Gross deferred tax
liabilities............ (16,173) (8,445)
Valuation allowance..... (30,592) (1,942)
-------- -------
Net deferred tax
assets................. $ 52,348 $30,802
======== =======
</TABLE>
The valuation allowance relates to deferred tax assets established under
SFAS No. 109 for foreign net operating loss carryforwards of $1,200, foreign
tax credit carryforwards of $210, which expire in 2002, and capital losses of
$29,200. These amounts will be carried forward to future years for possible
utilization. No benefit of these deferred items has been recognized in the
financial statements because the company's ability to utilize such benefits is
considered remote.
The reconciliation between our effective tax rate and the U.S. federal
income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Federal income tax rate.................................. 35.0 % 35.0% 35.0%
State taxes, net of federal benefit...................... 3.7 3.1 4.1
Foreign income taxes..................................... (0.7) 0.5
Nondeductible amortization of intangible assets.......... (2.1) 2.0 0.9
Valuation allowance...................................... (15.6) 2.3
Other.................................................... (1.3) 1.1
----- ---- ----
Effective tax rate....................................... 19.0 40.1 43.9
Merger charges........................................... 38.9
----- ---- ----
Effective tax rate....................................... 19.0 % 79.0% 43.9%
===== ==== ====
</TABLE>
F-15
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
10. Long-term debt
Long-term debt comprises the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Credit facilities................................. $ 959,610 $ 749,575
Convertible subordinated notes, 7%, due 2009...... 345,000 345,000
Convertible subordinated notes, 5 5/8%, due 2006.. 125,000 125,000
Acquisition obligations and other notes payable... 21,482 24,160
Capital lease obligations (see Note 11)........... 6,799 3,893
----------- ----------
1,457,891 1,247,628
Less current portion and long-term debt
potentially callable under covenant provisions... (1,452,195) (21,847)
----------- ----------
$ 5,696 $1,225,781
=========== ==========
</TABLE>
Scheduled maturities of long-term debt are as follows:
<TABLE>
<S> <C>
2000................................................................ $ 26,585
2001................................................................ 4,876
2002................................................................ 109,702
2003................................................................ 466,986
2004................................................................ 4,217
Thereafter.......................................................... 845,525
</TABLE>
Included in debt expense was interest expense, net of capitalized interest,
of $106,633, $72,804, and $28,214 for 1999, 1998, and 1997, respectively. Also
included in debt expense were amortization and write-off of deferred financing
costs of $4,164, $1,376, and $868 for 1999, 1998, and 1997, respectively, and
interest rate swap early termination costs of $9,823 in 1998.
Credit facilities
At December 31, 1999 and 1998, outstanding borrowings under the revolving
credit facility were $567,610 and $353,575, respectively, and outstanding
borrowings under the fixed-term credit facility were $392,000 and $396,000,
respectively.
In 1998, the existing credit facilities were replaced with an aggregate of
$1,350,000 in two senior bank facilities. These credit facilities consisted of
a seven-year $950,000 revolving senior credit facility and a ten-year $400,000
senior term facility. As a result of this refinancing, remaining net deferred
financing costs in the amount of approximately $16,019, less tax of $6,087,
were recognized as an extraordinary loss in 1998.
The credit facilities contain financial and operating covenants including,
among other things, requirements that the company maintain certain financial
ratios and satisfy certain financial tests, and also impose limitations on our
ability to make capital expenditures, to incur other indebtedness and to pay
dividends.
In August 1999 the lenders under the credit facilities had waived compliance
with a financial covenant that established a maximum leverage ratio. In
November 1999, this waiver was extended on revised terms because the company
exceeded the maximum leverage ratio allowable under the terms of the August
waiver.
F-16
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Key terms of the last revised waiver were as follows:
. Permanent reduction in the maximum borrowings of the revolving credit
facility from $950,000 to $700,000. (in accordance with the original
terms, the revolving credit facility will be reduced by an additional
$105,110 on September 30, 2002);
. Reduction in permitted borrowings under the revolving credit facility to
$650,000 during the waiver period;
. Limits on the amounts that may be spent for acquisitions and
developments, expansion or relocation of existing dialysis centers
during the waiver period;
. Acceleration of the maturity dates on the term loan and revolving credit
facility by two years, to March 31, 2006 and March 31, 2003,
respectively;
. Permanent increase in the applicable margins used to determine the
interest rates for borrowings under the credit facilities; and
. An increase in the maximum allowable debt to EBITDA ratio, as defined in
the revolving credit agreement, to 4.8 until March 15, 2000.
Under the $400,000 term facility, principal payments of $4,000 are due
annually on September 30, with the remaining balance of $368,000 due when the
facility is scheduled to terminate, on March 31, 2006.
As of December 31, 1999, the current average interest rate on the credit
facilities was 10.87%.
When measured as of December 31, 1999 the company was not in compliance with
certain formula-based covenants in the credit facilities. If the lenders do
not waive this failure to comply, a majority of the lenders could declare an
event of default, which would allow the lenders to accelerate payment of all
amounts due under the credit facilities. Additionally, this noncompliance will
result in higher interest costs, and the lenders may require additional
concessions from the company before giving a waiver. In the event of default
under the credit facilities, the holders of the convertible subordinated notes
could also declare the company to be in default. The company is highly
leveraged and would be unable to pay the accelerated amounts that would become
immediately payable if a default is declared. As a result of this non-
compliance, all debt as of December 31, 1999 that is potentially due within
one year has been reclassified from long-term debt to a current
classification. Under these conditions, the company is currently unable to
draw additional amounts under the credit facilities.
F-17
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The company is currently in discussions with the lenders regarding obtaining
a waiver of these violations or restructuring the credit facilities. Actions
the company has taken and is taking to ensure its ongoing ability to cover
scheduled debt servicing include divestiture of operations outside the
continental U.S. (see Note 2), curtailment of new facility acquisitions and
developments, improvements in billing and cash collections processes,
increased management controls over expenditures, and evaluations of
alternative capital sources, as well as pursuing debt restructuring with
lenders. Prior to March 2000, the company focused its attention primarily on
those actions that would improve operating performance and cash flows, as well
as filling key senior management positions. Given the progress made in these
areas, the company is now entering into more active discussions with its
lenders for an acceptable restructuring arrangement. Management believes it is
unlikely that an event of default will be declared because of the company's
substantial cash balance and because cash flows are expected to be sufficient
to cover operating requirements and scheduled debt service through 2000.
Several of the company's subsidiaries, including subsidiaries owning
substantially all of the company's dialysis facilities assets, have guaranteed
the obligations under the credit facilities.
RTC also had a credit agreement which provided for a $350,000 revolving
credit/term facility available to fund acquisitions and general working
capital requirements. The RTC credit agreement was terminated and repaid with
borrowings under the credit facilities on February 27, 1998 in connection with
the completion of our merger with RTC. The remaining net amortized deferred
financing costs in the amount of $4,393 related to the RTC credit agreement
were recognized as an extraordinary loss, net of tax effect of $1,580, in
1998.
7% convertible subordinated notes
In November 1998, $345,000 of 7% convertible subordinated notes due 2009
were issued in a private placement offering. The notes are convertible, at the
option of the holder, at any time into common stock at a conversion price of
$32.81 principal amount per share, and the notes may be redeemed on or after
November 15, 2001. The notes are general, unsecured obligations junior to all
existing and future senior debt and, effectively all existing and future
liabilities of the company and its subsidiaries. The company subsequently
filed a registration statement covering the resale of the notes, which was
declared effective on February 1, 2000. Commencing May 18, 1999, the company
incurred monetary penalties on a weekly basis until the registration was
declared effective. Penalties of $976 were included in debt expense for the
year ended December 31, 1999.
5 5/8% convertible subordinated notes
In June 1996, RTC (a wholly-owned subsidiary following the merger with TRCH
in 1998) issued $125,000 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. After July 17, 1999, all or any part of these notes are redeemable at
the company's option on at least 15 and not more than 60 days' notice as a
whole or, from time to time, in part at redemption prices ranging from 103.94%
to 100% of the principal amount thereof, depending on the year of redemption,
together with accrued interest to, but excluding, the date fixed for
redemption. These notes are guaranteed by TRCH.
F-18
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The following is summarized financial information of RTC (a wholly-owned
subsidiary):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Cash and cash equivalents.................................... $ 4,118 $ 5,396
Accounts receivable, net..................................... 115,442 130,129
Other current assets......................................... 11,946 19,106
-------- --------
Total current assets....................................... 131,506 154,631
Property and equipment, net.................................. 86,572 75,641
Intangible assets, net....................................... 346,756 406,603
Other assets................................................. 167 9,249
-------- --------
Total assets............................................... $565,001 $646,124
======== ========
Current liabilities (includes $161,720 and $306,628,
respectively, of intercompany payable to TRCH at December
31, 1999 and 1998).......................................... $274,144 $354,489
Long-term debt potentially callable under covenant
provisions.................................................. 125,000 125,000
Other long-term liabilities.................................. 1,504 199
Shareholder's equity......................................... 164,353 166,436
-------- --------
Total liabilities and shareholder's equity................. $565,001 $646,124
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net operating revenues........................... $496,380 $472,355 $322,792
Total operating expenses......................... 499,560 446,367 279,607
-------- -------- --------
Operating income (loss).......................... (3,180) 25,988 43,185
Debt expense..................................... 7,988 8,993 11,802
Other income (loss).............................. (3,639)
-------- -------- --------
Income (loss) before income taxes................ (14,807) 16,995 31,383
Income tax expense............................... 9,296 19,959 14,376
-------- -------- --------
Income (loss) before extraordinary item and
change in accounting principle.................. (24,103) (2,964) 17,007
Extraordinary loss related to early
extinguishment of debt, net of tax.............. 2,812
Cumulative effect of change in accounting
principle, net of tax........................... 3,993
-------- -------- --------
Net income (loss).............................. $(24,103) $ (9,769) $ 17,007
======== ======== ========
</TABLE>
Interest rate swap agreements
In November 1996, the company entered into a seven-year interest rate swap
agreement involving the exchange of fixed and floating interest payment
obligations without the exchange of the underlying principal amounts. At
December 31, 1997, the total notional principal amount of this interest rate
swap agreement was $100,000 and the effective interest rate thereon was 7.57%.
In July 1997, the company entered into a ten-year interest rate swap
agreement. At December 31, 1997, the total notional principal amount of this
interest rate swap agreement was $200,000 and the effective interest rate
thereon was 7.77%. In April 1998, in conjunction with the refinancing of
senior credit facilities, these two interest rate swap agreements were
cancelled. The loss associated with the early cancellation of those swaps was
$9,823, and was included in debt expense for 1998.
F-19
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
In May 1998, the company entered into cancelable interest rate swap
agreements, with a combined notional amount of $800,000. During 1999 two of
the swap agreement counterparties exercised their right to cancel agreements
in the aggregate notional amount of $100,000. The remaining $700,000 of swap
agreements mature between 2003 and 2008 with cancellation clauses at the swap
holders' option from 2000 to 2005. As a result of these swap agreements, the
effective underlying blended rate for $700,000 of outstanding debt is fixed at
approximately 5.66% plus an applicable margin based upon our current leverage
ratio. At December 31, 1999, the effective interest rate for borrowings
covered under the swap agreements was 9.30%.
11. Leases
The majority of the company's facilities are leased under noncancelable
operating leases expiring in various years through 2021. Most lease agreements
cover periods from five to ten years and contain renewal options of five to
ten years at the fair rental value at the time of renewal or at rates subject
to consumer price index increases since the inception of the lease. In the
normal course of business, operating leases are generally renewed or replaced
by other similar leases.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<S> <C>
2000............................................................... $ 42,903
2001............................................................... 40,037
2002............................................................... 36,420
2003............................................................... 33,545
2004............................................................... 31,600
Thereafter......................................................... 120,362
--------
Total minimum lease payments....................................... $304,867
========
</TABLE>
Rental expense under all operating leases for 1999, 1998, and 1997 amounted
to $52,504, $38,975 and $24,589, respectively.
Certain equipment is leased under capital lease agreements. Future minimum
lease payments under capital leases are as follows:
<TABLE>
<S> <C>
2000................................................................ $ 2,004
2001................................................................ 1,399
2002................................................................ 1,001
2003................................................................ 842
2004................................................................ 544
Thereafter.......................................................... 5,302
Less portion representing interest.................................. (4,293)
-------
Total capital lease obligation, including current portion........... $ 6,799
=======
</TABLE>
The net book value of fixed assets under capital lease was $7,719 and $4,314
at December 31, 1999 and 1998, respectively. Capital lease obligations are
included in long-term debt (see Note 10).
F-20
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
12. Shareholders' equity
Change in shares, stock splits and dividends
On September 30, 1997 the company declared a common stock dividend to all
shareholders of record as of October 7, 1997, to be paid on October 20, 1997.
Each shareholder received two additional shares of common stock for each three
shares held. Fractional shares calculated as a result of the stock dividend
were paid out in cash in the amount of approximately $14. All share and per
share amounts presented in the financial statements and related notes thereto
have been restated to reflect this stock dividend accounted for as a stock
split.
Earnings per share
The reconciliation of the numerators and denominators used to calculate
earnings per share is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1999 1998 1997
--------- ------- -------
(in thousands, except per
share)
<S> <C> <C> <C>
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle:
As reported.................................... $(147,256) $10,192 $45,524
========= ======= =======
Income (loss) before extraordinary item and
cumulative effect of change in
accounting principle--assuming dilution:
As reported.................................... $(147,256) $10,192 $45,524
Add back interest on RTC earnout note, tax
effected...................................... 34
--------- ------- -------
$(147,256) $10,192 $45,558
========= ======= =======
Applicable common shares:
Average outstanding during the year............ 81,168 80,156 77,649
Reduction in shares in connection with notes
receivable from employees..................... (16) (13) (125)
--------- ------- -------
Weighted average number of shares outstanding for
use in computing basic earnings per share....... 81,152 80,143 77,524
Outstanding stock options (based on the
treasury stock method)........................ 1,558 2,288
Dilutive effect of RTC earnout note............ 163
--------- ------- -------
Adjusted weighted average number of common and
common share equivalent shares outstanding--
assuming dilution............................. 81,152 81,701 79,975
========= ======= =======
Earnings (loss) per common share--basic.......... $ (1.81) $ 0.12 $ 0.59
Earnings (loss) per common share--assuming
dilution........................................ $ (1.81) $ 0.12 $ 0.57
</TABLE>
All options to purchase common stock, as described below, were excluded from
the 1999 EPS calculation because they were anti-dilutive. Options to purchase
4,726,975 and 401,676 shares of common stock at $28.43 to $36.13 per share and
$24.21 to $32.25 per share, were outstanding during 1998 and 1997,
respectively, but were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares or the effect was anti-dilutive. The shares of common stock from
the assumed conversion of the 7% convertible subordinated notes and the 5 5/8%
convertible subordinated notes (see Note 10) were not included in the
computation of diluted EPS for any period because the effect was anti-
dilutive.
F-21
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
Stock-based compensation plans
The company's stock-based compensation plans are described below.
1994 plan. The 1994 Equity Compensation Plan provides for awards of
nonqualified stock options to purchase common stock and other rights to
purchase shares of common stock to certain employees, directors, consultants
and facility medical directors.
There are 4,935,874 shares of common stock reserved for issuance under the
1994 plan. Original options granted generally vest on the ninth anniversary of
the date of grant, subject to accelerated vesting in the event that certain
performance criteria are met. In April 1996, the vesting schedule was changed
for new options granted so that options vest over four years from the date of
grant. The exercise price of each option equals the market price of our stock
on the date of grant, and an option's maximum term is ten years. In December
1999, the plan was amended so that no further grants may be made under this
plan.
Purchase rights to acquire 1,314,450 common shares for $0.90-$3.60 per share
have been awarded to certain employees under the 1994 plan. All of these
rights were exercised and the company received notes for the uncollected
portion of the purchase proceeds. These notes bear interest at the lesser of
The Bank of New York's prime rate or 8%, are full recourse to the employees,
and are secured by the employees' stock. The notes are repayable four years
from the date of issuance, subject to certain prepayment requirements. At
December 31, 1999 and 1998 the outstanding notes plus accrued interest totaled
$192 and $356, respectively.
1995 plan. The 1995 Equity Compensation Plan provides awards of stock
options and the issuance of restricted stock to certain employees, directors
and other individuals providing services. There are 1,247,709 common shares
reserved for issuance under the 1995 plan. Options granted generally vest over
four years from the date of grant and an option's maximum term is ten years,
subject to certain restrictions. Awards are generally issued with the exercise
prices equal to the market price of the stock on the date of grant. In
December 1999, the plan was amended so that no further grants may be made
under this plan.
1997 plan. The 1997 Equity Compensation Plan provides awards of stock
options and the issuance of restricted stock to certain employees, directors
and other individuals providing services. In February 1998, the shares
reserved for issuance under the 1997 plan were increased to 7,166,667 common
shares. Options granted generally vest over four years from the date of grant
and an option's maximum term is ten years. Awards are generally issued with
the exercise prices equal to the market price of the stock on the date of
grant.
1999 plans. The 1999 Equity Compensation Plan provides awards of stock
options to employees, directors and other individuals providing services.
There are 3,000,000 common shares reserved for issuance under this plan.
Options granted under this plan generally vest over four years from the date
of grant and an option's maximum term is seven years, subject to certain
restrictions. Awards under this plan are generally issued with the exercise
prices equal to the market price of the stock on the date of grant. The 1999
Non-Executive Officer and Non-Director Equity Compensation Plan provides
awards of stock options to employees other than executive officers and to
other individuals providing services. There are 1,267,500 common shares
reserved for issuance under this plan. Options granted under this plan
generally vest over four years from the date of grant, subject to certain
restrictions. Awards under this plan are generally issued with the exercise
prices equal to the market price of the stock on the date of grant.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants for 1999, 1998, and 1997, respectively: dividend yield of 0% for all
periods; weighted average expected volatility of 50.01%, 33.98% and 35.12%;
risk-free interest rates of 5.63%, 5.51% and 6.40% and expected lives of six
years for all periods.
F-22
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
Stock options issued under these plans to non-employees at fair value and
those issued to employees with intrinsic value generated stock option expense
of $1,116, $3,585, and $3,541 for the years ended December 31, 1999, 1998, and
1997, respectively.
A combined summary of the status of the plans is presented below:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period ............. 10,047,784 $24.15 5,039,838 $16.01 3,118,394 $13.82
Granted ................ 4,575,000 9.35 5,570,567 31.10 3,931,080 19.74
Exercised .............. (82,320) .99 (254,220) 9.48 (275,620) 3.96
Forfeited .............. (4,331,881) 28.64 (308,401) 28.25 (1,734,016) 22.46
---------- ------ ---------- ------ ---------- ------
Outstanding at end of
year .................. 10,208,583 $15.80 10,047,784 $24.15 5,039,838 $16.01
========== ====== ========== ====== ========== ======
Options exercisable at
year end .............. 3,841,397 1,959,913 797,474
========== ========== ==========
Weighted-average fair
value of options
granted during the year
....................... $12.74 $13.67 $ 9.15
====== ====== ======
</TABLE>
Forfeitures and grants include the effects of modifications to the terms of
awards as if the original award was repurchased and exchanged for a new award
of greater value. On April 24, 1997, 1,649,735 shares were cancelled and
reissued at the market price as of that date. The new awards vest annually
over three years on the anniversary date of the new award.
Effective September 20, 1999 1,750,000 options with exercise prices greater
than $30 per share were forfeited for the right to participate in a retention
bonus program. Retention compensation expense of $2.6 million was recognized
in 1999, and no replacement options were awarded as of December 31, 1999.
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
---------------- ------------------
Weighted Weighted
Weighted Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Options Contractual Life Price Options Price
- ------------------------ ---------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 5.00........... 718,522 4.8 $ 1.17 718,522 $ 1.17
$ 5.01-$10.00........... 3,583,545 9.3 8.47 344,045 8.48
$10.01-$15.00........... 467,612 9.2 13.86 11,112 11.70
$15.01-$20.00........... 3,324,477 6.7 18.65 2,015,943 18.61
$20.01-$25.00........... 400,058 8.1 22.63 149,012 22.12
$25.01-$30.00........... 433,866 8.0 26.40 181,512 26.42
$30.01-$35.00........... 1,278,503 8.5 32.09 420,751 32.05
$35.01-$40.00........... 2,000 8.3 35.81 500 35.82
---------- --- ------ --------- ------
10,208,583 7.9 $15.80 3,841,397 $16.40
========== === ====== ========= ======
</TABLE>
Special Purpose Option Plan (RTC Plans). Upon consummation of the merger
with RTC, all outstanding options under RTC plans were converted to Total
Renal Care Holdings Inc. Special Purpose Option Plan options. This plan
provides for awards of incentive and nonqualified stock options in exchange
for outstanding RTC stock plan options. Options under this plan have the same
provisions and terms provided for in the RTC stock plan,
F-23
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
including acceleration provisions upon certain sale of assets, mergers and
consolidations. On the merger date, there was a conversion of 2,156,426
options. Further, options for 1,305,738 shares became fully vested due to
change in control acceleration vesting provisions that were contained in the
original grants. Options for 1,662,356 shares were exercised subsequent to the
merger date. In December 1999, the plan was amended so that no further grants
may be made under this plan.
During 1997, RTC granted 1,182,543 incentive stock options to certain
directors, officers and employees. These options were granted at an exercise
price equal to the fair market value of RTC's common stock on the dates of the
grants and vest in two to five years. During 1997, RTC also granted 26,700
options to acquisition consultants for covenants not to compete. These options
were granted at a price equal to the fair market values of RTC's common stock
on the date of the grant and were valued at $235.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
1997: dividend yield of 0%; weighted average expected volatility of 43%; risk
free interest rate of 6.55%; and an expected life of 4.29 years.
A summary of the status of the RTC plans as of and for the years ended
December 31, 1999, 1998 and 1997, is presented below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1999 1998 1997
------------------ -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period ............. 367,633 $15.66 3,285,192 $13.20 2,293,483 $11.09
Granted ................ 1,182,543 16.84
Exercised .............. (2,403) 9.31 (2,901,218) 12.88 (171,830) 7.60
Forfeited .............. (151,968) 16.24 (16,341) 15.45 (19,004) 13.09
-------- ------ ---------- ------ --------- ------
Outstanding at end of
year .................. 213,262 $15.32 367,633 $15.66 3,285,192 $13.33
======== ====== ========== ====== ========= ======
Options exercisable at
year end .............. 163,278 248,958 1,785,169
======== ========== =========
Weighted-average fair
value of options
granted during the year
....................... $ 9.70
======
</TABLE>
The following table summarizes information about RTC fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------- ----------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
- ------------------------ ------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
5.01-15.00....................... 24,564 5.1 $ 8.58 24,564 $ 8.58
15.01-20.00...................... 188,698 7.1 16.20 138,714 16.24
------- --- ------ ------- ------
213,262 6.9 $15.32 163,278 $15.09
======= === ====== ======= ======
</TABLE>
Stock purchase plan. The Employee Stock Purchase Plan entitles qualifying
employees to purchase up to $25 of common stock during each calendar year. The
amounts used to purchase stock are typically accumulated through payroll
withholdings and through an optional lump sum payment made in advance of the
first day of the plan. The plan allows employees to purchase stock for the
lesser of 100% of the fair market value on the first
F-24
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
day of the purchase right period or 85% of the fair market value on the last
day of the purchase right period. Each purchase right period begins on January
1 or July 1, as elected by the employee and ends on December 31. Payroll
withholdings related to the plan, included in accrued employee compensation
and benefits, were $1,937 and $1,892 at December 31, 1999 and 1998,
respectively. Subsequent to December 31, 1999, and December 31, 1998, 77,106
and 49,060 shares, respectively were issued to satisfy obligations under the
plan.
