FILED PURSUANT TO
RULE 424(B)(3)
REGISTRATION NO. 333-62552
Prospectus
[LOGO OF DAVITA]
We hereby offer to exchange our 9 1/4% Series B Senior Subordinated Notes
due April 15, 2011, which have been registered under the Securities Act, for
any and all of our outstanding 9 1/4% Series A Senior Subordinated Notes due
April 15, 2011.
The exchange offer will expire at 5:00 p.m., New York City time, on July
20, 2001, unless extended.
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Terms of the exchange offer:
. We will exchange all outstanding notes that are validly tendered and
not withdrawn prior to the expiration of the exchange offer.
. You may withdraw tendered outstanding notes at any time prior to the
expiration of the exchange offer.
. The exchange of outstanding notes for new notes should not be a
taxable exchange for United States federal income tax purposes.
. The terms of the new notes to be issued are substantially identical to
the terms of the outstanding notes, except that transfer restrictions,
registration rights and liquidated damages provisions relating to the
outstanding notes do not apply.
. Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. The letter of transmittal
accompanying this prospectus states that by acknowledging this and by
delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
This prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of new
notes received in exchange for outstanding notes where the outstanding
notes were acquired by the broker-dealer as a result of market-making
activities or other trading activities. We have agreed that, for a
period of up to one year after the date of effectiveness of the
exchange offer, we will make this prospectus available to any broker-
dealer for use in connection with any resale. See the "Plan of
Distribution" section of this prospectus for more information.
. We will not receive any proceeds from the exchange offer.
. There is no existing market for the new notes to be issued, and we do
not intend to apply for their listing on any securities exchange.
See the "Description of Series B Notes" section beginning on page 32 for
more information about the new notes to be issued in this exchange offer.
See "Risk Factors" on page 9 for information that should be considered in
connection with this exchange offer.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
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The date of this prospectus is June 21, 2001.
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TABLE OF CONTENTS
Incorporation by Reference.................................................. i
Forward-Looking Statements.................................................. ii
Summary..................................................................... 1
Risk Factors................................................................ 9
Use of Proceeds............................................................. 17
Capitalization.............................................................. 17
Exchange Offer.............................................................. 18
Selected Financial Data..................................................... 26
Description of Debt......................................................... 29
Description of Series B Notes............................................... 32
Certain United States Federal Income Tax Considerations..................... 71
Plan of Distribution........................................................ 71
Legal Matters............................................................... 72
Experts..................................................................... 72
Where You Can Find More Information......................................... 72
Index to Consolidated Financial Statements.................................. F-1
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You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This prospectus may only be used where it is
legal to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus.
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INCORPORATION BY REFERENCE
The following documents have been filed with the Securities and Exchange
Commission and are incorporated by reference into this prospectus:
(1) Our Annual Report on Form 10-K for the year ended December 31, 2000,
as amended on Form 10-K/A, except Part III, Item 14 (which Item is
updated herein);
(2) Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2001 (Part I, Item 1 of which is also included herein);
(3) Our Current Report on Form 8-K dated February 5, 2001; and
(4) All documents subsequently filed by us pursuant to section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, prior to the termination of this exchange offer.
Any statements contained in this prospectus or in the documents
incorporated by reference into this prospectus shall be deemed to be modified
or superseded for purposes of this prospectus to the extent that a statement
contained in this prospectus or which is incorporated by reference in this
prospectus modifies or supersedes the statement. Any statement modified or
superseded shall not be deemed, except as modified or superseded, to constitute
part of this prospectus.
