<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q/A
(AMENDMENT NO. 2)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 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)
FOR THE QUARTER ENDED MARCH 31, 1999
Delaware 51-0354549
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21250 Hawthorne Blvd., Suite 800
Torrance, California 90503-5517
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 792-2600
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class May 1, 1999
----- -----------------
<S> <C>
Common Stock, Par Value $0.001........................... 81,172,370 shares
</TABLE>
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- --------------------------------------------------------------------------------
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
Unless otherwise indicated in this Form 10-Q/A (Amendment No. 2), "we," "us,"
"our" and similar terms refer to Total Renal Care Holdings, Inc. and its
subsidiaries.
INTRODUCTORY STATEMENT
We are filing this Amendment No. 2 on Form 10-Q/A for the quarterly period
ended March 31, 1999 to restate our financial statements for the three months
ended March 31, 1998 and 1999 as summarized below. Concurrent restatements for
the three years ended December 31, 1998 have been reported on our 1998 Form 10-
K/A (Amendment No. 2).
Decreases (increases) to income before taxes
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1998 1999
---------- -----------
<S> <C> <C>
To reflect goodwill adjustments associated with
acquisition transactions:(1)
Valuation adjustments(2)............................. $ 526,000 $ (69,000)
Pre-acquisition management fees(3)................... 887,000 (36,000)
Other acquisition costs.............................. (287,000) 6,000
To recognize a calculated fair value of stock options
granted to medical directors and contract labor....... 1,497,000 (922,000)
To reflect accounts payable accruals in the quarters
the liabilities were subsequently determined to have
been incurred......................................... (3,800,000)
---------- -----------
Decrease (increase) to income before taxes............. $2,623,000 $(4,821,000)
========== ===========
</TABLE>
- ---------------------
Additional information is provided in Note 1A to the condensed consolidated
financial statements.
(1) Adjustments include the impact on goodwill amortization associated with the
goodwill adjustments.
(2) Accounts receivable and other valuation adjustments originally considered
to be acquisition valuation contingencies and included in goodwill have
been restated to be included in results of operations.
(3) Pre-acquisition management fee income has been restated to be included as
acquisition consideration.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999 and December
31, 1998................................................................ 1
Condensed Consolidated Statements of Income and Comprehensive Income for
the three months ended March 31, 1999 and March 31, 1998................ 2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 1998................................. 3
Notes to Condensed Consolidated Financial Statements..................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 20
Risk Factors............................................................... 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 28
Signatures................................................................. 29
</TABLE>
- ---------------------
Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS--AS RESTATED
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................... $ 39,905,000 $ 41,487,000
Patient accounts receivable, less allowance
for doubtful accounts of $68,828,000 and
$61,848,000, respectively................... 441,810,000 416,472,000
Deferred income taxes........................ 41,383,000 39,014,000
Other current assets......................... 57,997,000 69,541,000
-------------- --------------
Total current assets....................... 581,095,000 566,514,000
Property and equipment, net.................... 261,189,000 233,337,000
Notes receivable and other long-term assets ... 94,704,000 38,268,000
Intangible assets, net of accumulated
amortization of $130,391,000 and $114,536,000,
respectively.................................. 1,106,519,000 1,073,500,000
-------------- --------------
Total assets............................... $2,043,507,000 $1,911,619,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term obligations..... $ 19,435,000 $ 21,847,000
Other current liabilities.................... 159,181,000 156,603,000
-------------- --------------
Total current liabilities.................. 178,616,000 178,450,000
Long term debt and other....................... 1,324,754,000 1,227,671,000
Deferred income taxes.......................... 15,301,000 8,212,000
Minority interests............................. 26,545,000 23,422,000
Stockholders' equity:
Preferred stock, ($0.001 par value; 5,000,000
shares authorized; none outstanding)........
Common stock, voting, ($0.001 par value;
195,000,000 shares authorized; 81,153,000
and 81,030,000 shares issued and
outstanding, respectively).................. 81,000 81,000
Additional paid-in capital................... 423,239,000 421,675,000
Notes receivable from stockholders........... (364,000) (356,000)
Accumulated other comprehensive income....... (336,000)
Retained earnings............................ 75,671,000 52,464,000
-------------- --------------
Total stockholders' equity................. 498,291,000 473,864,000
-------------- --------------
Total liabilities and stockholders'
equity.................................... $2,043,507,000 $1,911,619,000
============== ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME--
AS RESTATED
Three months ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Three Months
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
STATEMENTS OF INCOME
Net operating revenues..................... $352,244,000 $257,833,000
Operating expenses:
Facilities............................... 229,640,000 168,440,000
General and administrative............... 23,608,000 16,622,000
Provision for doubtful accounts.......... 10,478,000 7,371,000
Depreciation and amortization............ 26,926,000 19,536,000
Merger and related costs................. 79,435,000
------------ ------------
Total operating expenses................ 290,652,000 291,404,000
Operating income (loss).................. 61,592,000 (33,571,000)
Interest expense, net of capitalized
interest.................................. (22,767,000) (14,517,000)
Interest income............................ 1,330,000 1,642,000
------------ ------------
Income (loss) before income taxes,
minority interests, extraordinary item
and cumulative effect of change in
accounting principle.................... 40,155,000 (46,446,000)
Income taxes............................... 14,630,000 120,000
------------ ------------
Income (loss) before minority interests,
extraordinary item and cumulative effect
of change in accounting principle....... 25,525,000 (46,566,000)
Minority interests in income of
consolidated subsidiaries................. 2,318,000 1,393,000
------------ ------------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle.................... 23,207,000 (47,959,000)
Extraordinary loss, net of tax of
$1,580,000................................ 2,812,000
Cumulative effect of change in accounting
principle, net of tax of $4,300,000....... 6,896,000
------------ ------------
Net income (loss).......................... $ 23,207,000 $(57,667,000)
============ ============
Earnings (loss) per common share:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle.................... $ 0.29 $ (0.61)
Extraordinary loss, net of tax........... (0.03)
Cumulative effect of change in accounting
principle, net of tax................... (0.09)
------------ ------------
Net income (loss)........................ $ 0.29 $ (0.73)
============ ============
Weighted average number of common shares
outstanding............................... 81,102,000 78,926,000
============ ============
Earnings (loss) per common share--assuming
dilution:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle.................... $ 0.28 $ (0.61)
Extraordinary loss, net of tax........... (0.03)
Cumulative effect of change in accounting
principle, net of tax................... (0.09)
------------ ------------
Net income (loss)........................ $ 0.28 $ (0.73)
============ ============
Weighted average number of common shares
and equivalents outstanding--assuming
dilution.................................. 86,458,000 78,926,000
============ ============
STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)........................ $ 23,207,000 $(57,667,000)
Other comprehensive income:
Foreign currency translation............ (336,000)
------------ ------------
Comprehensive income (loss).............. $ 22,871,000 $(57,667,000)
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--AS RESTATED
Three months ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Three Months
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................. $ 23,207,000 $ (57,667,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 26,926,000 19,536,000
Extraordinary item, net of tax............... 2,812,000
Deferred income taxes........................ 34,000 (752,000)
Provision for doubtful accounts.............. 10,478,000 7,371,000
Change in accounting principle, net of tax... 6,896,000
Compensation expense from stock option
exercise.................................... 16,000,000
Stock option expense......................... (922,000) 1,497,000
Changes in working capital................... (21,406,000) (37,066,000)
------------- -------------
Total adjustments.......................... 15,110,000 16,294,000
------------- -------------
Net cash provided by (used in) operating
activities.............................. 38,317,000 (41,373,000)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment............ (38,638,000) (12,937,000)
Cash paid for acquisitions, net of cash
acquired...................................... (77,417,000) (64,160,000)
Other.......................................... (17,666,000) (13,113,000)
------------- -------------
Net cash used in investing activities.... (133,721,000) (90,210,000)
------------- -------------
Cash flows from financing activities:
Borrowings from bank credit facility........... 84,500,000 494,000,000
Principal payments on long-term obligations.... (325,121,000)
Net proceeds from sale of common stock......... 1,992,000 17,441,000
Other.......................................... 7,330,000 4,628,000
------------- -------------
Net cash provided by financing
activities.............................. 93,822,000 190,948,000
------------- -------------
Net (decrease) increase in cash.................. (1,582,000) 59,365,000
Cash at beginning of period...................... 41,487,000 6,700,000
------------- -------------
Cash at end of period............................ $ 39,905,000 $ 66,065,000
============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1A. Restatement of previously reported financial statements and subsequent
event.
Restatement
Our financial statements have been restated for the three months ended March
31, 1998 and 1999 as summarized below. Such restatements supersede our
financial statements included in Form 10-Q/A (Amendment No. 1) previously
reported.