The fair value of the employees' purchase rights were estimated on the
beginning date of the purchase right period using the Black-Scholes model with
the following assumptions for grants on July 1, 1998, January 1, 1998, July 1,
1997, and January 1, 1997, respectively: dividend yield of 0% for all periods;
expected volatility of 42.10% in 1998 and 34.23% in 1997; risk-free interest
rate of 5.5%, 5.7%, 6.8% and 6.8%; and expected lives of 0.5 and 1.0 years.
Using these assumptions, the weighted-average fair value of purchase rights
granted were $6.24, $7.84, $11.17, and $15.31, respectively.
The fair value of the 1999 purchase right periods were not estimated at
December 31, 1999 because of the employees' ability to withdraw from
participation through December 31.
Pro forma net income and earnings per share. The company applied APB Opinion
No. 25 and related interpretations in accounting for all of our employee stock
compensation plans. Had compensation cost for our stock-based compensation
plans been determined consistent with SFAS 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1999 1998 1997
---------- -------- -------
(in thousands, except per
share)
<S> <C> <C> <C>
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle...................................... $(162,472) $ 4,004 $33,779
Extraordinary loss............................ (12,744)
Cumulative effect of change in accounting
principle ................................... (6,896)
---------- -------- -------
Net income (loss) ............................ $(162,472) $(15,636) $33,779
========== ======== =======
Earnings (loss) per common share
Income (loss) before extraordinary item....... $ (2.00) $ 0.04 $ 0.44
Extraordinary loss............................ (0.16)
Cumulative effect of change in accounting
principle.................................... (0.08)
---------- -------- -------
Net income (loss)............................. $ (2.00) $ (0.20) $ 0.42
========== ======== =======
Weighted average number of common shares and
equivalents outstanding........................ 81,152 80,143 77,524
========== ======== =======
Earnings (loss) per common share--assuming
dilution:
Income (loss) before extraordinary item....... $ (2.00) $ 0.05 $ 0.43
Extraordinary loss............................ (0.16)
Cumulative effect of change in accounting
principle.................................... (0.08)
---------- -------- -------
Net income (loss)............................. $ (2.00) $ (0.19) $ 0.41
========== ======== =======
Weighted average number of common shares and
equivalents outstanding--assuming dilution..... 81,152 81,076 78,982
========== ======== =======
</TABLE>
F-25
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
13. Transactions with related parties
Tenet
Tenet Healthcare Corporation, or Tenet, owns less than 5% of our common
stock and the company provide dialysis services to Tenet hospital patients
under agreements with terms of one to three years. The contract terms are
comparable to contracts with unrelated third parties. Included in accounts
receivable are amounts related to these services of $1,211 and $350 at
December 31, 1999 and 1998, respectively. Net operating revenues received from
Tenet for these services were $7,037, $2,424, and $2,640, for 1999, 1998 and
1997, respectively.
DLJ
A managing director of Donaldson, Lufkin & Jenrette, or DLJ, serves on the
company's board of directors and, prior to August 1997, an affiliate of DLJ
held an ownership interest in the company. Effective with the August 1997
public offering of common stock, DLJ and its affiliates no longer own an
interest in the Company. During 1998, DLJ advised the company on the
acquisition of RTC and assisted us in the issuance of the 7% notes.
The company has entered into a business arrangement with DLJ under which the
company will manage third-party dialysis facilities with options to acquire
the facilities at future dates, and has guaranteed third-party debt of
approximately $11 million as of December 31, 1999.
14. Employee benefit plan
The company has a savings plan for substantially all employees, which has
been established pursuant to the provisions of Section 401(k) of the Internal
Revenue Code, or IRC. The plan provides for employees to contribute from 1% to
15% of their base annual salaries on a tax-deferred basis not to exceed IRC
limitations. The company may make a contribution under the plan each fiscal
year as determined by our board of directors. Company matched contributions
were $76 and $58 for the years ended December 31, 1999 and 1998, in accordance
with specific state requirements.
RTC had a defined contribution savings plan covering substantially all of
its employees. RTC's contributions under the plan were approximately $641 and
$1,069 for years ended December 31, 1998 and 1997, respectively. Effective
July 1, 1998, the plan was terminated and merged into TRCH's plan.
15. Contingencies
Health care providers' revenues may be subject to adjustment as a result of
1) the examination by government agencies or contractors, for which the
resolution of any matters raised may take extended periods of time to
finalize; 2) different interpretations of government regulations by different
fiscal intermediaries; 3) differing opinions regarding a patient's medical
diagnosis or the medical necessity or services provided; and 4) retroactive
implications or interpretations of governmental requirements.
The company's Florida-based laboratory subsidiary is the subject of a third-
party carrier review relating to claims for Medicare reimbursement. The
carrier has issued formal overpayment determinations in the amount of $5,600
for the period from January 1, 1995 to April 1996 and $14,200 for the period
from May 1996 to March 1998. The carrier has also suspended all payments of
claims related to this laboratory, regardless of when the laboratory performed
the tests. The carrier has requested additional billing records with respect
to the time period April 1998 to August 1999. The cumulative amount withheld
was approximately $30,000 as of December 31, 1999.
F-26
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The company is disputing the overpayment determinations and has provided
supporting documentation of its claims. The company has 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 July 1999. In January 2000 the hearing officer issued a
decision regarding the initial review period upholding the overpayment
determination of $5,600. The company has filed an appeal to a federal
administrative law judge. No provisions or allowances have been recorded for
this matter. Any determination adverse to the company could have an adverse
impact on the company's business, results of operations or financial
condition.
Following the announcement on February 18, 1999 of the company's preliminary
results for the fourth quarter of 1998 and the full year then ended, several
class action lawsuits were filed against the company and several of its
officers in the U.S. District Court for the Central District of California.
The lawsuits have been consolidated into a single action. The consolidated
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 the company 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 the suspension of payments to the company's Florida-based laboratory
subsidiary on Medicare claims, accounted for goodwill to overstate income, and
manipulated the value of intangible assets. On January 24, 2000, all
defendants responded to this complaint by filing a motion to dismiss. The
motion is set to be heard on June 5, 2000, and all discovery is stayed pending
the court's hearing and decision on the motion. Management believes that all
of the claims are without merit. It is anticipated that the attorneys' fees
and related costs of defending these lawsuits will be covered primarily under
insurance policies. Any determination adverse to the company could have an
adverse impact on the company's business, results of operations or financial
condition.
In addition, TRCH is subject to claims and suits in the ordinary course of
business for which the company is believed to be covered by insurance.
Management believes that the ultimate resolution of these additional pending
proceedings, whether the underlying claims are covered by insurance or not,
will not have a material adverse effect on the company's financial condition,
results of operations or cash flows.
16. Merger and acquisitions
Merger
. Renal Treatment Centers
On February 27, 1998 TRCH merger with Renal Treatment Centers, Inc., or RTC.
In connection with the merger, TRCH issued 34,565,729 shares of TRCH common
stock in exchange for all of the outstanding shares of RTC common stock. In
addition, TRCH guaranteed $125,000 of RTC's 5 5/8% convertible subordinated
notes. In conjunction with this transaction, an additional 140,000 shares of
common stock was authorized by the shareholders.
The RTC merger transaction was accounted for as a pooling of interests and
the TRCH consolidated financial statements have been restated to include the
results of operations and account balances of RTC for all periods presented.
There were no transactions between RTC and TRCH prior to the combination.
F-27
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
As a result of the merger, RTC's revolving credit agreement was terminated
and the outstanding balance of approximately $297,228 was paid off through
additional borrowings under our credit facilities. The remaining net
unamortized deferred financing costs in the amount of $4,393, less tax of
$1,580, related to RTC's revolving credit agreement were recognized as an
extraordinary loss in 1998.
Merger and related costs recorded during 1998 included transaction costs,
integration costs, employee severance and other directly associated
compensation expense.
A summary of merger and related costs and accrual activity through December
31, 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 $ 41,960 $ 15,895 $ 79,435
Amounts utilized during 1998.... (22,885) (37,401) (13,137) (73,423)
Adjustment of estimates......... 1,305 (959) (1,593) (1,247)
-------- -------- -------- --------
Accrual, December 31, 1998...... 3,600 1,165 4,765
Amounts utilized during 1999.... (600) (377) (977)
-------- -------- -------- --------
Accrual, December 31, 1999...... $ -- $ 3,000 $ 788 $ 3,788
======== ======== ======== ========
</TABLE>
Direct transaction costs consisted primarily of investment banking fees,
legal and accounting costs and other costs, including the costs of
consultants, printing and registration, which were incurred by both TRCH and
RTC in connection with the merger.
Severance and other compensation directly resulting from the merger included
a constructive termination of preexisting employment contracts with RTC
officers (approximately $6,500); severance payments to approximately 80
employees of RTC (approximately $1,600); exercise of RTC stock options by
tendered shares (less than six months from exercise date) permitted under pre-
existing terms of RTC stock option grants (approximately $16,000); and special
merger bonuses awarded (approximately $16,300).
Integration costs of the combined operations were principally associated
with the elimination of redundant overhead functions and business processes.
TRCH eliminated the following RTC departments: human resources, managed care,
laboratory, and all finance functions, with the exception of patient
accounting. The finance functions eliminated included payroll, financial
reporting and analysis, budgeting, general ledger, accounts payable, and tax
functions. The RTC human resources and managed care departments were
discontinued in Berwyn, Pennsylvania and consolidated with our respective
departments in our Torrance, California corporate offices. The finance
functions, with the exception of patient accounting, were consolidated into
our Tacoma, Washington business office. RTC's laboratory, located in Las
Vegas, Nevada, was closed prior to its commencement of operation.
Integration costs included termination of a long-term laboratory management
service agreement (approximately $3,800), write-off of leasehold improvements
and other capitalized costs associated with the RTC lab closures
(approximately $5,100), and incremental costs of integrating operations,
including training and travel expenses (approximately $5,400).
The remaining balance of severance and employment costs represents tax
gross-up payments and the remaining balance of costs to integrate operations
represents remaining lease payments on RTC's vacant laboratory lease space.
F-28
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Acquisitions
The following is a summary of acquisitions that were accounted for as
purchases for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Number of facilities acquired................... 45 76 119
Number of common shares issued.................. 98,549 17,613
Estimated fair value of common shares issued.... $ 2,796 $ 273
Deferred purchase payments and acquisition
obligations.................................... $ 12,737 15,233
Cash paid, net of cash acquired................. 154,226 338,164 455,090
-------- -------- --------
Aggregate purchase price........................ $166,963 $356,193 $455,363
======== ======== ========
</TABLE>
The assets and liabilities of the acquired entities in the preceding table
were recorded at their estimated fair market values at the dates of
acquisition. The results of operations of the facilities and laboratories have
been included in the financial statements from their effective acquisition
dates. The nearest month-end has been used as the effective date for recording
acquisitions that close during the month because there were no partial month
accounting cutoffs and partial month results associated with these
acquisitions would not have a material impact on consolidated operating
results. The company acquired all of its foreign operations and several
domestic operations through purchases of capital stock. Any settlement with
tax authorities relating to pre-acquisition income tax liabilities will result
in an adjustment to goodwill attributable to that acquisition.
The initial allocations of fair value are based upon available information
for the acquired businesses and are finalized when the contingent acquisition
amounts are determined. The final allocations are not expected to differ
materially from the initial allocations. Allocations were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Identified intangibles......................... $ 18,061 $ 39,992 $ 87,498
Goodwill....................................... 140,111 315,655 366,121
Tangible assets................................ 20,359 30,650 47,053
Liabilities assumed............................ (11,568) (30,104) (45,309)
-------- -------- --------
Total purchase price......................... $166,963 $356,193 $455,363
======== ======== ========
</TABLE>
F-29
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
The following summary, prepared on a pro forma basis, combines the results
of operations as if the acquisitions had been consummated as of the beginning
of each of the periods presented, after including the impact of certain
adjustments such as amortization of intangibles, interest expense on
acquisition financing and income tax effects.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1999 1998 1997
(unaudited) (unaudited) (unaudited)
----------- ---------- ----------
<S> <C> <C> <C>
Net revenues............................. $1,472,396 $1,285,546 $840,211
Net income (loss) before extraordinary
item and cumulative effect of change in
accounting principle.................... $ (145,049) $ 15,587 $ 54,964
Net income (loss)........................ (145,049) (4,053) 54,964
Pro forma net income (loss) per share
before extraordinary item and cumulative
effect of change in accounting
principle............................... $ (1.79) $ 0.19 $ 0.66
Pro forma net income (loss) per share
before extraordinary item and cumulative
effect of change in accounting
principle--assuming dilution............ $ (1.79) $ 0.19 $ 0.66
Pro forma net income (loss) per share.... (1.79) (0.05) 0.64
Pro forma net income (loss) per share--
assuming dilution....................... (1.79) (0.05) 0.64
</TABLE>
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been completed prior to
the beginning of the periods presented. In addition, they are not intended to
be a projection of future results and do not reflect any of the synergies,
additional revenue-generating services or direct facility operating expense
reduction that might be achieved from combined operations.
17. Fair value of financial instruments
Financial instruments consist primarily of cash, accounts receivable, notes
receivable, accounts payable, accrued compensation and benefits, and other
accrued liabilities. These balances, as presented in the financial statements
at December 31, 1999, approximate their fair value. Borrowings under credit
facilities, of which $959,610 was outstanding as of December 31, 1999, reflect
fair value as they are subject to fees and rates competitively determined in
the marketplace. The fair value of the 7% convertible subordinated notes and
the RTC 5 5/8% convertible subordinated notes were approximately $230,000, and
$77,000 at December 31, 1999. The fair value of the interest rate swap
agreements is based on the present value of expected future cash flows from
the agreements and was in a net receivable position of $17,393 at December 31,
1999.
F-30
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
18. Supplemental cash flow information
The table below provides supplemental cash flow information:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash paid for:
Income taxes.................................... $ 32,324 $13,676 $37,402
Interest........................................ 102,125 66,409 25,039
Non cash investing and financing activities:
Estimated value of stock and options issued in
acquisitions................................... 2,796 273
Fixed assets acquired under capital lease
obligations.................................... 3,405 583 829
Contribution to partnerships.................... 2,195 2,592 2,318
Issuance of common stock in connection with
earnout note................................... 5,148
Grant of stock options in connection with
covenant not to compete........................ 235
</TABLE>
F-31
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
19. Selected quarterly financial data (unaudited)
Summary unaudited quarterly financial data for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1999 1999 1999 1999 1998 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $352,244 $352,819 $367,168 $ 373,120 $257,833 $288,350 $318,585 $338,970
Operating income
(loss)................. 62,128 (6,353) 35,107 (154,864) (33,016) 55,575 66,684 45,520
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. 23,207 (22,059) 2,259 (150,664) (47,959) 16,841 28,058 13,252
Net income (loss)....... 23,207 (22,059) 2,259 (150,664) (57,667) 6,909 28,058 13,252
Income (loss) per common
share:
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ 0.29 $ (0.27) $ 0.03 $ (1.86) $ (0.61) $ 0.21 $ 0.35 $ 0.16
Extraordinary loss..... (0.03) (0.12)
Cumulative effect of
change in accounting
principle............. (0.09)
-------- -------- -------- --------- -------- -------- -------- --------
Net income (loss) per
share................. $ 0.29 $ (0.27) $ 0.03 $ (1.86) $ (0.73) $ 0.09 $ 0.35 $ 0.16
======== ======== ======== ========= ======== ======== ======== ========
Income (loss) per common
share--assuming
dilution:
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ 0.28 $ (0.27) $ 0.03 $ (1.86) $ (0.61) $ 0.20 $ 0.33 $ 0.16
Extraordinary loss..... (0.03) (0.12)
Cumulative effect of
change in accounting
principle............. (0.09)
-------- -------- -------- --------- -------- -------- -------- --------
Net income (loss) per
share................. $ 0.28 $ (0.27) $ 0.03 $ (1.86) $ (0.73) $ 0.08 $ 0.33 $ 0.16
======== ======== ======== ========= ======== ======== ======== ========
</TABLE>
Certain reclassifications have been made to conform with the 1999 year-end
presentation.
F-32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this Report on Form 10-K to be
signed on our behalf by the undersigned, thereunto duly authorized, in the
City of Torrance, State of California, on March 29, 2000.
TOTAL RENAL CARE HOLDINGS, INC.
/s/ Kent J. Thiry
By: _________________________________
Kent J. Thiry
Chairman and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Kent J. Thiry and Steven J. Udicious, and each
of them his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Kent J. Thiry Chairman and Chief March 29, 2000
______________________________________ Executive Officer
Kent J. Thiry (Principal Executive
Officer)
/s/ Richard K. Whitney Chief Financial Officer March 29, 2000
______________________________________ (Principal Financial
Richard K. Whitney Officer)
/s/ John J. McDonough Vice President and Chief March 29, 2000
______________________________________ Accounting Officer
John J. McDonough (Principal Accounting
Officer)
/s/ Maris Andersons Director March 29, 2000
______________________________________
Maris Andersons
/s/ Richard B. Fontaine Director March 29, 2000
______________________________________
Richard B. Fontaine
/s/ Peter T. Grauer Director March 29, 2000
______________________________________
Peter T. Grauer
/s/ C. Raymond Larkin, Jr. Director March 29, 2000
______________________________________
C. Raymond Larkin, Jr.
/s/ Shaul G. Massry Director March 29, 2000
______________________________________
Shaul G. Massry
</TABLE>
II-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Total Renal Care Holdings, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 22, 2000, appearing on page F-1 of this Annual Report on
Form 10-K also included audits of the Financial Statement Schedule listed in
Item 14(a)(2) of this Form 10-K for the years ended December 31, 1999, 1998
and 1997. In our opinion, the Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10, the Company
is not in compliance with certain debt covenants which raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
PricewaterhouseCoopers LLP
Seattle, Washington
March 22, 2000
S-1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Amounts Balances of Balance
beginning charged to companies Amounts at end
Description of year income acquired written off of year
----------- ---------- ---------- ----------- ----------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for
uncollectible accounts:
Year ended December
31, 1997............. $15,765 $ 28,899 $2,962 $ 16,931 $30,695
Year ended December
31, 1998............. 30,695 44,858 679 14,384 61,848
Year ended December
31, 1999............. 61,848 133,253 -- 127,786 67,315
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------- ------
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of TRCH,
dated December 4, 1995.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of
TRCH, dated February 26, 1998.(2)
3.3 Bylaws of TRCH, dated October 6, 1995.(3)
4.1 Shareholders Agreement, dated August 11, 1994, between DLJMBP
and affiliates, NME Properties, Continental Bank, as voting
trustee, and TRCH.(4)
4.2 Agreement and Amendment, dated as of June 30, 1995, between
DLJMBP and affiliates, Tenet, TRCH, Victor M.G. Chaltiel,
the Putnam Purchasers, the Crescent Purchasers and the
Harvard Purchasers, relating to the Shareholders Agreement
dated as of August 11, 1994.(4)
4.3 Indenture, dated June 12, 1996 by RTC to PNC Bank including
form of RTC Note.(5)
4.4 First Supplemental Indenture, dated as of February 27, 1998,
among RTC, TRCH and PNC Bank under the 1996 Indenture.(2)
4.5 Second Supplemental Indenture, dated as of March 31, 1998,
among RTC, TRCH and PNC Bank under the 1996 Indenture.(2)
4.6 Indenture, dated as of November 18, 1998, between TRCH and
United States Trust Company of New York, as trustee, and
Form of Note.(6)
4.7 Registration Rights Agreement, dated as of November 18, 1998,
between TRCH and DLJ, BNY Capital Markets, Inc., Credit
Suisse First Boston Corporation and Warburg Dillon Read LLC,
as the initial purchasers.(6)
4.8 Purchase Agreement, dated as of November 12, 1998, between
TRCH and the initial purchasers.(6)
10.1 Noncompetition Agreement, dated August 11, 1994, between TRCH
and Tenet.(4)
10.2 Employment Agreement, dated as of August 11, 1994, by and
between TRCH and Victor M.G. Chaltiel (with forms of
Promissory Note and Pledge and Stock Subscription Agreement
attached as exhibits thereto).(4)*
10.3 Amendment to Mr. Chaltiel's employment agreement, dated as of
August 11, 1994.(4)*
10.4 Second Amendment to Mr. Chaltiel's employment agreement,
dated as of March 2, 1998.(7)*
10.5 Employment Agreement, dated as of March 2, 1998, by and
between TRCH and Barry C. Cosgrove.(8)*
10.6 Employment Agreement, dated as of March 2, 1998, by and
between TRCH and Leonard W. Frie.(8)*
10.7 Employment Agreement, dated as of March 2, 1998, by and
between TRCH and John E. King.(8)*
10.8 Employment Agreement, dated as of March 2, 1998, by and
between TRCH and Stan M. Lindenfeld.(8)*
10.9 Amendment to Dr. Lindenfeld's employment agreement, dated
September 1, 1998.(7)*
10.10 Employment Agreement, dated as of May 6, 1999, by and between
TRCH and George DeHuff.(9)*
10.11 Employment Agreement, dated as of October 18, 1999, by and
between TRCH and Kent J. Thiry.(10)*
</TABLE>
<PAGE>
EXHIBIT INDEX--(Continued)
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------- ------
<C> <S> <C>
10.12 Employment Agreement, dated as of March 1, 1998, by and
between TRCH and John J. McDonough.[X]*
10.13 Agreement, dated as of October 6, 1999, by and between TRCH
and Victor M.G. Chaltiel.(10)*
10.14 Agreement, dated as of October 18, 1999, by and between TRCH
and John E. King.(10)*
10.15 Consulting Agreement, dated as of October 1, 1998, by and
between Total Renal Care, Inc. and Shaul G. Massry,
M.D.(10)*
10.16 Second Amended and Restated 1994 Equity Compensation Plan.[X]*
10.17 Form of Stock Subscription Agreement relating to the 1994
Equity Compensation Plan.(4)*
10.18 Form of Promissory Note and Pledge Agreement relating to the
1994 Equity Compensation Plan.(4)*
10.19 Form of Purchased Shares Award Agreement relating to the 1994
Equity Compensation Plan.(4)*
10.20 Form of Nonqualified Stock Option relating to the 1994 Equity
Compensation Plan.(4)*
10.21 First Amended and Restated 1995 Equity Compensation Plan.[X]*
10.22 Employee Stock Purchase Plan, 1999 Amendment and
Restatement.[X]*
10.23 Option Exercise and Bonus Agreement, dated as of September
18, 1995 between TRCH and Victor M.G. Chaltiel.(3)*
10.24 First Amended and Restated 1997 Equity Compensation Plan.[X]*
10.25 First Amended and Restated Special Purpose Option Plan.[X]*
10.26 1999 Equity Compensation Plan.(11)
10.27 Amended and Restated Revolving Credit Agreement, dated as of
April 30, 1998, by and among TRCH, the lenders party
thereto, DLJ Capital Funding, Inc., as Syndication Agent,
First Union National Bank, as Documentation Agent, and The
Bank of New York, as Administrative Agent.(12)
10.28 Amendment No. 1 and Consent No. 1, dated as of August 5,
1998, to the Revolving Credit Agreement.(7)
10.29 Amendment No. 2, dated as of November 12, 1998, to the
Revolving Credit Agreement.(7)
10.30 Amendment No. 3 and Waiver, dated as of August 9, 1999, to
and under the Revolving Credit Agreement.(9)
10.31 Amendment No. 4 and Waiver, dated as of November 8, 1999, to
and under the Revolving Credit Agreement.(10)
10.32 Amendment No. 5 and Consent, dated as of February 22, 2000,
to and under the Revolving Credit Agreement.[X]
10.33 Amended and Restated Term Loan Agreement, dated as of April
30, 1998, by and among TRCH, the lenders party thereto, DLJ
Capital Funding, Inc., as Syndication Agent, First Union
National Bank, as Documentation Agent, and The Bank of New
York, as Administrative Agent.(12)
10.34 First Amendment, dated as of August 5, 1998, to the Term Loan
Agreement.(13)
10.35 Limited Waiver and Second Amendment, dated as of August 9,
1999, to the Term Loan Agreement.(9)
</TABLE>
<PAGE>
EXHIBIT INDEX--(Continued)
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------- ------
<C> <S> <C>
10.36 Limited Waiver and Third Amendment, dated as of November 8,
1999, to the Term Loan Agreement.(10)
10.37 Subsidiary Guaranty dated as of October 24, 1997 by Total
Renal Care, Inc., TRC West, Inc. and Total Renal Care
Acquisition Corp. in favor of and for the benefit of The
Bank of New York, as Collateral Agent, the lenders to the
Revolving Credit Agreement, the lenders to the Term Loan
Agreement, the Term Agent (as defined therein), the
Acknowledging Interest Rate Exchangers (as defined therein)
and the Acknowledging Currency Exchangers (as defined
therein).(14)
10.38 Borrower Pledge Agreement dated as of October 24, 1997 and
entered into by and between the Company, and The Bank of New
York, as Collateral Agent, the lenders to the Revolving
Credit Agreement, the lenders to the Term Loan Agreement,
the Term Agent (as defined therein), the Acknowledging
Interest Rate Exchangers (as defined therein) and the
Acknowledging Currency Exchangers (as defined therein).(14)
10.39 Amendment to Borrower Pledge Agreement, dated February 27,
1998, executed by TRCH in favor of The Bank of New York, as
Collateral Agent.(7)
10.40 Form of Subsidiary Pledge Agreement dated as of October 24,
1997 by Total Renal Care, Inc., TRC West, Inc. and Total
Renal Care Acquisition Corp., and The Bank of New York, as
Collateral Agent, the lenders to the Revolving Credit
Agreement, the lenders to the Term Loan Agreement, the Term
Agent (as defined therein), the Acknowledging Interest Rate
Exchangers (as defined therein) and the Acknowledging
Currency Exchangers (as defined therein).(14)
10.41 Subsidiary Pledge Agreement, dated as of February 27, 1998,
by RTC and The Bank of New York, as Collateral Agent, the
lenders to the Revolving Credit Agreement, the lenders to
the Term Loan Agreement, the Term Agent (as defined
therein), the Acknowledging Interest Rate Exchangers (as
defined therein) and the Acknowledging Currency Exchangers
(as defined therein).(7)
10.42 Form of First Amendment to Borrower/Subsidiary Pledge
Agreement, dated April 30, 1998, by and among TRCH, RTC, TRC
and The Bank of New York, as Collateral Agent.(12)
10.43 Form of Acknowledgement and Confirmation, dated April 30,
1998, by TRCH, RTC, TRC West, Inc., Total Renal Care, Inc.,
Total Renal Care Acquisition Corp., Renal Treatment
Centers--Mid-Atlantic, Inc., Renal Treatment Centers--
Northeast, Inc., Renal Treatment Centers--California, Inc.,
Renal Treatment Centers--West, Inc., and Renal Treatment
Centers--Southeast, Inc. for the benefit of The Bank of New
York, as Collateral Agent and the lenders party to the Term
Loan Agreement or the Revolving Credit Agreement.(12)
10.44 First Amendment to the Subsidiary Guaranty dated February 17,
1998.(2)
10.45 Guaranty, entered into as of March 31, 1998, by TRCH in favor
of and for the benefit of PNC Bank.(2)
12.1 Statement re Computation of Ratios of Earnings to Fixed
Charges.[X]
21.1 List of our subsidiaries.[X]
23.1 Consent of PricewaterhouseCoopers LLP.[X]
24.1 Powers of Attorney with respect to TRCH (included on page II-
1).
