UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-Q10-Q/A
AMENDMENT NO. 1
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 1996 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 JUNESEPTEMBER 30, 1996
Delaware 51-0354549
(State or other jurisdiction of (I.R.S. Employer
Incorporationincorporation or organization) Identification No.)
21250 Hawthorne Blvd.
Suite 800
Torrance, CA 90503-5517
(Address of principal executive offices) (Zip Code)
(310) 792-2600
(Registrant's telephone number, including area code)
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 and 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 registrantRegistrant 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.
Class Outstanding at August 14,October 31, 1996
Common Stock, Par Value $.001 25,925,365$0.001 25,968,029 shares
TOTAL RENAL CARE HOLDINGS, INC.
Purpose of Amendment:
This Quarterly Report on Form 10-Q/A is being filed to amend entirely and
to restate the Registrant's Quarterly Report on Form 10-Q that was filed on
November 1, 1996. Such Form 10-Q was filed inadvertently due to filing agent
error prior to completion and final revisions.
Index
Part I. Financial Information
Page No.
--------
Financial Statements:
Condensed Consolidated Balance Sheets as of JuneSeptember 30, 1996 and
December 31, 1995 1
Condensed Consolidated Statements of Income for the Three Months and
SixNine Months Ended JuneSeptember 30, 1996 and JuneSeptember 30, 1995 3
Condensed Consolidated Statements of Cash Flows for the SixNine Months
Ended JuneSeptember 30, 1996 and JuneSeptember 30, 1995 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and Results of Operations 116
Liquidity and Capital Resources 8
Risk Factors 169
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 2114
Signature 2215
Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not applicable.
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JuneSeptember 30, 1996 and December 31, 1995
JuneSeptember 30, 1996 December 31, 1995
-------------------------------- -----------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . .equivalents.............................. $ 39,969,000 $30,181,0005,440,000 $ 30,181,000
Accounts receivable, less allowance for
doubtful accounts of $9,752,000$10,734,000 (unaudited)
and $5,668,000, respectively . . . . . . . . . . . 82,375,000respectively......................... 95,314,000 40,014,000
Receivable from Tenet, a related company . . . . . . 390,000company............... 322,000 432,000
Other current assets . . . . . . . . . . . . . . . . 8,685,000assets................................... 14,855,000 4,867,000
------------ ------------
Total current assets . . . . . . . . . 131,419,000assets...................... 115,931,000 75,494,000
Property and equipment, net . . . . . . . . . . . . . . . 44,456,000net................................. 49,443,000 25,505,000
Notes receivable from a related parties. . . . . . . . . . . 1,678,000party....................... 1,851,000 1,379,000
Investment in affiliate, at equity. . . . . . . . . . . . 995,000equity.......................... 1,018,000 972,000
Other long term assets . . . . . . . . . . . . . . . . . . 887,000long-term assets...................................... 899,000 885,000
Intangible assets, net of accumulated amortization of
$10,348,000$12,152,000 (unaudited) and $7,353,000, respectively . . . . . . 111,611,000respectively...... 151,279,000 59,763,000
------------- -------------
$291,046,000------------ ------------
Total assets.............................. $320,421,000 $163,998,000
============= ========================= ============
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JuneSeptember 30, 1996 and December 31, 1995
JuneSeptember 30, 1996 December 31, 1995
-------------------------------- -----------------
(unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY
Total current liabilities................................... $23,366,000 $20,803,000$ 30,677,000 $ 20,803,000
Deferred income taxes....................................... 523,0001,052,000 510,000
Long term debt and other.................................... 59,101,00079,007,000 56,538,000
Minority interests.......................................... 4,541,0005,326,000 3,343,000
Stockholders' equity:
Common stock, Class A voting, ($.0010.001 par value; 55,000,000
shares authorized; 25,889,90525,967,029 (unaudited) and
22,308,207 issued and outstanding, respectively)......... 26,000 22,000
Preferred stock, ($.0010.001 par value; 5,000,000 shares
authorized; none outstanding).......................... -- ------ ----
Additional paid-in capital............................... 234,369,000236,433,000 123,710,000
Notes receivable from stockholders....................... (2,727,000)(2,783,000) (2,773,000)
Retained earnings (deficit).............................. (28,153,000)(29,317,000) (38,155,000)
--------------- ------------------------- ------------
Total stockholders' equity......................... 203,515,000204,359,000 82,804,000
--------------- -------------
$291,046,000------------ ------------
$320,421,000 $163,998,000
=============== =============Total liabilities and stockholders' equity ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations
2
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months and SixNine Months Ended JuneSeptember 30, 1996 and 1995
(unaudited)
Three Months SixNine Months
------------------------ ------------------------------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------- -----------
Net operating revenues . . . . . . . . . . . . $64,583,000 $30,624,000 $114,820,000 $56,093,000$73,333,000 $37,415,000 $188,153,000 $93,508,000
Operating expenses:
Facilities . . . . . . . . . . . . . . . . 43,318,000 19,498,000 76,647,000 36,420,000Facilities......................................... 49,474,000 23,884,000 126,121,000 60,304,000
General and administrative . . . . . . . . 4,800,000 2,777,000 8,701,000 5,200,000administrative......................... 4,943,000 3,107,000 13,644,000 8,307,000
Provision for doubtful accounts. . . . . . 1,337,000 687,000 2,333,000 1,266,000accounts.................... 1,559,000 757,000 3,892,000 2,023,000
Depreciation and amortization . . . . . . 3,572,000 1,414,000 6,032,000 2,673,000
----------amortization...................... 4,231,000 1,891,000 10,263,000 4,564,000
----------- ----------- ------------ -----------
Total operating expenses . . . . . 53,027,000 24,376,000 93,713,000 45,559,000
----------expenses......................... 60,207,000 29,639,000 153,920,000 75,198,000
----------- ----------- ------------ -----------
Operating income . . . . . . . . . . . . . . . 11,556,000 6,248,000 21,107,000 10,534,000income..................................... 13,126,000 7,776,000 34,233,000 18,310,000
Interest expense . . . . . . . . . . . . . . . . (2,238,000) (2,502,000) (4,150,000) (4,721,000)expense..................................... (1,719,000) (2,813,000) (5,869,000) (7,534,000)
Interest income . . . . . . . . . . . . . . . . 1,182,000 117,000 1,613,000 174,000
----------income...................................... 394,000 73,000 2,007,000 247,000
----------- ----------- ------------ -----------
Income before income taxes and minority interests
. . . . . . . . . . . . . . . . 10,500,000 3,863,000 18,570,000 5,987,000and extraordinary item............................. 11,801,000 5,036,000 30,371,000 11,023,000
Income taxes . . . . . . . . . . . . . . . . . . 4,110,000 1,352,000 7,151,000 2,078,000
----------taxes......................................... 4,386,000 1,774,000 11,537,000 3,852,000
----------- --------------------- ------------ -----------
Income before minority interests
. . . . . . . . 6,390,000 2,511,000 11,419,000 3,909,000and extraordinary item............................. 7,415,000 3,262,000 18,834,000 7,171,000
Minority interests in income of
consolidated subsidiaries . . . . . . . . . . . . . . . 664,000 613,000 1,417,000 1,010,000
----------subsidiaries.......................... 879,000 777,000 2,296,000 1,787,000
----------- ----------- ------------ -----------
Income before extraordinary item..................... 6,536,000 2,485,000 16,538,000 5,384,000
Extraordinary loss related to early extinguishment
of debt, net of tax................................ 7,700,000 0 7,700,000 0
----------- ----------- ------------ -----------
Net income . . . . . . . . . . . . . . . . . . $5,726,000 $1,898,000 $10,002,000 $2,899,000(loss) income.................................... $(1,164,000) $ 2,485,000 $ 8,838,000 $ 5,384,000
=========== =========== ============ ==========
Net income===========
Earnings (loss) per common share . . . . . . . . . . $0.22 $0.12 $0.40 $0.19share:
Income before extraordinary item..................... $ 0.25 $ 0.16 $ 0.65 $ 0.35
Extraordinary item................................... $ (0.29) ---- $ (0.30) ----
----------- ----------- ------------ -----------
Net (loss) income.................................... $ (0.04) $ 0.16 $ 0.35 $ 0.35
=========== =========== ============ =====================
Weighted average number of common shares
and equivalents outstanding . . . . . . . . . . 26,579,000 15,532,000 24,837,000 15,418,000outstanding........................ 26,661,000 15,690,000 25,409,000 15,427,000
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SixNine Months Ended JuneSeptember 30, 1996 and 1995
(Unaudited)
1996 1995
------------ ----------------------- -----------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $10,002,000 $2,899,000income....................................................... $ 8,838,000 $ 5,384,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . 6,032,000 2,673,000amortization............................ 10,263,000 4,564,000
Extraordinary item....................................... 12,623,000 --
Noncash interest. . . . . . . . . . . . . . . . . . . . 3,228,000 4,420,000interest......................................... 4,396,000 6,729,000
Provision for doubtful accounts . . . . . . . . . . . . 2,333,000 1,266,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . (29,769,000) (5,107,000)
------------accounts.......................... 3,892,000 2,023,000
Other.................................................... (38,039,000) (8,808,000)
----------- -----------
Total adjustments. . . . . . . . . . . . . . . . . (18,176,000) 3,252,000
------------adjustments.................................... (6,865,000) 4,508,000
----------- -----------
Net cash (used) provided by operating activities (8,174,000) 6,151,000
------------activities. 1,973,000 9,892,000
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . (11,833,000) (3,736,000)equipment......................... (18,118,000) (4,699,000)
Cash paid for acquisitions, net of cash acquired. . . . . (77,867,000) (16,753,000)acquired............ (120,495,000) (31,440,000)
Additions to intangible assets . . . . . . . . . . . . . . (1,966,000) (363,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 152,000 536,000
------------ ------------assets.............................. (2,880,000) (1,347,000)
Issuance of long-term note receivable....................... (472,000) (2,726,000)
Other....................................................... 746,000 517,000
----------- -----------
Net cash used by investing activities (91,514,000) (20,316,000)activities............ (141,219,000) (39,695,000)
----------- -----------
Cash flows from financing activities:
Borrowings from bank credit facility . . . . . . . . . . . 51,000,000 17,800,000facility........................ 84,335,000 28,050,000
Payments on bank credit facility . . . . . . . . . . . . .facility............................ (51,000,000) (4,000,000)
Net proceeds from sale of common stock . . . . . . . . . 110,051,000 54,000stock...................... 110,079,000 2,900,000
Cash paid to retire bonds................................... (28,499,000) --
Distributions to minority interests. . . . . . . . . . . . (747,000) (1,133,000)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 172,000 (621,000)
------------ ------------interests......................... (1,488,000) (1,453,000)
Other....................................................... 1,078,000 173,000
----------- -----------
Net cash provided by financing activities 109,476,000 12,100,000activities........ 114,505,000 25,670,000
----------- -----------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . 9,788,000 (2,065,000)cash.................................. (24,741,000) (4,133,000)
Cash at beginning of period . . . . . . . . . . . . . . . . . .period...................................... 30,181,000 6,931,000
------------ ------------6,932,000
----------- -----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . $39,969,000 $4,866,000period............................................ $ 5,440,000 $ 2,799,000
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
4
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments which are necessary to state fairly the
consolidated financial position, results of operations, and cash flows of Total
Renal Care Holdings, Inc., ("TRCH" or the "Company") as of and for the periods
indicated. TRCH presumes that users of the interim financial information herein
have read or have access to the Company's 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, footnote and other disclosures which would substantially
duplicate the disclosures contained in Form 10-K for the transitional fiscal
year ended December 31, 1995 filed on March 18, 1996 by the Company have been
omitted. Certain other reclassifications of prior period amounts have been made
to conform to current period classifications. The financial information herein
is not necessarily representative of a full year's operations.