Decreases (increases) to income before taxes
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
To reflect goodwill adjustments associated with
acquisition transactions:(1)
Valuation adjustments(2)............................ $ 526,000 $ (69,000)
Pre-acquisition management fees(3).................. 887,000 (36,000)
Other acquisition costs............................. (287,000) 6,000
To recognize a calculated fair value of stock options
granted to medical directors and contract labor...... 1,497,000 (922,000)
To reflect accounts payable accruals in the quarters
the liabilities were subsequently determined to have
been incurred........................................ (3,800,000)
---------- -----------
Decrease (increase) to income before taxes.......... $2,623,000 $(4,821,000)
========== ===========
</TABLE>
- ---------------------
(1) Adjustments include the impact on goodwill amortization associated with the
goodwill adjustments.
(2) Accounts receivable and other valuation adjustments originally considered
to be acquisition valuation contingencies and included in goodwill have
been restated to be included in results of operations.
(3) Pre-acquisition management fee income has been restated to be included as
acquisition consideration.
4
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the amounts previously reported for the three months
ended March 31, 1998 and 1999 to the amounts presented in the restated
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1999
------------------------------------- ------------------------------------
As previously As previously
reported Adjustment As restated reported Adjustment As restated
------------- ---------- ------------ ------------- ---------- -----------
(in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $ 258,749 $ (916) $ 257,833 $ 352,244 $ 352,244
Operating expenses
Facilities........... 166,995 1,445 168,440 233,983 $ (4,343) 229,640
General and
administrative....... 16,910 (288) 16,622 23,987 (379) 23,608
Provision for doubtful
accounts............. 6,763 608 7,371 10,478 10,478
Depreciation and
amortization......... 19,594 (58) 19,536 27,025 (99) 26,926
Merger and related
costs................ 79,435 79,435
Total operating
expenses............ 289,697 1,707 291,404 295,473 (4,821) 290,652
Operating income
(loss)................. (30,948) (2,623) (33,571) 56,771 4,821 61,592
Income before
extraordinary item and
cumulative effect of
change in accounting
principle.............. (46,088) (1,871) (47,959) 19,941 3,266 23,207
Net income (loss)....... (55,796) (1,871) (57,667) 19,941 3,266 23,207
Income (loss) per common
share:
Income before
extraordinary item
and cumulative effect
of change in
accounting
principle............ (0.59) (0.02) (0.61) 0.25 0.04 0.29
Extraordinary loss.... (0.03) (0.03)
Cumulative effect of
change in accounting
principle............ (0.09) (0.09)
Net income (loss) per
share................ (0.71) (0.02) (0.73) 0.25 0.04 0.29
Income (loss) per common
share--assuming
dilution:
Income before
extraordinary item
and cumulative effect
of change in
accounting
principle............ (0.59) (0.02) (0.61) 0.24 0.04 0.28
Extraordinary loss.... (0.03) (0.03)
Cumulative effect of
change in accounting
principle............ (0.09) (0.09)
Net income (loss) per
share................ (0.71) (0.02) (0.73) 0.24 0.04 0.28
<CAPTION>
March 31, 1999 December 31, 1998
------------------------------------- ------------------------------------
As previously As previously
reported Adjustment As restated reported Adjustment As restated
------------- ---------- ------------ ------------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Current assets.......... $ 574,157 $ 6,938 $ 581,095 $ 559,542 $ 6,972 $ 566,514
Long term assets........ 1,473,247 (10,835) 1,462,412 1,356,039 (10,934) 1,345,105
Total assets............ 2,047,404 (3,897) 2,043,507 1,915,581 (3,962) 1,911,619
Current liabilities..... 176,909 1,707 178,616 174,464 3,986 178,450
Long term liabilities,
other.................. 1,366,600 1,366,600 1,259,305 1,259,305
Stockholders' equity.... 503,895 (5,604) 498,291 481,812 (7,948) 473,864
Liabilities and
stockholders' equity... 2,047,404 (3,897) 2,043,507 1,915,581 (3,962) 1,911,619
</TABLE>
5
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent event
Our credit facilities contain numerous financial and operating covenants.
Throughout 1999 we either complied with these covenants or obtained waivers and
continued to utilize these credit facilities. Based on our expectations
developed as of the date of this filing regarding our fourth quarter 1999
financial results, we anticipate not being in compliance with the covenants in
our credit facilities when measured as of December 31, 1999. Our anticipated
inability to maintain compliance results from an expected loss for the fourth
quarter of 1999, primarily due to asset impairments and valuation losses. These
fourth quarter asset impairments and valuation losses include: an impairment
loss for non-continental United States operations held for sale as of December
31, 1999, provision for uncollectible accounts receivable based on current
collection experience, and other asset impairments and valuation losses
associated with facility closures and other facility related assessments.
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. Additionally, this
noncompliance will result in higher interest costs, and the lenders may require
additional concessions from us before giving us a waiver. 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.
1. In our opinion the interim financial information reflects all normal
recurring adjustments which are necessary to state fairly our consolidated
financial position, results of operations, and cash flows as of and for the
periods indicated. We presume that users of the interim financial information
herein have read or have access to our audited consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the preceding fiscal year and that the adequacy of
additional disclosure needed for a fair presentation, except in regard to
material contingencies or recent significant events, may be determined in that
context. Accordingly, we have omitted footnote and other disclosures which
would substantially duplicate the disclosures contained in our Form 10-K/A
(Amendment No. 2) for the year ended December 31, 1998. We have made certain
reclassifications of prior period amounts to conform to current period
classifications. The interim financial information herein is not necessarily
representative of a full year's operations.
6
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The information related to the activity for the three months ended March 31,
1999 was previously restated for adjustments to correct for previously
unrecorded amounts due to suppliers. Facility operating expenses and general
and administrative expenses have increased by $11,900,000 and $1,250,000,
respectively, and adjustments to other accrued liabilities and income tax
liabilities have been recorded and are reflected in this Form 10-Q/A (Amendment
No. 2). The following summarizes the impact of these adjustments to net income
for the three months ended March 31, 1999.
<TABLE>
<CAPTION>
For the three months
ended March 31, 1999
-------------------------
As As
originally previously
reported restated
------------ ------------
<S> <C> <C>
Operating expense.................................... $282,323,000 $295,473,000
Income from operations............................... 69,921,000 56,771,000
Income taxes......................................... 18,282,000 13,075,000
Net income........................................... 27,884,000 19,941,000
Earnings per share................................... 0.34 0.25
Earnings per share--assuming dilution................ 0.34 0.24
</TABLE>
The information related to the activity for the three months ended March 31,
1998 was previously restated for certain reclassifications and adjustments. The
accrued merger and related costs initially reported by us in the first quarter
of 1998 amounted to $92,835,000. We have revised our financial reporting
relating to certain costs initially included in our merger and related costs
and accrual resulting in a decrease in merger and related costs of $13,400,000,
partially offset by an increase to facilities operating costs of $1,700,000 and
an increase to depreciation and amortization of $590,000 for a net decrease to
our first quarter 1998 operating expenses of $11,110,000. These
reclassifications and adjustments are more fully described in our Form 10-K/A
(Amendment No. 2) for the year ended December 31, 1998.
2. On February 27, 1998, we acquired Renal Treatment Centers, Inc., or RTC,
in a merger transaction. The merger was accounted for as a pooling of
interests. As a result, we restated our condensed consolidated financial
statements to include RTC for all periods presented. We had no transactions
with RTC prior to the combination and no adjustments were necessary to conform
RTC's accounting policies to ours. The results of operations for the separate
companies and the combined results presented in the condensed consolidated
financial statements follow:
<TABLE>
<CAPTION>
Three months
ended
March 31,
1998
------------
<S> <C>
Net operating revenues
TRCH....................................................... $143,172,000
RTC........................................................ 114,661,000
------------
$257,833,000
============
Loss before extraordinary item and cumulative effect of
change in accounting principle
TRCH....................................................... $(20,721,000)
RTC........................................................ (27,238,000)
------------
$(47,959,000)
============
Net loss
TRCH....................................................... $(23,625,000)
RTC........................................................ (34,042,000)
------------
$(57,667,000)
============
</TABLE>
7
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Merger and related costs recorded during the first quarter of 1998 in
connection with our merger with RTC included costs associated with certain of
the integration activities, transaction costs and costs of employee severance
and amounts due under employment agreements and other compensation programs. A
summary of merger and related costs and accrual activity through March 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......... $21,580,000 $ 41,960,000 $ 15,895,000 $ 79,435,000
Amounts utilized in
1998................... (22,885,000) (37,401,000) (13,137,000) (73,423,000)
Adjustment of
estimates.............. 1,305,000 (959,000) (1,593,000) (1,247,000)
----------- ------------ ------------ ------------
Accrual, December 31,
1998................... $ -- 3,600,000 1,165,000 4,765,000
===========
Amounts utilized--1st
quarter 1999........... (600,000) (90,000) (690,000)
------------ ------------ ------------
Accrual, March 31,
1999................... $ 3,000,000 $ 1,075,000 $ 4,075,000
============ ============ ============
</TABLE>
The remaining balance of severance and employment costs represents tax gross-
up payments expected to be paid in the second quarter of 1999. The remaining
balance of costs to integrate operations represents remaining lease payments on
RTC's vacant laboratory lease space.