We will provide without charge to each person, including any prospective
investor to whom this prospectus has been delivered, upon written or oral
request of such person, a copy of any and all of the documents referred to
above that have been or may be incorporated by reference in this prospectus
other than exhibits to the documents, unless such exhibits are specifically
incorporated by reference. Requests for such copies should be directed to
DaVita Inc., attention Secretary, Suite 800, 21250 Hawthorne Boulevard,
Torrance, California 90503-5517, telephone number (310) 792-2600.
i
FORWARD-LOOKING STATEMENTS
This prospectus contains statements that are forward-looking statements
within the meaning of the federal securities laws, including statements about
our expectations, beliefs, intentions or strategies for the future. We have
identified some of these forward-looking statements with words such as
"anticipates," "believes," "expects," "will," "should" and "intends" and the
negative of these words or other comparable terminology. These forward-looking
statements include statements regarding our expectations for treatment growth
rates, revenue per treatment, expense growth, levels of the provision for
uncollectible accounts receivable, earnings before depreciation and
amortization, debt expense and taxes, effective income tax rates and capital
expenditures.
These statements involve known and unknown risks and uncertainties,
including risks resulting from economic and market conditions, the regulatory
environment in which we operate, competitive activities and other business
conditions. Our actual results may differ materially from results anticipated
in these forward-looking statements. Important factors that could cause actual
results to differ materially from the forward-looking statements include those
set forth below under the caption "Risk Factors." We base our forward-looking
statements on information currently available to us, and we undertake no
obligation to update these statements, whether as a result of changes in
underlying factors, new information, future events or other developments.
ii
SUMMARY
The following summary contains information about DaVita and the exchange
of the notes. It does not contain all of the information that may be important
to you in making a decision to exchange the notes. For a more complete
understanding of DaVita and the exchange of the notes, we urge you to read this
entire prospectus carefully, including the "Risk Factors" section.
The Company
DaVita Inc., headquartered in Torrance, California, is the second largest
provider of dialysis services in the United States for patients suffering from
chronic kidney failure, also known as end stage renal disease, or ESRD. ESRD is
the state of advanced kidney impairment that is irreversible and requires
routine dialysis treatments or kidney transplantation to sustain life. Dialysis
is the removal of toxins, fluids and salt from the blood of ESRD patients by
artificial means.
As of March 31, 2001, we operated 486 outpatient dialysis centers located
in 32 states and the District of Columbia, serving over 41,000 patients. Our
centers offer hemodialysis treatments and services for home dialysis patients,
including equipment and supplies, training, patient monitoring and follow-up
assistance. In addition, we provide inpatient dialysis services in more than
280 hospitals. We also provide ancillary services to ESRD patients, including
laboratory services and the administration of erythropoietin, or EPO, and other
pharmaceuticals.
In October 1999, Kent Thiry was named our chairman and chief executive
officer. Beginning in late 1999, we initiated a multiyear turnaround plan
focused on improving our financial and operational infrastructure. During 2000,
we sold our non-continental U.S. operations, restructured our credit facilities
and reduced our debt, settled a securities class action lawsuit, improved
collections and focused on our core operations.
The Dialysis Industry
Patients suffering from ESRD generally require dialysis at least three
times per week for the rest of their lives. Dialysis services are paid for
primarily by Medicare in accordance with rates established by the Health Care
Financing Administration, or HCFA, by state Medicaid programs and by other
third-party payors such as HMOs and health insurance carriers. For the year
ended December 31, 2000, we generated 53% of our continental U.S. dialysis
revenues from Medicare, 5% from Medicaid and 42% from commercial and other
nongovernment payors.
The dialysis industry is characterized by:
. Stable and predictable growth in patient base. According to the United
States Renal Data System, or USRDS, the number of ESRD patients in the
United States, including patients with functioning transplants, is
forecasted to increase from approximately 324,000 at the end of 1998 to
approximately 660,000 in 2010, a compound annual growth rate of
approximately 6%. We believe factors affecting this growth include: (1)
the continued aging of the general population, (2) better treatment and
longer survival of patients with diseases that typically lead to ESRD,
including diabetes and hypertension, (3) improved medical and dialysis
technology and (4) the growth of minority populations that have a
higher incidence rate of ESRD.