27.1 Financial Data Schedule.[X]
</TABLE>
<PAGE>
EXHIBIT INDEX--(Continued)
- --------
[X] Included in this filing.
* Management contract or executive compensation plan or arrangement.
(1) Filed on March 18, 1996 as an exhibit to our Transitional Report on Form
10-K for the transition period from June 1, 1995 to December 31, 1995.
(2) Filed on March 31, 1998 as an exhibit to our Form 10-K for the year ended
December 31, 1997.
(3) Filed on October 24, 1995 as an exhibit to Amendment No. 2 to our
Registration Statement on Form S-1 (Registration Statement No. 33-97618).
(4) Filed on August 29, 1995 as an exhibit to our Form 10-K for the year
ended May 31, 1995.
(5) Filed as an exhibit to RTC's Form 10-Q for the quarter ended June 30,
1996.
(6) Filed on December 18, 1998 as an exhibit to our Registration Statement on
Form S-3 (Registration Statement No. 333-69227).
(7) Filed on March 31, 1999 as an exhibit to our Form 10-K for the year ended
December 31, 1998.
(8) Filed as an exhibit to our Form 10-Q for the quarter ended September 30,
1998.
(9) Filed on August 16, 1999 as an exhibit to our Form 10-Q for the quarter
ended June 30, 1999.
(10) Filed on November 15, 1999 as an exhibit to our Form 10-Q for the quarter
ended September 30, 1999.
(11) Filed on February 18, 2000 as an exhibit to our Registration Statement on
Form S-8 (Registration Statement No. 333-30736).
(12) Filed on May 18, 1998 as an exhibit to Amendment No. 1 to our annual
report for the year ended December 31, 1997 on Form 10-K/A.
(13) Filed on October 8, 1999 as an exhibit to our Form 10-K/A (Amendment No.
1) for the year ended December 31, 1998.
(14) Filed on December 19, 1997 as an exhibit to our Current Report on Form 8-
K.
<PAGE>
EXHIBIT 10.12
TERMS OF EMPLOYMENT - DIVISIONAL V.P.
These Terms of Employment (this "Agreement") shall govern the employment of
John McDonough("Employee") by Total Renal Care Holdings, Inc. or any of its
direct or indirect subsidiaries (the entity employing Employee at any time is
referred to herein as the "Company"). In consideration of the Company's
agreement to employ or to continue to employ Employee and the mutual promises
set forth in this Agreement, the Company and Employee, intending to be legally
bound, agree as follows:
Section 1. Employment and Duties. The Company shall employ Employee,
---------------------
and Employee accepts such employment, on an "at will" basis and on the terms and
conditions set forth in this Agreement. Employee shall serve the Company in
such capacities as the Company deems appropriate from time to time and shall
perform such duties as may be assigned to Employee from time to time during the
continuance of Employee's employment by the Company by the Chief Executive
Officer of the Company or his designee. Employee shall devote Employee's best
efforts and skills to the business and interests of the Company on a full-time
basis. Employee shall not engage in any other business activity while employed
by the Company; provided, however, that Employee may manage personal investments
and participate in charitable and civic affairs to the extent that such
activities do not adversely affect the performance of Employee's
responsibilities to the Company hereunder. Employee 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 Employee hereunder, Employee shall receive:
2.1 Base Salary. A salary at the rate of $130,000 per year (the
-----------
"Base Salary"), effective as of March 1, 1998. The Base Salary shall be payable
in installments consistent with the Company's payroll schedule. The Base Salary
shall be subject to adjustment annually for increases, if any, in the Consumer
Price Index for the most proximate geographic area in which Employee 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. Employee shall be provided employee benefits
--------
(including life, health, accident and disability insurance, stock options and
vacation) on the same basis as such benefits are generally made available to
other employees of similar position with the Company.
2.3 Bonuses.
-------
(a) Employee shall be eligible to receive such bonuses as are
approved by the Compensation Committee of the Board of Directors of the Company,
provided that Employee
<PAGE>
shall be eligible to receive a bonus of up to 50% of the Base Salary each year
pursuant to such bonus plans as may be approved by the Compensation Committee
(the "Bonus"). Except as otherwise provided herein, up to 50% of the Bonus will
be awarded in connection with the achievement of a Company earnings per share
("EPS") target (the "EPS Bonus") and the remainder of the Bonus shall be subject
to the absolute discretion of the Committee based upon the Committee's
subjective judgment.
(b) Except as set forth below, the Company EPS target for
determination of Employee's EPS Bonus shall be determined in the sole discretion
of the Committee, provided that the EPS target used to determine Employee's EPS
Bonus shall be identical to the EPS target used to determine the EPS Bonuses for
the executive officers of the Company. For the calendar year ending December
31, 1998 , the EPS Bonus will represent 50% of the Bonus and Employee shall be
entitled to receive (i) 50% of the EPS Bonus if the Company's EPS for such year
("1998 EPS") equals or exceeds 125% of the Company's EPS for the calendar year
ended December 31, 1997 ("1997 EPS"), (ii) 100% of the EPS Bonus if 1998 EPS
equals or exceeds 150% of 1997 EPS, and (iii) a pro rated amount between 50% and
100% of the EPS Bonus if 1998 EPS is greater than 125% of 1997 EPS but less than
150% of 1997 EPS.
(c) The Bonus for any year shall be paid within a reasonable
period of time after the EPS for such year has been determined, but in no event
later than 75 days after the last day of such year. Employee 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 Employee is not employed by the Company (or an
affiliate) on the date any Bonus is paid for any reason whatsoever, Employee
shall not be entitled to receive such Bonus; provided, however, that in the
event Employee (i) dies, (ii) is terminated by the Company by reason of
Disability (as defined below), or (iii) is terminated without Material Cause (as
defined below) following a Change of Control (as defined below), Employee shall
be entitled to receive a pro rated Bonus for that portion of any year prior to
such termination (or for the whole year and a portion of a year if such
termination occurs after December 31 of any year and prior to the date on which
the Bonus for such year is paid) regardless of whether Employee is employed on
the date such Bonus is paid. Any such prorated Bonus shall be paid at such time
as bonuses for such year are otherwise paid.
Section 3. Provisions Relating to Termination of Employment.
------------------------------------------------
3.1 Employment At Will. Employee's employment with the Company
------------------
is "at will" and is terminable by the Company or by Employee at any time without
prior notice and for any reason or for no reason. Except as expressly provided
in this Section 3 or as otherwise required by law, upon the termination of
---------
Employee's employment with the Company for any reason, Employee (i) shall be
entitled to receive the Base Salary and benefits as set forth in Section 2.1 and
-----------
Section 2.2 through the effective date of such termination and (ii) shall not be
- -----------
entitled to receive any other
2
<PAGE>
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.
3.2 Termination Following a Change of Control. Although Employee's
-----------------------------------------
employment hereunder is "at will" and may be terminated at any time by the
Company for any reason or for no reason, if, at any time following a Change of
Control, Employee's employment is terminated for any reason other than Material
Cause, death or Disability (as defined below), Employee shall be obligated to
provide consulting services to the Company as provided in Section 4 and shall be
---------
entitled to receive (i) to the extent applicable, the bonus provided for in
Section 2.3(c) and (ii) in consideration for such consulting services, within
two business days of the effective date of such termination, a lump sum payment
in an amount equal to one-half (1/2) of Employee's then current Base Salary.
3.3 Termination Due To Disability. In the event the Company
-----------------------------
terminates Employee for Disability, unless Employee is eligible to receive full
disability benefits under the disability insurance, if any, provided to Employee
by the Company, the Company shall continue to pay the Base Salary to Employee
until the first to occur of (i) six (6) months or (ii) full disability benefits
are available to Employee.
3.4 Definitions. For the purposes of this Section 3, the following
----------- ---------
terms shall have the meanings indicated:
(a) "Change of Control" shall mean (i) any transaction or series
of transactions in which any person or group (within the meaning of Rule 13d-5
under the Exchange Act and Sections 13(d) and 14(d) of the Exchange Act) becomes
the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), by way of a stock issuance, tender offer, merger, consolidation,
other business combination or otherwise, of greater than 50% of the total voting
power (on a fully diluted basis as if all convertible securities had been
converted and all warrants and options had been exercised) entitled to vote in
the election of directors of the Company (including any transaction in which the
Company becomes a wholly owned or majority owned subsidiary of another
corporation), (ii) any merger or consolidation or reorganization in which the
Company does not survive, (iii) any merger or consolidation in which the Company
survives, but the shares of the Company's Common Stock outstanding immediately
prior to such merger or consolidation represent 50% or less of the voting power
of the Company after such merger or consolidation, and (iv) any transaction in
which more than 50% of the Company's assets are sold.
(b) "Disability" shall mean the inability, for a period of six
(6) months to adequately perform Employee's regular duties due to a physical or
mental illness, condition or disability.
3
<PAGE>
(c) "Material Cause" shall mean: (i) conviction of a felony
involving moral turpitude relating to the business of the Company and which
does, in fact, adversely and directly affect the business of the Company; (ii)
the adjudication by a court of competent jurisdiction that Employee has
committed any act of fraud or dishonesty resulting or intended to result
directly or indirectly in personal enrichment at the expense of the Company;
(iii) repeated failure or refusal by Employee to follow policies or directives
reasonably established by the Chief Executive Officer of the Company or his
designee that goes uncorrected for a period of thirty (30) consecutive days
after written notice has been provided to Employee; or (iv) intentional breach
by Employee of Section 5.1 or Section 5.2 of this Agreement.
----------- -----------
3.5 Effect of Termination. Upon termination, this Agreement
---------------------
shall be of no further force and effect and neither party shall have any
further right or obligation hereunder; provided, however, that no termination
shall modify or affect the rights and obligations of the parties which have
accrued prior to termination; and provided further, that the rights and
obligations of the parties under Section 3, Section 4, Section 5, Section 6 and
--------- --------- --------- ---------
Section 7 shall survive termination of this Agreement. Notwithstanding anything
to the contrary set forth herein, upon the termination of this Agreement,
Employee shall be entitled to receive any payments or benefits under any
benefit, or retirement plans or other arrangements that would, by their terms,
apply.
Section 4. Consulting Services. If Employee is entitled to receive a
-------------------
lump sum payment upon the termination of employment pursuant to Section 3.2 and
-----------
receives such payment, acceptance of such payment shall be deemed to constitute
an agreement by Employee to provide consulting services to the Company for a
period of one year after the termination of employment (the "Consulting Period")
on an "as needed" basis (which shall not exceed 120 hours per year). The
consulting services to be provided during the Consulting Period will include
advising the Company as to those matters which were within the scope of
Employee's responsibilities while employed by the Company and such other
consulting services as may be mutually agreed upon by the Company and Employee.
The times and locations at which such consulting services will be provided will
be mutually agreed upon by Employee and the Company. During the Consulting
Period, Employee will not provide any similar consulting services in any manner,
directly or indirectly, to any Person described in clause (i) or (ii) of Section
-------
5.2(a).
- ------
Section 5. Information and Competition.
---------------------------
5.1 (a) Employee acknowledges and agrees that: (i) in the course of
Employee's employment or continued employment by the Company, it will or may be
necessary for Employee 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
4
<PAGE>
Company's affairs (collectively, "Confidential Information") and (B) information
and materials that concern the Company's business that come into Employee'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 Employee not disclose any Confidential Information or
Business Related Information to others or use any Confidential Information or
Business Related Information to Employee's own advantage or the advantage of
others.
(b) In recognition of the acknowledgments contained in Section
-------
5.1(a) above, Employee agrees that, during the Term and thereafter until the
- ------
Confidential Information and Business Related Information becomes publicly
available (otherwise than through breach by Employee), Employee 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 Employee, except as required in the performance of Employee's
duties to the Company; (iii) keep in strictest confidence any Confidential
Information or Business Related Information; and (iv) not to disclose or
divulge, or allow to be disclosed or divulged by any person within Employee's
control, to any person, firm or corporation, or use directly or indirectly, for
Employee's own benefit or the benefit of others, any Confidential Information or
Business Related Information.
5.2 Competition.
-----------
(a) Employee agrees that, during the Term and for a period of
one (1) year from the date Employee's employment terminates for any reason,
Employee shall not: (i) directly or indirectly, on Employee'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 had conducted any
5
<PAGE>
business during Employee's employment hereunder, where such activity is similar
to or competitive with the activities carried on by the Company or any of its
subsidiaries or affiliates. As used herein, the term "dialysis services" or
"renal care services" includes, but shall not be limited to, all dialysis
services and nephrology-related services provided by the Company at any time
during the period, including, but not limited to, hemodialysis, acute dialysis,
apheresis services, peritoneal dialysis of any type, staff-assisted
hemodialysis, home hemodialysis, dialysis-related laboratory and pharmacy
services, access-related services, Method II dialysis supplies and services, and
any other service or treatment for persons diagnosed as having end stage renal
disease ("ESRD") or pre-end stage renal disease, as well as any dialysis
services provided in an acute hospital. To the extent such regulation is changed
or amended, the term "ESRD" shall have the same meaning as set forth in Title
42, Code of Federal Regulations 405.2101 et seq. or any successor thereto.
Employee 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) Employee agrees that, during the Term and for a period of
one (1) years from the date Employee's employment terminates for any reason,
Employee 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 Employee if any patient or customer of the Company were to withdraw,
curtail or cancel such person's business with the Company; (iv) solicit, induce
or encourage any physician (or former physician) affiliated with the Company or
induce or encourage any other person employed by or under contract with the
Company to curtail or terminate such person's affiliation or employment or
contractual relationship with the Company; (iv) disclose to any Person the names
or physician addresses of any customer of the Company; or (vi) disparage the
Company or any of its agents, employees or affiliate physicians in any fashion.
5.3 Enforcement. In the event that any part of this Section 5 shall
----------- ---------
be held unenforceable or invalid, the remaining parts hereof shall nevertheless
continue to be valid and enforceable as though the invalid portions had not been
a part hereof. In the event that the area, period of restriction, activity or
subject established in accordance with this Section 5 shall be deemed to exceed
---------
the maximum area, period of restriction, activity or subject that a court of
competent jurisdiction deems enforceable, such area, period of restriction,
activity or subject shall, for the purpose of this Section 5, be reduced to the
---------
extent necessary to render them enforceable.
5.4 Equitable Relief. Employee agrees that any violation by Employee
----------------
of any covenant in this Section 5 may cause such damage to the Company as will
---------
be serious and irreparable
6
<PAGE>
and the exact amount of which will be difficult to ascertain, and for that
reason, Employee 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 Employee. 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 Employee's employment
---------
with the Company for any reason, Employee 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. Amendment of Stock Options. This Agreement shall serve to
--------------------------
memorialize the amendment approved by the Board of Directors of the Company on
March 2, 1998 to any and all stock options held by Employee prior to such date
(the "Options") to provide that the Options may be exercised through the
delivery of shares of Common Stock owned by Employee having a fair market value
as of the date of such exercise equal to the cash exercise price of the Options
being exercised, provided that such shares of Common Stock being so delivered
have been owned by Employee for at least six (6) months prior to the date of
such exercise. The parties acknowledge and agree that, the Options will become
fully vested and exercisable without regard to their vesting provisions in the
event that Employee is terminated by the Company for any reason at any time
following a Change of Control as set forth in Section 3.4(a) hereof.
Section 7. Miscellaneous.
-------------
7.1 Mediation of Disputes Concerning Employment. In the event of
-------------------------------------------
any dispute concerning Employee's employment by the Company, whether or not
relating to this Agreement, Employee and the Company shall first attempt to
resolve such dispute through mediation as provided in this Section 7.1 before
-----------
instituting any legal action or other proceedings with respect thereto;
provided, however, that neither party shall be required to utilize such
mediation procedures to the extent that equitable relief is being sought by a
party in the good faith belief that an immediate remedy is required to avoid
irreparable injury to such party. Except as otherwise provided in the proviso
to the immediately preceding sentence, in the event that either party desires to
institute litigation or other legal proceedings to resolve a dispute concerning
Employee'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
7
<PAGE>
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 Employee.
7.2 Entire Agreement; Amendment. This Agreement represents the
---------------------------
entire understanding of the parties hereto with respect to the employment of
Employee and supersedes all prior agreements with respect thereto; provided,
however, that except as set forth in Section 6, this Agreement shall not affect
---------
any stock option agreement or similar agreement relating to equity incentives
between the Company and Employee. This Agreement may not be altered or amended
except in writing executed by both parties hereto.
7.3 Assignment; Benefit. This Agreement is personal and may not be
-------------------
assigned by Employee. This Agreement may be assigned by the Company and shall
inure to the benefit of and be binding upon the successors and assigns of the
Company.
7.4 Applicable Law. This Agreement shall be governed by the laws of
--------------
the State of California, without regard to the principles of conflicts of laws.
7.5 Notice. Notices and all other communications provided for in
------
this Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, addressed to the Company at its principal office and
to Employee at Employee's principal residence as shown in the Company's
personnel records, provided that all notices to the Company shall be directed to
the attention of the Chief Executive Officer with a copy to the Secretary of the
Company, or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of
8
<PAGE>
change of address shall be effective only upon receipt.
7.6 Waiver. The waiver by any party of a breach of any provision of
------
this Agreement by the other shall not operate or be construed as a waiver of any
other or subsequent breach of such or any provision.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the 1/st/ day of March, 1998.
TOTAL RENAL CARE HOLDINGS, INC. EMPLOYEE
By:_______________________________ ________________________________
Signature
Its:______________________________ ________________________________
John McDonough
9
<PAGE>
EXHIBIT 10.16
SECOND AMENDED AND RESTATED
TOTAL RENAL CARE HOLDINGS, INC.
1994 EQUITY COMPENSATION PLAN
SECTION 1. Purpose. The purposes of this Total Renal Care Holdings,
-------
Inc. 1994 Equity Compensation Plan (the "Plan") are to promote the interests of
Total Renal Care Holdings, Inc. (together with any successor thereto, the
"Company") and its stockholders by (i) attracting and retaining key employees,
directors, consultants and advisers of the Company and its Affiliates; (ii)
motivating such individuals by means of performance-related incentives to
achieve longer-range performance goals; and (iii) enabling such individuals to
participate in the long-term growth and financial success of the Company.
SECTION 2. Definitions. As used in the Plan, the following terms
-----------
shall have the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or through one or
more intermediaries, controls or is controlled by the Company and (ii) any
entity in which the Company has a significant equity interest, as determined by
the Committee.
"Award" shall mean any Option or Purchased Shares Award.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant, unless otherwise determined by the
Committee.
"Board" shall mean the Board of Directors of the Company.
"Cause" shall mean "Cause" as defined in the applicable employment
agreement between the Participant and the Company, or if there is no such
agreement at the relevant time or such agreement does not define such term, then
(i) a Participant's willful and continued failure substantially to perform his
duties with, or services for, the Company or its Affiliates (other than as a
result of death or Disability), (ii) a Participant's dishonesty in the
performance of his duties with, or services for, the Company or its Affiliates,
(iii) an act or acts on a Participant's part constituting a felony under the
laws of the United States or any state thereof, (iv) any other act or omission
by a Participant which is materially injurious to the financial condition or
business reputation of the Company or any of its Affiliates, or (v) the
occurrence of a Non-Compete Trigger or Confidentiality Trigger.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Committee" shall mean (i) a committee of the Board designated by the
Board to administer the Plan and composed of not less than the minimum number of
persons from time to time required by any applicable law and, during any period
in which the Company has become
<PAGE>
subject to the provisions of Section 16, Rule 16b-3, each of whom, to the extent
necessary to comply with Rule 16b-3 only, is a "disinterested person" within the
meaning of Rule 16b-3 or (ii) if the Board has not so designated a committee,
the Board.
"Confidentiality Trigger" shall mean a Participant's disclosure or use
for his own benefit or purposes or for the benefit or purposes of any 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 (whether during or after the termination of his
employment, consulting or advisory relationship with the Company), of 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 of any Subsidiary or
Affiliate of the Company; provided that the foregoing shall not apply to
--------
information which is not unique to the Company or which is generally known to
the industry or the public other than as a result of the Participant's breach of
this covenant or to disclosure that is required by any applicable law, rule or
regulation (including compliance with any oral or written questions,
interrogatories, requests for information or documents, subpoena, civil
investigative demand or similar process to which the Participant is subject).
"Disability" shall mean "Disability" as defined in the applicable
employment agreement between the Participant and the Company, or if there is no
such agreement at the relevant time or such agreement does not define such term,
then the physical or mental incapacity resulting in the Participant being unable
for a period of six (6) consecutive months or for an aggregate of six (6) months
in any twenty-four (24) consecutive month period to perform his duties with, or
services for, the Company, as determined in good faith by the Committee, which
determination shall be final and conclusive for all purposes of this Plan.