In February 1998, in conjunction with our merger with RTC, we terminated
RTC's revolving credit agreement, and recorded all of the remaining unamortized
deferred financing costs as an extraordinary loss of $2,812,000, net of income
tax effect.
3. During the quarter ended March 31, 1999, we purchased 23 centers and
additional interests from minority partners in certain of our partnerships.
Total cash consideration for these transactions was approximately $77.4
million.
We accounted for these transactions under the purchase method. The cost of
these acquisitions is allocated primarily to intangible assets such as patient
charts, noncompete agreements and goodwill to the extent the purchase price
exceeds the value of the tangible assets, primarily capital equipment.
The assets and liabilities of the acquired centers were recorded at their
estimated fair market values at the dates of acquisition. The initial
allocations of fair market value are preliminary and subject to adjustment. The
results of operations of the facilities have been included in our financial
statements from their respective effective acquisition dates.
The results of operations on a pro forma basis, as though the above
acquisitions had been combined with us at the beginning of each period
presented for the three months ended March 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Pro forma net operating revenues................ $357,614,000 $269,409,000
Pro forma income (loss) before extraordinary
item and cumulative effect of change in
accounting principle........................... $ 24,100,000 $(46,544,000)
Pro forma net income (loss) .................... $ 24,100,000 $(56,252,000)
Pro forma earnings (loss) per share before
extraordinary item and cumulative effect of
change in accounting principle:
Basic......................................... $ 0.30 $ (0.59)
Assuming dilution............................. $ 0.28 $ (0.59)
</TABLE>
4. In March 1998, Statement of Position No. 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use, or SOP 98-1, was
issued and we adopted SOP 98-1 in the first quarter of 1999, effective January
1, 1999. SOP 98-1 defines internal-use software and identifies whether
internal-use software costs that we incur must be expensed or capitalized.
Costs that should be capitalized include external
8
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
direct costs of materials and services, payroll and payroll related costs for
employees directly associated with the internal-use software projects and
certain interest costs incurred in the application development stage. All other
internal-use software costs are expensed as incurred.
As a result of the adoption of SOP 98-1, we capitalized certain direct costs
of materials and payroll and payroll related costs related to software projects
currently in their application development stage. The capitalized costs of
these projects are included in projects under development as a component of
property, plant and equipment, as of March 31, 1999. The impact of the adoption
is not material to our operations.
In April 1998, Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities, or SOP 98-5, was issued. We adopted SOP 98-5 effective
January 1, 1998. SOP 98-5 requires that pre-opening and organization costs,
incurred in conjunction with facility pre-opening activities, which previously
had been treated as deferred costs and amortized over five years, should be
expensed as incurred. As a result of the adoption of SOP 98-5, all remaining
unamortized pre-opening, development and organizational costs existing prior to
January 1, 1998 of $11,196,000 were recognized, net of tax of $4,300,000, as
the cumulative effect of a change in accounting principle in the first quarter
of 1998.
5. The reconciliation of the numerators and denominators used to calculate
earnings (loss) per common share for all periods presented is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1999 1998
----------- ------------
<S> <C> <C>
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.......................................... $23,207,000 $(47,959,000)
Interest, net of tax resulting from dilutive effect
of convertible debt................................ 1,088,000
----------- ------------
Adjusted income (loss).............................. 24,295,000 (47,959,000)
Extraordinary loss, net of tax...................... (2,812,000)
Cumulative effect of change in accounting principle,
net of tax......................................... (6,896,000)
----------- ------------
Income (loss)--assuming dilution.................... $24,295,000 $(57,667,000)
=========== ============
Applicable common shares
Average outstanding during the period............. 81,123,000 79,031,000
Reduction in shares in connection with notes
receivable from employees.......................... (21,000) (105,000)
----------- ------------
Weighted average number of shares outstanding
for use in computing earnings per share............ 81,102,000 78,926,000
Dilutive effect of outstanding stock options........ 477,000
Dilutive effect of convertible debt................. 4,879,000
----------- ------------
Weighted average number of shares and equivalents
outstanding for use in computing earnings per
share--assuming dilution........................... 86,458,000 78,926,000
=========== ============
Earnings (loss) per common share:
Income (loss) per common share before
extraordinary item and cumulative effect
of change in accounting principle................ $ 0.29 $ (0.61)
Extraordinary loss, net of tax.................... (0.03)
Cumulative effect of change in accounting
principle, net of tax............................ (0.09)
----------- ------------
Net income (loss) per common share.................. $ 0.29 $ (0.73)
=========== ============
Earnings (loss) per common share--assuming dilution:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle........................................ $ 0.28 $ (0.61)
Extraordinary loss, net of tax.................... (0.03)
Cumulative effect of change in accounting
principle, net of tax............................ (0.09)
----------- ------------
Net income (loss) per common share--assuming
dilution........................................... $ 0.28 $ (0.73)
=========== ============
</TABLE>
9
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in the above calculation for the three months ended March 31, 1999,
is the effect of RTC's 5 5/8% convertible subordinated notes due 2006 treated
on an "as converted" basis; however, the effect is not included for the three
months ended March 31, 1998 because it was anti-dilutive. Our 7% convertible
notes due 2009 were also antidilutive for all periods presented.
6. During the quarter ended June 30, 1998, we entered into forward interest
rate cancelable swap agreements, with a combined notional amount of
$800,000,000. The lengths of the agreements are between three and ten years
with cancellation clauses at the swap holders' option from one to seven years.
The underlying blended rate is fixed at approximately 5.65% plus an applicable
margin based upon our current leverage ratio. At March 31, 1999, the effective
interest rate for borrowings under the swap agreements was 7.2%.
7. In June 1996, RTC issued $125,000,000 of 5 5/8% convertible subordinated
notes due 2006. These notes are convertible, at the option of the holder, at
any time after August 12, 1996 through maturity, unless previously redeemed or
repurchased, into our common stock at a conversion price of $25.62 principal
amount per share, subject to certain adjustments. At any time on or after July
17, 1999, all or any part of these notes will be redeemable at our option on at
least 15 and not more than 60 days' notice as a whole or, from time to time, in
part at redemption prices ranging from 103.94% to 100% of the principal amount
thereof, depending on the year of redemption, together with accrued interest
to, but excluding, the date fixed for redemption. TRCH has guaranteed these
notes.
The following is summarized financial information of RTC:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents........................ $ 0 $ 5,396,000
Accounts receivable, net......................... 127,355,000 130,129,000
Other current assets............................. 18,906,000 19,106,000
------------ ------------
Total current assets............................ 146,261,000 154,631,000
Property and equipment, net...................... 86,734,000 75,641,000
Intangible assets, net........................... 421,527,000 406,603,000
Other assets..................................... 3,159,000 9,249,000
------------ ------------
Total assets.................................... $657,681,000 $646,124,000
============ ============
Current liabilities (includes $311,843,000 and
$306,628,000 intercompany payable to TRCH at
March 31, and December 31, 1998, respectively).. $353,969,000 $354,489,000
Long-term debt................................... 134,553,000 125,199,000
Stockholder's equity............................. 169,159,000 166,436,000
------------ ------------
Total liabilities and stockholders' equity...... $657,681,000 $646,124,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net operating revenues.......................... $120,402,000 $114,661,000
Total operating expenses........................ 114,240,000 136,279,000
------------ ------------
Operating income (loss)......................... 6,162,000 (21,618,000)
Interest expense, net........................... 1,802,000 3,588,000
------------ ------------
Income before income taxes...................... 4,360,000 (25,206,000)
Income taxes.................................... 1,665,000 2,032,000
------------ ------------
Net income (loss) before extraordinary item and
cumulative effect of change in accounting
principle..................................... $ 2,695,000 $(27,238,000)
============ ============
</TABLE>
8. In November 1998, we issued $345,000,000 of 7% convertible subordinated
notes due 2009, or the 7% notes, in a private placement offering. The 7% notes
are convertible, at the option of the holder, at any time into our common stock
at a conversion price of $32.81 per share. We may redeem the 7% notes on or
after November 15, 2001. The 7% notes are general, unsecured obligations junior
to all of our existing and future senior debt and, effectively, all existing
and future liabilities of us and our subsidiaries.
10
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We subsequently filed a registration statement covering the resale of the 7%
notes which has not yet been declared effective by the SEC. As further
described in the registration statement, commencing May 18, 1999, we will
accrue certain monetary penalties on a weekly basis until the registration
statement is declared effective, as follows:
<TABLE>
<CAPTION>
Days
following
180 days
after Weekly Cumulative
closing Penalty Penalty
--------- ------- ----------
<S> <C> <C>
0-90 $17,250 $ 207,000
91-180 34,500 656,000
181-270 51,750 1,328,000
271-360 69,000 2,225,000
Thereafter 86,250
</TABLE>
Payment of these penalties is due upon the next interest due date.