2. On November 3, 1995, the Company completed an equity offering of 6.9 million
shares of its common stock, par value $0.001 (the "Common Stock"). In
connection with this offering the Company's directors redesignated the Class
A Common Stock as "Common Stock", authorized an increase in the number of
shares of Common Stock to 55,000,000, par value $0.001, authorized 5,000,000
new shares of preferred stock, par value $0.001, and approved a three-into-
two reverse stock split of the Company's Class A and Class B Common Stock.
Additionally, as of December 4, 1995, all Class B Common Stock was converted
to Common Stock. All information in these condensed consolidated financial
statements pertaining to shares of Common Stock and per share amounts have
been adjusted to give retroactive effect to these actions.
3. During the period fromof October 1, 1994 to November 2, 1995 the Company issued
approximately 2,190,000 shares of Common Stockits common stock, par value $0.001 (the
"Common Stock") and options at prices significantly below the offering price of
the Common Stock in the Company's initial public offering. Such shares and
common stock equivalents have been included in the number of shares outstanding
from June 1, 1994, (including the quarter and sixnine months ended JuneSeptember 30,
1995) until November 2, 1995 using the Treasury Stock method using the actual
offering price of $15.50 per share.
3. On November 3, 1995, the Company completed an equity offering of 6.9
million shares of its Common Stock. In connection with this offering the
Company's directors redesignated the Class A Common Stock as "Common Stock,"
authorized an increase in the number of shares of Common Stock to 55,000,000,
par value $0.001, authorized 5,000,000 new shares of preferred stock, par value
$0.001, and approved a three-into-two reverse stock split of the Company's Class
A and Class B Common Stock. Additionally, as of December 4, 1995, all Class B
Common Stock was converted to "Common Stock." All information in these condensed
consolidated financial statements pertaining to shares of Common Stock and per
share amounts have been adjusted to give retroactive effect to these actions.
4. Effective March 1, 1996, the Company purchased substantially all of the
assets and assumed certain specified liabilities of the Nephrology Services
Business of Caremark International, Inc. (The(the "Caremark Acquisition") and one centertwo
centers located in South Carolina for cash consideration of $49$49.0 million and
$8.2 million, respectively.
The transactions were recorded under the purchase method of accounting and
the results of operations from March 1, 1996 have been recognized in the
accompanying financial statements. Goodwill of $21.5 million and $5.9 million,
respectively, was recorded in connection with these transactions and will be
amortized over their estimated lives in accordance with the Company's existing
accounting policies.
During the quarter ended June 30, 1996, the Company purchased substantially
all of the assets and assumed certain specified liabilities of two unrelated
centers in Maryland for cash consideration of $8.0 million and $2.9 million,
respectively. Goodwill of $5.8 million and $2.6 million was recorded in
connection with these transactions in accordance with the Company's existing
accounting policies.
During the second quarter endedperiod January 1, 1996 through June 30, 1996 and the first quarter ended
March 31, 1996, the Company also
purchased selected net assets of an existing dialysis company for $6.4 million
and two existing dialysis companies for $2.6 million respectively, and contributed those
assets during the formation of three unrelated general partnerships. Aggregate
goodwill associated with these transactions during the quarter ended June
30, 1996 and May 31, 1996 was $2.0 million and $5.3 million respectively.$7.3 million.
The Company entered into two management agreements with two additional
unaffiliated centers, one in each of the quarters ended June 30, 1996 and March
31, 1996, respectively.
5
During the quarter ended September 30, 1996, the Company purchased
substantially all of the assets and assumed certain liabilities of 11 centers
for total consideration of $43.9 million consisting of cash of $42.1 million
and common stock valued at $1.8 million. Goodwill of $33.7 million was recorded
in connection with these transactions in accordance with the Company's
existing accounting policies.
The results of operations on a pro forma basis as though the above
acquisitions had been combined with the Company at the beginning of each period
presented for the sixnine months ended JuneSeptember 30, are as follows:
1995 1996
1995
------------ ------------------- --------
Pro forma net operating revenues $127,800,000 $75,630,000
============ ===========revenues....................... $180,978 $232,902
======== ========
Pro forma net incomeincome................................... $ 9,755,0001,965 $ 2,355,000
============ ===========6,548
======== ========
Pro forma earnings per shareshare........................... $ 0.390.13 $ 0.14
============ ===========0.26
======== ========
5. On April 3, 1996, the Company completed an equity offering of 8,050,000
shares of Common Stock, 3,500,000 of which were sold for the Company's account
and 4,550,000 of which were sold by certain of the Company's stockholders. The
net proceeds to the Company of $110.1$110.0 million from the offering were used to repay borrowings
incurred under the Company's senior credit facility ("the Senior
Credit Facility") in connection with the
Caremark Acquisition. The remaining
proceeds areAcquisition or were invested in short-term, investment grade
instruments and are to be used for future acquisitions, de novo developments, routineworking
capital
expenditures, and other general corporate purposes.
Additionally, in6. In July and September 1996, the Company purchased the Senior Subordinated Discount Notes (the
"Discount Notes").
6. Effective August 14, 1996, the Company received firm commitments to increase
its Senior Credit Facility to $130 million.
7. In July 1996, the Companyirrevocably purchased and
subsequently retired $27.4 million of its remaining outstanding Discount Notes for $28.4$68.4 million,
including consent payments of $1.1 million. Including the writedown of related
bond issuance costs of $800,000,$1.9 million, and $474,000 in related transaction costs,
the Company will
recognizerecognized an extraordinary loss, net of taxes, of approximately
$3.0$7.7 million in the quarter ending September 30, 1996.
8.7. Subsequent to JuneSeptember 30, 1996, the Company completed acquisitionacquisitions of eightor
entered into letters of intent to acquire nine facilities for consideration of
$32.9approximately $29.7 million, which will primarily be funded by borrowings under
the Senior Credit Facility (as defined below). In addition, the Company has
agreed to purchase the minority interest in one of which $32.1 million was paid in cash;
the remainder in the issuance of common stock.
9.its existing centers.
8. Effective January 1,October 17, 1996, the Company changedrefinanced its year endprior bank credit
facility with the senior credit facility which permits borrowings of up to
December 31$400.0 million (the "Senior Credit Facility"). Under the Senior Credit Facility,
up to $50.0 million may be used in connection with letters of credit, and up to
$15.0 million in short-term funds may be borrowed the same day notice is given
to the banks under a "Swing Line" facility. In general, borrowings under the
Senior Credit Facility bear interest at one of two floating rates selected by
the Company: (i) the Alternate Base Rate (defined as the higher of The Bank of
New York's prime rate or the federal funds rate plus 0.5%); and (ii) Adjusted
LIBOR (defined as the 30-, 60-, 90- or 180-day London Interbank Offered Rate,
adjusted for statutory reserves) plus a margin that ranges from May 31. The consolidated statements of income and cash flows included
herein have been restated from0.45% to 1.25%
depending on the Company's previous filingsleverage ratio. Swing Line borrowings bear interest
at either a rate negotiated by the Company and the banks at the time of
borrowing or, if no rate is negotiated and agreed upon, the Alternate Base Rate.
Maximum borrowings under the Senior Credit Facility will be reduced by $50.0
million on Form 10-Q to
reflectSeptember 30, 2000, $75.0 million on September 30, 2001, and another
$75.0 million on September 30, 2002, and the new calendar quarter format.Senior Credit Facility terminates
on September 30, 2003. The Company's sole direct wholly-ownedSenior Credit Facility contains financial and
operating subsidiary, Total Renal
Care, Inc., a California corporation ("TRC"),covenants including, among other things, requirements that the Company
maintain certain financial ratios and TRC's wholly-owned
subsidiaries have guaranteedsatisfy certain financial tests, and
imposes limitations on the Company's obligations arising from the
Discount Notes. TRC's ability to make capital expenditures, to
incur other indebtedness and to pay dividends or otherwise distribute fundsdividends. As of the date hereof, the
Company is in compliance with all such covenants.