"Effective Date" shall mean the effective date of the Plan as
determined pursuant to Section 9.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall mean, (A) with respect to any property other
than the Shares or any Option, the fair market value of such property determined
by such methods or procedures as shall be established from time to time by the
Committee and (B) with respect to the Shares, except as otherwise provided in
the applicable employment agreement between the Participant and the Company, as
of any date:
(i) if there is a public market for the Shares as of such date
(x) the last reported sales price of the Shares on the principal national
securities exchange on which the Shares are listed or admitted to trading on the
date immediately preceding such date or, if no such reported sale takes place on
such day, the average of the closing bid and asked prices
2
<PAGE>
thereon, as reported in The Wall Street Journal, or (y) if the Shares are not
-----------------------
then listed or admitted to trading on a national securities exchange, the last
reported sales price on the NASDAQ National Market System on the date
immediately preceding such date or, if no such reported sale takes place on such
day, the average of the closing bid and asked prices thereon, as reported in The
---
Wall Street Journal, or (z) if the Shares are not then quoted on such National
- -------------------
Market System or listed or admitted to trading on a national securities
exchange, the average of the closing bid and asked prices, as reported by The
---
Wall Street Journal for the over-the-counter market on the date immediately
- -------------------
preceding such date; or
(ii) if there is no public market for the Shares as of such
date, then (x) $1.00 per Share if Fair Market Value is being determined as of a
date within one (1) year of the Effective Date or (y) the per share value as
determined by an accounting firm, investment banking firm or appraisal firm of
national standin g selected by the Committee; provided that if such value has
--------
previously been determined for the Company by an accounting firm, investment
banking firm or appraisal firm of national standing with respect to a date not
more than twelve months prior to such date, at the Committee's option, the Fair
Market Value will equal the value as so determined.
"Fair Market Value Per Option" shall mean with respect to any Option,
the excess, if any, of the aggregate Fair Market Value of the Shares represented
by the unexercised and uncancelled portion of such Option over the aggregate
purchase price of such Shares pursuant to such Option.
"Initial Grant Options" shall mean those Options granted as of the
Effective Date pursuant to Section 6(a).
"Initial Public Offering" shall mean the initial sale of Shares
pursuant to an effective registration statement under the Securities Act of 1933
(other than a registration statement on Form S-8 or any successor form), if, as
a result of such sale, the Company receives net proceeds of at least
$15,000,000.
"Initial Purchased Shares" shall mean the Purchased Shares made
available for purchase pursuant to Purchased Shares Awards granted as of the
Effective Date pursuant to Section 6(b).
"Non-Compete Trigger" shall mean the occurrence during the
Participant's employment with or retention by the Company or during the period
from the date the Participant ceases employment with, or providing consulting or
advisory services to, the Company, as the case may be, through the first
anniversary of that date, of (i) the Participant's engagement in or becoming an
employee, director, or principal or shareholder of, consultant to or equity
participant in, any Person that engages in, activities that are in competition
with the Company within the United States of America or such other geographic
area as is specified in the applicable Award
3
<PAGE>
Agreement; provided that such activities will be limited to those businesses of
--------
the Company in which the Company was engaged during the term of such
Participant's employment or provision of consulting or advisory services to the
Company; provided further that the Participant may make passive investments of
-------- -------
not more than one percent of the outstanding shares of, or any other equity
interest in, any company or entity listed or traded on a national securities
exchange or in an over-the-counter securities market or (ii) (x) the
Participant's direct or indirect inducement of any employee of the Company or
any of its Subsidiaries, any Medical Director who is an independent contractor
for the Company or its Subsidiaries or any physician referring patients to the
Company or its Subsidiaries to (A) engage in any activity that would result in
the occurrence of a Non-Compete Trigger if engaged in by the Participant or (B)
terminate his or her employment, contractual relationship or referring
relationship, respectively, with the Company or any of its Subsidiaries or (y)
the Participant's direct or indirect employment of, or offer of employment or
other similar arrangement with, any person who is or was during the period of
the Participant's employment or consulting or advisory relationship with the
Company, or was beforehand, employed by the Company or its Subsidiaries, a
Medical Director of a dialysis facility owned or operated by the Company or its
Subsidiaries or a referring physician for any dialysis center owned or operated
by the Company or its Subsidiaries.
"Note" shall have the meaning set forth in Section 6(b)(i) hereof.
"Option" shall mean any Option (including any Initial Grant Option)
granted pursuant to Section 6(a).
"Participant" shall mean any employee or director of, or consultant or
adviser to, the Company granted an Award under the Plan.
"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, government
or political subdivision thereof or other entity.
"Pledge" shall have the meaning set forth in Section 6(c)(vi) hereof.
"Prime Rate" shall mean the rate of interest publicly announced by The
Bank of New York from time to time as its prime rate.
"Purchased Shares" shall mean the shares made available for purchase
pursuant to Section 6(b) (including the Initial Purchased Shares).
"Purchased Shares Award" shall have the meaning set forth in Section
6(b) hereof.
"Purchased Shares Loan" shall have the meaning set forth in Section
6(b)(i) hereof.
4
<PAGE>
"Replaced Award" shall have the meaning set forth in Section 6(a)(iv)
hereof.
"Repurchase Notice" shall have the meaning set forth in Section
6(a)(iii) hereof.
"Repurchase Right" shall have the meaning set forth in Section
6(a)(iii) hereof.
"Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the
Exchange Act, or any successor rule or regulation thereto as in effect from time
to time.
"SEC" shall mean the Securities and Exchange Commission, or any
successor thereto.
"Section 16" shall mean Section 16 of the Exchange Act, or any
successor provision thereto as in effect from time to time.
"Shareholders Agreement" shall mean an agreement substantially in the
form of Exhibit A to the Subscription Agreement dated as of May 26, 1994 among
DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ
Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., NME Properties
Corp., the Company and National Medical Enterprises, Inc.
"Shares" shall mean shares of Class A Common Stock of the Company,
$.001 par value, and such other securities or property as may become the subject
of Awards or become subject to Awards pursuant to an adjustment made under
Section 4(b) of the Plan.
"Subsidiary" shall mean any entity (including, without limitation, any
partnership) of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions (including, in the case of a partnership, a general
partner) are at the time directly or indirectly owned by the Company.
SECTION 3. Administration. The Plan shall be administered by the
--------------
Committee. Subject to the terms of the Plan and applicable law, and in addition
to other express powers and authorizations conferred on the Committee by the
Plan, the Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the type or types of Awards to be granted to an
eligible director or employee of, or consultant or advisor to, the Company;
(iii) determine the number of Shares to be covered by, or with respect to which
payments, rights, or other matters are to be calculated in connection with,
Awards; (iv) determine the terms and conditions of any Award; (v) determine
whether, to what extent, and under what circumstances Awards may be settled or
exercised in cash, Shares, other securities, other Awards or other property, or
canceled, forfeited, or suspended and the method or methods by which Awards may
be settled, exercised, canceled, forfeited, or suspended; (vi) determine
whether, to what extent, and under
5
<PAGE>
what circumstances cash, Shares, other securities, other Awards, other property,
and other amounts payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any instrument or agreement relating
to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Plan; and (ix) make any other determination
and take any other action that the Committee deems necessary or desirable for
the administration of the Plan. Unless otherwise expressly provided in the Plan,
all designations, determinations, interpretations, and other decisions under or
with respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive, and binding
upon all Persons, including the Company, any Affiliate, any Participant, any
holder or beneficiary of any Award, any shareholder and any Employee.
SECTION 4. Shares Available for Awards.
---------------------------
(a) Shares Available. Subject to adjustment as provided in Section
----------------
4(b):
(i) Calculation of Number of Shares Available. The number of
-----------------------------------------
Shares with respect to which Awards may be granted under the Plan shall be
5,084,447. If, after the effective date of the Plan, any Shares covered by an
Award granted under the Plan, or to which such an Award relates, are forfeited,
or if an Award otherwise terminates or is canceled without the delivery of
Shares or of other consideration, then the Shares covered by such Award, or to
which such Award relates, or the number of Shares otherwise counted against the
aggregate number of Shares with respect to which Awards may be granted, to the
extent of any such forfeiture, termination or cancellation, shall again be, or
shall become, Shares with respect to which Awards may be granted.
(ii) Accounting for Awards. For purposes of this
---------------------
Section 4, the number of Shares covered by any Award, or to which such Award
relates, shall be counted on the date of grant of such Award against the
aggregate number of Shares with respect to which Awards may be granted under the
Plan, provided, that Awards that operate in tandem with (whether granted
--------
simultaneously with or at a different time from), or that are substituted for,
other Awards may be counted or not counted under procedures adopted by the
Committee in order to avoid double counting. Any Shares delivered by the
Company, any Shares with respect to which Awards are made by the Company, or any
Shares with respect to which the Company becomes obligated to make Awards,
through the assumption of, or in substitution for, outstanding awards previously
granted by an acquired company, shall not, except in the case of Shares with
respect to which Awards are granted to employees of the Company who are officers
or directors of the Company for purposes of Section 16 or any successor section
thereto during any period in which the Company is subject to Section 16, be
counted against the Shares available for Awards under the Plan.
6
<PAGE>
(iii) Sources of Shares Deliverable Under Awards. Any Shares
------------------------------------------
delivered pursuant to an Award may consist, in whole or in part, of authorized
and unissued Shares or of treasury Shares.
(b) Adjustments. In the event that the Committee determines that
-----------
any dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such manner as
it may deem equitable, adjust any or all of (i) the number and type of Shares
(or other securities or property) with respect to which Awards may be granted,
(ii) the number and type of Shares (or other securities or property) subject to
outstanding Awards, and (iii) the grant or exercise price with respect to any
Award or, if deemed appropriate, make provision for a cash payment to the holder
of an outstanding Award; provided that the number of Shares subject to any
--------
Award denominated in Shares shall always be a whole number.
SECTION 5. Eligibility. Any employee or director of, or consultant
-----------
or adviser to, the Company or any Affiliate who is not a member of the
Committee, including any officer or employee-director of the Company or any
Affiliate, shall be eligible to be designated a Participant.
SECTION 6. Awards.
------
(a) Options. The Committee is hereby authorized to grant to any
-------
Participant an option to purchase Shares (an "Option") which shall contain the
following terms and conditions and such additional terms and conditions, which
are not inconsistent with the provisions of the Plan, as the Committee shall
determine; provided that such Options are not intended to constitute Incentive
--------
Stock Options within the meaning of Section 422 of the Code:
(i) Exercise Price. The purchase price per Share purchasable
--------------
under an Option shall be such amount as shall be determined by the Committee in
its sole discretion, provided that the purchase price per Share for any Initial
Grant Options shall be $1.00 per Share.
(ii) Time and Method of Exercise. The Committee shall
---------------------------
determine the time or times during which any Option may be exercised, in whole
or in part, and the conditions, if any, upon which any Option shall vest and
become exercisable on an accelerated basis or be canceled without consideration.
7
<PAGE>
(iii) Restrictions. Except as otherwise provided in any
------------
applicable Award Agreement, any Shares acquired by a Participant upon the
exercise of an Option shall, if so requested by the Committee in its sole
discretion, be held by the Participant subject to the terms and conditions of
the Shareholders Agreement, by which such Participant shall agree to be bound.
In addition, except as otherwise provided in any applicable Award Agreement,
upon termination of a Participant's employment, consulting or advising
relationship with the Company, or upon the occurrence of a Non-Compete Trigger
or a Confidentiality Trigger (whether during or after the termination of such
relationship), any portion of an Option which is not canceled by reason of such
termination and each Share acquired upon exercise of an Option shall be subject
to repurchase by the Company (the "Repurchase Right") at (A) Fair Market Value
Per Option or Fair Market Value Per Share, as the case may be, in the event of
such Participant's death, voluntary termination of his employment, consulting or
advisory relationship with the Company, or termination of such relationship due
to Disability or by the Company without Cause, as the case may be; provided than
--------
such Repurchase Right shall not arise solely by reason of a voluntary
termination of such relationship with the Company or termination by reason of
the Participant's death or Disability, if such event occurs after an Initial
Public Offering and (B) 80% of Fair Market Value Per Option or Fair Market Value
per Share, as the case may be, in the event of the termination of such
Participant's relationship with the Company by the Company with Cause or upon
the occurrence of a Non-Compete Trigger or Confidentiality Trigger. The Company
may exercise its Repurchase Right by giving written notice (a "Repurchase
Notice") to the Participant by no later than the 30th day following the date on
which such Repurchase Right arises. The closing for the exercise of the
Repurchase Right shall occur as promptly as practicable (but no later than 120
days) after delivery of the Repurchase Notice. On or prior to the closing of
the exercise of the Repurchase Right, the Participant shall deliver to a
representative of the Company certificates representing all the Shares subject
to the Repurchase Right, duly endorsed, together with all documents required to
be executed in connection with the sale of such Shares (it being understood that
in no event will the Participant be obligated to make any representations and
warranties, or to provide indemnities, with respect to any matters other than
title to the Shares subject to the Repurchase Right held by the Participant and
the authority to sell such Shares).
(iv) Substitute Awards. In the event an Option is granted
-----------------
hereunder in substitution for an option or other award granted under this Plan
or any other plan or arrangement (a "Replaced Award"), the grant of the Option
hereunder may be conditioned and contingent upon the Participant's execution of
a written acknowledgement that such Option is in satisfaction in full of all
obligations and liabilities of the Company, its Subsidiaries and Affiliates with
respect to the Replaced Award.
(b) Purchased Shares. The Committee is hereby authorized to grant to
----------------
any Participant the right to purchase Shares from the Company (the "Purchased
Shares") at a purchase price to be determined in the sole discretion of the
Committee (a "Purchased Shares
8
<PAGE>
Award"); provided that the purchase price with respect to the Initial Purchased
--------
Shares shall be equal to $1.00 per Share. The Purchased Shares shall be subject
to such conditions or restrictions as may be determined by the Committee as
evidenced in the applicable Award Agreement. Without limiting the generality of
the foregoing, except as otherwise provided in any applicable Award Agreement,
the Purchased Shares shall, if so requested by the Committee in its sole
discretion, be held by the Participant subject to the terms and conditions of
the Shareholders Agreement, by which such Participant shall agree to be bound,
and each Purchased Share shall be subject to the Company's Repurchase Right at
(A) Fair Market Value Per Share in the event of such Participant's death,
voluntary termination of his employment, consulting or advisory relationship
with the Company, or termination of such relationship due to Disability or by
the Company without Cause, as the case may be; provided that such Repurchase
--------
Right shall not arise solely by reason of a voluntary termination of such
relationship with the Company or termination by reason of the Participant's
death or Disability, if such event occurs after an Initial Public Offering, and
(B) 80% of Fair Market Value Per Share in the event of the termination of such
Participant's relationship with the Company by the Company with Cause or upon
the occurrence of a Non-Compete Trigger or Confidentiality Trigger (whether
during or after the termination of such relationship). The Company may exercise
its Repurchase Right by giving a Repurchase Notice to the Participant by no
later than the 30th day following the date on which such Repurchase Right
arises. The closing for the exercise of the Repurchase Right shall occur as
promptly as practicable (but no later than 120 days) after delivery of the
Repurchase Notice. On or prior to the closing of the exercise of the Repurchase
Right, the Participant shall deliver to a representative of the Company
certificates representing all the Shares subject to the Repurchase Right, duly
endorsed, together with all documents required to be executed in connection with
the sale of such Shares (it being understood that in no event will the
Participant be obligated to make any representations and warranties, or to
provide indemnities, with respect to any matters other than title to the Shares
subject to the Repurchase Right held by the Participant and the authority to
sell such Shares).
(i) Purchased Shares Loan. In order to assist Participants in
---------------------
financing the purchase of Shares pursuant to any Purchased Shares Award, with
respect to any Purchased Shares Award the Participant will be eligible to
receive a loan from the Company (the "Purchased Shares Loan") with a principal
amount equal to up to 100% of the aggregate purchase price of the Shares subject
to the Purchased Shares Award, as determined by the Committee. The Purchased
Shares Loan will be evidenced by a full recourse promissory note substantially
in the form of Exhibit I hereto (the "Note") and will be secured by a pledge by
the Participant in favor of the Company of all Shares purchased by the
Participant pursuant to any Purchased Shares Award or otherwise acquired by the
Participant upon the exercise of any Option.
(c) General.
-------
(i) Awards May Be Granted Separately or Together. Awards may,
--------------------------------------------
in the discretion of the Committee, be granted either alone or in addition to,
in tandem with,
9
<PAGE>
or in substitution for any other Award granted under the Plan or any award
granted under any other plan of the Company or any Affiliate or under any plan
of an acquired company. Awards granted in addition to or in tandem with other
Awards or awards granted under any other plan of the Company or any Affiliate
may be granted either at the same time as or at different times from the grant
of such other Awards or awards.
(ii) Form of Payment by Company Under Awards. Subject to the
---------------------------------------
terms of the Plan and of any applicable Award Agreement, payments or transfers
to be made by the Company or an Affiliate upon the grant, exercise or payment of
an Award may be made in such form or forms as the Committee shall determine,
including, without limitation, cash, Shares, other securities, other Awards or
other property, or any combination thereof and may be made in a single payment
or transfer, in installments, or on a deferred basis, in each case in accordance
with rules and procedures established by the Committee. Such rules and
procedures may include, without limitation, provisions for the payment or
crediting of reasonable interest on installment or deferred payments.
(iii) Limits on Transfer of Awards.
----------------------------
(A) Each Award, and each right under any Award, shall be
exercisable only by the Participant during the Participant's lifetime, or, if
permissible under applicable law, by the Participant's legal representative.
(B) No Award and no right under any such Award, may be
assigned, alienated, pledged, attached, sold or otherwise transferred or
encumbered by a Participant otherwise than by will or by the laws of community
property or of descent and distribution (or, in the case of Purchased Shares, to
the Company) and any such purported assignment, alienation, pledge, attachment,
sale, transfer or encumbrance shall be void and unenforceable against the
Company or any Affiliate.
(iv) Term of Awards. The term of each Award shall be for such
--------------
period as may be determined by the Committee; provided, that the term of the
--------
Initial Grant Options shall be 10 years from the date of grant, subject to
earlier cancellation as provided in the applicable Award Agreement.
(v) Rule 16b-3 Six-Month Limitations. During any period in
--------------------------------
which the Company is subject to the provisions of Section 16, to the extent
required in order to comply with Rule 16b-3 only, any equity security offered
pursuant to the Plan must be held for at least six months after the date of
grant, and with respect to any derivative security issued pursuant to the Plan
at least six months must elapse from the date of acquisition of such derivative
security to the date of disposition (other than upon exercise or conversion) of
the derivative security or its underlying equity security, except in case of
death or disability. Terms
10
<PAGE>
used in the preceding sentence shall, for the purposes of such sentence only,
have the meanings, if any, assigned or attributed to them under Rule 16b-3.
(vi) Share Certificates. All certificates for Shares or other
------------------
securities of the Company or any Affiliate delivered under the Plan pursuant to
any Award or the exercise thereof shall be subject to such stop transfer orders
and other restrictions as the Committee may deem advisable under the Plan or the
rules, regulations, and other requirements of the SEC, any stock exchange upon
which such Shares or other securities are then listed, and any applicable
Federal or state laws, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate reference to such restrictions. The
Company shall register in the name of the Participant the number of Shares
received by the Participant upon the exercise of any Option or acquired upon the
purchase of Shares pursuant to any Purchased Shares Award; provided that the
--------
Company may retain possession of the certificates relating to all such Shares,
which Shares shall be pledged (the "Pledge") by the Participant to the Company
as security for any Purchased Shares Loan provided to the Participant pursuant
to Section 6(b) on the terms and conditions set forth in the Note.
(vii) Consideration for Grants. Awards may be granted for
------------------------
no cash consideration or for such minimal cash consideration as may be required
by applicable law.
(viii) Delivery of Shares or Other Securities and Payment by
-----------------------------------------------------
Participant of Consideration. No Shares or other securities shall be delivered
- ----------------------------
pursuant to any Award until payment in full of any amount required to be paid
pursuant to the Plan or the applicable Award Agreement is received by the
Company. Such payment may be made by such method or methods and in such form or
forms as the Committee shall determine, including, without limitation, cash,
Shares, other securities, other Awards or other property, or any combination
thereof; provided that the combined value, as determined by the Committee, of
--------
all cash and cash equivalents and the Fair Market Value of any such Shares or
other property so tendered to the Company, as of the date of such tender, is at
least equal to the full amount required to be paid pursuant to the Plan or the
applicable Award Agreement to the Company.
SECTION 7. Amendment and Termination. Except to the extent
-------------------------
prohibited by applicable law and unless otherwise expressly provided in an Award
Agreement or in the Plan:
(a) Amendments to the Plan. The Board may amend, alter, suspend,
----------------------
discontinue, or terminate the Plan without the consent of any shareholder,
Participant, other holder or beneficiary of an Award, or other Person; provided
--------
that any such amendment, alteration, suspension, discontinuation, or termination
that would impair the rights of any Participant, or any other holder or
beneficiary of any Award theretofore granted, shall not to that extent be
effective except to the extent the Committee shall have obtained the consent of
such Participant, holder or beneficiary pursuant to Section 7(b); and provided
--------
further, that notwithstanding any other provision of the Plan or any Award
- -------
Agreement, in the event the Company is at such time subject to the requirements
of Section 16, without the approval of the
11
<PAGE>
shareholders of the Company no such amendment, alteration, suspension,
discontinuation, or termination shall be made that would:
(i) increase the total number of Shares available for Awards
under the Plan, except as provided in Section 4 of the Plan; or
(ii) otherwise cause the Plan to cease to comply with any tax or
regulatory requirement, including for these purposes any approval or other
requirement which is a prerequisite for exemptive relief from Section 16(b) of
the Exchange Act during any period in which the Company is subject to Section
16.
(b) Amendments to Awards. The Committee may waive any conditions or
--------------------
rights under, amend any terms of, or alter, suspend, discontinue, cancel or
terminate, any Award theretofore granted, prospectively or retroactively,
without the consent of any relevant Participant or holder or beneficiary of an
Award; provided that any such amendment, alteration, suspension,
discontinuation, cancellation or termination that would impair the rights of any
Participant, or any other holder or beneficiary of any Award, shall not to that
extent be effective without the consent of the Participant or such other holder
or beneficiary.
(c) Adjustments of Awards Upon Certain Acquisitions. In the event
-----------------------------------------------
the Company or any Affiliate shall assume outstanding employee awards or the
right or obligation to make future employee awards in connection with the
acquisition of another business or another corporation or business entity, the
Committee may make such adjustments, not inconsistent with the terms of the
Plan, in the terms of Awards as it shall deem appropriate in order to achieve
reasonable comparability or other equitable relationship between the assumed
awards and the Awards as so adjusted.
(d) Adjustment of Awards Upon the Occurrence of Certain Unusual or
--------------------------------------------------------------
Nonrecurring Events. Notwithstanding any other provision in the Plan or any
- -------------------
Award granted hereunder, the Committee is hereby authorized to make adjustments
in the terms and conditions of, and the criteria included in, Awards in
recognition of unusual or nonrecurring events affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate, or of
changes in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan.
(e) Correction of Defects, Omissions and Inconsistencies. The
----------------------------------------------------
Committee may correct any defect, supply any omission, or reconcile any
inconsistency in the Plan or any Award or Award Agreement in the manner and to
the extent it shall deem desirable to carry the Plan into effect. In the event
of a conflict between any term or provision contained in an Award or an Award
Agreement and a term or provision contained in the Plan, the applicable terms
and conditions of the Plan shall govern and prevail.
12
<PAGE>
SECTION 8. General Provisions.
------------------
(a) No Rights to Awards. No Participant or other Person shall have
-------------------
any claim to be granted any Award, and there is no obligation for uniformity of
treatment of Participants, or holders or beneficiaries of Awards. The terms and
conditions of Awards need not be the same with respect to each recipient.