9. Contingencies
Our Florida-based laboratory subsidiary is the subject of a third-party
carrier review relating to certain claims submitted by us for Medicare
reimbursement. We understand that similar reviews have been undertaken with
respect to other providers' laboratory activities in Florida and elsewhere. The
carrier has alleged that 99.3% of the tests performed by this laboratory for
the review period it initially identified, from January 1995 to April 1996,
were not properly supported by the prescribing physicians' medical
justification. The carrier subsequently requested billing records with respect
to the additional period from May 1996 to March 1998. The carrier has issued a
formal overpayment determination in the amount of $5.6 million and has
suspended all payments of claims related to this laboratory. From the beginning
of the suspension through March 31, 1999, the carrier has withheld
approximately $18 million. In addition the carrier has informed the local
offices of the Department of Justice, or DOJ, and the Department of Health and
Human Services, or HHS, of this matter.
We have consulted with outside counsel, reviewed our records, are disputing
the overpayment determination vigorously and have provided extensive supporting
documentation of our claims. We have cooperated with the carrier to resolve
this matter and have initiated the process of a formal review of the carrier's
determination. The first step in this formal review process is a hearing before
a hearing officer at the carrier, which is scheduled to begin in June 1999. We
have received minimal responses from the carrier to our repeated requests for
clarification and information regarding the continuing payment suspension. In
February 1999, our Florida-based laboratory subsidiary filed a complaint
against the carrier and HHS seeking a court order to lift the payment
suspension. We initiated this action only after serious consideration and the
unanimous approval of our board of directors, and we believe it is necessary to
bring a prompt resolution to this payment dispute. 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;
. What the outcome of the carrier's review of the periods from May 1996
through March 1998 will be and whether it will include the initiation of
another payment suspension;
. Whether additional periods may be reviewed by the carrier; or
. Any other outcome of this investigation or our lawsuit.
Any determination adverse to us could have an adverse impact on our business,
results of operations, financial condition or cash flows.
11
<PAGE>
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following the announcement on February 18, 1999 of our preliminary results
for the fourth quarter of fiscal 1998 and the full year then ended, several
class action lawsuits were filed against us and certain of our officers in the
U.S. District Court for the Central District of California. The complaints are
similar and allege violations of federal securities laws arising from alleged
false and misleading statements primarily regarding our accounting for the
integration of RTC into TRCH and request unspecified monetary damages. We
believe that all of the claims are without merit and we intend to defend
ourselves vigorously. We anticipate that the attorneys' fees and related costs
of defending these lawsuits should be covered primarily by our directors and
officers insurance policies and we believe that any additional costs will not
have a material impact on our financial condition, results of operations or
cash flows.
In addition, we are subject to claims and suits in the ordinary course of
business for which we believe 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
cash flows.
10. Subsequent to March 31, 1999, we completed acquisitions of 11 dialysis
facilities for consideration of approximately $50.5 million, which has been
funded by additional borrowings under our credit facilities.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Our financial statements have been restated for the three months ended March
31, 1998 and 1999. These restatements supersede our financial statements
included in Form 10-Q/A (Amendment No. 1) previously reported. The combined
impact of the restatements was as follows:
Decreases (increases) to income before taxes
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1998 1999
---------- -----------
<S> <C> <C>
To reflect goodwill adjustments associated with
acquisition transactions.............................. $1,126,000 $ (99,000)
To recognize a calculated fair value of stock options
granted to medical directors and contract labor....... 1,497,000 (922,000)
To reflect accounts payable accruals in the quarters
the liabilities were subsequently determined to have
been incurred......................................... (3,800,000)
---------- -----------
Decrease (increase) to income before taxes........... $2,623,000 $(4,821,000)
========== ===========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1999
---------------------- ----------------------
As previously As As previously As
reported restated reported restated
------------- -------- ------------- --------
(in thousands, except per share)
<S> <C> <C> <C> <C>
Net operating revenues......... $258,749 $257,833 $352,244 $352,244
Operating expenses............. 289,697 291,404 295,473 290,652
Operating income............... (30,948) (33,571) 56,771 61,592
Income taxes................... 872 120 13,075 14,630
Net income (loss).............. (55,796) (57,667) 19,941 23,207
Income (loss) per common share:
Net income (loss) per share.. (0.71) (0.73) 0.25 0.29
Income (loss) per common
share--assuming dilution...... (0.71) (0.73) 0.24 0.28
</TABLE>
As described in Note 2 to our condensed consolidated financial statements, we
acquired Renal Treatment Centers, Inc., or RTC, on February 27, 1998 in a
merger accounted for as a pooling of interests. Accordingly, our condensed
consolidated financial statements were previously restated to include RTC for
all periods presented.
The information related to the activity for the three months ended March 31,
1999 was previously restated for adjustments to correct for previously
unrecorded amounts due to suppliers. Facility operating expenses and general
and administrative expenses have increased by $11,900,000 and $1,250,000,
respectively, and adjustments to other accrued liabilities and income tax
liabilities have been recorded and are reflected in this Form 10-Q/A (Amendment
No. 2). The following summarizes the impact of these adjustments to net income
for the three months ended March 31, 1999.
<TABLE>
<CAPTION>
For the three months
ended March 31, 1999
-------------------------
As As
originally previously
reported restated
------------ ------------
<S> <C> <C>
Operating expense.................................... $282,323,000 $295,473,000
Income from operations............................... 69,921,000 56,771,000
Income taxes......................................... 18,282,000 13,075,000
Net income........................................... 27,884,000 19,941,000
Earnings per share................................... 0.34 0.25
Earnings per share--assuming dilution................ 0.34 0.24
</TABLE>
13
<PAGE>
The information related to the activity for the three months ended March 31,
1998 was previously restated for certain reclassifications and adjustments. The
accrued merger and related costs initially reported by us in the first quarter
of 1998 amounted to $92,835,000. We have revised our financial reporting
relating to certain costs initially included in our merger and related costs
and accrual resulting in a decrease in merger and related costs of $13,400,000,
partially offset by an increase to facilities operating costs of $1,700,000 and
an increase to depreciation and amortization of $590,000 for a net decrease to
our first quarter 1998 operating expenses of $11,110,000. These
reclassifications and adjustments are more fully described in our Form 10-K/A
(Amendment No. 2) for the year ended December 31, 1998.
Results of operations
Three months ended March 31, 1999 compared to the three months ended March 31,
1998
Net operating revenues. Net operating revenues are derived primarily from
five sources: (a) outpatient facility hemodialysis services; (b) ancillary
services, including the administration of EPO and other intravenous
pharmaceuticals, clinical laboratory services, oral pharmaceutical products and
other ancillary services; (c) home dialysis services and related products; (d)
inpatient hemodialysis services provided to hospitalized patients pursuant to
arrangements with hospitals; and (e) international operations. Additional
revenues are derived from the provision of dialysis facility management
services to certain subsidiaries and affiliated and unaffiliated dialysis
centers. Our dialysis and ancillary services are reimbursed primarily under the
Medicare ESRD program in accordance with rates established by HCFA. Payments
are also provided by other third party payors, generally at rates higher than
those reimbursed by Medicare for up to the first 33 months of treatment as
mandated by law. Rates paid for services provided to hospitalized patients are
negotiated with individual hospitals.
We maintain a usual and customary fee schedule for our dialysis treatment and
other patient services. We often do not realize our usual and customary rates,
however, because of limitations on the amounts we can bill to or collect from
the payors for our services. We generally bill the Medicare and Medicaid
programs at net realizable rates determined by applicable fee schedules for
these programs, which are established by statute or regulation. We bill most
non-governmental payors, including managed care payors with which we have
contracted, at our usual and customary rates. Since we bill most non-
governmental payors at our usual and customary rates, but often expect to
receive payments at the lower contracted rates, we also record a contractual
allowance in order to record expected net realizable revenue for services
provided. This process involves estimates and we record revisions to these
estimates in subsequent periods as they are determined to be necessary.
Net operating revenues increased $94,411,000 to $352,244,000 in the first
quarter of 1999 from $257,833,000 in the first quarter of 1998, representing a
36.6% increase. Of this increase, $68,649,000 was due to increased treatments,
of which $57,734,000 was from acquisitions consummated after the first quarter
of 1998, $7,829,000 was from de novo developments commencing operations after
the first quarter of 1998 and $3,086,000 was from existing facilities as of
March 31, 1998. The remaining increase of $25,762,000 resulted from an increase
in net operating revenues per treatment which increased from $234.47 in the
first quarter of 1998 to $253.16 in the first quarter of 1999. The increase in
net operating revenue per treatment was mainly attributable to an increase in
ancillary services intensity and pricing of $13,339,000, primarily in the
administration of EPO of $9,979,000, an increase in services reimbursed by
private payors of $6,846,000, who pay at higher rates, stemming from the
extension of the period during which Medicare is secondary payor and private
payors are primary payor for an additional twelve-month period, and an increase
in corporate and ancillary program fees of $5,577,000, primarily from the
expansion of laboratory services to former RTC facilities of $3,251,000.