9. In October 1996, the Company commenced a public equity offering of
2,500,000 shares of Common Stock, 500,000 of which were sold for the Company's
account and 2,000,000 of which were sold by certain of the Company's
stockholders. The net proceeds to the Company is limited pursuantof $18.2 million will be used for
acquisitions, de novo developments, working capital and other corporate
purposes. Pending such uses, the Company may use such proceeds to reduce the
termsamount under the revolving portion of the Company's Senior Credit Facility with the exception of providing funds for: the payment of
taxes by the Company on a consolidated basis, interest and principal on the
Discount Notes as required, certain Company stock repurchases and providing
for general corporate overhead expenses of the Company. In addition, under
California law, TRC may pay dividends and make distributions only from
legally available sources of funds.
Separate financial statements and other disclosures concerning TRC's
subsidiaries are not presented as management has determined that they are not
material to investors.
Summary unaudited condensed consolidating financial information for the
Company, segregating guarantor and non-guarantor subsidiaries, follows:
6
Supplemental Condensed Consolidating Balance Sheets
December 31, 1995
----------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
------------ ------------ ----------- -------------- ------------
Current Assets:
Accounts receivable . . . . . . . $212,000 $33,974,000 $5,828,000 $40,014,000
Receivable from Tenet. . . . . . ------- 432,000 ------- 432,000
Other current assets . . . . . . 30,235,000 2,587,000 2,226,000 35,048,000
---------- ------------ ----------- -------------- ------------
Total current assets . . . . . 30,447,000 36,993,000 8,054,000 75,494,000
Property and equipment, net . . . . . 625,000 19,882,000 4,998,000 25,505,000
Deposits and other . . . . . . . . . 5,000 868,000 12,000 885,000
Investments in subsidiaries. . . . . 43,151,000 3,429,000 ------- ($46,580,000)(a) -------
Advances to subsidiaries . . . . . . 59,429,000 ------- ------- (59,429,000)(b) -------
Other assets, net . . . . . . . . . . 3,486,000 56,809,000 1,819,000 62,114,000
---------- ------------ ----------- -------------- ------------
$137,143,000 $117,981,000 $14,883,000 ($106,009,000) $163,998,000
=========== =========== ========== ============= ===========
Current liabilities . . . . . . . . . $519,000 $16,848,000 $3,436,000 $20,803,000
Payable to parent . . . . . . . . . ------- 54,886,000 4,543,000 ($59,429,000)(b) -------
Long-term obligations . . . . . . . . 53,820,000 2,586,000 132,000 56,538,000
Deferred income tax . . . . . . . . . ------- 510,000 ------- 510,000
Minority interests . . . . . . . . . ------- ------- ------- 3,343,000 (a) 3,343,000
Stockholders' equity . . . . . . . . 82,804,000 43,151,000 6,772,000 (49,923,000)(a) 82,804,000
------------ ------------ ----------- -------------- ------------
$137,143,000 $117,981,000 $14,883,000 ($106,009,000) $163,998,000
=========== =========== ========== ============= ===========
June 30, 1996
----------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
------------ ------------ ----------- -------------- ------------
Current Assets:
Accounts receivable . . . . . . . $744,000 $72,565,000 $9,066,000 $82,375,000
Receivable from Tenet. . . . . . ------- 390,000 ------- 390,000
Other current assets . . . . . . 37,769,000 7,474,000 3,411,000 48,654,000
------------ ------------ ----------- -------------- ------------
Total current assets . . . . . 38,513,000 80,429,000 12,477,000 131,419,000
Property and equipment, net . . . . . 870,000 35,788,000 7,798,000 44,456,000
Deposits and other . . . . . . . . . 5,000 862,000 20,000 887,000
Investments in subsidiaries. . . . . 51,485,000 4,992,000 ------- ($56,477,000)(a) -------
Advances to subsidiaries . . . . . . 166,514,000 ------- ------- (166,514,000)(b) -------
Other assets, net . . . . . . . . . . 4,067,000 108,239,000 1,978,000 114,284,000
------------ ------------ ----------- -------------- ------------
$261,454,000 $230,310,000 $22,273,000 ($222,991,000) $291,046,000
=========== =========== ========== ============= ===========
Current liabilities . . . . . . . . . $891,000 $15,595,000 $6,880,000 $23,366,000
Payable to parent . . . . . . . . . ------- 160,944,000 5,570,000 ($166,514,000)(b) -------
Long-term obligations . . . . . . . . 57,048,000 1,763,000 290,000 59,101,000
Deferred income tax . . . . . . . . . ------- 523,000 ------- 523,000
Minority interests . . . . . . . . . ------- ------- ------- 4,541,000 (a) 4,541,000
Stockholders' equity . . . . . . . . 203,515,000 51,485,000 9,533,000 (61,018,000)(a)203,515,000
------------ ------------ ----------- -------------- ------------
$261,454,000 $230,310,000 $22,273,000 ($222,991,000) $291,046,000
=========== =========== ========== ============= ===========
7
Supplemental Condensed Consolidating Statements of Income
Six Months Ended
June 30, 1995
---------------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
Net operating revenues................ $ 429,000 $43,646,000 $12,018,000 $ 56,093,000
Operating expenses.................... (2,827,000) 39,433,000 8,953,000 45,559,000
----------- ----------- ----------- ----------- ------------
Operating Income................. 3,256,000 4,213,000 3,065,000 10,534,000
Interest expense, net................. 4,328,000 247,000 (28,000) 4,547,000
Income taxes.......................... (428,000) 1,630,000 876,000 2,078,000
Equity in income of subsidiaries...... 3,543,000 1,207,000 ---- ($4,750,000)(a) ----
Minority interests.................... ---- ---- ---- (1,010,000)(b) 1,010,000
----------- ----------- ----------- ----------- ------------
Net Income....................... $ 2,899,000 $ 3,543,000 $ 2,217,000 ($5,760,000) $ 2,899,000
=========== =========== =========== =========== ============
Three Months Ended
June 30, 1995
---------------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
Net operating revenues................ $ 429,000 $23,551,000 $ 6,644,000 $ 30,624,000
Operating expenses.................... (2,950,000) 22,529,000 4,797,000 24,376,000
----------- ----------- ----------- ----------- ------------
Operating Income................. 3,379,000 1,022,000 1,847,000 6,248,000
Interest expense, net................. 2,150,000 247,000 (12,000) 2,385,000
Income taxes.......................... 491,000 317,000 544,000 1,352,000
Equity in income of subsidiaries...... 1,160,000 702,000 ---- ($1,862,000)(a) ----
Minority interests.................... ---- ---- ---- (613,000)(b) 613,000
----------- ----------- ----------- ----------- ------------
Net Income....................... $ 1,898,000 $ 1,160,000 $ 1,315,000 ($2,475,000) $ 1,898,000
=========== =========== =========== =========== ============
Six Months Ended
June 30, 1996
----------------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- -------------
Net operating revenues................ $ 780,000 $92,017,000 $22,023,000 $114,820,000
Operating expenses.................... (4,096,000) 79,901,000 17,908,000 93,713,000
----------- ----------- ----------- ------------ ------------
Operating Income................. 4,876,000 12,116,000 4,115,000 21,107,000
Interest expense, net................. 2,081,000 126,000 330,000 2,537,000
Income taxes.......................... 1,127,000 5,000,000 1,024,000 7,151,000
Equity in income of subsidiaries...... 8,334,000 1,344,000 ---- ($9,678,000)(a) ----
Minority interests.................... ---- ---- ---- (1,417,000)(b) 1,417,000
----------- ----------- ----------- ------------ ------------
Net Income....................... $10,002,000 $ 8,334,000 $ 2,761,000 ($11,095,000) $ 10,002,000
=========== =========== =========== ============ ============
Three Months Ended
June 30, 1996
--------------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
Net operating revenues................ $ 400,000 $52,790,000 $11,393,000 $ 64,583,000
Operating expenses.................... (2,401,000) 46,107,000 9,321,000 53,027,000
----------- ----------- ----------- ----------- ------------
Operating Income................. 2,801,000 6,683,000 2,072,000 11,556,000
Interest expense, net................. 893,000 (149,000) 312,000 1,056,000
Income taxes.......................... 772,000 2,854,000 484,000 4,110,000
Equity in income of subsidiaries...... 4,590,000 612,000 ---- ($5,202,000)(a) ----
Minority interests.................... ---- ---- ---- (664,000)(b) 664,000
----------- ----------- ----------- ----------- ------------
Net Income....................... $ 5,726,000 $ 4,590,000 $ 1,276,000 ($5,866,000) $ 5,726,000
=========== =========== =========== =========== ============
8
Six Months Ended
June 30, 1995
----------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
Cash flows from operating activities:
Net income................................ $ 2,899,000 $ 3,543,000 $ 2,217,000 ($ 5,760,000)(a) $ 2,899,000
Adjustments to net income:
Depreciation and amortization......... 178,000 2,079,000 416,000 2,673,000
Noncash interest...................... 4,420,000 ---- ---- 4,420,000
Provision for doubtful accounts....... ---- 1,249,000 17,000 1,266,000
Equity in earnings of subsidiaries.... (3,543,000) (1,207,000) ---- 4,750,000 (a) ----
Other................................. 119,000 (5,320,000) (916,000) 1,010,000 (a) (5,107,000)
----------- ----------- ----------- ----------- ------------
Net cash provided by
operating activities.............. 4,073,000 344,000 1,734,000 ---- 6,151,000
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment....... (219,000) (1,887,000) (1,630,000) (3,736,000)
Cash paid for acquisitions, net of
cash acquired........................... ---- (16,753,000) ---- (16,753,000)
Additions to intangible assets............ (54,000) (307,000) (2,000) (363,000)
Other..................................... ---- 289,000 247,000 536,000
----------- ----------- ----------- ----------- ------------
Net cash used by investing
activities....................... (273,000) (18,658,000) (1,385,000) (20,316,000)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Intercompany advances..................... (3,603,000) 1,230,000 2,373,000 ----
Proceeds from bank credit facility........ ---- 17,800,000 ---- 17,800,000
Payments on bank credit facility.......... ---- (4,000,000) ---- (4,000,000)
Net proceeds from sale of common stock.... 54,000 ---- ---- 54,000
Distributions to minority interests....... ---- 2,791,000 (3,924,000) (1,133,000)