(b) Delegation. Subject to the terms of the Plan and applicable law,
----------
the Committee may delegate to one or more officers or managers of the Company or
any Affiliate, or to a committee of such officers or managers, the authority,
subject to such terms and limitations as the Committee shall determine, to grant
Awards to, or to cancel, modify or waive rights with respect to, or to alter,
discontinue, suspend, or terminate Awards held by, Participants who are not
officers or directors of the Company for purposes of Section 16, or any
successor section thereto, or who are otherwise not subject to such Section.
(c) Withholding. The Company or any Affiliate is hereby authorized
-----------
to withhold from any Award, from any payment due or transfer made under any
Award or under the Plan or from any compensation or other amount owing to a
Participant the amount (in cash, Shares, other securities, other Awards or other
property) of any applicable withholding taxes in respect of an Award, its
exercise, or any payment or transfer under an Award or under the Plan and to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes.
(d) No Limit on Other Compensation Arrangements. Nothing contained
-------------------------------------------
in the Plan shall prevent the Company or any Affiliate from adopting or
continuing in effect other compensation arrangements (subject to shareholder
approval if such approval is required), and such arrangements may be either
generally applicable or applicable only in specific cases.
(e) No Right to Employment, Etc. The grant of an Award shall not be
---------------------------
construed as giving a Participant the right to be retained in the employ of, or
to provide continued consulting or advisory services to, the Company or any
Affiliate. Further, the Company or an Affiliate may at any time dismiss a
Participant from employment, consulting or advisory relationship with the
Company, as the case may be, free from any liability or any claim under the
Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.
(f) Governing Law. The validity, construction, and effect of the
-------------
Plan and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of California. Except as otherwise
provided in the applicable Award Agreement, any and all controversies, claims
and matters of difference arising out of or in respect of Awards that are
granted under the Plan shall be subject to final and binding arbitration in Los
Angeles, California,
13
<PAGE>
according to the rules and practices of the American Arbitration Association,
including the selection of an arbitrator from its Employment panel pursuant to
the rules then in effect.
(g) Severability. If any provision of the Plan or any Award is or
------------
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.
(h) Other Laws. The Committee may refuse to issue or transfer any
----------
Shares or other consideration under an Award if, acting in its sole discretion,
it determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the
relevant Participant, holder or beneficiary.
(i) No Trust or Fund Created. Neither the Plan nor any Award shall
------------------------
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(j) No Fractional Shares. No fractional Shares shall be issued or
--------------------
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be canceled, terminated, or otherwise eliminated.
(k) Headings. Headings are given to the Sections and subsections of
--------
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
SECTION 9. Effective Date of the Plan. The Plan shall be effective
--------------------------
as of the date of its approval by the Board.
SECTION 10. Term of the Plan. No Award shall be granted under the
----------------
Plan after December 17, 1999. However, unless otherwise expressly provided in
the Plan or in an
14
<PAGE>
applicable Award Agreement, any Award theretofore granted may, and the authority
of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or
terminate any such Award or to waive any conditions or rights under any such
Award shall, extend beyond such date.
15
<PAGE>
EXHIBIT 10.21
First Amended and Restated
Total Renal Care Holdings, Inc.
1995 Equity Compensation Plan
1. Purpose. The purpose of the Total Renal Care Holdings, Inc. 1995
-------
Equity Compensation Plan ("Plan") is to promote the interests of Total Renal
Care Holdings, Inc. ("Company") and its shareholders by enabling the Company to
offer Participants an opportunity to acquire an equity interest in the Company
so as to better attract, retain, and reward employees, directors, and other
persons providing services to the Company and, accordingly, to strengthen the
mutuality of interests between those persons and the Company's shareholders by
providing those persons with a proprietary interest in pursuing the Company's
long-term growth and financial success.
2. Definitions. For purposes of this Plan, the following terms shall
-----------
have the meanings set forth below.
(a) "Board" means the Board of Directors of Total Renal Care
Holdings, Inc.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
Reference to any specific section of the Code shall be deemed to be a
reference to any successor provision.
(c) "Committee" means the administrative Committee of this Plan that
is provided in Section 3 below.
(d) "Common Stock" means the common stock of Total Renal Care
Holdings, Inc. or any security issued in substitution, exchange, or in
lieu thereof.
(e) "Company" means Total Renal Care Holdings, Inc., a Delaware
corporation, or any successor corporation. Except where the context
indicates otherwise, the term "Company" shall include its Parent and
Subsidiaries.
(f) "Disabled" means permanent and total disability, as defined in
Code Section 22(e)(3).
(g) "Exchange Act" means the Securities Exchange Act of 1934.
(h) "Fair Market Value" shall mean, on any given day, the closing
price for the Common Stock on that day, or if the Common Stock was not
traded on that day, on the next preceding day on which the Common Stock
was traded, determined in accordance with the following rules.
<PAGE>
(i) If the Common Stock is admitted to trading or listed on a
national securities exchange, the closing price for any day shall be
the last reported sale price regular way, or if no such reported sale
takes place on that day, the average of the last reported bid and ask
prices regular way, in either case on the principal national
securities exchange on which the Common Stock is admitted to trading
or listed.
(ii) If not listed or admitted to trading on any national
securities exchange, the last sale price on that day of the Common
Stock reported on the Nasdaq National Market of the Nasdaq Stock
Market ("Nasdaq National Market") or, if no such reported sale takes
place on that day, the average of the closing bid and ask prices on
that day.
(iiI) If not included in the Nasdaq National Market, the average
of the closing bid and ask prices of the Common Stock on that day
reported by The Nasdaq Stock Market, or any comparable system on that
day.
(iv) If the Common Stock is not included in the Nasdaq Stock
Market or any comparable system, the closing bid and ask prices on
that day as furnished by any member of the National Association of
Securities Dealers, Inc. selected from time to time by the Company for
that purpose.
In the case of an Incentive Stock Option, "Fair Market Value" shall be
determined without reference to any restriction other than one that, by its
terms, will never lapse.
(i) "Incentive Stock Option" means an option to purchase Common Stock
that is an incentive stock option under Section 422 of the Code.
(j) "Insider" means a person who is subject to Section 16 of the
Exchange Act.
(k) "Non-Qualified Stock Option" means any option to purchase Common
Stock that is not an Incentive Stock Option.
(l) "Option" means an Incentive Stock Option or a Non-Qualified Stock
Option.
(m) "Parent" shall mean any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if each of the
corporations (other than the Company) owns stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock in
one of the other corporations in the chain, as determined in accordance
with the rules of Code Section 424(e).
-2-
<PAGE>
(n) "Participant" means a person who was been granted an Option or
Restricted Stock.
(o) "Plan" means this Total Renal Care Holdings, Inc. 1995 Equity
Compensation Plan, as it may be amended from time to time.
(p) "Restricted Stock" means shares of Common Stock issued under
Section 8 below that are subject to restrictions on ownership.
(q) "Severance" means, with respect to a Participant, the termination
of the Participant's provision of services to the Company as an employee,
director, or independent contractor, whether by reason of death,
disability, retirement, or any other reason. For purposes of determining
the exercisability of an Incentive Stock Option, a Participant who is on a
leave of absence that exceeds ninety (90) days will be considered to have
incurred a Severance on the ninety-first (91st) day of the leave of
absence, unless the Participant's rights to reemployment are guaranteed by
statute or contract. However, a Participant will not be considered to have
incurred a Severance because of a transfer of employment between the
Company and a Subsidiary or a Parent (or vice versa).
(r) "Subsidiary" shall mean any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if each of
the corporations (other than the last corporation in the unbroken chain)
owns stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in
the chain, as determined in accordance with the rules of Code Section
424(f).
(s) "Ten Percent Shareholder" means any person who owns (after taking
into account the constructive ownership rules of Section 424(d) of the
Code) more than ten percent (10%) of the stock of Total Renal Care
Holdings, Inc. or of any of its Parents or Subsidiaries.
3. Administration.
--------------
(a) This Plan shall be administered by a Committee appointed by the
Board. The Board may remove members from, or add members to, the Committee
at any time. The Committee shall be composed of individuals in a manner
that complies with Rule 16b-3 under the Exchange Act and with Code Section
162(m).
(b) The Committee may conduct its meetings in person or by telephone.
A majority of the members of the Committee shall constitute a quorum, and
any action shall constitute the action of the Committee if it is
authorized by a majority of the members:
-3-
<PAGE>
(i) Present at any meeting; or
(ii) In writing without a meeting.
(c) The Committee is authorized to interpret this Plan and to adopt
rules and procedures relating to the administration of this Plan. All
actions of the Committee in connection with the interpretation and
administration of this Plan shall be binding upon all parties.
(d) Subject to the limitations of Sections 9 and 14 below, the
Committee is expressly authorized to make such modifications to this Plan
and the Options granted hereunder as are necessary to effectuate the intent
of this Plan as a result of any changes in the tax, accounting, or
securities laws treatment of Participants and the Plan.
(e) The Committee may delegate its responsibilities to others under
such conditions and limitations as it may prescribe, except that the
Committee may not delegate its authority with regard to the granting of
Options to Insiders.
4. Duration of Plan.
----------------
(a) This Plan shall be effective as of the close of the initial
public offering of the Common Stock of Total Renal Care Holdings, Inc.,
provided this Plan is approved by the majority of the Company's
shareholders, in accordance with the provisions of Code Section 422, within
twelve (12) months before or after its adoption by the Board. If the Plan
is not approved by the shareholders within that time period, the Plan and
all Options issued under the Plan will terminate. The approval by the
shareholders must relate to:
(i) The class of individuals entitled to receive Incentive Stock
Options; and
(ii) The aggregate number of shares of Common Stock that may be
issued under the Plan, except as modified pursuant to Section 12
below.
If either of those items are changed, the approval of the shareholders must
again be obtained.
(b) In the event that this Plan is not so approved, this Plan shall
terminate and any Options granted under this Plan shall be void.
(c) This Plan shall terminate on December 17, 1999, except with
respect to Options then outstanding.
-4-
<PAGE>
5. Number of Shares.
----------------
(a) The aggregate number of shares of Common Stock which may be
issued pursuant to this Plan shall be one million (1,000,000). This
aggregate number may be adjusted from time to time as set forth in Section
12 below. The maximum number of shares that may be issued to a single
Participant is one million (1,000,000).
(b) Upon the forfeiture of shares of Restricted Stock, the forfeited
shares of Common Stock shall again become available for use under the Plan.
Upon the expiration or termination of an outstanding Option which shall not
have been exercised in full, the shares of Common Stock remaining unissued
under the Option shall again become available for use under the Plan.
(c) The Committee shall prescribe such rules as it deems appropriate
regarding the effect that using Common Stock to:
(i) Satisfy the withholding obligations; or
(ii) Pay part or all of the exercise price of an Option or the
purchase price of a grant of Restricted Stock;
will have upon the maximum number of shares that may be issued under the
Plan.
6. Eligibility.
-----------
(a) Persons eligible to receive grants of Options or Restricted Stock
under this Plan shall consist of employees, directors, and other persons
providing services to the Company. However, Incentive Stock Options may
only be granted to employees.
(b) In the event that the Company acquires another entity, the
Committee may authorize the issuance of Options ("Substitute Options") to
the individuals performing services for the acquired entity in substitution
of stock options previously granted to those individuals in connection with
their performance of services for the acquired entity upon such terms and
conditions as the Committee shall determine, taking into account the
limitations of Code Section 424(a) in the case of a Substitute Option that
is intended to be an Incentive Stock Option.
7. Form of Options. Options shall be granted under this Plan on such
---------------
terms and in such form as the Committee may approve, which shall not be
inconsistent with the provisions of this Plan, and which need not be the same
for each such grant.
-5-
<PAGE>
(a) The exercise price per share of Common Stock purchasable under an
Option shall be set forth in the Option. However, the exercise price of an
Incentive Stock Option, determined on the date of the grant, shall be no
less than:
(i) One hundred ten percent (110%) of the Fair Market Value of
the Common Stock in the case of a Ten Percent Shareholder; or
(ii) One hundred percent (100%) of the Fair Market Value of the
Common Stock in the case of any other employee.
However, the exercise price of such a substituted Incentive Stock Option
(issued pursuant to Section 6 above) may be less than the Fair Market Value
on the grant date.
(b) An Option shall be exercisable at such time or times and be
subject to such terms and conditions as may be set forth in the Option.
However, no Option shall be exercisable prior to the date this Plan is
approved by the Company's shareholders, as set forth in Section 4 above.
(c) The aggregate Fair Market Value (determined as of the date of
grant) of the number of shares of Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by a Participant
during any calendar year shall not exceed one hundred thousand dollars
($100,000) or such other limit as may be required by Code Section 422.
8. Restricted Stock.
----------------
(a) The Committee may issue grants of Restricted Stock, upon such
terms and conditions as it may deem appropriate, which need not be the same
for each grant.
(b) Restricted Stock may be sold to Participants, or it may be issued
to Participants without the receipt of any consideration.
(c) A Participant shall not have a vested right to the shares subject
to the grant of Restricted Stock until the satisfaction of the vesting
requirements specified in the grant.
(d) The Participant may not assign or alienate the Participant's
interest in the shares of Restricted Stock prior to vesting. Otherwise, the
Participant shall have all of the rights of a shareholder of the Company,
with respect to the shares received under a grant of Restricted Stock,
including the right to vote the shares and to receive any cash dividends.
Stock dividends issued with respect to the shares covered by a grant of
Restricted Stock shall be treated as additional shares received under the
grant of Restricted Stock.
-6-
<PAGE>
9. Modification of Grants.
----------------------
(a) The Committee may modify an existing Option, including the right
to:
(i) Change the exercise price;
(ii) Accelerate the right to exercise it;
(iii) Extend or renew it; or
(iv) Cancel it and issue a new Option.
However, no modification may be made to an Option that would impair the
rights of the Participant holding the Option without the Participant's
consent. The Committee may make similar modifications to grants of
Restricted Stock.
(b) In the event that the Board amends the terms of an Option so that
it no longer qualifies as an Incentive Stock Option under Code Section 422,
the limitations imposed upon the Option under the Code and the Plan by
virtue of it (formerly) qualifying as an Incentive Stock Option shall no
longer apply, to the extent specified in the amendment.
(c) Whether a modification of an existing Incentive Stock Option will
be treated as the issuance of a new Incentive Stock Option will be
determined in accordance with the rules of Code Section 424(h).
(d) Whether a modification of an existing Option granted to an
Insider will be treated as a new grant will be determined in accordance
with Rule 16b-3.
10. Termination of Options.
----------------------
(a) Except to the extent the terms of an Option require its prior
termination, each Incentive Stock Option shall terminate on the earliest of
the following dates:
(i) The date which is ten (10) years from the date on which the
Option is granted or five (5) years in the case of an Option granted
to a Ten Percent Shareholder.
(ii) The date which is one (1) year from the date of the
Severance of the Participant to whom the Option was granted, if the
Participant was Disabled at the time of Severance.
-7-
<PAGE>
(iii) The date which is one (1) year from the date of the
Severance of the Participant to whom the Option was granted, if the
Participant's death occurs:
(A) While the Participant is employed by the Company; or
(B) Within three (3) months following the Participant's
Severance.
(iv) In the case of any Severance other than one described in
Subparagraphs (ii) or (iii) above, the date that is three (3) months
from the date of the Participant's Severance.
(b) The rules contained in Paragraph (a) above do not apply to Non-
Qualified Stock Options.
11. Non-transferability of Grants.
-----------------------------
(a) During the lifetime of the Participant, each Option is
exercisable only by the Participant. Options are not assignable or
transferable except by will or the laws of descent and distribution.
(b) Shares of Restricted Stock shall be subject to such restrictions
as may be imposed in the grants.
12. Adjustments
-----------
(a) In the event of any change in the capitalization of the Company
affecting its Common Stock (e.g., a stock split, reverse stock split, stock
dividend, recapitalization, combination, or reclassification), the
Committee shall authorize such adjustments as it may deem appropriate with
respect to:
(i) The aggregate number or kind of shares for which Options
may be granted under this Plan;
(ii) The number or kind of shares covered by each outstanding
Option; and
(iii) The exercise price per share in respect of each
outstanding Option.
(b) The Committee may also make such adjustments in the event of a
spinoff or other distribution) of Company assets to shareholders (other
than normal cash
-8-
<PAGE>
dividends.
13. Notice of Disqualifying Disposition. A Participant must notify the
-----------------------------------
Company if the Participant disposes of stock acquired pursuant to the exercise
of an Incentive Stock Option issued under the Plan prior to the expiration of
the holding periods required to qualify for capital gains treatment on the sale.
14. Amendment and Termination. The Board may at any time amend or
-------------------------
terminate this Plan. However, no amendment or termination may impair the rights
of the Participant holding an Option without the Participant's consent.
However, except as may otherwise be permitted under Rule 16b-3 under the 1934
Act, no amendment to the Plan may be adopted without the approval of the
shareholders that would materially:
(a) Increase the number of shares that may be issued to Insiders;
(b) Increase the benefits accruing to Insiders; or
(c) Modify the requirements for Insiders to participate.
15. Tax Withholding.
---------------
(a) The Company shall have the right to take such actions as may be
necessary to satisfy its tax withholding obligations arising because of
the operation of this Plan.
(b) If Common Stock is used to satisfy the Company's tax withholding
obligations, the stock shall be its Fair Market Value when the tax
withholding is required to be made.
16. No Additional Rights.
--------------------
(a) Neither the adoption of this Plan nor the granting of any Option
or Restricted Stock shall:
(i) Affect or restrict in any way the power of the Company to
undertake any corporate action otherwise permitted under applicable
law; or
(ii) Confer upon any Participant the right to continue
performing services for the Company, nor shall it interfere in any way
with the right of the Company to terminate the services of any
Participant at any time, with or without cause.
(b) No Participant shall have any rights as a shareholder with
respect to any
-9-
<PAGE>
shares covered by an Option granted to the Participant until the date a
certificate for such shares has been issued to the Participant following
the exercise of the Option.
17. Securities Law Restrictions.
---------------------------
(a) No shares of Common Stock shall be issued under this Plan unless
the Committee shall be satisfied that the issuance will be in compliance
with applicable federal and state securities laws.
(b) The Committee may require certain investment or other
representations and undertakings by the person exercising an Option or
purchasing Restricted Stock in order to comply with applicable law.
(c) Certificates for shares of Common Stock delivered under this Plan
may be subject to such restrictions as the Committee may deem advisable.
The Committee may cause a legend to be placed on the certificates to refer
to these restrictions.
18. Indemnification. To the maximum extent permitted by law, the Company
---------------
shall indemnify each member of the Committee and each other member of the Board,
as well as any other employee of the Company with duties under this Plan,
against expenses (including any amount paid in settlement) reasonably incurred
by the individual in connection with any claims against the individual by reason
of the performance of the individual's duties under this Plan, unless the losses
are due to the individual's gross negligence or lack of good faith.
19. Governing Law. This Plan and all actions taken thereunder shall be
-------------
governed by and construed in accordance with the laws of the State of Delaware.
-10-
<PAGE>
EXHIBIT 10.22
Total Renal Care Holdings, Inc.
Employee Stock Purchase Plan
1999 Amendment and Restatement
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Article I - Purpose and Effective Date.............................................. 1
Article II - Definitions............................................................ 1
2.1 "Account...................................................................... 1
2.2 "Board........................................................................ 1
2.3 "Code......................................................................... 1
2.4 "Committee.................................................................... 1
2.5 "Common Stock................................................................. 1
2.6 "Company...................................................................... 1
2.7 "Continuous Employment........................................................ 1
2.8 "Employee..................................................................... 2
2.9 "Exchange Act"................................................................ 2
2.10 "Fair Market Value"........................................................... 2
2.11 "Leave of Absence............................................................. 2
2.12 "Participant.................................................................. 2
2.13 "Plan......................................................................... 3
2.14 "Purchase Right............................................................... 3
2.15 "Purchase Right Period........................................................ 3
2.16 "Stockholders................................................................. 3
2.17 "Subsidiary................................................................... 3
Article III - Eligibility and Participation......................................... 3
3.1 Eligibility................................................................... 3
3.2 Payroll Withholding........................................................... 3
3.3 Limitations................................................................... 4
3.4 Granting of Purchase Rights................................................... 4
3.5 Establishment of Accounts..................................................... 5
Article IV - Purchase Rights........................................................ 5
4.1 Termination of Purchase Rights................................................ 5
4.2 Exercise of Purchase Rights................................................... 5
4.3 Termination Event............................................................. 6
4.4 Non-Transferability of Purchase Rights........................................ 6
Article V - Common Stock............................................................ 6
5.1 Shares Subject to Plan........................................................ 6
5.2 Adjustment Upon Changes in Capitalization..................................... 7
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
Article VI - Plan Administration.................................................... 7
6.1 Administration................................................................ 7
6.2 Indemnification............................................................... 8
Article VII - Amendment and Termination............................................. 8
7.1 Amendment and Termination..................................................... 8
7.2 Shareholder Approval.......................................................... 8
Article VIII - Miscellaneous Matters................................................ 9
8.1 Uniform Rights and Privileges................................................. 9
8.2 Application of Proceeds....................................................... 9
8.4 No Additional Rights.......................................................... 9
8.5 Governing Law................................................................. 9
</TABLE>
ii
<PAGE>
Total Renal Care Holdings, Inc.
Employee Stock Purchase Plan
Article I
Purpose and Effective Date
The purpose of the Plan is to provide incentives for, and to encourage
stock ownership by, Employees of Total Renal Care Holdings, Inc. or any of its
Subsidiaries whose Employees participate in the Plan in order to increase their
proprietary interest in the success of the Company.
The effective date of this 1999 Amendment and Restatement of the Plan is
November 9, 1999.
Article II
Definitions
Whenever capitalized in the text, the following terms shall have the
meanings set forth below.
2.1 "Account" shall mean the account established pursuant to Section 3.5
-------
to hold a Participant's contributions to the Plan.
2.2 "Board" shall mean the Board of Directors of Total Renal Care
-----
Holdings, Inc.
2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
Reference to any specific section of the Code shall be deemed to be a reference
to any successor provision.
2.4 "Committee" shall mean the Board of Total Renal Care Holdings, Inc. or
---------
a committee designated by the Board to administer the Plan.
2.5 "Common Stock" shall mean the common stock of Total Renal Care
------------
Holdings, Inc.
2.6 "Company" shall mean Total Renal Care Holdings, Inc., a Delaware
-------
corporation, as well as any Subsidiary whose employees participate in the Plan
with the consent of the Board.
2.7 "Continuous Employment" shall mean employment without interruption by
---------------------
the Company. Employment shall not be considered interrupted because of:
<PAGE>
(a) Transfers of employment between the Company and a Subsidiary (or
vice versa); or
(b) Any Leave of Absence.
2.8 "Employee" shall mean any person employed by the Company. This term
--------
does not include directors unless they are employed by the Company in a position
in addition to their duties as a director.
2.9 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
2.10 "Fair Market Value" shall mean, on any given day, the closing price
-----------------
for the Common Stock on that day, or if the Common Stock was not traded on that
day, on the next preceding day on which the Common Stock was traded, determined
in accordance with the following rules.
(a) If the Common Stock is admitted to trading or listed on a national
securities exchange, the closing price for any day shall be the last
reported sale price regular way, or if no such reported sale takes place on
that day, the average of the last reported bid and ask prices regular way,
in either case on the principal national securities exchange on which the
Common Stock is admitted to trading or listed.
(b) If not listed or admitted to trading on any national securities
exchange, the last sale price on that day of the Common Stock reported on
the Nasdaq National Market of the Nasdaq Stock Market ("Nasdaq National
Market") or, if no such reported sale takes place on that day, the average
of the closing bid and ask prices on that day.
(c) If not included in the Nasdaq National Market, the average of the
closing bid and ask prices of the Common Stock on that day reported by The
Nasdaq Stock Market, or any comparable system on that day.
(d) If the Common Stock is not included in the Nasdaq Stock Market or
any comparable system, the closing bid and ask prices on that day as
furnished by any member of the National Association of Securities Dealers,
Inc. selected from time to time by the Company for that purpose.