Facility operating expenses. Facility operating expenses consist of costs and
expenses specifically attributable to the operation of dialysis facilities,
including operating and maintenance costs of such facilities, equipment, direct
labor, and supply and service costs relating to patient care. Facility
operating expenses
14
<PAGE>
increased $61,200,000 to $229,640,000 in the first quarter of 1999 from
$168,440,000 in the first quarter of 1998. As a percentage of net operating
revenues, facility operating expenses was 65.2% in the first quarter of 1999
compared to 65.3% in the first quarter of 1998.
General and administrative expenses. General and administrative expenses
include headquarters expense and administrative, legal, quality assurance,
information systems and centralized accounting support functions. General and
administrative expenses increased $6,986,000 to $23,608,000 in the first
quarter of 1999 from $16,622,000 in the first quarter of 1998 and as a
percentage of net operating revenues, general and administrative expenses
increased to 6.7% in the first quarter of 1999 from 6.4% in the first quarter
of 1998.
Provision for doubtful accounts. The provision for doubtful accounts is
influenced by the amount of net operating revenues generated from non-
governmental payor sources in addition to the relative percentage of accounts
receivable by aging category. The provision for doubtful accounts increased
$3,107,000 to $10,478,000 in the first quarter of 1999 from $7,371,000 in the
first quarter of 1998. As a percentage of net operating revenues, the provision
for doubtful accounts increased to 3.0% in the first quarter of 1999 from 2.9%
in the first quarter of 1998. This increase was due to an increase in the non-
governmental payor mix caused by the Medicare as secondary payor extension.
Depreciation and amortization. Depreciation and amortization increased
$7,390,000 to $26,926,000 in the first quarter of 1999 from $19,536,000 in the
first quarter of 1998. As a percentage of net operating revenues, depreciation
and amortization was 7.6% for both periods.
Merger and related costs.
Merger and related costs recorded during the first quarter of 1998 include
costs associated with certain integration activities, transaction costs and
costs of employee severance and amounts due under employment agreements and
other compensation programs, in connection with our merger with RTC.
A summary of merger and related costs and accrual activity through March 31,
1999 is as follows:
<TABLE>
<CAPTION>
Direct Transaction Severance and Costs to Integrate
Costs Employment Costs Operations Total
------------------ ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Initial expense......... $ 21,580,000 $ 41,960,000 $ 15,895,000 $ 79,435,000
Amounts utilized in
1998................... (22,885,000) (37,401,000) (13,137,000) (73,423,000)
Adjustment of
estimates.............. 1,305,000 (959,000) (1,593,000) (1,247,000)
------------ ------------ ------------ ------------
Accrual, December 31,
1998................... $ 3,600,000 1,165,000 4,765,000
============
Amounts utilized--1st
quarter 1999........... (600,000) (90,000) (690,000)
------------ ------------ ------------
Accrual, March 31,
1999................... $ 3,000,000 $ 1,075,000 $ 4,075,000
============ ============ ============
</TABLE>
The remaining balance of severance and employment costs represents tax gross-
up payments expected to be paid in the second quarter of 1999. The remaining
balance of costs to integrate operations represents remaining lease payments on
RTC's vacant laboratory lease space.
Operating income. Operating income increased $95,163,000 to $61,592,000 in
the first quarter of 1999 from an operating loss of $33,571,000 in the first
quarter of 1998. Operating income before merger and related costs increased
$15,728,000 to $61,592,000 from $45,864,000 in the first quarter of 1998. As a
percentage of net operating revenues, operating income before merger and
related costs decreased to 17.5% in the first quarter of 1999 from 17.8% in the
first quarter of 1998 primarily due to increases in facility operating
expenses, general and administrative expenses, the provision for doubtful
accounts and depreciation and amortization expense.
15
<PAGE>
Interest expense. Interest expense increased $8,250,000 to $22,767,000 in the
first quarter of 1999 from $14,517,000 in the first quarter of 1998. The
increase in interest expense was due to an increase in borrowings made under
our credit facilities to fund acquisitions.
Interest income. Interest income is generated as a result of the short-term
investment of surplus cash from operations and excess proceeds from borrowings
under our credit facilities. Interest income decreased $312,000 to $1,330,000
in the first quarter of 1999 from $1,642,000 in the first quarter of 1998 and
as a percentage of net operating revenues, interest income decreased to 0.4% in
the first quarter of 1999 from 0.6% in the first quarter of 1998. This decrease
is primarily the result of lower average balances of cash and cash equivalents
during the first quarter of 1999 as compared to the first quarter of 1998.
Provision for income taxes. Provision for income taxes increased $14,510,000
to $14,630,000 for the first quarter of 1999 from $120,000 in the first quarter
of 1998. The effective tax rate was 38.7% for the first quarter of 1999
compared to 42.9% in the first quarter of 1998, after minority interest but
before merger and related costs. The decrease in the effective tax rate was due
to a reduction in the blended state tax rate and less amortization of non-
deductible goodwill as a percentage of taxable income.
Minority interests. Minority interests represent the pretax income earned by
minority partners who directly or indirectly own minority interests in our
partnership affiliates and the net income in certain of our corporate
subsidiaries. Minority interests increased $925,000 to $2,318,000 from
$1,393,000 in the first quarter of 1998. As a percentage of net operating
revenues, minority interest increased slightly to 0.7% in the first quarter of
1999 from 0.5% in the first quarter of 1998.
Extraordinary loss. In February 1998, in conjunction with our merger with
RTC, we terminated RTC's revolving credit agreement, and recorded all of the
remaining related unamortized deferred financing costs as an extraordinary loss
of $2,812,000, net of income tax effect.
Cumulative effect of change in accounting principle. Effective January 1,
1998, we adopted Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities, or SOP 98-5. SOP 98-5 requires that pre-opening and
organizational costs, incurred in conjunction with our pre-opening activities
on our de novo facilities, which previously had been treated as deferred costs
and amortized over five years, should be expensed as incurred. In connection
with the adoption of SOP 98-5, we recorded a charge of $6,896,000, net of
income tax effect as a cumulative effect of a change in accounting principle,
in the first quarter of 1998.
Liquidity and capital resources
Sources and uses of cash
Our primary capital requirements have been the funding of our growth through
acquisitions and de novo developments, and equipment purchases. Net cash
provided by operating activities was $38.3 million for the first quarter of
1999 and net cash used in operating activities was $41.4 million for the first
quarter of 1998. Net cash provided by operating activities consists of our net
income (loss), increased by non-cash expenses such as depreciation,
amortization, non-cash interest and the provision for doubtful accounts, and
adjusted by changes in components of working capital, primarily accounts
receivable.
Accounts receivable, net of allowance for doubtful accounts, increased during
the first quarter of 1999 by $25.3 million, of which approximately $13.0
million was due to the increase in our revenues and approximately $6.9 million
was due to the continuance of the payment suspension imposed on our Florida-
based laboratory by its Medicare carrier, cumulatively $18 million. The
remaining $5.4 million was primarily due to an increase in receivables in our
international business, mostly due to a slow down in payment by certain large
health care unions in Argentina. We have recorded no allowances as a result of
the payment suspension imposed on our Florida-based laboratory because we
believe that we will ultimately collect these amounts. Until it is resolved,
the payment suspension will negatively impact our cash flows from operations,
and may require us to borrow additional amounts to fund our working capital
needs, depending on our other cash flows.
16
<PAGE>
Net cash used in investing activities was $133.7 million for the first
quarter of 1999 and $90.2 million for the first quarter of 1998. Our principal
uses of cash in investing activities have been related to acquisitions,
purchases of new equipment and leasehold improvements for our facilities, as
well as the development of new facilities. Net cash provided by financing
activities was $93.8 million for the first quarter of 1999 and $190.9 million
for the first quarter of 1998 primarily consisting of borrowings from our two
credit facilities. As of March 31, 1999, we had working capital of $402.5
million, including cash of $39.9 million.
We believe that we will have sufficient liquidity to fund our debt service
obligations and our growth strategy over at least the next twelve months.
Expansion
In the quarter ended March 31, 1999, we developed seven new facilities, two
of which we manage, and we expect to develop approximately 33 additional de
novo facilities in the remainder of 1999. We anticipate that our capital
requirements for purchases of equipment and leasehold improvements for
facilities, including de novo facilities, will be approximately $85 to
$95 million in aggregate for 1999.
During the quarter ended March 31, 1999, we paid cash of approximately $77.4
million to acquire 23 facilities and additional interests from minority
partners in certain of our partnerships. Subsequent to March 31, 1999, we
completed acquisitions of 11 dialysis facilities for consideration of
approximately $50.5 million, which has been funded by additional borrowings
under our credit facilities.