Other..................................... (249,000) (367,000) (5,000) (621,000)
----------- ----------- ----------- ----------- ------------
Net cash provided (used) by
financing activities............. (3,798,000) 17,454,000 (1,556,000) 12,100,000
----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash........... 2,000 (860,000) (1,207,000) (2,065,000)
Cash at beginning of period............... ---- 3,852,000 3,079,000 6,931,000
----------- ----------- ----------- ----------- ------------
Cash at end of period..................... $ 2,000 $ 2,992,000 $ 1,872,000 $ 4,866,000
=========== =========== =========== =========== ============
Six Months Ended
June 30, 1996
----------------------------------------------------------------------------------
Total Renal Non-
Care Guarantor Guarantor Consolidating Consolidated
Holdings, Inc. Subsidiaries Subsidiaries Adjustments Total
-------------- ------------ ------------ ------------- ------------
Cash flows from operating activities:
Net income................................ $10,002,000 $ 8,334,000 $ 2,761,000 ($11,095,000)(a) $ 10,002,000
Adjustments to net income:
Depreciation and amortization......... 172,000 5,324,000 536,000 6,032,000
Noncash interest...................... 3,228,000 ---- ---- 3,228,000
Provision for doubtful accounts....... ---- 1,816,000 517,000 2,333,000
Equity in earnings of subsidiaries.... (8,334,000) (1,344,000) ---- 9,678,000 (a) ----
Other................................. (349,000) (32,748,000) 1,911,000 1,417,000 (a) (29,769,000)
----------- ----------- ----------- ----------- ------------
Net cash provided (used) by
operating activities............. 4,719,000 (18,618,000) 5,725,000 ---- (8,174,000)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment....... (301,000) (8,071,000) (3,461,000) (11,833,000)
Cash paid for acquisitions, net of
cash acquired........................... ---- (77,867,000) ---- (77,867,000)
Additions to intangible assets............ (467,000) (1,346,000) (153,000) (1,966,000)
Other..................................... (232,000) 110,000 274,000 152,000
----------- ----------- ----------- ----------- ------------
Net cash used by investing
activities....................... (1,000,000) (87,174,000) (3,340,000) (91,514,000)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Intercompany advances..................... (107,085,000) 106,058,000 1,027,000 ----
Proceeds from bank credit facility........ ---- 51,000,000 ---- 51,000,000
Payments on bank credit facility.......... ---- (51,000,000) ---- (51,000,000)
Net proceeds from sale of common stock.... 110,051,000 ---- ---- 110,051,000
Distributions to minority interests....... ---- 1,687,000 (2,434,000) (747,000)
Other..................................... 753,000 (204,000) (377,000) 172,000
----------- ----------- ----------- ----------- ------------
Net cash provided (used) by
financing activities............. 3,719,000 107,541,000 (1,784,000) 109,476,000
----------- ----------- ----------- ----------- ------------
Net increase in cash...................... 7,438,000 1,749,000 601,000 9,788,000
Cash (overdraft) at beginning of period... 30,116,000 (1,682,000) 1,747,000 30,181,000
----------- ----------- ----------- ----------- ------------
Cash at end of period..................... $37,554,000 $ 67,000 $ 2,348,000 $ 39,969,000
=========== =========== =========== =========== ============
9
Investments in subsidiaries in the foregoing condensed consolidating financial
statements are accounted for under the equity method of accounting.
Consolidating adjustments to the condensed consolidating balance sheets
include the following:
(a) Elimination of investments in subsidiaries and recording of minority
interests, and
(b) Elimination of intercompany accounts.
Consolidating adjustments to the condensed consolidating statements of income
include the following:
(a) Elimination of equity in earnings of subsidiaries, and
(b) Recognition of minority interests in income of consolidated subsidiaries.
Consolidating adjustments to the condensed consolidating statements of cash
flows include the following:
(a) Elimination of equity in income of subsidiaries and recognition of
minority interests in income of consolidated subsidiaries.
10Facility.
5
TOTAL RENAL CARE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such statements relating to
future events and financial performance are forward-looking statements that
involveinvolving
risks and uncertainties that are detailed from time to time in the Company's
various Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
Three Months Ended JuneSeptember 30, 1996 Compared to the Three Months Ended
JuneSeptember 30, 1995.
Net Operating Revenues. Net operating revenues for the second quarterthree months ended
JuneSeptember 30, 1996 (third quarter) increased $33,959,000$35,918,000 to $64,583,000$73,333,000 from
$30,624,000$37,415,000 for the second quarterthree months ended JuneSeptember 30, 1995 representing a 110.9%96.0%
increase. Of this increase, $29,126,000$34,742,000 was due to increased treatments from
acquisitions, existing facility growth and from de novo developments. The remainder
was due to an increase in net operating revenues per treatment, $235.48$232.38 in the
secondthird quarter of 1996 compared to $223.64$228.65 in the secondthird quarter of 1995, and an
increase in affiliated and unaffiliated facility management fees. The increase
in operating revenues per treatment was due to increased ancillary utilization primarily in
the administration of erythropoietin ("EPO"), the addition of Total Renal Care,
Inc.'s ("TRC") end stage renal disease ("ESRD") laboratory, an overall increase
in average reimbursement rates, and the opening of an intravenous therapy ("IV")
and oral pharmaceutical program and an access management program.
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 and direct labor, and supplies and service costs relating to patient
care. Facility operating expenses increased $23,820,000 to $43,318,000 in the
second quarter of 1996 from $19,498,000 in the second quarter of 1995. As a
percentage of net operating revenues, facility operating expenses increased to
67.1% in the second quarter of 1996 from 63.7% in the second quarter of 1995 due
to the significant amount of recent acquisitions and de novo development
activity with an operating epense structure that is initially higher due to
integration costs incurred in the first few months of operations coupled with a
lower base of revenue generated until the Company's ancillary programs are
added, leading to an overall lower operating margin.
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 $2,023,000 to $4,800,000 in the
second quarter of 1996 from $2,777,000 in the second quarter of 1995. As a
percentage of net operating revenues, general and administrative expenses
declined to 7.4% in the second quarter of 1996 from 9.1% in the second quarter
of 1995. This decline as a percentage of net revenue is a result of revenue
growth and economies of scale achieved through the leveraging of corporate staff
across a higher revenue base.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $650,000 to $1,337,000 in the second quarter of 1996 from $687,000 in
the second quarter of 1995. As a percentage of net operating revenues, the
provision for doubtful accounts decreased to 2.1% in the second quarter of 1996
from 2.2% in the second quarter of 1995. 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. Due to the significant acquisition activity since
the second quarter of 1995, the percentage of accounts receivable, for which the
Company provision methodology will be applied, in the more recent aging
categories has increased, causing a corresponding decrease in the provision as a
percentage of revenues.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Depreciation and Amortization. Depreciation and amortization increased
$2,158,000 to $3,572,000 in the second quarter of 1996 from $1,414,000 in the
second quarter of 1995. As a percentage of net operating revenues, depreciation
and amortization increased to 5.5% in the second quarter of 1996 from 4.6% in
the second quarter of 1995. The increase was attributable to goodwill, other
intangibles and fixed assets recorded through significant acquisition activity
and increased depreciation from new center leaseholds and routine capital
expenditures.
Operating Income. Operating income increased $5,308,000 to $11,556,000
in the second quarter of 1996 from $6,248,000 in the second quarter of 1995. As
a percentage of net operating revenues, operating income decreased to 17.9% in
the second quarter of 1996 from 20.4% in the second quarter of 1995. This
decrease in operating income is primarily due to an increase in facilities
expense and depreciation and amortization as a percentage of net operating
revenue partially offset by a decrease in general and administrative expenses as
a percentage of net operating revenues.
Interest Expense/Interest Income. In connection with the Total Renal
Care Holdings, Inc.'s ("TRCH" or the "Company") reorganization in 1994 and the
implementation of the Company's growth strategy, the Company incurred
substantial debt, some of which requires interest to be paid in cash and most of
which is recognized as non-cash interest expense. Interest expense, net of
interest income, decreased $1,329,000 in the second quarter of 1996 from
$2,385,000 in the second quarter of 1995. As a percentage of net operating
revenues, interest expense, net of interest income, decreased to 1.6% in the
second quarter of 1996 from 7.8% in the second quarter of 1995. Cash interest
expense during the second quarter of 1996 was $601,000 and non-cash interest
during the same period was $1,637,000 versus $260,000 and $2,242,000 in the
second quarter of 1995, respectively. The decrease in the second quarter of 1996
non-cash interest expense was due primarily to a scheduled accretion offset by
the redemption of 35% of the accreted value of the Company's senior subordinated
discount notes (the "Discount Notes") in December 1995. The increase in cash
interest expense was due primarily to ae under the Company's senior credit
facility (the "Senior Credit Facility") to fund the Company's acquisition of the
Nephrology Services Business of Caremark International, Inc. (the "Caremark
Acquisition"). The increase in interest income was due to investments of excess
cash generated from the Company's equity public offering, completed April 3,
1996, placed in short-term high-grade instruments.