2.11 "Leave of Absence" shall mean an unpaid leave of absence taken in
----------------
accordance with the Company's leave of absence policy. A Participant will not
be considered to have incurred a break in Continuous Employment because of a
Leave of Absence that does not exceed ninety (90) days. If the Leave of Absence
exceeds ninety (90) days, the Participant will be deemed to have incurred a
break in Continuous Employment on the ninety-first (91st) day, unless the
Participant's rights to reemployment are guaranteed by statute or contract.
-2-
<PAGE>
2.12 "Participant" shall mean an Employee who has been granted a Purchase
-----------
Right under the Plan.
2.13 "Plan" shall mean the 1999 Amendment and Restatement of the Total
----
Renal Care Holdings, Inc. Employee Stock Purchase Plan.
2.14 "Purchase Right" shall mean a right to purchase Common Stock granted
--------------
pursuant to the Plan.
2.15 "Purchase Right Period" shall mean the period beginning on January 1
---------------------
or July 1 (whichever is applicable) and terminating on the immediately following
December 31. (But see Section 43 for special rules regarding the termination of
a Purchase Right Period.)
2.16 "Stockholders" shall mean the holders of Common Stock.
------------
2.17 "Subsidiary" shall mean any corporation (other than the Company) in
----------
an unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
Article III
Eligibility and Participation
3.1 Eligibility.
-----------
(a) All Employees of the Company who are scheduled to work at least
twenty (20) hours per week are eligible to participate in the Plan,
provided they have completed at least three (3) months of Continuous
Employment prior to the first day of the Purchase Right Period.
(b) No Employee may be granted a Purchase Right if the Employee would
immediately thereafter own, directly or indirectly, five percent (5%) or
more of the combined voting power or value of all classes of stock of the
Company or of a Subsidiary. For this purpose, an Employee's ownership
interest shall be determined in accordance with the constructive ownership
rules of Code Section 424(d).
3.2 Payroll Withholding.
-------------------
(a) Employees who have satisfied the eligibility conditions of Section
3.1 may enroll as Participants by executing prior to the commencement of
each Purchase Right Period a form provided by the Committee on which they
designate:
-3-
<PAGE>
(i) The dollar amount (not a percentage of compensation) to be
deducted from their paychecks and contributed to their Accounts for
the purchase of Common Stock, which shall not be less than ten dollars
($10) per payroll period; and/or
(ii) The amount of funds, if any, which they will deposit at the
beginning of the Purchase Right Period for the purchase of Common
Stock.
(b) Once chosen, the rate of contributions for a Purchase Right Period
cannot be decreased or increased without terminating the Purchase Right.
However, pursuant to rules and procedures prescribed by the Committee, a
Participant may make additional contributions to make up for amounts that
he or she failed to make while on a Leave of Absence if the Participant
returns to active employment and contributes those amounts before the end
of the Purchase Right Period.
3.3 Limitations.
-----------
(a) Notwithstanding anything herein to the contrary, a Participant may
not accrue a right to purchase shares of Common Stock at a rate that
exceeds twenty-five thousand dollars ($25,000) per calendar year,
determined in a manner consistent with Code Section 423(b)(8).
(b) This limitation shall apply to the Participant's right to purchase
Common Stock under the Plan and under all other employee stock purchase
plans described in Code Section 423 that are maintained by the Company and
its Subsidiaries.
(c) This dollar limitation applies to the Fair Market Value of Common
Stock determined at the time the Purchase Right is granted.
3.4 Granting of Purchase Rights. The price at which each share covered by
---------------------------
a Purchase Right will be purchased will in all instances be the lesser of:
(a) One hundred percent (100%) of the Fair Market Value of a share of
Common Stock on the first day of the applicable Purchase Right Period; or
(b) Eighty-five percent (85%) of the Fair Market Value of a share of
Common Stock on the last day of that Purchase Right Period.
However, in no event will the maximum number of shares that can be purchased
pursuant to the provisions of this Section 3.4 in a single Purchase Right Period
exceed twenty-five thousand (25,000).
-4-
<PAGE>
3.5 Establishment of Accounts.
-------------------------
(a) All amounts contributed by the Participant to the Plan (whether by
means of payroll withholding or a lump sum advance contribution) will be
deposited into a separate Account maintained for the Participant.
(b) No interest will be earned on those contributions.
(c) A Participant may not withdraw any amounts from his or her Account
without terminating his or her Purchase Right pursuant to Section 4.1
below.
Article IV
Purchase Rights
4.1 Termination of Purchase Rights.
------------------------------
(a) A Participant may withdraw from the Plan at any time prior to the
last day of the Purchase Right Period by submitting a form prescribed by
the Committee to the Human Resources Department of the Company at the
Corporate Office in Torrance, California. The Participant's Purchase Right
shall terminate upon withdrawal from the Plan.
(b) A Purchase Right shall terminate automatically if the Participant
holding the Purchase Right ceases to be employed by the Company for any
reason (including death, disability, or retirement) prior to the last day
of the Purchase Right Period.
(c) Upon the termination of a Purchase Right, all amounts held in the
Participant's Account shall be refunded to the Participant.
4.2 Exercise of Purchase Rights.
---------------------------
(a) Unless previously terminated, Purchase Rights will be exercised
automatically on the last day of the Purchase Right Period.
(b) Except as provided in Paragraph (b) of Section 3.2 above, payment
for shares to be purchased at the termination of the Purchase Right Period
may only be made from funds:
(i) Deposited at the beginning of a Purchase Right Period;
and/or
(ii) Accumulated through payroll deductions made during the
Purchase Right Period.
-5-
<PAGE>
(c) If the amount in the Participant's Account at the end of the
Purchase Right Period is insufficient to purchase all the shares covered by
the Purchase Right granted to the Participant, those funds will be used to
purchase as many whole shares as possible.
(d) If the balance of the Participant's Account on the date of
purchase exceeds the purchase price of the whole number of shares to be
acquired, the surplus shall be applied to the next Purchase Right Period,
unless the Participant elects to receive a refund by submitting a form
prescribed by the Committee to the Human Resources Department of the
Company at the Corporate Office in Torrance, California.
(e) Stock certificates will be distributed within forty-five (45) days
following the date of the exercise of the Purchase Right.
4.3 Termination Event. The following provisions of this Section 4.3 shall
-----------------
apply, notwithstanding anything herein to the contrary.
(a) A "Termination Event" shall be deemed to occur as a result of (i)
a transaction in which the Company will cease to be an independent
publicly-owned corporation or (ii) a sale or other disposition of all or
substantially all the assets of the Company.
(b) All Purchase Rights shall be automatically exercised immediately
preceding the Termination Event. In such an event, for purposes of applying
the rules of Paragraph (b) of Section 3.4, the Fair Market Value of the
Common Stock on that date shall be deemed to be the consideration paid for
the Common Stock in the transaction.
4.4 Non-Transferability of Purchase Rights. A Purchase Right may not be
--------------------------------------
assigned or alienated other than by will and the laws of descent and
distribution.
Article V
Common Stock
5.1 Shares Subject to Plan.
----------------------
(a) Effective November 9, 1999, the maximum number of shares of Common
Stock which may be issued under the Plan is one million, three hundred
thirty-three thousand, three hundred and three (1,133,333). The number of
these shares shall be subject to adjustment under Section 5.2 below.
(b) If any outstanding Purchase Right is terminated for any reason
prior to its exercise, the shares subject to the Purchase Right will again
become subject to purchase
-6-
<PAGE>
under the Plan.
(c) The Common Stock issuable under the Plan may be previously
unissued or may have been reacquired by the Company in the open market (or
otherwise).
5.2 Adjustment Upon Changes in Capitalization. Subject to the provisions
-----------------------------------------
of Section 4.3, a proportionate adjustment shall be made by the Committee in the
number, price, and kind of shares subject to outstanding Purchase Rights if the
outstanding shares of Common Stock are increased, decreased, or exchanged for
different securities, through reorganization, merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, or other
similar transaction.
Article VI
Plan Administration
6.1 Administration.
--------------
(a) The Plan shall be administered by the Committee. The Committee
shall have authority to:
(i) Interpret the Plan;
(ii) Prescribe rules and procedures relating to the Plan; and
(iii) Take all other actions necessary or appropriate in
connection with the administration of the Plan.
(b) A majority of the members of the Committee shall constitute a
quorum, and any action shall constitute the action of the Committee if it
is authorized by a majority of the members:
(i) Present at any meeting; or
(ii) In writing without a meeting.
(c) All decisions of the Committee shall be final and binding on all
Participants.
(d) No member of the Committee shall be liable for any action or
inaction taken in good faith with respect to the Plan or any Purchase Right
granted under it.
-7-
<PAGE>
6.2 Indemnification.
---------------
(a) To the maximum extent permitted by law, the Company shall
indemnify each member of the Committee and each other member of the Board,
as well as any other Employee with duties under the Plan, against expenses
(including any amount paid in settlement or in satisfaction of a judgment)
reasonably incurred by the individual in connection with any claims against
the individual by reason of the performance of the individual's duties
under the Plan. This indemnity shall not apply, however, if:
(i) It is determined in the action, lawsuit, or proceeding that
the individual is guilty of gross negligence or intentional misconduct
in the performance of those duties; or
(ii) The individual fails to assist the Company in defending
against any such claim.
(b) Notwithstanding the above, the Company shall have the right to
select counsel and to control the prosecution or defense of the suit.
Furthermore, the Company shall not be obligated to indemnify any individual
for any amount incurred through any settlement or compromise of any action
unless the Company consents in writing to the settlement or compromise.
Article VII
Amendment and Termination
7.1 Amendment and Termination. The Board may amend or terminate the Plan
-------------------------
at any time by means of written action, except with respect to outstanding
Purchase Rights.
7.2 Stockholder Approval. No additional shares of Common Stock shall be
--------------------
issued solely as a result of the adoption of the 1999 Amendment and Restatement
of the Plan unless the Plan is approved by the Stockholders within twelve (12)
months before or after the date of its adoption by the Board, which is November
9, 1999. If the 1999 Amendment and Restatement is not approved by the
Stockholders within that time period, the prior version of the Plan will remain
in effect. The approval by the Stockholders must relate to:
(a) The class of individuals eligible to participate; and
(b) The aggregate number of shares to be granted under the Plan.
If either of those items are changed, approval of the Stockholders must again be
obtained.
-8-
<PAGE>
Article VII
Miscellaneous Matters
8.1 Uniform Rights and Privileges. The rights and privileges of all
-----------------------------
Participants under the Plan shall be the same.
8.2 Application of Proceeds. The proceeds received by the Company from
-----------------------
the sale of Common Stock pursuant to Purchase Rights may be used for any
corporate purpose.
8.3 Notice of Disqualifying Disposition. A Participant must notify the
-----------------------------------
Company if the Participant disposes of stock acquired pursuant to the Plan prior
to the expiration of the holding periods required to qualify for capital gains
treatment on the sale.
8.4 No Additional Rights.
--------------------
(a) Neither the adoption of this Plan nor the granting of any
Purchase Right shall:
(i) Affect or restrict in any way the power of the Company to
undertake any corporate action otherwise permitted under applicable
law; or
(ii) Confer upon any Participant the right to continue to be
employed by the Company, nor shall it interfere in any way with the
right of the Company to terminate the employment of any Participant at
any time, with or without cause.
(b) No Participant shall have any rights as a Shareholder with respect
to any shares covered by a Purchase Right granted to the Participant until
the Common Stock is actually issued to the Participant.
(c) No adjustments will be made for cash dividends or other rights for
which the record date is prior to the issuance of the Common Stock.
8.5 Governing Law.
-------------
(a) The Plan and all actions taken under it shall be governed by and
construed in accordance with the laws of the State of Delaware.
(b) The provisions of this Plan shall be interpreted in a manner that
is consistent with this Plan satisfying the requirements of Code Section
423.
-9-
<PAGE>
EXHIBIT 10.24
TOTAL RENAL CARE HOLDINGS, INC.
FIRST AMENDED AND RESTATED
1997 EQUITY COMPENSATION PLAN
1. Purpose. The purpose of the Amended and Restated Total Renal Care
Holdings, Inc. 1997 Equity Compensation Plan (this "Plan") is to promote the
interests of Total Renal Care Holdings, Inc. (the "Company") and its
stockholders by enabling the Company to offer Participants an opportunity to
acquire an equity interest in the Company so as to better attract, retain, and
reward employees, directors, and other persons providing services to the Company
and, accordingly, to strengthen the mutuality of interests between Participants
and the Company's stockholders by providing Participants with a proprietary
interest in pursuing the Company's long-term growth and financial success.
2. Definitions. For purposes of this Plan, the following terms shall
have the meanings set forth below.
(a) "Award" means an Option granted under this Plan or Restricted
Stock issued under this Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended, and
the applicable regulations thereunder. Reference to any specific section of the
Code shall be deemed to be a reference to any successor provision.
(d) "Committee" means the committee appointed by the Board, if any, to
administer this Plan as permitted by Section 4 below or, if no such committee is
appointed, the Board.
(e) "Common Stock" means the common stock of Total Renal Care
Holdings, Inc. or any security issued in substitution, exchange, or in lieu
thereof.
(f) "Company" means Total Renal Care Holdings, Inc., a Delaware
corporation, or any successor corporation. Except where the context indicates
otherwise, the term "Company" shall include the Subsidiaries of Total Renal Care
Holdings, Inc.
(g) "Incentive Stock Option" means an option to purchase Common Stock
that is an incentive stock option under Section 422 of the Code.
(h) "1995 Plan" means the Company's 1995 Equity Incentive Plan.
<PAGE>
(i) "Non-Qualified Stock Option" means any Option that is not an
Incentive Stock Option.
(j) "Option" means an Incentive Stock Option or a Non-Qualified Stock
Option.
(k) "Participant" means a person who has been granted an Option or
Restricted Stock.
(l) "Plan" means this 1997 Equity Compensation Plan of the Company, as
it may be amended from time to time.
(m) "Restricted Stock" means shares of Common Stock issued pursuant to
this Plan that are subject to contractual restrictions.
(n) "Spill-Over Shares" means (i) 66,526 shares of Common Stock which
remained available for issuance under the 1995 Plan on the date this Plan was
approved by the Company's stockholders, and (ii) shares of Common Stock which
would otherwise have become available for issuance under the 1995 Plan due to
the expiration or termination of options granted under the 1995 Plan prior to
stockholder approval of the 1997 Plan.
(o) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain, as determined in
accordance with the rules of Section 424(f) of the Code.
3. Eligibility. All employees, directors, and other persons providing
bona fide services (other than persons only providing services in connection
with the offering or sale of securities in a capital raising transaction) to the
Company or any Subsidiary are eligible to receive Awards under this Plan;
provided, however, that Incentive Stock Options may only be granted to employees
of the Company or any Subsidiary. In the event that the Company acquires
another entity, the Committee may authorize the issuance of Awards ("Substitute
Awards") to employees, directors and other persons in substitution of stock
options or restricted stock grants previously granted to such employees,
directors and other persons in connection with their performance of services for
the acquired entity upon such terms and conditions as the Committee shall
determine, taking into account the limitations of Code Section 424(a) in the
case of any Substitute Award that is intended to be an Incentive Stock Option.
4. Administration. This Plan shall be administered by the Board or by a
committee consisting of two or more members of the Board appointed by the Board
to administer this Plan. The Committee is authorized to interpret this Plan and
to adopt rules and procedures relating to the administration of this Plan. All
actions of the committee in connection with the interpretation and
administration of this Plan shall be binding upon all parties. Subject to the
limitations set
2
<PAGE>
forth below, the Committee is expressly authorized to make such modifications to
this plan and the Awards granted hereunder as are necessary to effectuate the
intent of this Plan as a result of any changes in the tax, accounting, or
securities laws treatment of Participants and the Plan. The Committee may
delegate its responsibilities to others under such conditions and limitations as
it may prescribe.
5. Effective Date of this Plan. This Plan shall be effective as of July
1, 1997. This Plan may be terminated by the Board at any time. Unless earlier
terminated by the Board, this Plan shall terminate as of the close of business
on the day prior to the tenth anniversary of the effective date of this Plan.
The foregoing notwithstanding, no termination of this Plan shall adversely
affect the rights of any Participant with respect to any Award outstanding as of
the time of such termination.
6. Shares Subject to this Plan. The aggregate number of shares of Common
Stock which may be issued pursuant to this Plan shall be equal to the sum of (i)
7,166,667 shares plus (ii) up to 833,333 Spill-Over Shares from the 1995 Plan.
This aggregate number may be adjusted from time to time as set forth in Section
11 below. Subject to adjustments as provided in Section 11 below, the maximum
number of shares of Common Stock which may be issuable pursuant to Awards
granted during any calendar year to any Participant is 833,333 shares. Upon the
expiration or termination of any Option granted under this Plan which shall not
have been exercised in full, the shares of Common Stock remaining unissued under
such Option shall again become available for granting under the Plan. Upon the
repurchase or forfeiture of any shares of Restricted Stock issued hereunder,
such repurchased shares of Common Stock shall again become available for
issuance under this Plan.
7. Form of Options. Options shall be granted under this Plan on such
terms and in such form as the Committee may approve, which shall not be
inconsistent with the provisions of this Plan, and which need not be the same
for each such grant. Options may be either Nonqualified Stock Options or
Incentive Stock Options. The terms and conditions of each Option shall include,
in addition to such other terms and conditions as may be established by the
Committee, (i) the per share exercise price of such Option, (ii) the termination
date of such Option, which shall not be later than ten years after the date of
grant, and (iii) the effect on such Option of the termination of the
Participant's employment. Any Option which is intended, as evidenced by its
designation, as an Incentive Stock Option shall be made subject to such terms
and conditions as may be required for such Option to qualify as an Incentive
Stock Option under the Code. Incentive Stock Options granted under this Plan
shall also include as a requirement that the Participant receiving such
Incentive Stock Option notify the Company if he or she disposes of Common Stock
acquired pursuant to the exercise thereof prior to the expiration of the holding
period prescribed in Section 422(a)(1) of the Code. Any Option which is
intended to constitute "qualified performance-based compensation" as such term
is defined in the regulations promulgated under Section 162(m) of the Code shall
be granted in such manner and made subject to such terms and conditions as may
be required for such Option to so qualify as "qualified performance-based
compensation."
3
<PAGE>
8. Restricted Stock. The Committee may issue Restricted Stock upon such
terms, restrictions and conditions as it may deem appropriate, which need not be
the same for each grant. Restricted Stock may be issued for such consideration
as the Committee may determine; provided, however, that in no case shall shares
of Restricted Stock be issued for less than the minimum consideration required
by law, if any. Effective for Awards granted after May 1, 1999, no more than
five percent (5%) of the total number of shares subject to Awards granted on or
after that date may be in the form of Restricted Stock.
9. Modification of Awards. The Committee may modify any outstanding
Award as it deems appropriate. Such authority shall include, without
limitation, the right to decrease the exercise price of any Option, accelerate
the right to exercise any Option and modify any restrictions with respect to any
Restricted Stock; provided, however, that no modification may be made to any
Award that would adversely affect the rights of the Participant with respect to
any outstanding Award without such Participant's consent. In the event that the
Board amends the terms of an Option so that it no longer qualifies as an
Incentive Stock Option, the limitations imposed upon the Option under the Code
and the Plan by virtue of it (formerly) qualifying as an Incentive Stock Option
shall no longer apply, to the extent specified in the amendment. Whether a
modification of an existing Incentive Stock Option will be treated as an
issuance of a new Incentive Stock Option will be determined in accordance with
the rules of Code Section 424(h).
10. Transfer Restrictions. During the lifetime of the Participant,
Options granted to such Participant under this Plan are exercisable only by the
Participant and are not assignable or transferable, except by will or the laws
of descent and distribution. Shares of Restricted Stock shall be subject to
such restrictions on transferability as may be imposed by the Committee.
11. Adjustments. In the event of any stock split, reverse stock split,
stock dividend, recapitalization, combination, reclassification, reorganization,
merger, combination, consolidation, exchange of Common Stock or spinoff or other
distribution of Company assets to stockholders (other than normal cash
dividends), the Committee may, in such manner and to such extent, if any, as it
deems appropriate and equitable, authorize such adjustments with respect to: (i)
the aggregate number and kind of shares for which Awards may be granted under
this Plan; (ii) the number and kind of shares covered by outstanding Awards; and
(iii) the per share exercise price of outstanding Options and the per share
repurchase price of outstanding Restricted Stock. In connection with any merger
or consolidation of the Company with or into another entity in which the Company
is not the surviving corporation or as a result of which the Common Stock ceases
or will cease to be publicly traded, the Committee may, but shall not be
required to, authorize the termination of all outstanding Options upon the
consummation of such merger or consolidation, provided that, as a condition to
such termination, all restrictions on the exercisability of such Options (i.e.,
vesting provisions) shall be eliminated and the holders thereof shall be given
at least 20 days prior to such termination to exercise such Options without
regard to any such restrictions.
4
<PAGE>
12. Amendment of this Plan. The Board may amend this Plan at any time;
provided, however, that no such amendment may adversely affect the rights of any
Participant with respect to any outstanding Award without the Participant's
consent.
13. Tax Withholding. The Company shall have the right to take such
actions as may be necessary to satisfy its tax withholding obligations arising
because of the operation of this Plan.
14. No Additional Rights. Neither the adoption of this Plan nor the
granting of any Option or the issuance of any Restricted Stock shall (i) affect
or restrict in any way the power of the Company to undertake any corporate
action otherwise permitted under applicable law, (ii) confer upon any
Participant the right to continue performing services for the Company, or (iii)
interfere in any way with the right of the Company to terminate the services of
any Participant at any time, with or without cause, subject to such other
contractual obligations which may exist. No Participant shall have any rights
as a shareholder with respect to any shares covered by an Option granted to the
Participant until the date a certificate for such shares has been issued to the
Participant following the exercise of the Option.
15. Securities Law Restrictions. No shares of Common Stock shall be
issued under this Plan unless the Committee shall be satisfied that the issuance
will be in compliance with applicable federal and state securities laws, as well
as the requirements of any stock exchange on which the Common Stock is traded.
The Committee may require certain investment or other representations and
undertakings by the person exercising an Option or purchasing Restricted Stock
in order to comply with applicable law. Certificates for shares of Common Stock
delivered under this Plan may be subject to such restrictions as the Committee
may deem advisable. The Committee may cause a legend to be placed on the
certificates to refer to these restrictions.
16. Indemnification. To the maximum extent permitted by law, the Company
shall indemnify each member of the Committee and each other member of the Board,
as well as any other employee of the Company with duties under this Plan,
against expenses (including any amount paid in settlement, provided such
settlement is approved by the Company) reasonably incurred by the individual in
connection with any claim against the individual by reason of the performance of
the individual's duties as a member of the Committee, unless the losses are due
to the individual's gross negligence or lack of good faith; provided, however,
that the Company shall be entitled to control the defense of any such claim and
shall be entitled to engage counsel for such defense; and provided further, that
if more than one member of the Committee or such other employee is subject to
such claim, or if the Company or other parties entitled to indemnification by
the Company are also subject to such claim, the Company, if applicable, and all
such parties shall be represented by a single counsel selected by the Company
and no member or other party shall be entitled to be represented by separate
counsel at the Company's expense unless counsel selected by the Company advises
the Company in writing that such counsel cannot represent such member or other
party under applicable rules of professional responsibility.
5
<PAGE>
17. Governing Law. This Plan and all actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware.
6
<PAGE>
EXHIBIT 10.25
FIRST AMENDED AND RESTATED
TOTAL RENAL CARE HOLDINGS, INC.