Credit facilities
As of March 31, 1999 the principal amount outstanding under our revolving
facility was $438 million and under our term facility was $396 million. The
term facility requires annual principal payments of $4.0 million, with the
$360.0 million balance due on maturity. As of March 31, 1999, we had $512
million available for borrowing under the revolving facility.
The credit facilities contain financial and operating covenants including,
among other things, requirements that we maintain certain financial ratios and
satisfy certain financial tests, and impose limitations on our ability to make
capital expenditures, to incur other indebtedness and to pay dividends.
Interest rate swaps
During the quarter ended June 30, 1998, we entered into forward interest rate
cancelable swap agreements with a combined notional amount of $800.0 million.
The lengths of the agreements are between three and ten years with cancellation
clauses at the swap holder's option from one to seven years. The underlying
blended interest rate is fixed at approximately 5.65% plus an applicable margin
based upon our current leverage ratio. Currently, the effective interest rate
for these swaps is 7.2%.
Subordinated notes
The $125.0 million outstanding 5 5/8% convertible subordinated notes due 2006
issued by RTC bear interest at the rate of 5 5/8%, payable semi-annually and
require no principal payments until 2006. The 5 5/8% notes are convertible into
shares of our common stock at an effective conversion price of $25.62 per share
and are redeemable by us beginning in July 1999.
In November 1998 we issued 7% convertible subordinated notes due 2009 in the
aggregate principal amount of $345.0 million. The 7% notes are convertible at
any time, in whole or in part, into shares of our common stock at a conversion
price of $32.81 and will be redeemable after November 16, 2001. We used the net
proceeds from the sale of the 7% notes to pay down debt under the revolving
facility, which may be reborrowed.
17
<PAGE>
Year 2000 considerations
Since the summer of 1998, all of our departments have been meeting with our
information systems department to determine the extent of our Year 2000, or
Y2K, exposure. Project teams have been assembled to work on correcting Y2K
problems and to perform contingency planning to reduce our total exposure. Our
goal is to have all corrective action and contingency plans in place by the
third quarter of 1999.
Software applications and hardware. Each component of our software
application portfolio, or SAP, must be examined with respect to its ability to
properly handle dates in the next millennium. As part of our software
assessment plan, key users will test each and every component of our SAP. These
tests will be constructed to make sure each component operates properly with
the system date advanced to the next millennium.
The major phases of our software assessment plan are as follows:
. Complete SAP inventory;
. Implement Y2K compliant software as necessary;
. Analyze which computers have Y2K problems and the cost to repair;
. Test all vendors' representations; and
. Fix any computer-specific problems.
Our billing and accounts receivable software is known to have a significant
Y2K problem. We have already addressed this issue by obtaining a new, Y2K
compliant version of this software. We expect to complete conversion to this
Y2K compliant version by the end of the third quarter of 1999.
Operating systems. We are also reviewing our operating systems to assess
possible Y2K exposure. We use several different network operating systems, or
NOS, for multi-user access to the software that resides on the respective
servers. Each NOS must be examined with respect to its ability to properly
handle dates in the next millennium. Key users will test each component of our
SAP with a compliant version of the NOS. One level beneath the NOS is a special
piece of software that comes into play when the computer is "booted" that
potentially has a Y2K problem and that is the basic input output system
software, or BIOS. The BIOS takes the date from the system clock and uses it in
passing the date to the NOS which in turn passes the date to the desktop
operating system. The system clock poses another problem in that some system
clocks were only capable of storing a two-digit year while other computer
clocks stored a four-digit year. This issue affects each and every computer we
have purchased. To remedy these problems, we plan to inventory all computer
hardware using a Y2K utility program to determine whether we have a BIOS or a
system clock problem. We then intend to perform a BIOS upgrade or perform a
processor upgrade to a Y2K compliant processor.
Dialysis centers, equipment and suppliers. The operations of our dialysis
centers can be affected by the Y2K problem so a contingency plan must be in
place to prevent the shutdown of these centers. Each center will be responsible
for completing a survey of the possible consequences of a failure of the
information systems of our vendors and formulating a contingency plan by the
third quarter of 1999. Divisional vice presidents will then review these plans
to assure compliance.
All of our biomedical devices, including dialysis machines that have a
computer chip in them will be checked thoroughly for Y2K compliance. We have
contacted or will contact each of the vendors of the equipment we use and ask
them to provide us with documentation regarding Y2K compliance. Where it is
technically and financially feasible without jeopardizing any warranties, we
will test our equipment by advancing the clock to a date in the next
millennium.
In general, we expect to have all of our biomedical devices Y2K compliant by
the third quarter of 1999. We have not yet been able to estimate the costs of
upgrading or replacing certain of our biomedical devices as we do not yet know
which of these machines, if any, are not currently Y2K compliant.
18
<PAGE>
In addition to factors noted above which are directly within our control,
factors beyond our direct control may disrupt our operations. If our suppliers
are not Y2K complaint, we may experience inventory shortages and run short of
critical supplies. If the utilities companies, transportation carriers and
telecommunications companies which service us experience Y2K difficulties, our
operations will also be adversely affected and some of our facilities may need
to be closed. We are in the process of taking steps to reduce the impact on our
operations in such instances and implementing contingency plans to address any
possible unavoidable effect which these difficulties would have on our
operations.
To address the possibility of a physical plant failure, we are contacting the
landlords of each of our facilities to insure that they will provide access to
our staff and any other key service providers. We are also providing written
notification to our utilities companies of the locations, schedules and
emergency services required of each of our dialysis facilities. In case a
physical plant failure should result in an emergency closure of any of our
facilities, we are currently:
.Confirming that backup hospital affiliation agreements are up-to-date and
complete;
.Reviewing appropriate elements of our disaster preparedness plan with our
staff and patients;
. Adopting/modifying emergency treatment orders and rationing plans with
our medical directors to provide patient safety; and
.Conducting patient meetings with social workers and dieticians.
To minimize the affect of any Y2K non-compliance on the part of suppliers, we
are currently taking steps to:
. Identify our critical suppliers and survey each of them to assess their
Y2K compliance status;
. Identify alternative supply sources where necessary;
. Identify Y2K compliant transportation/shipping companies and establish
agreements with them to cover situations where our current supplier's
delivery systems go down;
. Include language in contracts with new suppliers addressing Y2K
performance obligations, requirements and failures;
. Stock our dialysis facilities with one week of additional inventory; the
orders will be placed two weeks before January 2000, to ensure receipt;
. Require critical distributors to carry additional inventory earmarked for
us; and
. Prepare a critical supplier contact/pager list for Y2K emergency supply
problems and ensure that contact persons will be on call 24 hours a day.
Our financial exposure from all sources of SAP and operating system Y2K
issues as well as from dialysis center, equipment and supplier Y2K issues known
to date ranges from approximately $500,000 to $1,200,000, none of which has
been expended.
General. The extent and magnitude of the Y2K problem as it will affect us,
both before, and for some period after, January 1, 2000, are difficult to
predict or quantify for a number of reasons. Among the most important are our
lack of control over systems that are used by the third parties who are
critical to our operations, such as telecommunications and utilities companies,
the complexity of testing interconnected networks and applications that depend
on third-party networks and the uncertainty surrounding how others will deal
with liability issues raised by Y2K-related failures. Moreover, the estimated
costs of implementing our plans for fixing Y2K problems do not take into
account the costs, if any, that might be incurred as a result of Y2K-related
failures that occur despite our implementation of these plans.
19
<PAGE>
With respect to third-party non-governmental payors, we are in the process of
determining where our exposure is and developing contingency plans to prevent
the interruption of cash flow. With respect to Medicare payments, neither the
Health Care Financing Administration, or HCFA, nor its financial intermediaries
have any contingency plan in place. However, HCFA has mandated that its
financial intermediaries submit a draft of their contingency plans to it by
March 1999 and that they be prepared to ensure that no interruption of Medicare
payments results from Y2K-related failures of their systems. With respect to
MediCal, the largest of our third-party state payors, we are already submitting
our claims with a four-digit numerical year in accordance with the current
system. We are currently working with our other state payors individually to
determine the extent of their Y2K compliance.
Although we currently are not aware of any material operational issues
associated with preparing our internal computer systems, facilities and
equipment for Y2K, we cannot assure you, due to the overall complexity of the
Y2K issues and the uncertainty surrounding third party responses to Y2K issues,
that we will not experience material unanticipated negative consequences and/or
material costs caused by undetected errors or defects in our or third party
systems or by our failure to adequately prepare for the results of such errors
or defects, including costs of related litigation, if any. The impact of such
consequences could have a material adverse effect on our business, financial
condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk exposure from that
reported in our Form 10-K/A (Amendment No. 1) for the fiscal year ended
December 31, 1998.
20
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Form 10-Q/A (Amendment
No. 2), you should note the following risks related to our business.