. Limited options for an irreversible life-long condition. Treatment
options for ESRD are hemodialysis, peritoneal dialysis and kidney
transplantation. According to the USRDS, of the approximately 324,000
ESRD patients in the United States at the end of 1998, approximately
1
233,000 patients were receiving dialysis and the remaining patients had
functioning transplants. The number of ESRD patients receiving dialysis
treatments is forecasted to grow to approximately 520,000 in 2010, a
compound annual growth rate of approximately 7%. In 2000, hemodialysis
treatments, excluding treatments to hospital inpatients, accounted for
approximately 87% of our total dialysis treatments, and peritoneal
dialysis accounted for approximately 9% of our total treatments.
Although transplantation, when successful, is generally the most
desirable form of therapeutic intervention, the shortage of suitable
donors, side effects of immunosuppressive drugs given to transplant
recipients and dangers associated with transplant surgery for some
patient populations limit the use of this treatment option. The USRDS
reports that, while the number of transplants performed has increased
since 1994, the rate of transplantation is not keeping pace with the
growth in the ESRD patient population.
. Universal Medicare coverage with recent rate increases. Since 1972, the
federal government has provided universal reimbursement for dialysis
under the Medicare ESRD program regardless of age or financial
circumstances. Under this system, Congress establishes Medicare
reimbursement rates for dialysis treatments and related supplies, tests
and medications. After nine years without an increase, the Medicare
treatment reimbursement rate was increased by 1.2% on each of January
1, 2000 and 2001. An additional 1.2% increase became effective April 1,
2001, plus an adjustment factor designed to provide the benefits of the
increase as if it had become effective on January 1, 2001.
2
The Exchange Offer
The exchange offer.......... We are offering to issue $1,000 principal amount
of Series B Notes in exchange for each $1,000
principal amount of Series A Notes. We are
offering to issue the Series B Notes to satisfy
our obligations contained in the registration
rights agreement entered into when the Series A
Notes were sold in transactions permitted by
Rule 144A under the Securities Act and therefore
not registered with the Commission. See the
"Exchange Offer" section of this prospectus. We
currently have $225 million in aggregate
principal amount of the Series A Notes
outstanding. We will issue the Series B Notes on
or promptly after the expiration date to holders
who tender their Series A Notes in this exchange
offer.
Expiration date; Tender;
Withdrawal rights.......... The exchange offer will expire at 5:00 p.m., New
York City time, on July 20, 2001, unless the
exchange offer is extended, in which case the
term "expiration date" means the latest date and
time to which the exchange offer is extended. We
will accept for exchange any and all Series A
Notes which are properly tendered in the
exchange offer prior to the expiration date. If
you decide to exchange your Series A Notes for
Series B Notes, you must acknowledge that you
are not engaging in, and do not intend to engage
in, a distribution of the Series B Notes. If you
decide to tender your Series A Notes in the
exchange offer, you may withdraw your tender at
any time prior to the expiration date. If we
decide for any reason not to accept any Series A
Notes for exchange, your Series A Notes will be
returned to you without expense promptly after
the exchange offer expires. For procedures for
tendering, see the "Exchange Offer" section of
this prospectus.
Certain tax considerations.. The exchange of Series A Notes for Series B
Notes in the exchange offer should not be a
taxable event for U.S. federal income tax
purposes.
Exchange agent.............. United States Trust Company of New York, is
serving as exchange agent in connection with the
exchange offer.
Failure to tender your
Series A Notes............. If you fail to tender your Series A Notes in the
exchange offer, you will not have any further
rights under the registration rights agreement,
including any right to require us to register
your Series A Notes or to pay you liquidated
damages.
You will be able to resell the securities without registering them with the
Commission if you meet the requirements described below.
Based on interpretations by the Commission's staff in no-action letters
issued to third parties, we believe that the Series B Notes issued in exchange
for the Series A Notes in the exchange offer may be offered for resale, resold
or otherwise transferred by you without registering the Series B Notes under
the Securities Act or delivering a prospectus, unless you are a broker-dealer
receiving securities for your own account, so long as:
. You are not one of our "affiliates," as defined in Rule 405 of the
Securities Act;
. You acquire the Series B Notes in the ordinary course of your business;
. You do not have any arrangement or understanding with any person to
participate in the distribution of the Series B Notes; and
. You are not engaged in, and do not intend to engage in, a distribution
of the Series B Notes.