Provision for Income Taxes. Provision for income taxes increased
$2,758,000 to $4,110,000 in the second quarter of 1996 from $1,352,000 in the
second quarter of 1995. As a percentage of net operating revenues, provision for
income taxes increased to 6.4% in the second quarter of 1996 from 4.4% in the
second quarter of 1995 and the effective tax rate increased slightly to 41.8%
from 41.6% over the same period. The effective tax rate is influenced by the mix
of operations in states with varying tax rates and the taxable income earned by
minority interests recognized in two subsidiary corporations. The increase as a
percentage of net operating revenues was primarily due to the increased
profitability of the Company in the second quarter of 1996 versus the same
period in the prior year.
Minority Interests. Minority interests represent the pretax net income
earned by physicians who directly or indirectly own minority interests in all of
the Company's partnership affiliates and the net income in two of the Company's
corporate subsidiaries. Minority interests increased $51,000 to $664,000 in the
second quarter of 1996 from $613,000 in the second quarter of 1995. As a
percentage of net operating revenues, minority interest decreased to 1.0% in the
second quarter of 1996 from 2.0% in the second quarter of 1995. This decrease in
minority interest as a percentage of net operating revenues is a result of a
relative proportionate decrease in the formation of partnership affiliates and
subsidiaries as a percentage of total new acquisitions.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net Operating Revenues. Net operating revenues for the six months
ended June 30, 1996 increased $58,727,000 to $114,820,000 from $56,093,000 for
the six months ended June 30, 1995 representing a 104.7% increase. Of this
increase $46,470,000 was due to increased treatments from acquisitions, existing
facility growth and from de novo developments. The remainder was due to an
increase in net operating revenues per treatment, $233.51 in the first six
months of 1996 compared to $215.70 in the first six months of 1995, and an
increase in affiliated and unaffiliated facility management fees. The increase
in operating revenues per treatment was due to the addition of the
Company's ESRD laboratory, increased ancillary utilization primarily in the
administration of EPO, an overall increase in average reimbursement rates,and the opening
increased utilization of an IV and oral pharmaceutical programsprogram and the start of
an access management program.
Facility Operating Expenses. Facility operating expenses increased
$40,227,000$25,590,000 to $76,647,000$49,474,000 in the first six monthsthird quarter of 1996 from $36,420,000$23,884,000 in the
first six monthsthird quarter of 1995. As a percentage of net operating revenues, facility
operating expenses increased to 66.8%67.5% in the first six monthsthird quarter of 1996 from 64.9%63.8% in
the first six monthsthird quarter of 1995 due to the significant amount of recent acquisitionacquisitions
and de novo development activity with an operating expense structure that is
initially higher due to integration costs incurred in the first few months of
operations coupled with a lower base of revenue generated until the Company's
ancillary programs are added, leading to an overall lower operating margin.
General and Administrative Expenses. General and administrative expenses
increased $3,501,000$1,836,000 to $8,701,000$4,943,000 in the third quarter of 1996 from $3,107,000
in the third quarter of 1995. As a percentage of net operating revenues, general
and administrative expenses declined to 6.7% in the third quarter of 1996 from
8.3% in the third quarter of 1995. This decline as a percentage of net revenue
is a result of revenue growth and economies of scale achieved through the
leveraging of corporate staff across a higher revenue base.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $802,000 to $1,559,000 in the third quarter of 1996 from $757,000 in
the third quarter of 1995. As a percentage of net operating revenues, the
provision for doubtful accounts increased slightly to 2.1% in the third quarter
of 1996 from 2.0% in the third quarter of 1995. 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. As a result of the recent acquisitions,
the allowance for doubtful accounts as a percentage of accounts receivable has
decreased as the change in ownership process, which can take approximately 30-
180 days to occur, must be completed on newly acquired facilities before any
governmental billing can be submitted or paid.
Depreciation and Amortization. Depreciation and amortization increased
$2,340,000 to $4,231,000 in the third quarter of 1996 from $1,891,000 in the
third quarter of 1995. As a percentage of net operating revenues, depreciation
and amortization increased to 5.8% in the third quarter of 1996 from 5.1% in the
third quarter of 1995. The increase was attributable to goodwill, other
intangibles and fixed assets recorded through acquisition activity and increased
depreciation from new center leaseholds and routine capital expenditures.
Operating Income. Operating income increased $5,350,000 to $13,126,000 in
the third quarter of 1996 from $7,776,000 in the third quarter of 1995. As a
percentage of net operating revenues, operating income decreased to 17.9% in the
third quarter of 1996 from 20.8% in the third quarter of 1995. This decrease
in operating income is primarily due to an increase in facility operating costs
and depreciation and amortization partially offset by a decrease in general and
administrative expenses as a percentage of net operating revenue as discussed
above.
Interest Expense. Interest expense, net of interest income, decreased
$1,415,000 to $1,325,000 in the third quarter of 1996 from $2,740,000 in the
third quarter of 1995. As a percentage of net operating revenues, interest
expense, net of interest income, decreased to 1.8% in the third quarter of 1996
from 7.3% in the third quarter of 1995. Cash interest expense during the third
quarter of 1996 was $551,000 and non-cash interest during the same period was
$1,168,000 versus $504,000 and $2,309,000 in the third quarter of 1995,
respectively. The decrease in the third quarter of 1996 non-cash interest
expense was due primarily to the redemption of 35.0% of the accreted value of
the Company's Discount Notes in December 1995 and the additional repurchase of
$27.4 million, at maturity, in July 1996. The increase in cash interest expense
was due primarily to borrowings made under the Company's Senior Credit Facility
to fund the Company's acquisitions and to repurchase additional Discount Notes
during the third quarter of 1996. The increase in interest income was due to
investments of excess cash generated from the Company's secondary equity
offering placed in short-term high-grade instruments.
Provision for Income Taxes. Provision for income taxes increased $2,612,000
to $4,386,000 in the third quarter of 1996 from $1,774,000 in the third quarter
of 1995. As a percentage of net operating revenues, provision for income taxes
increased to 6.0% in the third quarter of 1996 from 4.7% in the third quarter of
1995 and the effective tax rate decreased to 40.2% from 41.7% over the same
period. The increase as a percentage of net operating revenues was primarily due
to the increased profitability of the Company in the third quarter of 1996
versus the same period in the prior year. The change in the effective tax rate
was primarily influenced by the mix of taxable income by state and was largely
due to the relative change in state taxable income and state taxable expense
associated with the mix of operations, including the effect of separate filing
requirements for certain states.
Minority Interest. Minority interest increased $102,000 to $879,000 in the
third quarter of 1996 from $777,000 in the third quarter of 1995. As a
percentage of net operating revenues, minority interest decreased to 1.2% in the
third quarter of 1996 from 2.1% in the third quarter of 1995. This decrease in
minority interest as a percentage of net operating revenues is a result of a
relative proportionate decrease in the formation of partnership affiliates and
subsidiaries as a percentage of total new acquisitions.
Extraordinary Loss. In July and September 1996 the Company retired all
outstanding Discount Notes for an aggregate payment of $68.4 million (including
consent payments of $1.1 million). The debt retirement resulted in an
extraordinary loss, net of tax, of $7.7 million during the third quarter of
1996.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net Operating Revenues. Net operating revenues for the nine months ended
September 30, 1996 increased $94,645,000 to $188,153,000 from $93,508,000 for
the nine months ended September 30, 1995 representing a 101.2% increase. Of this
increase, $84,665,000 was due to increased treatments from acquisitions,
existing facility growth and de novo developments. The remainder was due to
an increase in net operating revenues per treatment, $233.07 in the first sixnine
months of 1996 compared to $220.71 in the first nine months of 1995, and an
increase in affiliated and unaffiliated facility management fees. The increase
in operating revenues per treatment was due to the addition of the Company's
ESRD laboratory, increased ancillary utilization primarily in the administration
of EPO, an overall increase in average reimbursement rates and the opening of
an IV and oral pharmaceutical program and an access management program.
Facility Operating Expenses. Facility operating expenses increased
$65,817,000 to $126,121,000 in the first nine months of 1996 from $5,200,000$60,304,000 in
the first sixnine months of 1995. As a percentage of net operating revenues,
facility operating expenses increased to 67.0% in the first nine months of 1996
from 64.5% in the first nine months of 1995 due to the significant amount of
recent acquisitions and de novo development activity with an operating expense
structure that is initially higher due to integration costs incurred in the
first few months of operations coupled with a lower base of revenue generated
until the Company's ancillary programs are added, leading to an overall lower
operating margin.
General and Administrative Expenses. General and administrative expenses
increased $5,337,000 to $13,644,000 in the first nine months of 1996 from
$8,307,000 in the first nine months of 1995. As a percentage of net operating
revenues, general and administrative expenses declined to 7.6%7.3% in the first sixnine
months of 1996 from 9.3%8.9% in the first sixnine months of 1995. This decline as a
percentage of net revenue is a result of revenue growth and economies of scale
achieved through the leveraging of corporate staff across a higher revenue
base.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $1,067,000$1,869,000 to $2,333,000$3,892,000 in the first sixnine months of 1996 from
$1,266,000$2,023,000 in the first sixnine months of 1995. As a percentage of net operating
revenues, the provision for doubtful accounts decreased to 2.0% in the first
sixnine months of 1996 from 2.3%2.1% in the first sixnine months of 1995. Due to the
significant acquisition activity since the first sixnine months of 1995, the
percentage of accounts receivable, for which the Company provision methodology
will be applied, in the more recent aging categories has increased, causing a
corresponding decrease in the provision as a percentage of revenues .revenues.