SPECIAL PURPOSE OPTION PLAN
---------------------------
1. Purpose. This Special Purpose Option Plan (the "Plan") is created to
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provide for the issuance of Adjusted Options, as such term is defined in that
certain Agreement and Plan of Merger (the "Merger Agreement") dated November 18,
1997, by and among Total Renal Care Holdings, Inc., a Delaware corporation (the
"Company"), Nevada Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of the Company, and Renal Treatment Centers, Inc., a Delaware
corporation ("RTC"), in substitution for the outstanding options under RTC's
Amended and Restated 1990 Stock Plan and RTC's Equity Incentive Plan for Outside
Directors as required by the Merger Agreement. The Adjusted Options are
intended to provide the current and former officers, directors and employees of
RTC and its subsidiaries with opportunities to purchase stock in the Company
pursuant to options granted hereunder which qualify as "incentive stock options"
under Section 422(b) of the Internal Revenue Code of 1986 (the "Code") ("ISO" or
"ISOs") and options granted hereunder which do not qualify as ISOs ("Non-
Qualified Option" or "Non-Qualified Options"). The Plan may also provide such
directors, officers, and employees with awards of stock in the Company
("Awards") and with opportunities to make direct purchases of stock in the
Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to
hereinafter individually as an "Option" and collectively as "Options". Options,
Awards and authorizations to make Purchases are referred to hereinafter
collectively as "Stock Rights". As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation,"
respectively, as those terms are defined in Section 425 of the Code.
2. Administration of the Plan.
--------------------------
A. Board or Committee Administration. The Plan shall be administered
---------------------------------
by the Board of Directors of the Company (the "Board"). The Board may
appoint a Stock Plan Committee (the "Committee") of two or more directors
to administer the Plan. A director of the Company shall be eligible to
serve on the Committee only if he or she qualifies as a "non-employee
director" for purposes of Rule 16b-3 under the Securities Exchange Act of
1934. In addition, each member of the Committee shall be an "Outside
director" within the meaning of Section 162(m) of the Code. Hereinafter,
all references in this Plan to the "Committee" shall mean the Board if no
Committee has been appointed. Subject to the terms of the Plan, the
Committee shall have the authority to (i) determine the employees of the
Company and any present or future subsidiaries of the Company
(collectively, "Related Corporations") (from among the class of employees
eligible under paragraph 3 to receive ISOs) to whom ISOs may be granted,
and to determine (from among the class of individuals and entities eligible
under paragraph 3 to receive Non-Qualified Options and Awards and to make
Purchases) to whom Non-Qualified Options, Awards and authorizations to make
Purchases may be granted; (ii) determine the time or times at which Options
or Awards may be granted or Purchases
<PAGE>
made; (iii) determine the option price of shares subject to each Option,
which price shall not be less than the minimum price specified in paragraph
6, and the purchase price of shares subject to each Purchase; (iv)
determine whether each Option granted shall be an ISO or a Non-Qualified
Option; (v) determine (subject to paragraph 7) the time or times when each
Option shall become exercisable and the duration of the exercise period;
(vi) determine whether restrictions such as repurchase options are to be
imposed on shares subject to Options, Awards and Purchases and the nature
of such restrictions, if any; and (vii) interpret the Plan and prescribe
and rescind rules and regulations relating to it. If the Committee
determines to issue a Non-Qualified Option, it shall take whatever actions
it deems necessary, under Section 422 of the Code and the regulations
promulgated thereunder, to ensure that such Option is not treated as an
ISO. The interpretation and construction by the Committee of any provisions
of the Plan or of any Stock Right granted under it shall be final unless
otherwise determined by the Board or except as may be specified in the
instrument evidencing the grant of a stock right. The Committee may from
time to time adopt such rules and regulations for carrying out the Plan as
it may deem best. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan
or any Stock Right granted under it.
B. Committee Actions. The Committee may select one of its members as
-----------------
its chairman, and shall hold meetings at such time and places as it may
determine. Acts by a majority of the Committee, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be
the valid acts of the Committee. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies however caused, or remove all members of the
Committee and thereafter directly administer the Plan.
3. Eligible Employees and Others. ISOs may be granted to any employee of
-----------------------------
the Company or any Related Corporation. Those officers and directors of the
Company who are not employees may not be granted ISOs under the Plan. Non-
Qualified Options, Awards and authorizations to make Purchases may be granted to
any employee, officer or director (whether or not also an employee) or
consultant of the Company or any Related Corporation. The Committee may take
into consideration a recipient's individual circumstances in determining whether
to grant an ISO, a Non-Qualified Option, an Award or an authorization to make a
Purchase. Granting of any Stock Right to any individual or entity shall neither
entitle that individual or entity to, nor disqualify him from, participation in
any other grant of Stock Rights.
4. Stock. The stock subject to Options, Awards and Purchases shall be
-----
authorized but unissued shares of Common Stock of the Company, par value $0.00l
per share (the "Common Stock"), or shares of Common Stock reacquired by the
Company in any manner. The aggregate number of shares which may be issued
pursuant to the Plan is 3,239,979, subject to adjustment as provided in
paragraph 13. Moreover, for the period commencing on January 1,
2
<PAGE>
1994 until December 17, 1999, no employee shall be granted options for more than
500,000 shares pursuant to this Plan. Any such shares may be issued as ISOs,
Non-Qualified Options or Awards, or to persons or entities making Purchases, so
long as the number of shares so issued does not exceed such number, as adjusted.
If any Option granted under the Plan shall expire or terminate for any reason
without having been exercised in full or shall cease for any reason to be
exercisable in whole or in part, or if the Company shall reacquire any unvested
shares issued pursuant to Awards or Purchases, the unpurchased shares subject to
such Options and any unvested shares so reacquired by the Company shall again be
available for grants of Stock Rights under the Plan.
5. Granting of Stock Rights. Stock Rights may be granted under the Plan
------------------------
at any time on or after September 28, 1990 and prior to December 17, 1999. The
date of grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant. The Committee shall have the right, with the consent of the optionee, to
convert an ISO granted under the Plan to a Non-Qualified Option pursuant to
paragraph 16.
6. Minimum Option Price; ISO Limitations.
-------------------------------------
A. Price for Non-Qualified Options. The exercise price per share
-------------------------------
specified in the agreement relating to each Non-Qualified Option granted
under the Plan shall in no event be less than the lesser of (i) the book
value per share of Common Stock as of the end of the fiscal year of the
Company immediately preceding the date of such grant, or (ii) fifty percent
(50%) of the fair market value per share of Common Stock on the date of
such grant.
B. Price for ISOs. The exercise price per share specified in the
--------------
agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, the
price per share specified in the agreement relating to such ISO shall not
be less than one hundred ten percent (110%) of the fair market value per
share of Common Stock on the date of grant.
C. $100,000 Annual Limitation on ISOs. Each eligible employee may be
----------------------------------
granted ISOs only to the extent that, in the aggregate under this Plan and
all incentive stock option plans of the Company and any Related
Corporation, such ISOs do not become exercisable for the first time by such
employee during any calendar year in a manner which would entitle the
employee to purchase more than $100,000 in fair market value (determined at
the time the ISOs were granted) of Common Stock in that year. Any options
granted to an employee in excess of such amount will be granted as Non-
Qualified Options.
3
<PAGE>
D. Determination of Fair Market Value. If, at the time an Option is
----------------------------------
granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined on the date such Option is granted
(or the first preceding business day for which the prices or quotes are
available, if the date of grant is not a business day) and shall mean (i)
the closing price (on that date) or the average of the high and low prices
(on that date) of the Common Stock on the principal national securities
exchange on which the Common Stock is traded, if the Common Stock is then
traded on a national securities exchange; or (ii) the last reported sale
price (on that date) of the Common Stock on the NASDAQ National Market
List, if the Common Stock is not then traded on a national securities
exchange; or (iii) the closing bid price (or average of bid prices) last
quoted (on that date) by an established quotation service for over-the-
counter securities, if the Common Stock is not reported on the NASDAQ
National Market List. However, if the Common Stock is not publicly traded
at the time an Option is granted under the Plan, "fair market value" shall
be deemed to be the fair value of the Common Stock as determined by the
Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of
the Common Stock in private transactions negotiated at arm's length.
7. Option Duration. Subject to earlier termination as provided in
---------------
paragraphs 9 and 10, each option shall expire on the date specified by the
Committee, but not more than (i) ten years and one day from the date of grant in
the case of Non-Qualified Options, (ii) ten years from the date of grant in the
case of ISOs generally, and (iii) five years from the date of grant in the case
of ISOs granted to an employee owning stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any Related Corporation. Subject to earlier termination as provided in
paragraphs 9 and 10, the term of each ISO shall be the term set forth in the
original instrument granting such ISO, except with respect to any part of such
ISO that is converted into a Non-Qualified Option pursuant to paragraph 16.
8. Exercise of Option. Subject to the provisions of paragraphs 9 through
------------------
12, each Option granted under the Plan shall be exercisable as follows:
A. Vesting. The Option shall either be fully exercisable on the date
-------
of grant or shall become exercisable thereafter in such installments as the
Committee may specify. The Committee may also establish certain
conditions, including, without limitation, performance criteria with
respect to the Company and/or the optionee, which must be satisfied before
an option may be exercised.
B. Full Vesting of Installments. Once an installment becomes
----------------------------
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.
4
<PAGE>
C. Partial Exercise. Each Option or installment may be exercised at
----------------
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.
D. Acceleration of Vesting. The Committee shall have the right to
-----------------------
accelerate the date of exercise of any installment of any option, upon such
circumstances and subject to such terms and conditions as the Committee
deems appropriate; provided that the Committee shall not, without the
consent of an optionee, accelerate the exercise date of any installment of
any option granted to any employee as an ISO (and not previously converted
into a Non-Qualified Option pursuant to paragraph 16) if such acceleration
would violate the annual vesting limitation contained in Section 422(d) of
the Code, as described in paragraph 6(C).
9. Termination of Employment. If an ISO optionee ceases to be employed
-------------------------
by the Company and all Related Corporations other than by reason of death or
disability as defined in paragraph 10, no further installments of his ISOs shall
become exercisable, and his ISOs shall terminate after the passage of ninety
(90) days from the date of termination of his employment, but in no event later
than on their specified expiration dates, except to the extent that such ISOs
(or unexercised installments thereof) have been converted into Non-Qualified
Options pursuant to paragraph 16. Employment shall be considered as continuing
uninterrupted during any bona fide leave of absence (such as those attributable
to illness, military obligations or governmental service) provided that the
period of such leave does not exceed 90 days or, if longer, any period during
which such optionee's right to reemployment is guaranteed by statute. A bona
fide leave of absence with the written approval of the Committee shall not be
considered an interruption of employment under the Plan, provided that such
written approval contractually obligates the Company or any Related Corporation
to continue the employment of the optionee after the approved period of absence.
ISOs granted under the Plan shall not be affected by any change of employment
within or among the Company and Related Corporations, so long as the optionee
continues to be an employee of the Company or any Related Corporation. Nothing
in the Plan shall be deemed to give any grantee of any Stock Right the right to
be retained in employment or other service by the Company or any Related
Corporation for any period of time.
10. Death; Disability.
-----------------
A. Death. If an ISO optionee ceases to be employed by the Company
-----
and all Related Corporations by reason of his death, any ISO of his may be
exercised, to the extent of the number of shares with respect to which he
could have exercised it on the date of his death (or to such greater extent
as may be specified in the instrument evidencing the grant of such ISO), by
his estate, personal representative or beneficiary who has acquired the ISO
by will or by the laws of descent and distribution, at any time prior to
the earlier of the specified expiration date of the ISO or 180 days from
the date of the optionee's death.
5
<PAGE>
B. Disability. If an ISO optionee ceases to be employed by the
----------
Company and all Related Corporations by reason of his disability, he shall
have the right to exercise any ISO held by him on the date of termination
of employment, to the extent of the number of shares with respect to which
he could have exercised it on that date (or to such greater extent as may
be specified in the instrument evidencing the grant of such ISO), at any
time prior to the earlier of the specified expiration date of the ISO or
180 days from the date of the termination of the optionee's employment.
For the purposes of the Plan, the term "disability" shall mean "permanent
and total disability" as defined in Section 22(e)(3) of the Code or
successor statute.
11. Assignability. No option or right to make Purchases shall be
-------------
assignable or transferable by the optionee or grantee thereof except by will or
by the laws of descent and distribution, and during the lifetime of the optionee
or grantee, each Option or right to make Purchases shall be exercisable only by
him or his guardian.
12. Terms and Conditions of Options. Options shall be evidenced by
-------------------------------
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. In granting any Non-Qualified Option, the
Committee may specify that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to ISOs, or to such other termination
and cancellation provisions as the Committee may determine. The Committee may
from time to time confer authority and responsibility on one or more of its own
members and/or one or more officers of the Company to execute and deliver such
instruments. The proper officers of the Company are authorized and directed to
take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
13. Adjustments. Upon the occurrence of any of the following events, an
-----------
optionee's rights with respect to Options granted to him hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
written agreement between the optionee and the Company relating to such Option:
A. Stock Dividends and Stock Splits. If the shares of Common Stock
--------------------------------
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of Options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
B. Consolidations or Mergers. If the Company is to be consolidated
-------------------------
with or acquired by another entity in a merger, sale of all or
substantially all of the Company's
6
<PAGE>
assets or otherwise (an "Acquisition"), the Committee or the board of
directors of any entity assuming the obligations of the Company hereunder
(the "Successor Board"), shall, as to outstanding Options, either (i) make
appropriate provision for the continuation of such Options by substituting
on an equitable basis for the shares then subject to such Options the
consideration payable with respect to the outstanding shares of Common
Stock in connection with the Acquisition; or (ii) upon written notice to
the optionees, provide that all Options must be exercised, to the extent
then exercisable (or to such greater extent as may be specified in the
instrument evidencing the grant of the Option), within a specified number
of days of the date of such notice, at the end of which period the Options
shall terminate; or (iii) terminate all Options in exchange for a cash
payment equal to the excess of the fair market value of the shares subject
to such Options to the extent then exercisable (or to such greater extent
as may be specified in the instrument evidencing the grant of the Option)
over the exercise price thereof.
C. Recapitalization or Reorganization. In the event of a
----------------------------------
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the
Company or of another corporation are issued with respect to the
outstanding shares of Common Stock, an optionee upon exercising an Option
shall be entitled to receive for the purchase price paid upon such exercise
the securities he would have received if he had exercised his Option prior
to such recapitalization or reorganization.
D. Modification of ISOs. Notwithstanding the foregoing, any
--------------------
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting with counsel for
the Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 425 of the
Code) or would cause any adverse tax consequences for the holders of such
ISOs. If the Committee determines that such adjustments made with respect
to ISOs would constitute a modification of such ISOs, it shall offer the
holder of such ISOs the option to convert the ISOs into Non-Qualified
Options as provided in paragraph 16 or refrain from making such
adjustments.
E. Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Committee.
F. Issuances of Securities. Except as expressly provided herein, no
-----------------------
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
7
<PAGE>
G. Fractional Shares. No fractional shares shall be issued under the
-----------------
Plan and the optionee shall receive from the Company cash in lieu of such
fractional shares.
H. Adjustments. Upon the happening of any of the events described in
-----------
subparagraphs A, B or C above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall
also be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor Board shall determine the
specific adjustments to be made under this paragraph 13 and, subject to
paragraph 2, its determination shall be conclusive.
If any person or entity owning restricted Common Stock obtained by exercise
of a Stock Right made hereunder receives shares or securities or cash in
connection with a corporate transaction described in subparagraphs A, B or C
above as a result of owning such restricted Common Stock, such shares or
securities or cash shall be subject to all of the conditions and restrictions
applicable to the restricted Common Stock with respect to which such shares or
securities or cash were issued, unless otherwise determined by the Committee or
the Successor Board.
14. Means of Exercising Stock Rights. A Stock Right (or any part or
--------------------------------
installment thereof) shall be exercised by giving written notice to the Company
at its principal office address. Such notice shall identify the Stock Right
being exercised and specify the number of shares as to which such Stock Right is
being exercised, accompanied by full payment of the purchase price therefor
either (a) in United States dollars in cash or by check, or (b) at the
discretion of the Committee, through delivery of shares of Common Stock having a
fair market value equal as of the date of the exercise to the cash exercise
price of the Stock Right, or (c) at the discretion of the Committee, by delivery
of the grantee's personal recourse note bearing interest payable not less than
annually at no less than 100% of the lowest applicable Federal rate, as defined
in Section 1274(d) of the Code, or (d) at the discretion of the Committee, by
any combination of (a), (b) and (c) above. If the Committee exercises its
discretion to permit payment of the exercise price of an ISO by means of the
methods set forth in clauses (b), (c), or (d) of the preceding sentence, such
discretion shall be exercised in writing at the time of the grant of the ISO in
question. The holder of a Stock Right shall not have the rights of a
shareholder with respect to the shares covered by his Stock Right until the date
of issuance of a stock certificate to him for such shares. Except as expressly
provided above in paragraph 13 with respect to changes in capitalization and
stock dividends, no adjustment shall be made for dividends or similar rights for
which the record date is before the date such stock certificate is issued.
15. Term and Amendment of Plan. This Plan was originally adopted by the
--------------------------
Board and approved by the stockholders on September 28, 1990. The Plan shall
expire at the end of the day on December 17, 1999 (except as to Options
outstanding on that date). Subject to the provisions of paragraph 5 above,
Stock Rights may be granted under the Plan prior to the date of stockholder
approval of the Plan or any amendment thereto for which stockholder approval is
8
<PAGE>
required under this paragraph 15. The Board may terminate or amend the Plan in
any respect at any time, except that, without the approval of the stockholders
obtained within twelve months before or after the Board adopts a resolution
authorizing any of the following actions: (a) the total number of shares that
may be issued under the Plan may not be increased (except by adjustment pursuant
to paragraph 13); (b) the provisions of paragraph 3 regarding eligibility for
grants of IS0s may not be modified; (c) the provisions of paragraph 6(B)
regarding the exercise price at which shares may be offered pursuant to ISOs may
not be modified (except by adjustment pursuant to paragraph 13); (d) the
expiration date of the Plan may not be extended; (e) the benefits accruing to
participants under the Plan may not be materially increased; and (f) the
requirements as to eligibility for participation in the Plan may not be
materially modified. In no event may action of the Board or stockholders alter
or impair the rights of a grantee, without his consent, under any Stock Right
previously granted to him.
16. Conversion of ISOs into Non-Qualified Options; Termination. The
----------------------------------------------------------
Committee, at the written request of any optionee, may in its discretion take
such actions as may be necessary to convert such optionee's ISOs (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior to the
expiration of such ISOs, regardless of whether the optionee is an employee of
the Company or a Related Corporation at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of the appropriate installments of such ISOs. At
the time of such conversion, the Committee (with the consent of the optionee)
may impose such conditions on the exercise of the resulting Non-Qualified
Options as the Committee in its discretion may determine, provided that such
conditions shall not be inconsistent with this Plan. Nothing in the Plan shall
be deemed to give any optionee the right to have such optionee's ISOs converted
into Non-Qualified Options, and no such conversion shall occur until and unless
the Committee takes appropriate action. The Committee, with the consent of the
optionee, may also terminate any portion of any ISO that has not been exercised
at the time of such termination.
17. Application of Funds. The proceeds received by the Company from the
--------------------
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. Governmental Regulation. The Company's obligation to sell and deliver
-----------------------
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
19. Withholding of Additional Income Taxes. Upon the exercise of a Non-
--------------------------------------
Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 20) or the vesting of restricted Common
Stock acquired on the exercise of a Stock Right hereunder, the Company, in
accordance with Section 3402(a) of the Code, may require the optionee, Award
recipient or purchaser to pay additional withholding taxes in respect of the
amount that is
9
<PAGE>
considered compensation includible in such person's gross income. The Committee
in its discretion may condition (i) the exercise of an Option, (ii) the grant of
an Award, (iii) the making of a Purchase of Common Stock for less than its fair
market value, or (iv) the vesting of restricted Common Stock acquired by
exercising a Stock Right, on the grantee's payment of such additional
withholding taxes.
20. Notice to Company of Disqualifying Disposition. Each employee who
----------------------------------------------
receives an ISO must agree to notify the Company in writing immediately after
the employee makes a Disqualifying Disposition of any Common Stock acquired
pursuant to the exercise of an ISO. A Disqualifying Disposition is any
disposition (including any sale) of such Common Stock before the later of (a)
two years after the date the employee was granted the ISO, or (b) one year after
the date the employee acquired Common Stock by exercising the ISO. If the
employee has died before such stock is sold, these holding period requirements
do not apply and no Disqualifying Disposition can occur thereafter.
21. Governing Law; Construction. The validity and construction of the
---------------------------
Plan and the instruments evidencing Stock Rights shall be governed by the laws
of the State of Delaware, or the laws of any jurisdiction in which the Company
or its successors in interest may be organized. In construing this Plan, the
singular shall include the plural and the masculine gender shall include the
feminine and neuter, unless the context otherwise requires.
22. Compliance with Rule 16b-3. The provisions of the Plan are intended
--------------------------
to comply in all respects with the provisions of Rule 16b-3 under the Securities
Exchange Act of 1934 and any amendments thereto, and, if the Plan shall not so
comply, whether on the date of adoption or by reason of any later amendment to
or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to
be automatically amended so as to bring them into full compliance with such
rule.
10
<PAGE>
Exhibit 10.32
AMENDMENT NO. 5 AND CONSENT
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
AMENDMENT NO. 5 AND CONSENT (this "Amendment"), dated as of February 18,
---------
2000, 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, Amendment No. 3 and Waiver,
dated as of August 9, 1999, and Amendment No. 4 and Waiver ("Amendment No. 4"),
---------------
dated as of November 8, 1999 (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
Required Lenders consent to the sale of (i) three certain renal treatment
centers listed on Schedule 1 attached hereto, the consideration of which equals
approximately $10,100,000 in cash plus the forgiveness of $3,000,000 in deferred
purchase obligations (the "Forgiven Deferred Purchase Obligations") (the "Renal
-------------------------------------- -----
Asset Sale"), (ii) the Borrower's pharmacy operations, the consideration of
- ----- ----
which approximately $3,400,000 (the "Pharmacy Asset Sale"), and (iii) certain
-------------------
other assets, the consideration of which shall not exceed $10,000,000 (the
"Future Asset Sales"), and together with the Renal Asset Sale and the Pharmacy
------------------
Asset Sale, (the "Permitted Asset Sales") upon the terms and conditions
---------------------
contained herein, and the Administrative Agent and the Required Lenders are
willing so to do.
III. Pursuant to Amendment No. 4, the total consideration for all
Permitted Acquisitions made after July 1, 1999 through and including March 15,
2000 was limited to an amount not to exceed $10,000,000. During such period but
prior to the date hereof, the Borrower has made Permitted Acquisitions in an
aggregate amount equal to $8,600,000. The Borrower has requested that the
Administrative Agent and the Required Lenders consent to the making of Domestic
Acquisitions on or prior to March 31, 2000 of renal treatment centers that the
Borrower or any of its wholly-owned Subsidiaries is contractually obligated on
the date hereof to make as described on Schedule 2 attached hereto in an
aggregate amount not to exceed $1,400,000 (the "Remaining Permitted
-------------------
Acquisitions") upon the terms and conditions contained herein, and the
- ------------
Administrative Agent and the Required Lenders are willing so to do.
IV. The Borrower acknowledges that one or more Defaults or Events of
Default have occurred and are continuing under the Revolving Credit Agreement.