If we fail to build adequate internal systems and controls then our revenue and
net income may be adversely affected.
We have experienced rapid growth in the last five years, and especially in
1998, as a result of our business strategy to acquire, develop and manage a
large number of dialysis centers. We also intend to continue to acquire,
develop and manage additional dialysis centers, both in the U.S. and
internationally. This historical growth and business strategy subjects us to
the following risks:
. Our billing and collection structures, systems and personnel may prove
inadequate to collect all amounts owed to us for services we have
rendered, resulting in a lack of sufficient cash flow;
. We may require additional management, administrative and clinical
personnel to manage and support our expanded operations, and we may not
be able to attract and retain sufficient personnel;
. Our assessment of the requirements of our growth on our information
systems may prove inaccurate, and we may have to spend substantial
amounts to enhance or replace our information systems;
. Our expanded operations may require cash expenditures in excess of the
cash available to us after paying our debt service obligations;
. We may inaccurately assess the historical and projected results of
operations of acquisition candidates, which may cause us to overpay for
acquisitions;
. We may inaccurately assess the historical and projected results of
operations of existing and recently acquired facilities, which may cause
us not to achieve the results of operations expected for these
facilities; and
. We may not be able to integrate acquired facilities as quickly or
smoothly as we expect, which may cause us not to achieve the results of
operations expected for these acquired facilities.
These risks are enhanced when we acquire entire regional networks or other
national dialysis providers, such as RTC, or enter into multi-facility
management agreements.
Future declines, or the lack of an increase, in Medicare reimbursement rates
could substantially decrease our net income.
We are reimbursed for dialysis services primarily at fixed rates established
in advance under the Medicare end stage renal disease, or ESRD, program. Unlike
many other Medicare programs, which receive periodic cost of living increases,
these rates have not increased since 1991. Increases in operating costs that
are subject to inflation, such as labor and supply costs, have occurred and
continue to occur without a compensating increase in reimbursement rates. In
addition, if Medicare should begin to include in its composite reimbursement
rate any ancillary services that it currently reimburses separately, our
revenue would decrease to the extent there was not a corresponding increase in
that composite rate. We cannot predict whether future rate changes will be
made. Approximately 49% of our net operating revenues in the first quarter of
1999 was generated from patients who had Medicare as the primary payor.
The Department of Health and Human Services, or HHS, has recommended, and the
Clinton administration has included in its fiscal year 2000 budget proposal to
the Congress, a 10% reduction in Medicare reimbursement for erythropoietin, or
EPO. We cannot predict whether this proposal or other future rate or
reimbursement method changes will be made. Approximately 13% of our net
operating revenues in the first quarter of 1999 was generated from EPO
reimbursement through Medicare and Medicaid programs.
21
<PAGE>
ddetermined 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 affect our ability to care for our patients.
A single manufacturer, Amgen Corporation, produces EPO. In the future, Amgen
may be unwilling or unable to supply us with EPO. Additionally, shortages in
the raw materials or other resources necessary to manufacture EPO, or simply an
arbitrary decision on the part of this sole supplier, may increase the
wholesale price of EPO. Interruptions of the supply of EPO or increases in the
price we pay for EPO could have a material adverse effect on our financial
condition as well as our ability to provide appropriate care to our patients.
If we fail to identify, assess and respond successfully to the unique
attributes of each of our foreign operations, our net income could be adversely
affected.
We only recently commenced operations outside the U.S., and expect to enter
additional foreign markets in the next few years. Our failure to identify,
understand and respond to the unique attributes of any of the foreign markets
that we enter could cause us to:
. Overpay for acquisitions of foreign dialysis centers;
. Fail to integrate foreign acquisitions into our operations successfully;
and
. Assess the performance of our foreign operations incorrectly.
The unique attributes of our foreign operations include:
. Differences in payment and reimbursement rules and procedures, including
unanticipated slowdowns in payments from large payors in Argentina;
. Differences in accepted clinical standards and practices;
. Differences in management styles and practices;
. The unfamiliarity of foreign companies with U.S. financial reporting
standards; and
. Local laws that restrict or limit employee discharges and disciplinary
actions.
If we fail to adhere to all of the complex government regulations that apply to
our business, we could incur substantial fines or be excluded from
participating in government reimbursement programs.
Our dialysis operations are subject to extensive federal, state and local
government regulations in the U.S. and to extensive government regulation in
every foreign country in which we operate. Any of the following could adversely
impact our revenues:
. Loss of required government certifications;
. Loss of authorizations to participate in or exclusion from government
reimbursement programs, such as the Medicare ESRD Program and Medicaid
programs;
. Suspension of payments from government programs;
. Loss of licenses required to operate health care facilities in some of
the states in which we operate; and
. Any challenge to the relationships we have structured in some foreign
countries to comply with barriers to direct foreign ownership of
healthcare businesses.
22
<PAGE>
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 affect our ability to care for our patients.
A single manufacturer, Amgen Corporation, produces EPO. In the future, Amgen
may be unwilling or unable to supply us with EPO. Additionally, shortages in
the raw materials or other resources necessary to manufacture EPO, or simply an
arbitrary decision on the part of this sole supplier, may increase the
wholesale price of EPO. Interruptions of the supply of EPO or increases in the
price we pay for EPO could have a material adverse effect on our financial
condition as well as our ability to provide appropriate care to our patients.
If we fail to identify, assess and respond successfully to the unique
attributes of each of our foreign operations, our net income could be adversely
affected.
We only recently commenced operations outside the U.S., and expect to enter
additional foreign markets in the next few years. Our failure to identify,
understand and respond to the unique attributes of any of the foreign markets
that we enter could cause us to:
. Overpay for acquisitions of foreign dialysis centers;
. Fail to integrate foreign acquisitions into our operations successfully;
and
. Assess the performance of our foreign operations incorrectly.
The unique attributes of our foreign operations include:
. Differences in payment and reimbursement rules and procedures, including
unanticipated slowdowns in payments from large payors in Argentina;
. Differences in accepted clinical standards and practices;
. Differences in management styles and practices;
. The unfamiliarity of foreign companies with U.S. financial reporting
standards; and
. Local laws that restrict or limit employee discharges and disciplinary
actions.
If we fail to adhere to all of the complex government regulations that apply to
our business, we could incur substantial fines or be excluded from
participating in government reimbursement programs.
Our dialysis operations are subject to extensive federal, state and local
government regulations in the U.S. and to extensive government regulation in
every foreign country in which we operate. Any of the following could adversely
impact our revenues:
. Loss of required government certifications;
. Loss of authorizations to participate in or exclusion from government
reimbursement programs, such as the Medicare ESRD Program and Medicaid
programs;
. Suspension of payments from government programs;
. Loss of licenses required to operate health care facilities in some of
the states in which we operate; and
. Any challenge to the relationships we have structured in some foreign
countries to comply with barriers to direct foreign ownership of
healthcare businesses.
23
<PAGE>
The regulatory scrutiny of healthcare providers has increased significantly
in recent years. For example, the Office of Inspector General of HHS reported
that it recovered $1.2 billion in fiscal 1997 from health care fraud
investigations, an amount five times greater than that recovered in the
previous fiscal year.
. 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 this laboratory submitted for Medicare
reimbursement. In May 1998, the carrier suspended all further Medicare payments
to this laboratory. Medicare revenues from this laboratory represent
approximately 2% of our net revenues. For the review period the carrier
initially identified, January 1995 to April 1996, the carrier has alleged that
the prescribing physician's medical justification did not properly support
99.3% of the tests this laboratory performed. The carrier also determined that
it overpaid the laboratory $5.6 million for this period. The carrier
subsequently requested billing records with respect to the additional period
from May 1996 to March 1998. The suspension of payments relates to all payments
due after the suspension started, regardless of when the laboratory performed
the tests. The carrier had withheld approximately $18 million as of March 31,
1999, which has adversely affected our cash flow. We may never recover the
amounts withheld.
. Our failure to comply with federal and state fraud and abuse statutes
could result in sanctions
Neither our arrangements with the medical directors of our facilities nor the
minority ownership interests of referring physicians in some of our dialysis
facilities meet all of the requirements of published safe harbors to the anti-
kickback provisions of the Social Security Act and similar state laws. These
laws impose civil and criminal sanctions on anyone who receives or makes
payments for referring a patient for any service reimbursed by Medicare,
Medicaid or similar federal and state programs. Arrangements within published
safe harbors are deemed not to violate these provisions. Enforcement agencies
may subject arrangements that do not fall within a safe harbor to greater
scrutiny. If we are challenged under these statutes, we may have to change our
relationships with our medical directors and with referring physicians holding
minority ownership interests.
The laws of several states in which we do business prohibit a physician from
making referrals for laboratory services to entities with which the physician,
or an immediate family member, has a financial interest. We currently operate a
large number of facilities in these states, which account for a significant
percentage of our business. These state statutes could apply to laboratory
services incidental to dialysis services. If so, we may have to change our
relationships with referring physicians who serve as medical directors of our
facilities or hold minority interests in any of our facilities.