Depreciation and Amortization. Depreciation and amortization increased
$3,359,000$5,699,000 to $6,032,000$10,263,000 in the first sixnine months of 1996 from $2,673,000$4,564,000 in
the first sixnine months of 1995. As a percentage of net operating revenues,
depreciation and amortization increased to 5.3%5.5% in the first sixnine months of 1996
from 4.8%4.9% in the first sixnine months of 1995. The increase was attributable to
goodwill, other intangibles and fixed assets recorded through significant acquisition
activity and increased depreciation from new center leaseholds and routine
capital expenditures.
Operating Income. Operating income increased $10,573,000$15,923,000 to $21,107,000$34,233,000 in
the first sixnine months of 1996 from $10,534,000$18,310,000 in the first sixnine months of
1995. As a percentage of net operating revenues, operating income decreased slightly to
18.4%18.2% in the first sixnine months of 1996 from 18.8%19.6% in the first sixnine months of
1995. This decrease in operating income is primarily due to an increase in
facility operating costs and depreciation and amortization partially offset by a
decrease in general and administrative expenses as a percentage of net operating
revenue.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)revenue as discussed above.
Interest Expense/Interest Income.Expense. Interest expense, net of interest income, decreased
$2,010,000$3,425,000 to $3,862,000 in the first sixnine months of 1996 from $4,547,000$7,287,000 in
the first sixnine months of 1995. As a percentage of net operating revenues,
interest expense, net of interest income, decreased to 2.2%2.1% in the first sixnine
months of 1996 from 8.1%7.8% in the first sixnine months of 1995. Cash interest
expense during the first sixnine months of 1996 was $922,000$1,473,000 and non-cash
interest expense during the same period was $3,228,000$4,396,000 versus $301,000$805,000 and $4,420,000$6,729,000
in the first sixnine months of 1995, respectively. The decrease in the first sixnine
months of 1996 non-cash interest expense was due primarily to the redemption
of 35%35.0% of the accreted value of the Company's Discount Notes in December 1995.
The increase in cash interest expense was due primarily to borrowings made
under the Company's Senior Credit Facility to fund the Company's Caremark Acquisition.acquisitions
and to repurchase additional Discount Notes during the first nine months of
1996. The increase in interest income was due to investments of excess cash
generated from the Company's initial public offering and secondary equity
offering placed in short-
termshort-term high-grade instruments.
ProvisionProvisions for Income Taxes. Provision for income taxes increased
$5,073,000$7,685,000 to $7,151,000$11,537,000 in the first sixnine months of 1996 from $2,078,000$3,852,000 in
the first sixnine months of 1995. As a percentage of net operating revenues,
provision for income taxes increased to 6.2%6.1% in the first sixnine months of 1996
from 3.7%4.1% in the first sixnine months of 1995 and the effective tax rate decreased
to 41.7%41.1% from 41.8%41.7% over the same period. The effective tax rate is influenced by the mix of
operations in states with varying tax rates and the taxable income earned by
minority interests recognized in two subsidiary corporations. The increase as a percentage of net
operating revenues was primarily due to the increased profitability of the
Company in the first sixnine months of 1996 versus the same period in the prior
year.
Minority Interests.Interest. Minority interestsinterest increased $407,000$509,000 to $1,417,000$2,296,000 in
the first sixnine months of 1996 from $1,010,000$1,787,000 in the first sixnine months of
1995. As a percentage of net operating revenues, minority interest decreased
to 1.2% in the first sixnine months of 1996 from 1.8%1.9% in the first sixnine months of
1995. This decrease in minority interest as a percentage of net operating
revenues is a result of a relative proportionate decrease in the formation of
partnership affiliates and subsidiaries as a percentage of total new
acquisitions.
14Extraordinary Loss. In July and September 1996 the Company retired all
outstanding Discount Notes for an aggregate payment of $68.4 million (including
consent payments of $1.1 million). The debt retirement resulted in an
extraordinary loss, net of tax, of $7.7 million during the third quarter of
1996.
7
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had working capital of $108,053,000,
including cash of $39,969,000. The Company intends to finance its working
capital needs, as well as purchases of additional property and equipment for the
operation of its existing facilities, from cash generated by operations and
borrowings under the Senior Credit Facility.
Net cash usedprovided by operating activities was $8,174,000$1,973,000 for the first sixnine
months of 1996. Net cash usedprovided by operating activities consists of the
Company's net income, 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, in the first sixnine months of 1996. Net cash used in investing
activities was $91,514,000$141,219,000 for the first sixnine months of 1996. The Company's
principal uses of cash in investing activities have been related to
acquisitions, purchases of new equipment and leasehold improvements for the
Company's outpatient facilities, as well as the development of new outpatient
facilities. Net cash provided by financing activities was $109,476,000$114,505,000, of
which the primary sourcesources of financing were $110,079,000 net proceeds from sale
of common stock used to finance the Caremark
Acquisition and the development of new facilities.$33,335,000 net borrowings on bank credit facility. The
remaining cash required for other acquisitions, de novo developments and
working capital needs were funded by the Company's available cash. As a
result, cash increaseddecreased by $9,788,000$24,741,000 in the first sixnine months of 1996.
On April 3,In July 1996, the Company repurchased $27.4 million of the outstanding
Discount Notes for $28.4 million. In September 1996, the Company completed a
tender offer for its Discount Notes pursuant to which it purchased all
outstanding Discount Notes, with a principal amount of $37.6 million at
maturity, for $38.9 million and made aggregate consent payments of $1.1 million.
The repurchase and tender offer resulted in an equityextraordinary loss, net of tax,
of $7.7 million during the third quarter of 1996.
Effective October 17, 1996, the Company refinanced its prior bank credit
facility with the Senior Credit Facility, which permits borrowings of up to
$400.0 million. Under the Senior Credit Facility, up to $50.0 million may be
used in connection with letters of credit, and up to $15.0 million in short-term
funds may be borrowed the same day notice is given to the banks under a "Swing
Line" facility. In general, borrowings under the Senior Credit Facility bear
interest at one of two floating rates selected by the Company: (i) the Alternate
Base Rate (defined as the higher of The Bank of New York's prime rate or the
federal funds rate plus 0.5%); and (ii) Adjusted LIBOR (defined as the 30-, 60-,
90- or 180-day London Interbank Offered Rate, adjusted for statutory reserves)
plus a margin that ranges from 0.45% to 1.25% depending on the Company's
leverage ratio. Swing Line borrowings bear interest at either a rate negotiated
by the Company and the banks at the time of borrowing or, if no rate is
negotiated and agreed upon, the Alternate Base Rate. Maximum borrowings under
the Senior Credit Facility will be reduced by $50.0 million on September 30,
2000, $75.0 million on September 30, 2001, and another $75.0 million on
September 30, 2002, and the Senior Credit Facility terminates on September 30,
2003. The Senior Credit Facility contains financial and operating covenants
including, among other things, requirements that the Company maintain certain
financial ratios and satisfy certain financial tests, and imposes limitations on
the Company's ability to make capital expenditures, to incur other indebtedness
and to pay dividends. As of the date hereof, the Company is in compliance with
all such covenants.
As of September 30, 1996, the Company had working capital of $85,254,000,
including cash of $5,440,000. In October 1996, the Company commenced a public
offering providing
$110.1 million of netwhich is anticipated to close in November. Net proceeds to the Company. On August 14,Company
from this offering will be approximately $18.2 million.
The Company anticipates that its aggregate capital requirements for
purchases of equipment and leasehold improvements for outpatient facilities
after September 30, 1996 through December 31, 1996 will be approximately $6.8
million.
The Company's strategy is to continue to expand its operations both through
development of de novo centers and through acquisitions. The development of a
typical outpatient facility generally requires $700,000 for initial
construction and equipment and $200,000 for working capital. Based on the
Company's experience, a de novo facility typically achieves operating
profitability, before depreciation and amortization, by the 12th to 15th month
of operation. However, the period of time for a development facility to break
even is dependent on many factors which can vary significantly from facility
to facility, and, therefore, the Company's past experience may not be
indicative of the performance of future developed facilities. The Company is
currently developing eight new facilities.
During the period January 1, 1996 through September 30, 1996, the Company
received firm commitmentspaid approximately $126.5 million in consideration for acquisitions, including
approximately $49.0 million for the Caremark Acquisition. From October 1, 1996
to increase its Senior Credit Facility to $100
million. On December 7, 1995 the Company redeemed 35% of the then accreted value
of its Discount Notes.
Subsequent to JuneOctober 30, 1996, the Company completed acquisitions of eightthree facilities for
consideration of $32.9$17.2 million of which $32.1$4.7 million was paid in cash;cash, the
remainder in the issuance of common stock. Alsoa letter of credit under its Senior Credit Facility
to secure a subsequent cash payment to be made in July 1996,
the first half of 1997. The
Company repurchased an additional $27.4has signed letters of intent in which it has agreed to purchase six
centers servicing approximately 300 patients for a total consideration of $12.5
million in cash and has agreed to purchase the minority interest at one of the outstanding Discount
Notes, at maturity,its
existing centers for $28.4 million. The remaining Discount Notes after the
transaction will accrete to $37.6$1.0 million on August 15, 1997 at which point cash
interest will begin to accrue. The outstanding Discount Notes are due August 15,
2004.in cash.
The Company believes that it will be able to fund all capital
requirements, including interest on the remaining Discount Notes andnet proceeds from its October 1996 equity
offering, borrowings under the Senior Credit Facility, with cash generated from
operations and other current sources of financing.financing will be sufficient to meet the
Company's need for capital for the foreseeable future, including working
capital, purchases of additional property and equipment for the operation of its
existing facilities and interest on the Senior Credit Facility. To continue its
growth strategy, however, the Company may need to issue additional debt or
equity securities. There can be no assurance that additional financing and
capital, if and when required, will be available on terms acceptable to the
Company or at all.