3
If you are an affiliate of ours or you are engaged in, intend to engage in
or have any arrangement or understanding with respect to, the distribution of
new securities acquired in the exchange offer, you (1) should not rely on our
interpretations of the position of the Commission's staff and (2) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction.
If you are a broker-dealer and receive new securities for your own account
in the exchange offer:
. You must represent that you do not have any arrangement with us or any
of our affiliates to distribute the Series B Notes;
. You must acknowledge that you will deliver a prospectus in connection
with any resale of the Series B Notes you receive from us in the
exchange offer; the letter of transmittal states that by so
acknowledging and by delivering a prospectus, you will not be deemed to
admit that you are an "underwriter" within the meaning of the
Securities Act; and
. You may use this prospectus, as it may be amended or supplemented from
time to time, in connection with the resale of Series B Notes received
in exchange for Series A Notes acquired by you as a result of market-
making or other trading activities.
For a period of one year after the date of effectiveness of the exchange
offer, we will make this prospectus available to any broker-dealer for use in
connection with any resale described above.
4
Terms of Series B Notes
Issuer...................... DaVita Inc.
Notes offered............... $225 million aggregate principal amount of 9
1/4% senior subordinated notes due 2011.
Maturity date............... April 15, 2011.
Interest payments........... The Series B Notes will bear interest at the
rate of 9 1/4% per year, payable semi-annually,
in arrears, on April 15 and October 15 of each
year, commencing on October 15, 2001.
Optional redemption......... We may redeem the Series B Notes, in whole or in
part, on or after April 15, 2006 at the
redemption prices set forth in this prospectus,
plus accrued and unpaid interest and liquidated
damages, if any.
In addition, on or prior to April 15, 2004, we
may redeem up to 35% of the aggregate principal
amount of the Series B Notes with the net
proceeds of one or more public equity offerings.
See the "Description of Series B Notes--Optional
redemption" section of this prospectus for more
information.
Subsidiary guarantees....... Substantially all of our operations are
conducted through our subsidiaries. Our
obligations under the Series B Notes will be
fully and unconditionally guaranteed on a senior
subordinated basis by all of our wholly owned
domestic subsidiaries.
Change of control........... Upon a change of control, you may require us to
repurchase all or a portion of your Series B
Notes at a purchase price of 101% of their
principal amount, plus accrued and unpaid
interest and liquidated damages, if any. The
term "change of control" is defined in the
"Description of Series B Notes--Certain
covenants--Repurchase of Series B Notes at the
option of the holder upon a change of control"
section of this prospectus.
Ranking..................... The Series B Notes and the guarantees will be
our and the applicable guarantor's unsecured
general obligations and will be:
. Junior in right of payment to all of our and
such guarantor's existing and future senior
indebtedness;
. Equal in right of payment to all of our and
such guarantor's existing and future senior
subordinated indebtedness; and
. Senior in right of payment to all of our and
such guarantor's existing and future
subordinated indebtedness.
As of March 31, 2001, on a pro forma basis after
giving effect to the issuance of the Series B
Notes and the application of the proceeds
therefrom and the refinancing of our bank credit
facilities, we would have had outstanding an
aggregate of approximately $263 million of
senior debt.
The Series B Notes will rank junior to debt
outstanding under our credit facilities. The
guarantee by Renal Treatment Centers, or RTC, of
the Series B Notes is senior to RTC's
obligations under its 5 5/8% convertible
subordinated notes. We, but none of our
operating subsidiaries, have guaranteed RTC's
notes. Our guarantee of RTC's notes is equal to
our obligations under the Series B Notes.
5
See the "Description of Series B Notes--Brief
description of the Series B Notes and the
guarantees" and the "--Subordination" sections
of this prospectus for more information.