We may not have sufficient cash flow from our business to service our debt.
The amount of our outstanding debt is large compared to the net book value of
our assets, and we have substantial repayment obligations under our outstanding
debt. As of March 31, 1999 we had:
. Total consolidated debt of approximately $1.3 billion;
. Stockholders' equity of approximately $498 million; and
. A ratio of earnings to fixed charges of 2.43.
24
<PAGE>
The following chart shows our aggregate interest and principal payments due
on all of our currently outstanding debt for each of the next five fiscal
years. Under interest swap agreements covering $800 million of debt, the
interest rate under our credit facilities varies based on the amount of debt we
incur relative to our assets and equity. Accordingly, the amount of these
interest payments could fluctuate in the future.
<TABLE>
<CAPTION>
Interest Payments Principal Payments
----------------- ------------------
<S> <C> <C>
For the year ending December 31:
1999.................................... $96,200,000 $ 21,847,000
2000.................................... 95,100,000 10,893,000
2001.................................... 88,400,000 94,579,000
2002.................................... 77,700,000 153,567,000
2003.................................... 68,800,000 241,559,000
</TABLE>
Due to the large amount of these principal and interest payments, we may not
have enough cash to pay the interest on our debt as it becomes due.
The large amount and terms of our outstanding debt may prevent us from taking
actions we would otherwise consider in our best interest.
Our credit facilities contain numerous financial and operating covenants that
limit our ability, and the ability of most of our subsidiaries, to engage in
activities such as incurring additional senior debt and disposing of our
assets. These covenants require that we meet interest coverage, net worth and
leverage tests.
Our level of debt and the limitations our credit facilities impose on us
could have other important consequences to you, including:
. We will have to use a portion of our cash flow from operations,
approximately $96.2 million in 1999 and $95.1 million in 2000, for debt
service rather than for our operations;
. We may not be able to obtain additional debt financing for future working
capital, capital expenditures, acquisitions or other corporate purposes;
. We could be less able to take advantage of significant business
opportunities, including acquisitions, and react to changes in market or
industry conditions.
If a change of control occurs, we may not have sufficient funds to repurchase
our outstanding notes.
Upon a change of control, generally the sale or transfer of a majority of our
voting stock or almost all of our assets, our noteholders may require us to
repurchase all or a portion of their notes. If a change of control occurs, we
may not be able to pay the repurchase price for all of the notes submitted for
repurchase. In addition, the terms of our credit facilities generally prohibit
us from purchasing any notes until we have repaid all debt outstanding under
these credit facilities. Future credit agreements or other agreements relating
to debt may contain similar provisions. We may not be able to secure the
consent of our lenders to repurchase our outstanding notes or refinance the
borrowings that prohibit us from repurchasing our outstanding notes. If we do
not obtain a consent or repay the borrowings, we could not repurchase these
notes.
We may experience material unanticipated negative consequences beginning in the
year 2000 due to undetected computer defects.
The Y2K issue concerns the potential exposures related to the automated
generation of incorrect information from the use of computer programs which
have been written using two digits, rather than four, to define the applicable
year of business transactions. Due to the overall complexity of the Y2K issues
and the uncertainty surrounding third party responses to Y2K issues, we cannot
assure you that undetected errors or defects in our or third party systems or
our failure to prepare adequately for the results of those errors or defects
will not cause us material unanticipated problems or costs.
25
<PAGE>
The extent and magnitude of the Y2K problem as it will affect us, both
before, and for some period after, January 1, 2000, are difficult to predict or
quantify for a number of reasons. Among the most important are:
. Our lack of control over third party systems that are critical to our
operations, including those of telecommunications and utilities companies
and governmental and non-governmental payors;
. The complexity of testing interconnected internal and external computer
networks, software applications and dialysis equipment; and
. The uncertainty surrounding how others will deal with liability issues
raised by Y2K-related failures.
Moreover, the estimated costs of implementing our plans for fixing Y2K
problems do not take into account the costs, if any, that we might incur as a
result of Y2K-related failures that occur despite our implementation of these
plans.
While we are developing contingency plans to address possible computer
failure scenarios, we recognize that there are "worst case" scenarios which may
occur. We may experience the extended failure of external and internal computer
networks and equipment that control
. Medicare, Medicaid and other third party payors' ability to reimburse us;
. Regional infrastructures, such as power, water and telecommunications
systems;
.Equipment and machines that are essential for the delivery of patient
care; and
. Computer software necessary to support our billing process.
If any one of these events occurs, our cash flow could be materially reduced.
Even in the absence of a failure of these networks and equipment, we will
likely continue to incur costs related to remediation efforts, the replacement
or upgrade of equipment, continued efforts regarding contingency planning,
increased staffing for the periods immediately preceding and after January 1,
2000 and the possible implementation of alternative payment schemes with our
payors.
Provisions in our charter documents may deter a change of control which our
stockholders may otherwise determine to be in their best interests.
Our certificate of incorporation and bylaws and the Delaware General
Corporation Law include provisions which may deter hostile takeovers, delay or
prevent changes in control or changes in our management, or limit the ability
of our stockholders to approve transactions that they may otherwise determine
to be in their best interests. These provisions include:
. A provision requiring that our stockholders may take action only at a
duly called annual or special meeting of our stockholders and not by
written consent;
. A provision requiring a stockholder to give at least 60 days' advance
notice of a proposal or director nomination that the stockholder desires
to present at any annual or special meeting of stockholders; and
. A provision granting our board of directors the authority to issue up to
five million shares of preferred stock and to determine the rights and
preferences of the preferred stock without the need for further
stockholder approval. The existence of this "blank-check" preferred stock
could discourage an attempt to obtain control of us by means of a tender
offer, merger, proxy contest or otherwise. Furthermore, this "blank-
check" preferred stock may have other rights, including economic rights,
senior to our common stock. Therefore, issuance of the preferred stock
could have an adverse effect on the market price of our common stock.
We may, in the future, adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a
change in control were at a premium price or favored by a majority of
unaffiliated stockholders. We may adopt certain of these measures without any
further vote or action by our stockholders.
26
<PAGE>
Forward-looking statements
We believe that this Form 10-Q/A (Amendment No. 2) contains statements that
are forward-looking statements within the meaning of the federal securities
laws. These include statements about our expectations, beliefs, intentions or
strategies for the future, which we indicate by words or phrases such as
"anticipate," "expect," "intend," "plan," "will," "believe" and similar
language. These statements involve known and unknown risks, including risks
resulting from economic and market conditions, the regulatory environment in
which we operate, competitive activities and other business conditions, and are
subject to uncertainties and assumptions set forth elsewhere in this
Form 10-Q/A (Amendment No. 2). Our actual results may differ materially from
results anticipated in these forward-looking statements. We base our forward-
looking statements on information currently available to us, and we assume no
obligation to update these statements.
27
<PAGE>
PART II
OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
27.1 Financial Data Schedule--three months ended March 31, 1999 and three
months ended March 31, 1998.X
</TABLE>
- ---------------------
X Filed herewith.
(b) Reports on Form 8-K
None.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOTAL RENAL CARE HOLDINGS, INC.
/s/ John J. McDonough
By: _________________________________
John J. McDonough
Vice President, Finance and
Chief Accounting Officer
Date: January 28, 2000
John J. McDonough is signing in the dual capacities as (i) Chief Accounting
Officer and (ii) a duly authorized officer of the Company.
29
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
27.1 Financial Data Schedule--three months ended March 31, 1999 and three
months ended March 31, 1998.X
</TABLE>
- ---------------------
X Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 39,905,000 0
<SECURITIES> 0 0
<RECEIVABLES> 510,638,000 0
<ALLOWANCES> 68,828,000 0
<INVENTORY> 27,260,000 0
<CURRENT-ASSETS> 581,095,000 0
<PP&E> 261,189,000 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,043,507,000 0
<CURRENT-LIABILITIES> 178,616,000 0
<BONDS> 470,000,000 0
0 0
0 0
<COMMON> 81,000 0
<OTHER-SE> 498,210,000 0
<TOTAL-LIABILITY-AND-EQUITY> 2,043,507,000 0
<SALES> 352,244,000 257,833,000
<TOTAL-REVENUES> 352,244,000 257,833,000
<CGS> 0 0
<TOTAL-COSTS> 290,652,000 291,404,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 10,478,000 7,371,000
<INTEREST-EXPENSE> 22,767,000 14,517,000
<INCOME-PRETAX> 37,837,000 (47,839,000)
<INCOME-TAX> 14,630,000 120,000
<INCOME-CONTINUING> 23,207,000 (47,959,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 2,812,000
<CHANGES> 0 6,896,000
<NET-INCOME> 23,207,000 (57,667,000)
<EPS-BASIC> 0.29 (0.73)
<EPS-DILUTED> 0.28 (0.73)
</TABLE>