158
RISK FACTORS
In evaluating the Company, its business and its financial position the
following risk factors should be carefully considered in addition to the other
information contained herein. The following factors could affect the Company's
actual future results and could cause them to differ from any forward-looking
statements made by or on behalf of the Company.
DEPENDENCE ON MEDICARE, MEDICAID AND OTHER SOURCES OF REIMBURSEMENT
The Company is reimbursed for dialysis services primarily at fixed
rates established in advance under the Medicare End Stage Renal Disease program.
Under this program, once a patient becomes eligible for Medicare reimbursement,
Medicare is responsible for payment of 80% of the composite rates determined by
the Health Care Financing Administration ("HCFA") for dialysis treatments. Since
1972, qualified patients suffering from chronic kidney failure, also known as
ESRD,end stage renal disease ("ESRD") have been entitled to Medicare benefits
regardless of age or financial circumstances. The Company estimates that
approximately 62% of itits net patient revenues during its fiscal year ended May
31, 1995, and approximately 60% during the seven months ended December 31, 1995 and
60% during the sixnine months ended JuneSeptember 30, 1996 were funded by Medicare.
Since 1983, numerous Congressional actions have resulted in changes in the
Medicare composite reimbursement rate from a national average of $138 per
treatment in 1983 to a low of $125 per treatment on average in 1986 and to
approximately $126 per treatment on average at present. The Company is not able
to predict whether future rate changes will be made. Reductions in composite
rates could have a material adverse effect on the Company's revenues and net
earnings. Furthermore, increases in operating costs that are subject to
inflation, such as labor and supply costs, without a compensating increase in
prescribed rates, may adversely affect the Company's earnings in the future. The
Company is also unable to predict whether certain services, as to which the
Company is currently separately reimbursed, may in the future be included in the
Medicare composite rate.
Since June 1, 1989, the Medicare ESRD program has provided
reimbursement for the administration to dialysis patients of EPO.erythropoietin
("EPO"). EPO is beneficial in the treatment of anemia, a medical complication
frequently experienced by dialysis patients. Many of the Company's dialysis
patients receive EPO. Revenues from EPO (the substantial majority of which are
reimbursed through Medicare and Medicaid programs) were approximately $18.2
million, or 18% of net patientoperating revenues, in its fiscal year ended May 31, 1995;1995
and were $18.0 million, or 20% of net patientoperating revenues, during the seven
months ended December 31, 1995;1995 and approximately $21.9$37.3 million, or 19%20% of net patientoperating
revenues forduring the sixnine months ended JuneSeptember 30, 1996. EPO reimbursement
significantly affects the Company's net income. Medicare reimbursement for EPO
was reduced from $11 to $10 per 1,000 units for services rendered after December
31, 1993. EPO is produced by a single manufacturer, and any interruption of
supply or product cost increases could adversely affect the Company's
operations.
The Company provides certain of its patients with intradialytic
parenteral nutrition ("IDPN"), a nutritional supplement administered during
dialysis to patients suffering from nutritional deficiencies. The Company has
historically been reimbursed by the Medicare program for the administration of
IDPN therapy. Beginning in 1993, HCFA designated four durable medical equipment
regional carriers ("DMERCs") to process reimbursement claims for IDPN therapy.
The DMERCs recently established new, more stringent medical policies for reimbursement of
IDPN therapy which were adopted by HCFA in April 1996, and many dialysis
providers' claims have
subsequently been denied or delayed. Where appropriate, the Company
has appealed and continues to appeal such denials. In addition, the DMERCs are
reportedly reviewing the existing IDPN medical policies. The final outcome of thesome
appeals and the anticipated review is uncertain and may ultimately reduce
the number of patients eligible to receive reimbursement for IDPN therapy.uncertain. The Company's allowance for
doubtful accounts reflects a reserve that the Company believes is adequate
against the possibility of an adverse outcome. The Company has continued to
provide IDPN therapy only to a select number of its patients pending clarification of
this policy. A significant reduction inwhom the number of patients eligibleCompany
believes meet the most stringent guidelines. Although the Company fully expects
to receive reimbursement for IDPN therapy or the amount of Medicare reimbursement
therefore would have an adverse effectbe paid on the Company's net operating revenues
and net income.
16outstanding claims, there can be no certainty to that effect.
9
All of the states in which the Company currently operates dialysis
facilities provide Medicaid (or comparable) benefits to qualified recipients to
supplement their Medicare entitlement. The Company estimates that approximately
8% of its net patient revenues during the fiscal year ended May 31, 1995, and 7% of
its net patientoperating revenues during the seven months ended December 31, 1995 and
6% of its net operating revenues during the nine month period ended September
30, 1996 were funded by Medicaid or comparable state programs. The Medicaid
programs are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy and governmental funding restrictions, all of
which may have the effect of decreasing program payments, increasing costs or
modifying the way the Company operates its dialysis business.
Approximately 30% of the Company's net patient revenues during the
fiscal year ended May 31, 1995, and 33% during the seven month period ended December
31, 1995 and 34% during the nine month period ended September 30, 1996 were from
sources other than Medicare and Medicaid. These sources include payments from
third-party, non-government payors, at rates that generally exceed the Medicare
and Medicaid rates, and payments from hospitals with which the Company has
contracts for the provision of acute dialysis treatments. Any restriction or
reduction of the Company's ability to charge for such services at rates in
excess of those paid by Medicare would adversely affect the Company's net
operating revenues and net income. The Company is unable to quantify or predict
the degree, if any, of the risk of reductions in payments under these various
payment plans. The Company is a party to non-
exclusivenon-exclusive agreements with certain
third-party payors and termination of such third-party agreements could have an
adverse effect on the Company.
OPERATIONS SUBJECT TO GOVERNMENT REGULATION
The Company is subject to extensive regulation by both the federal
government and the states in which the Company conducts its business. The
Company is subject to the illegal remuneration provisions of the Social
Security Act and similar state laws, which impose civil and criminal sanctions
on persons who solicit, offer, receive or pay any remuneration, directly or
indirectly, for referring a patient for treatment that is paid for in whole or
in part by Medicare, Medicaid or similar state programs. In July 1991 and
November 1992, the federal government published regulations that provide
exceptions or "safe harbors" for certain business transactions. Transactions
that are structured within the safe harbors are deemed not to violate the
illegal remuneration provisions. Transactions that do not satisfy all elements
of a relevant safe harbor do not necessarily violate the illegal remuneration
statute, but may be subject to greater scrutiny by enforcement agencies.
Neither the arrangements between the Company and the physician directors of
its facilities ("Medical Directors") nor the minority ownership interests of
referring physicians in certain of the Company's dialysis facilities fall
within the protection afforded by these safe harbors. Although the Company has
never been challenged under these statutes and believes it complies in all
material respects with these and all other applicable laws and regulations,
there can be no assurance that the Company will not be required to change its
practices or relationships with its Medical Directors or with referring
physicians holding minority ownership interests or that the Company will not
experience material adverse effects as a result of any such challenge.
The Omnibus Budget Reconciliation Act of 1989 includes certain
provisions ("Stark I") that restrict physician referrals for clinical laboratory
services to entities with which a physician or an immediate family member has a
"financial relationship." In August 1995, HCFA published regulations
interpreting Stark I. The regulations specifically provide that services
furnished in an ESRD facility that are included in the composite billing rate
are excluded formfrom the coverage of Stark I. The Company believes that the
language and legislative history of Stark I indicate that Congress did not
intend to include laboratory services provided incidental to dialysis services
within the Stark I prohibition; however, laboratory services not included in the
Medicare composite rate could be included within the coverage of Stark I.
Violations of Stark I are punishable by civil penalties which may include
exclusion or suspension of a provider from future participation in Medicare and
Medicaid programs and substantial fines. Due to the breadth of the statutory
provisions, it is possible that the Company's practices might be challenged
under this law. Any suchA broad interpretation of Stark I would apply to the Company's
competitors as well.
1710
The Omnibus Budget Reconciliation Act of 1993 includes certain
provisions ("Stark II") that restrict physician referrals for certain
"designated health services" to entities with which a physician or an immediate
family member has a "financial relationship." The Company believes that the
language and legislative history of Stark II indicate that Congress did not
intend to include dialysis services and the services and items provided incident
to dialysis services within the Stark II prohibitions; however, certain
services, including the provision of, or arrangement and assumption of financial
responsibility for, outpatient prescription drugs, including EPO, and clinical
laboratory services, could be construed as designated health services within the
meaning of Stark II. Violations of Stark II are punishable by civil penalties,
which may include exclusion or suspension of athe provider from future
participation in Medicare and Medicaid programs and substantial fines. Due to
the breadth of the statutory provisions and the absence of regulations or court
decisions addressing the specific arrangements by which the Company conducts its
business, it is possible that the Company's practices might be challenged under
these laws. A broad interpretation of Stark II to include dialysis services and
items provided incident to dialysis services would apply to the Company's
competitors as well.
A California statute that became effective January 1, 1995 makes it
unlawful for a physician who has, or a member of whose immediate family has, a
financial interest with or in an entity to refer a person to that entity for,
among other services, laboratory services. The Company currently operates
centers in California, which accounted for a significant percentage of net
operating revenues for the fiscal year ended May 31, 1995 and the seven months
ended December 31, 1995. Although the Company does not believe that the statute
is intended to apply to laboratory services that are provided incident to
dialysis services, it is possible that the statute could be interpreted to apply
to such laboratory services. If the California statute were so interpreted, the
Company would be required to restructure some or all of its relationships with
referring physicians who serve as Medical Directors of the Company's facilities
and with the physicians who hold minority interests in certain of the Company's
facilities.