Restrictive covenants....... The indenture governing the Series B Notes
contains covenants that limit our and our
subsidiaries' ability to, among other things:
. Pay dividends, redeem capital stock and make
other restricted payments and investments;
. Incur additional debt or issue preferred
stock;
. Enter into agreements that restrict our
subsidiaries from paying dividends or other
distributions, making loans or otherwise
transferring assets to us or to any of our
other subsidiaries;
. Create liens on assets;
. Engage in transactions with affiliates;
. Sell assets, including capital stock of
subsidiaries; and
. Merge, consolidate or sell all or
substantially all of our assets and the
assets of our subsidiaries.
All of these limitations are subject to
important exceptions and qualifications
described under the "Description of Series B
Notes--Certain covenants" section of this
prospectus.
Use of proceeds............. We will not receive any proceeds from the
exchange offer.
Risk Factors
Investing in the notes involves substantial risks. You should carefully
consider the matters set forth in this prospectus under the heading "Risk
Factors" before tendering the Series A Notes in exchange for the Series B
Notes.
6
Summary Financial Data
The following tables present our summary financial data. The summary
statement of income data for each of the years ended December 31, 1998, 1999
and 2000 and the summary balance sheet data as of December 31, 2000 have been
derived from our audited consolidated financial statements for the year ended
December 31, 2000 included elsewhere in this prospectus. The summary statement
of income data and the summary balance sheet data for the quarter ended March
31, 2001 have been derived from our unaudited condensed consolidated financial
statements from our Quarterly Report on Form 10-Q for the quarter ended March
31, 2001 included elsewhere in this prospectus.
Pro forma statement of income and other operating data are calculated as
if the offering of the Series A Notes and the refinancing of our bank credit
facilities and the application of the estimated net proceeds had occurred on
January 1 of each period presented. Pro forma balance sheet data as of December
31, 2000 and as of March 31, 2001 is presented as if the offering of the Series
A Notes and the refinancing of our bank credit facilities and the application
of the estimated net proceeds had occurred on such dates.
You should read the following information together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference from our Annual Report on Form 10-K for the year
ended December 31, 2000, as amended on Form 10-K/A, our consolidated financial
statements and related notes included elsewhere in this prospectus and our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
Year ended December 31, Quarter ended March 31,
------------------------------------------------- --------------------------------
Pro forma Pro forma
1998 1999 2000(a) 2000 2000 2001 2001
---------- ---------- ---------- ---------- -------- ---------- ----------
(dollars in thousands)
Statement of income
data:
Net operating revenues.. $1,203,738 $1,445,351 $1,486,302 $1,486,302 $372,113 $ 386,217 $ 386,217
Operating expenses
before impairment
losses and merger
costs.................. 990,637 1,369,528 1,307,031 1,307,031 331,796 310,750 310,750
Operating income before
impairment losses and
merger costs........... 213,101 75,823 179,271 179,271 40,317 75,467 75,467
Impairment losses and
merger costs........... 78,188 139,805 4,556 4,556 -- -- --
Operating income
(loss)................. 134,913 (63,982) 174,715 174,715 40,317 75,467 75,467
Debt expense (b)........ 84,003 110,797 116,637 106,333 33,165 19,724 19,273
Income (loss) before
extraordinary item and
change in accounting
principle.............. 10,192 (147,256) 16,975 23,070 3,847 30,934 31,201
Ratio of earnings to
fixed charges.......... 1.50x (c) 1.34x -- -- 3.27x --
Other operating data:
Operating cash flow..... $ 11,918 $ 171,506 $ 307,648 $ -- $ 62,340 $ 57,831 $ --
EBITDA (d).............. 303,454 188,304 290,876 290,876 68,035 101,615 101,615
Margin.................. 25% 13% 20% 20% 18% 26% 26%
Pro forma cash interest expense (e)...................... $ 79,307 -- -- 18,131
Ratio of EBITDA to pro forma cash interest expense....... 3.7x -- -- 5.6x
Ratio of pro forma net debt to EBITDA.................... 3.3x -- -- 2.3x
Balance sheet data:
Working capital............................... $ 148,348 $ 148,348 $ 139,264 $ 141,995
Cash and cash equivalents..................... 31,207 31,207 17,443 20,174
Working capital excluding cash and cash
equivalents.................................. 117,141 117,141 121,821 121,821
Total assets.................................. 1,596,632 1,608,457 1,625,737 1,637,562
Total debt.................................... 975,682 987,507 939,605 958,305
Shareholders' equity.......................... 349,368 349,368 388,219 388,219
7
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(dollars in thousands)
Quarterly data for 2000:
Net operating revenues................. $372,113 $378,908 $362,535 $372,746
EBITDA (d)............................. 68,035 66,927 76,833 79,081
Margin................................. 18.3% 17.7% 21.2% 21.2%
- --------
(a) Excluding our non-continental U.S. operations, which were divested during
2000, revenues and EBITDA were $1,412 million and $281 million,
respectively.