<PAGE>
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. Notwithstanding anything to the contrary contained in Sections
2.6(d), 2.7(f) and 8.7 of the Revolving Credit Agreement, the Administrative
Agent and the Required Lenders hereby consent to the consummation of the
Permitted Asset Sales, provided that each of the following conditions is
satisfied:
(a) (i) the consummation of each Permitted Asset Sale shall be
deemed to be an Asset Sale made pursuant to Section 8.7 of the Revolving Credit
Agreement for purposes of the $31,590,000 amount contained in Section 8.7(i) of
the Revolving Credit Agreement (after giving effect to this Amendment), and (ii)
on and after the effective date of this Amendment, the definition of "Threshold
Amount" contained in Section 1.1 of the Revolving Credit Agreement shall equal
zero;
(b) the consideration received or to be received by the Borrower
or any of its Subsidiaries with respect to each Permitted Asset Sale shall (i)
not be less than the fair market value thereof as reasonably determined by the
Board of Directors of the Borrower, (ii) be payable on or before the closing
thereof, and (iii) be payable (A) with respect to the Renal Asset Sale and the
Pharmacy Asset Sale, 100% in cash (other than the Forgiven Deferred Purchase
Obligations), and (B) with respect to each Future Asset Sale, at least 75% in
cash and any non-cash consideration shall be limited to the forgiveness of
Indebtedness of the Borrower or any of its Subsidiaries in connection with such
Future Asset Sale (the "Forgiven Indebtedness");
---------------------
(c) the consideration received or to be received for all Future
Asset Sales shall not exceed $10,000,000 in the aggregate, and the Net Cash
Proceeds of any Future Asset Sale plus any Forgiven Indebtedness in connection
therewith shall exceed the amount equal to the EBITDA attributable to the assets
of such Future Asset Sale for the twelve month period most recently preceding
the date of such Future Asset Sale multiplied by 5.5 (the "Minimum Sale Price");
------------------
(d) on the date of each such Permitted Asset Sale, the
Administrative Agent and the Lenders shall have received a certificate with
respect thereto signed by the chief financial officer of the Borrower and either
the chairman of the board (if an officer) or any vice president of the Borrower
identifying the Property sold pursuant to such Permitted Asset Sale and (i)
stating the total consideration to be paid in respect of such Permitted Asset
Sale, (ii) certifying that the consideration received by the Borrower or such
Subsidiary for such Property has been determined by the Board of Directors of
the Borrower to be not less than the fair market value of such Property, and
(iii) certifying to and attaching a true and correct calculation of (A) the Net
Cash Proceeds of such Permitted Asset Sale and (B) with respect to a Future
Asset Sale, the Minimum Sale Price, such calculations to be reasonably
acceptable to the Administrative Agent and the Syndication Agent;
(e) on the date of the consummation of each Permitted Asset
Sale, the Borrower shall prepay the Revolving Credit Loans in an amount
equal to the Revolver
-2-
<PAGE>
Prepayment Fraction multiplied by the Total Prepayment Amount (as defined in
Paragraph 3 of this Amendment) of such Permitted Asset Sale (the "Revolver
--------
Prepayment Amount"), provided, however, that the Borrower shall not elect to
- -----------------
give the Lenders under and as defined in the Term Loan Facility the option to
waive their rights to receive any prepayments with respect to the Permitted
Asset Sales pursuant to the provisions of Section 2.4(d)(iii) of the Term Loan
Facility;
(f) on the date of the consummation of each Permitted Asset
Sale, the Aggregate Revolving Credit Commitments shall be automatically and
permanently reduced in an amount equal to the Revolver Prepayment Amount of such
Permitted Asset Sale (assuming for purposes of this Paragraph 1(f) that the then
outstanding amount of Revolving Credit Loans equals or exceeds the amount of
such prepayment);
(g) (i) the Renal Asset Sale shall be consummated on or before
February 29, 2000, (ii) the Pharmacy Asset Sale shall be consummated on or
before March 31, 2000, and (iii) any Future Asset Sale shall be consummated on
or before March 31, 2000; and
(h) during the period from and including the effective date of
this Amendment through and including March 15, 2000, the Aggregate Credit
Exposure of all Lenders shall not exceed $650,000,000, which amount shall be
reduced on the date of the consummation of each Permitted Asset Sale by the
Revolver Prepayment Amount of such Permitted Asset Sale (assuming for purposes
of this Paragraph 1(h) that the then outstanding amount of Revolving Credit
Loans equals or exceeds the amount of such prepayment).
2. Section 8.7(i) of the Revolving Credit Agreement is amended by
replacing the amount "$25,000,000" contained therein with the amount
"$31,590,000".
3. The "Total Prepayment Amount" of each Permitted Asset Sale shall,
for purposes hereof and the Revolving Credit Agreement, be the amount of the Net
Cash Proceeds of such Permitted Asset Sale.
4. The Administrative Agent and the Required Lenders hereby consent
to the making of the Remaining Permitted Acquisitions by the Borrower or any
wholly-owned Subsidiary of the Borrower, provided that (i) the total
consideration paid for all such Remaining Permitted Acquisitions shall not
exceed $1,400,000 in the aggregate, (ii) the Remaining Permitted Acquisitions
shall be made on or before March 31, 2000, (iii) the terms, conditions and
restrictions of Section 8.5(f) of Revolving Credit Agreement (other than
Sections 8.5(f)(a) and 8.5(f)(E) thereof) shall have been satisfied, and (iv) on
the date of each such Remaining Permitted Acquisition, the Administrative Agent
and the Lenders shall have received a certificate with respect thereto signed by
the chief financial officer of the Borrower and either the chairman of the board
(if an officer) or any vice president of the Borrower certifying that there has
been no material adverse change in the information listed on or provided
pursuant to Schedule 2 attached hereto with respect to such Remaining Permitted
Acquisition.
5. Paragraphs 1 through 4 of this Amendment shall not become effective
until the satisfaction of all of the following conditions precedent:
-3-
<PAGE>
(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) 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.
(c) The Administrative Agent shall have received an opinion of
the 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.
(d) All costs, fees and expenses incurred by or payable to the
Administrative Agent and the Syndication Agent in connection with the
negotiation, execution and closing of this Amendment, including, without
limitation, the reasonable fees and expenses of Special Counsel for which an
invoice has been presented to the Borrower, shall have been paid.
6. The Borrower hereby acknowledges and agrees that (i) one or more
Defaults or Events of Default have occurred and are continuing under the
Revolving Credit Agreement, (ii) no failure to exercise and no delay in
exercising, on the part of the Administrative Agent, the Collateral Agent, the
Letter of Credit Issuer or any Lender, any right, remedy, power or privilege
under any Loan Document shall operate as a waiver thereof, nor shall any single
or partial exercise of any right, remedy, power or privilege under any Loan
Document preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege, and (iii) no Default or Event of
Default may be waived except upon the execution and delivery of a written
instrument pursuant to the terms and conditions of Section 11.1 of the Revolving
Credit Agreement.
7. On the date hereof, each Credit Party hereby (a) reaffirms and
admits the validity and enforceability of the Loan Documents (after giving
effect to this Amendment) and all of its obligations thereunder and (b) agrees
and admits that it has no defenses to or offsets against any such obligation.
8. 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.
-4-
<PAGE>
9. This Amendment may be executed in any number of counterparts all
of which, taken together, shall constitute one agreement. In making proof of
this Amendment, it shall only be necessary to produce the counterpart executed
and delivered by the party to be charged.
10. 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]
-5-
<PAGE>
AMENDMENT NO. 5 AND CONSENT
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:
----------------
THE BANK OF NEW YORK,
Individually, as the Letter of Credit Issuer, as
the Swing Line Lender and as Administrative Agent
By:
-------------------
Name:
-----------------
Title:
----------------
DLJ CAPITAL FUNDING, INC.,
Individually and as Syndication Agent
By:
-------------------
Name:
-----------------
Title:
----------------
FIRST UNION NATIONAL BANK,
Individually and as Documentation Agent
By:
-------------------
Name:
----------------
Title:
----------------
ABN AMRO BANK N.V.
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
<PAGE>
ALLIED IRISH BANKS, P.L.C.,
CAYMAN ISLANDS BRANCH
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA, NASSAU
BRANCH
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
BANK LEUMI USA
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
THE BANK OF NOVA SCOTIA
By:
-------------------
Name:
-----------------
Title:
----------------
<PAGE>
BANQUE NATIONALE DE PARIS
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
BHF (USA) CAPITAL CORPORATION
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
CITY NATIONAL BANK
By:
-------------------
Name:
----------------
Title:
----------------
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
CREDIT LYONNAIS NEW YORK BRANCH
By:
-------------------
Name:
-----------------
Title:
----------------
<PAGE>
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
ERSTE BANK DER OESTERREICHISCHEN
SPARKASSEN AG--NEW YORK
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
FLEET NATIONAL BANK
By:
-------------------
Name:
-----------------
Title:
----------------
THE FUJI BANK, LIMITED
By:
-------------------
Name:
-----------------
Title:
----------------
<PAGE>
HIBERNIA NATIONAL BANK
By:
-------------------
Name:
-----------------
Title:
----------------
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By:
-------------------
Name:
-----------------
Title:
----------------
KBC BANK
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
GENERAL ELECTRIC CAPITAL
CORPORATION
By:
-------------------
Name:
-----------------
Title:
----------------
MELLON BANK, N.A.
By:
-------------------
Name:
-----------------
Title:
----------------
MICHIGAN NATIONAL BANK
By:
-------------------
Name:
-----------------
Title:
----------------
<PAGE>
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By:
-------------------
Name:
-----------------
Title:
----------------
NATIONAL CITY BANK OF KENTUCKY
By:
-------------------
Name:
-----------------
Title:
----------------
PARIBAS
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
COOPERATIEVE CENTRALE
RAIFFEISEN - BOERENLEENBANK B.A,
"RABOBANK NEDERLAND", NEW YORK
BRANCH
By:
-------------------
Name:
-----------------
Title:
----------------
By:
-------------------
Name:
-----------------
Title:
----------------
<PAGE>
ROYAL BANK OF CANADA
By:
-------------------
Name:
-----------------
Title:
----------------
THE ROYAL BANK OF SCOTLAND PLC
By:
-------------------
Name:
-----------------
Title:
----------------
ROYALTON COMPANY
By: Pacific Investment Management Company,
as its Investment Advisor
By: PIMCO Management Inc., a general partner
By:
-------------------
Name:
-----------------
Title:
----------------
THE SANWA BANK, LIMITED
By:
-------------------
Name:
-----------------
Title:
----------------
SOCIETE GENERALE
By:
-------------------
Name:
-----------------
Title:
----------------
<PAGE>
STB DELAWARE FUNDING TRUST I
By:
-------------------
Name:
-----------------
Title:
----------------
SUNTRUST BANK, NASHVILLE, N.A.
By:
-------------------
Name:
-----------------
Title:
----------------
THE TOKAI BANK, LIMITED
By:
-------------------
Name:
-----------------
Title:
----------------
THE TOYO TRUST & BANKING CO., LTD.,
New York Branch
By:
-------------------
Name:
-----------------
Title:
----------------
UNION BANK OF CALIFORNIA, N.A.
By:
-------------------
Name:
-----------------
Title:
---------------
U.S. BANK NATIONAL ASSOCIATION
By:
-------------------
Name:
-----------------
Title:
----------------
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
By:
-------------------
Name:
-----------------
Title:
----------------
ROTHSCHILD RECOVERY FUND, L.P.
By:
-------------------
Name:
-----------------
Title:
----------------
AGREED AND CONSENTED TO:
TOTAL RENAL CARE, INC.
TOTAL RENAL CARE ACQUISITION CORP.
RENAL TREATMENT CENTERS, INC.
RENAL TREATMENT CENTERS-MID-ATLANTIC, INC.
RENAL TREATMENT CENTERS-NORTHEAST, INC.
RENAL TREATMENT CENTERS-CALIFORNIA, INC.
RENAL TREATMENT CENTERS-WEST, INC.
RENAL TREATMENT CENTERS-SOUTHEAST, INC.
Each by:
----------------
Name:
-------------------
Title:
------------------
TRC WEST, INC.
By:
---------------------
Name:
-------------------
Title:
------------------
<PAGE>
AMENDMENT NO. 5 AND CONSENT
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
SCHEDULE 1
LIST OF RENAL TREATMENT CENTERS
-------------------------------
1. Rogosin - Manhattan
2. Rogosin - Queens
3. Rogosin - Brooklyn
<PAGE>
AMENDMENT NO. 5 AND CONSENT
TO AND UNDER
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
SCHEDULE 2
LIST OF REMAINING PERMITTED ACQUISITIONS
----------------------------------------
Lanai Dialysis Center, Hawaii - Asset acquisition of one managed (non-
- -----------------------------
consolidated) center for approximately $200,000. The Borrower must acquire this
center so that it can be sold to Fresenius A.G. as part of the sale of the
Borrower's non-continental U.S. assets.
IHS facilities, NY - First payment of approximately $530,000, due by March 31,
- ------------------
2000, for asset acquisition of seven managed (non-consolidated) centers.
The Borrower is contractually obligated to enter into certain additional
agreements pursuant to previously granted rights. At this time, the Borrower is
unable to determined whether and when such rights will be exercised.
The Borrower will not be assuming any contingent liabilities in connection with
any of the Remaining Permitted Acquisitions.
<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 and amortization of
financing costs, and the estimated interest component of rental expense on
operating leases.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- ------- -------
(in thousands, except for ratio data)
<S> <C> <C> <C> <C> <C>
Income before income taxes,
extraordinary items and
cumulative effect of a change
in accounting principle........ $(181,826) $ 48,641 $ 81,178 $54,563 $37,141
--------- -------- -------- ------- -------
Fixed charges:
Interest expense and
amortization of debt issuance
costs and discounts on all
indebtedness................. 110,797 84,003 29,082 13,670 12,921
Interest portion of rental
expense...................... 17,501 12,992 8,196 5,301 3,346
--------- -------- -------- ------- -------
Total fixed charges......... 128,298 96,995 37,278 18,971 16,267
--------- -------- -------- ------- -------
Earnings before income taxes,
extraordinary items, cumulative
effect of a change in
accounting principle and fixed
charges........................ $ (53,528) $145,636 $118,456 $73,534 $53,408
========= ======== ======== ======= =======
Ratio of earnings to fixed
charges........................ (a) 1.50 3.18 3.88 3.28
========= ======== ======== ======= =======
</TABLE>
- --------
(a) Due to the Company's loss in 1999, the ratio coverage was less than 1:1.
The Company would have had to generate additional earnings of $182 million
to achieve a coverage of 1:1.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
As of January 13, 2000
<TABLE>
<CAPTION>
NAME STRUCTURE JURISDICTION OF
INCORPORATION
<S> <C> <C>
Assisi S.r.l. Sociedad de responsibilidad limitada (6)
Astro, Hobby, West Mt., Renal Care Ltd. Partnership Limited Partnership DE
Bay Area Dialysis Partnership Partnership CA
Beta Dial S.r.l. Sociedad de responsibilidad limitada (6)
Beverly Hills Dialysis Partnership Partnership+ CA
Burbank Dialysis Partnership Partnership CA
Capital Dialysis Partnership Partnership CA
Carroll County Dialysis Facility, Inc. Corporation MD
Carroll County Dialysis Facility Limited Partnership Partnership MD
Centro De Tratamiento Medico Renal S.A. Sociedad Anonima (3)
Cercos S.r.l. Sociedad de responsibilidad limitada (6)
Continental Dialysis Center, Inc. Corporation VA
Continental Dialysis Center of Springfield-Fairfax, Inc. Corporation VA
Crescent City Dialysis Partnership Partnership LA
Crystal River Dialysis, LLC Limited Liability Company FL
DialTorre S.r.l. Sociedad de responsibilidad limitada (6)
Dialysis Specialists of Dallas, Inc. Corporation TX
Dialysis Treatment Centers of Macon, LLC Limited Liability Company GA
Due Torri S.r.l. Sociedad de responsibilidad limitada (6)
East End Dialysis Center, Inc. Corporation VA
Eastmont Partnership Partnership CA
Eaton Canyon Dialysis Partnership Partnership CA
Elberton Dialysis Center, Inc. Corporation GA
Elmbrook Kidney Center, Inc. Corporation TX
Enfermedades Renales - Centro de Dialisis S.A. Sociedad Anonima* (2)
Enne S.r.l. Sociedad de responsibilidad limitada (6)
Fanus S.r.l. Sociedad de responsibilidad limitada (6)
Flamingo Park Kidney Center, Inc. Corporation FL
Flaminia S.r.l. Sociedad de responsibilidad limitada (6)
Flavia S.r.l. Sociedad de responsibilidad limitada (6)
Garey Dialysis Center Partnership Partnership CA
Guam Renal Care Partnership Partnership GU
Guam Renal Management Partnership Partnership GU
Houston Kidney Center/Total Renal Care Integrated Svc. Partnership DE
Hutchinson Dialysis, L.L.C. Limited Liability Company# KS
IL Nefrologico S.r.l. Sociedad de responsibilidad limitada (6)
Imera S.A. Sociedad Anonima (3)
Integrated Services Network, LP Partnership DE
Instituto Privado de Nefrologia S.A. Sociedad Anonima* (7)
Instituto Renal Tucuman S.A. Sociedad Anonima (4)
Ionica S.r.l. Sociedad de responsibilidad limitada (6)
Irno Dial S.r.l. Sociedad de responsibilidad limitada (6)
Kenner Regional Dialysis Partnership Partnership LA
Lincoln Park Dialysis Services, Inc. Corporation IL
</TABLE>
<PAGE>
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
NAME STRUCTURE JURISDICTION OF
INCORPORATION
<S> <C> <C>
Los Angeles Dialysis Center Partnership CA
Mason-Dixon Dialysis Facility, Inc. Corporation MD
MD Investments, LLC Partnership VA
Moncrief Dialysis Center/Total Renal Care, LP Partnership# DE
Nedial S.r.l. Sociedad de responsibilidad limitada (6)
Nedial Napoli, S.r.l. Sociedad de responsibilidad limitada (6)
Nefrologia S.r.l. Sociedad de responsibilidad limitada (6)
Nefrologia Escobar S.A. Sociedad Anonima (3)
New Dial S.r.l. Sociedad de responsibilidad limitada (6)
Omnia Dial S.r.l. Sociedad de responsibilidad limitada (6)
Open Access Sonography Corporation FL
Pacific Coast Dialysis Center Partnership CA
Pacific Dialysis Partnership Partnership GU
Peninsula Dialysis Center, Inc. Corporation VA
Peralta Renal Center Partnership+ CA
Piedmont Dialysis Center Partnership+ CA
Renal Diagnostic Laboratories, Inc. Corporation DE
Renal Treatment Centers, Inc. Corporation DE
Renal Treatment Centers - California Corporation DE
Renal Treatment Centers - Hawaii, Inc. Corporation DE
Renal Treatment Centers - Illinois, Inc. Corporation DE
Renal Treatment Centers - Management Acquisition, Inc. Corporation DE
Renal Treatment Centers - Mid-Atlantic, Inc. Corporation DE
Renal Treatment Centers - Northeast, Inc. Corporation DE
Renal Treatment Centers - Southeast, Inc. Corporation DE
Renal Treatment Centers - West, Inc. Corporation DE
RTC Argentina S.A. Sociedad Anonima (3)
RTC Holdings, Inc. Corporation DE
RTC Holdings International, Inc. Corporation DE
RTC Supply, Inc. Corporation DE
RTC - Texas Acquisition, Inc. Corporation TX
RTC TN, Inc. Corporation DE
Rusdial S.r.l. Sociedad de responsibilidad limitada (6)
Salaria S.r.l. Sociedad de responsibilidad limitada (6)
San Cristobal - TRC Dialysis Center Partnership PR
San Gabriel Valley Partnership Partnership CA
Sunrise Dialysis Partnership Partnership+ CA
Tiburtina S.r.l. Sociedad de responsibilidad limitada (6)
Total Acute Kidney Care, Inc. Corporation FL
Total Renal Care Acquisition Corp. Corporation DE
Total Renal Care, Inc. Corporation CA
Total Renal Care Colorado, Inc. Corporation CO
Total Renal Care (Denham), Limited Corporation (5)
</TABLE>
<PAGE>
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
NAME STRUCTURE JURISDICTION OF
INCORPORATION
<S> <C> <C>
Total Renal Care Hollywood Partnership Partnership CA
Total Renal Care International Limited Corporation (5)
Total Renal Care Italia S.r.l. Sociedad de responsibilidad limitada (6)
Total Renal Care New York, Inc. Corporation NY
Total Renal Care North Carolina, LLC Limited Liability Company DE
Total Renal Care Provo, L.L.C. Limited Liability Company DE
Total Renal Care Puerto Rico, Inc. Corporation PR
Total Renal Care Utah, LLC Limited Liability Company DE
Total Renal Care (UK) Limited Corporation (5)
Total Renal Care Texas Limited Partnership Limited Partnership DE
Total Renal Care West, Inc. Corporation DE
Total Renal Laboratories, Inc. Corporation FL
Total Renal Research Institute, Inc. Corporation DE
Total Renal Support Services, Inc. Corporation DE
Total Renal Support Services of North Carolina, LLC Limited Liability Company DE
TRC Dyker Heights, L.P. Limited Partnership NY
TRC El Paso Limited Partnership Partnership DE
TRC Four Corners Dialysis Clinics, LLC Partnership NM
TRC - Georgetown Regional Dialysis LLC Limited Liability Company DC
TRC Germany GmbH Gesellschaft mit beschrankter Haftung (1)
TRC - Indiana LLC Limited Liability Company IN
TRC - Richmond Renal Care, LLC Limited Liability Company VA
TRC - Petersburg, LLC Limited Liability Company DE
TRC - Rogosin Group, L.P. Limited Partnership NY
Tri-City Dialysis Center, Inc. Corporation VA
Unidad Nefrologica Bustamante S.A. Sociedad Anonima (3)
University Park Dialysis Partnership Partnership CA
Vega S.r.l. Sociedad de responsibilidad de limitada (6)
Wilshire Dialysis Partnership Partnership CA
- ------------------------
</TABLE>
(1) Germany
(2) Province of Mendoza, Argentina
(3) City of Buenos Aires, Argentina
(4) Province of Tucuman, Argentina
(5) United Kingdom
(6) Italy
(7) Province of Santiago del Estero, Argentina
* These entities were each originally a Sociedad de Responsibilidad Limitada
(S.r.l.), but were each transformed into a Sociedad Anonima prior to
acquisition by RTC Argentina S.A. The transformation in each case is still
in the process of being registered before the applicable Public Register of
Commerce.
+ Wholly owned by Total Renal Care, Inc. with an affiliated entity.
# Minority subsidiaries not consolidated for accounting purposes
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-84610, No. 33-83018, No. 33-99862, No. 33-
99864, No. 333-1620, No. 333-34693, No. 333-34695, No. 333-46887, No. 333-
75361, No. 333-56149, No. 333-30734, and No. 333-30736) and Form S-3
(No. 333-69227) of Total Renal Care Holdings, Inc. of our report dated March
22, 2000, relating to the financial statements, which appears in this Annual
Report on Form 10-K. We also consent to the incorporation by reference of our
report dated March 22, 2000 relating to the Financial Statement Schedule,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Seattle, Washington
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 107,981,000 41,487,000 0
<SECURITIES> 0 0 0
<RECEIVABLES> 457,644,000 478,670,000 0
<ALLOWANCES> 67,315,000 61,848,000 0
<INVENTORY> 32,916,000 23,470,000 0
<CURRENT-ASSETS> 654,748,000 566,514,000 0
<PP&E> 427,109,000 341,446,000 0
<DEPRECIATION> 141,660,000 108,109,000 0
<TOTAL-ASSETS> 2,056,718,000 1,911,619,000 0
<CURRENT-LIABILITIES> 1,698,554,000 178,450,000 0
<BONDS> 470,000,000 470,000,000 0
0 0 0
0 0 0
<COMMON> 81,000 81,000 0
<OTHER-SE> 326,323,000 473,783,000 0
<TOTAL-LIABILITY-AND-EQUITY> 2,056,718,000 1,911,619,000 0
<SALES> 0 0 0
<TOTAL-REVENUES> 1,445,351,000 1,203,738,000 758,403,000
<CGS> 0 0 0
<TOTAL-COSTS> 1,509,333,000 1,068,825,000 646,816,000
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 133,253,000 44,858,000 28,899,000
<INTEREST-EXPENSE> 110,797,000 84,003,000 29,082,000
<INCOME-PRETAX> (181,826,000) 48,641,000 81,178,000
<INCOME-TAX> (34,570,000) 38,449,000 35,654,000
<INCOME-CONTINUING> (147,256,000) 10,192,000 45,524,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 12,744,000 0
<CHANGES> 0 6,896,000 0
<NET-INCOME> (147,256,000) (9,448,000) 45,524,000
<EPS-BASIC> (1.81) (0.12) 0.59
<EPS-DILUTED> (1.81) (0.12) 0.57
</TABLE>