At present, ESRD patients eligible for California's Medicaid program,
MediCal, are reimbursed for their transportation costs relating to ESRD
treatments. From time to time, the Company pays Medicare supplemental insurance
premiums for patients with a financial need. If this practice is deemed to
violate applicable federal or state law, the Company may be forced to halt this
practice and the Company cannot predict the effect the foregoing would have on
the desire of such patients to use the Company's services.
A number of proposals for health care reform have been made in recent
years, some of which have included radical changes in the health care system.
Health care reform could result in material changes in the financing and
regulation of the health care business, and the Company is unable to predict the
effect of such changes on its future operations. It is uncertain what
legislation on health care reform, if any, will ultimately be implemented or
whether other changes in the administration or interpretation of governmental
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
results of operations of the Company.
RISKS INHERENT IN GROWTH STRATEGY
Following the Company's reorganization in August 1994 Transaction, the Company began an aggressive
growth strategy. This growth strategy is dependent on the continued availability
of suitable acquisition candidates and subjects the Company to the risks
inherent in assessing the value, strengths and weaknesses of acquisition
candidates, integrating and managing the operations of acquired companies and identifying suitable
locations for additional facilities. The Company's growth is expected to place
significant demands on the Company's financial and management resources. In
recent years, acquisition prices and competition for facilities has increased.
To the extent the Company is unable to acquire or develop facilities in a cost-
effective manner, its ability to expand its business and enhance results of
operations would be adversely affected. In addition, although the Company
believes it has a demonstrable track record of integrating the operations of
acquired companies with its historic operations, the process for integrating
acquired
11
operations, particularly for newly acquired regional clusters, presents a
significant challenge to the Company's management and may lead to
unanticipated costs or a diversion of management's attention from day-to-day
operations. There can be no assurance that the Company will be able to
continue its growth strategy or that this strategy will ultimately prove
successful. A failure to successfully continue its growth strategy could have
an adverse effect on the Company's results of operations.
COMPETITION
The dialysis industry is fragmented and highly competitive,
particularly in terms of acquisitions of existing dialysis facilities and
developing relationships with referring physicians. Certain of the Company's
competitors have substantially greater financial resources than the Company and
may compete with the Company for acquisitions of facilities in markets targeted
by the Company. Competition for acquisitions has increased the cost of acquiring
existing dialysis facilities. The Company has from time to time experienced
competition from referring physicians who have opened their own dialysis
facilities. A portion of the Company's business consists of monitoring and
providing supplies for ESRD treatments in patients' homes. Certain physicians
also provide similar services and, if the number of such physicians were to
increase, the Company could be adversely affected.
18
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the services and management experience
of the Company's executive officers, and accordingly has entered into employment
agreements with, and provided a variety of equity incentives to, each of these
executives. The Company's continued growth depends upon its ability to attract
and retain skilled employees, in particular highly skilled nurses, for whom
competition is intense. The Company believes that its future success will also will
be significantly dependent uponon its ability to attract and retain qualified
physicians to serve as Medical Directors of its dialysis facilities. The Company
does not carry key-man life insurance on any of its officers.
DEPENDENCE ON PHYSICIAN REFERRALS
The Company's facilities are dependent upon referrals of ESRD patients
for treatment by physicians specializing in nephrology and practicing in the
communities served by the Company's dialysis facilities. As is generally true in
the dialysis industry, at each facility one or a few physicians account for all
or a significant portion of the patient referral base. The loss of one or more
key referring physicians at a particular facility could have a material adverse
effect on the operations of that facility and could adversely affect the
Company's overall operations. Referring physicians own minority interests in 1221
of the Company's dialysis facilities. If such interests are deemed to violate
applicable federal or state law, such physicians may be forced to dispose of
their ownership interests. The Company cannot predict the effect such
dispositions would have on its business. SIGNIFICANT INFLUENCE BY DLJMB
DLJ Merchant Banking Partners, L.P. and certain of its affiliates
("DLJMB") own approximately 10% of the outstanding Common Stock of the Company.
In addition, pursuantSee "Risk Factors--Operations Subject
to a Shareholders Agreement, DLJMB has the right to
nominate four of the five members of the Company's Board of Directors. As a
result of its significant stock ownership and its rights under such Shareholders
Agreement, DLJMB will be able to influence significantly the outcome of certain
corporate transactions, including any "going private" transaction, merger,
consolidation or sale of all or substantially all of the Company's assets.
19Government Regulation."
12
PART II. OTHER INFORMATION
ITEM 1,2,3ITEMS 1,2,3,4 AND 5 ARE NOT APPLICABLE.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders of the Company was held on
June 6, 1996. Proposal I submitted to a vote of security holders at the
meeting was the election of Directors. The following Directors, being
all of the Directors of the Corporation, were elected at the meeting,
with the number of votes cast for each Director or withheld from each
Director being set forth after Director's respective name:
Name Votes For Votes Withheld
Victor M.G. Chaltiel 19,006,151 75,750
Maris Andersons 19,004,751 77,150
Peter T. Grauer 18,943,851 138,050
Marsha M. Plotnitsky 18,943,851 138,050
David B. Wilson 19,004,751 77,150
Proposal II submitted to a vote of security holders at the meeting was
the ratification of the 1994 Equity Compensation Plan. Votes were cast
as follows:
For Against Abstain
13,637,608 5,440,243 4,050
Proposal III submitted to a vote of security holders at the meeting
was the ratification of the 1995 Equity Compensation Plan. The votes
were cast as follows:
For Against Abstain No Vote
13,759,477 5,306,388 6,450 9,586
Proposal IV submitted to a vote of security holders at the meeting was
the ratification of the Employee Stock Purchase Plan. The votes were
cast as follows:
For Against Abstain No Vote
19,020,001 44,564 7,750 9,586
Proposal V submitted to a vote of security holders at the meeting was
the ratification of the Appointment of Price Waterhouse LLP as
Independent Accountants. The votes were cast as follows:
For Against Abstain
19,077,751 950 3,200
2013
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. Credit Agreement by and among Total Renal Care Holdings, Inc.,
the lenders party thereto, BNY Capital Markets, Inc. and
Donaldson Lufkin & Jenrette Securities Corporation as Arrangers,
DLJ Capital Funding, Inc. as Documentation Agent and The Bank of
New York as Administrative Agent, dated as of October 11, 1996
(the "Credit Agreement"). The Credit Agreement was filed as an
Exhibit to the Company's Current Report on Form 8-K dated October
18, 1996 and is incorporated herein by reference.
11. Computation of per share earnings for the three months and sixnine
months ended JuneSeptember 30, 1996 and JuneSeptember 30, 1995.
27. Financial Data Schedule (filed via EdgarSchedule.
(b) Reports on Form 8-K
(i) August 29, 1996
Item 5. Other Events. Covers second quarter earnings press
release and announcement of tender offer for outstanding
Discount Notes.
(ii) October 18, 1996
Item 5. Other Events. Covers the Credit Agreement and the
financial statments listed in Item 7 below.
Item 7. Financial Statements and Exhibits.
BURBANK DIALYSIS GROUP, INC.
Report of Independent Accountants of Price Waterhouse LLP
Balance Sheet
Statement of Operations and Retained Earnings (Deficit)
Statement of Cash Flows
Notes to Financial Statements
PASADENA DIALYSIS CENTER, INC.
Report of Independent Accountants of Price Waterhouse LLP
Balance Sheet
Statement of Operations and Retained Earnings
Statement of Cash Flows
Notes to Financial Statements
PIEDMONT DIALYSIS, INC.; PERALTA RENAL CENTER
Report of Independent Accountants of Price Waterhouse LLP
Combined Balance Sheet
Combined Statement of Income and Retained Earnings
Combined Statement of Cash Flows
Notes to Combined Financial Statements
HOUSTON KIDNEY CENTER; NORTHWEST KIDNEY CENTER, LLP; NORTH
HOUSTON KIDNEY CENTER, LLP; HOUSTON KIDNEY CENTER--
SOUTHEAST, LLP
Report of Independent Accountants of Price Waterhouse LLP
Combined Balance Sheet
Combined Statement of Income and Partners' Equity
Combined Statement of Cash Flows
Notes to Combined Financial Statements
BERTHA SIRK DIALYSIS CENTER, INC.; GREENSPRING DIALYSIS CENTER,
INC.
Report of Independent Accountants of Price Waterhouse LLP
Combined Balance Sheet
Combined Statement of Income and Retained Earnings
Combined Statement of Cash Flows
Notes to Combined Financial Statements
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Combined Balance Sheet
Notes to Unaudited Pro Forma Combined Balance Sheet
Unaudited Pro Forma Combined Statements of Income
Notes to Unaudited Pro Forma Combined Statements of Income
(iii) October 25, 1996
Item 5. Other Events. Covers third quarter earnings press
release.
Item 7. Financial Statements and Exhibits.
(iv) October 30, 1996
Item 5. Other Events. Covers unaudited pro forma financial
statements listed in Item 7 below.
Item 7. Financial Statements and Exhibits.
Unaudited Pro Forma Combined Balance Sheet
Notes to Unaudited Pro Forma Combined Balance Sheet
Unaudited Pro Forma Combined Statements of Income
Notes to Unaudited Pro Forma Combined Statements of Income
14 1996).
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SIGNATURE
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.
(REGISTRANT)
/s/ John E. King
------------------------------
John E. King
Vice President, Finance and
Chief Financial Officer
Date: August 14,November 4, 1996
John E. King is signing in the dual capacities as i) Chief Financial Officer,
and ii) a duly authorized officer of the Company.
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