(b) Debt expense includes a write-off of deferred financing costs of $1,601 in
1999 and $1,192 in 2000 and a loss of $9,823 on termination of interest
rate swap agreements related to refinanced debt in 1998.
(c) Due to the 1999 loss, this ratio was below 1.0x; additional earnings of
$182 million would have been required to achieve a ratio of 1.0x.
(d) EBITDA as used herein represents operating income plus depreciation,
amortization, impairment losses and merger costs. We believe that EBITDA
provides useful information regarding our ability to service our debt.
EBITDA is not a measure of operating performance computed in accordance
with GAAP and should not be considered as a substitute for operating income
(loss), net income (loss), cash flows from operating activities, or other
statement of operations or cash flow data prepared in conformity with GAAP,
or as a measure of profitability or liquidity. In addition, EBITDA may not
be comparable to similarly titled measures of other companies, and EBITDA
as presented is calculated differently than for purposes of the covenants
under the indenture governing the notes and our credit facilities.
(e) Pro forma cash interest expense reflects debt reductions in 2000 and 2001
and is calculated based on the level of our pro forma debt and interest
rates at December 31, 2000 and March 31, 2001, respectively, excluding
amortization of net deferred financing costs of approximately $3 million
and $0.5 million, respectively, and as if the offering of the Series A
Notes and the replacement of our then-existing bank credit facility and the
application of the net proceeds had occurred on January 1 of each year.
Actual cash paid for interest was $118 million in 2000, reflecting the
higher debt levels during 2000. Actual cash paid for interest was
$16 million in the first quarter of 2001.
8
RISK FACTORS
In evaluating the exchange offer, you should carefully consider the
following factors in addition to the other information contained in this
prospectus. The terms "note" or "notes" refer to both the Series A Notes and
the Series B Notes.
Risks Relating to our Debt, including the Series B Notes
We may not have sufficient cash flow from our business to pay our substantial
debt.
As of May 4, 2001 we had total consolidated debt of approximately $957
million, including $250 million outstanding under our refinanced credit
facilities and $225 million new senior subordinated debt, and, for the quarter
ended March 31, 2001, we had a ratio of earnings to fixed charges of 3.27:1.
The following table shows the aggregate interest and principal payments
due on all of our currently outstanding debt for each of the next five fiscal
years. Also, because the interest rate under our credit facilities is based
upon a variable market rate plus a margin determined by the amount of debt we
incur relative to our earnings before income taxes, depreciation and
amortization, the amount of these interest payments could fluctuate
substantially in the future. Also, we are not prohibited from incurring
additional debt.
Scheduled payments Interest Principal
------------------ -------- ---------
(dollars in
thousands)
For the year ending December 31:
2002.................................................... $75,125 $ 17,815
2003.................................................... 73,950 12,700
2004.................................................... 72,745 12,250
2005.................................................... 71,545 12,250
2006.................................................... 57,970 318,250
Due to the large amount of these principal and interest payments, we may
not generate enough cash from our operations to meet these obligations or to
fund other liquidity needs. Our ability to generate cash in the future is, to
some extent, subject to risks and uncertainties that are beyond our control. If
we are unable to meet our debt obligations, we may need to refinance all or a
portion of our indebtedness, sell assets or raise funds in the capital markets.
We may not be able to engage in any of these activities on desirable terms or
at all, which could result in a default on our debt obligations.
The large amount and terms of our outstanding debt may prevent us from taking
actions we would otherwise consider in our best interest.
Our credit facilities contain numerous financial and operating covenants
that limit our ability to engage in activities such as incurring additional
debt, acquiring and developing new dialysis centers, disposing of assets, or
repurchasing our common stock. These covenants require that we meet financial
ratios including interest coverage, net worth and leverage tests.
The large amount of our outstanding debt and the limitations our credit
facilities impose on us could have other important consequences, including:
. It may be difficult for us to satisfy our obligations under the notes;
. We will have to use much of our cash flow for scheduled debt service
rather than for operations;
. We may not be able to increase our borrowings under the credit
facilities or obtain other debt financing for future working capital,
capital expenditures, acquisitions or other corporate purposes;
9
. We could be less able to take advantage of significant business
opportunities, including acquisitions or divestitures;
. Our vulnerability to general adverse economic and industry conditions
could be increased; and
. We could be at a competitive disadvantage to competitors with less
debt.
Despite our substantial debt, we and our subsidiaries may incur additional
indebtedness, including senior debt, which would intensify the risks described
above.
We and our subsidiaries may be able to incur substantial additional debt,
including senior debt, in the future. The terms of our debt will not fully
prohibit us or our subsidiaries from doing so. Our credit facilities permit
additional borrowings of up to $150 million, and all of those borrowings would
be senior to the notes and the subsidiary guarantees. If new debt is added to
our and our subsidiaries' current debt levels, the related risks that we and
they now face could intensify.
Your right to receive payment on the notes from us or our subsidiary guarantors
will be junior to our and their existing and future senior debt.
The Series A Notes and the guarantees rank, and the Series B Notes will
rank, junior to all of our and the subsidiary guarantors' existing and future
senior indebtedness, including all indebtedness under our credit facilities. As
a result of the subordination of the notes, if we or our subsidiary guarantors
become insolvent or enter into a bankruptcy or similar proceeding, then the
holders of our senior indebtedness must be paid in full before you are paid. In
addition, we cannot make any cash payments to you if we have failed to make
payments to holders of designated senior indebtedness. In addition, the notes
will rank equal to our guarantee of RTC's 5 5/8% convertible subordinated
notes.
At March 31, 2001, assuming we had completed the offering of the Series A
Notes and the refinancing of our credit facilities on that day, the notes and
the subsidiary guarantees ranked junior in right of payment to $263 million of
senior indebtedness, and $150 million was available for borrowing as additional
senior debt under our credit facilities.
Our ability to repay the notes and our other debt depends on cash flow from our
subsidiaries.
We are a holding company. Our only material non-cash assets are our
ownership interests in our subsidiaries and our investments in third-party
dialysis businesses. Consequently, we depend on distributions or other
intercompany transfers of funds from our subsidiaries to meet our debt service
and other obligations, including with respect to the notes. Our non-guarantor
subsidiaries are not obligated to make funds available to us for payment on the
notes. Generally, only our wholly owned domestic subsidiaries will guarantee
the notes. We cannot assure you that the operating results of our subsidiaries
will be sufficient to enable us to make payments on the notes. In addition, our
rights and the rights of our creditors, including holders of the notes, to
participate in the assets of any of our non-guarantor subsidiaries upon their
liquidation or recapitalization will generally be subject to the prior claims
of those subsidiaries' creditors.
If a change of control occurs, we may not have sufficient funds to repurchase
your notes.
Upon specified change of control events, you may require us to repurchase
all or a portion of your notes. If a change of control occurs, we may not be
able to pay the repurchase price for all of the notes submitted for repurchase.
In addition, the terms of our credit facilities generally prohibit us from
purchasing any notes until we have repaid all debt outstanding under these
credit facilities. Future credit agreements or other agreements relating to
debt may contain similar provisions. We may not be able to secure the consent
of our lenders to repurchase the notes or refinance the borrowings that
prohibit us from repurchasing the notes. If we do not obtain a consent or repay
the borrowings, we could not repurchase the notes. In addition, some
10
important corporate events, such as leveraged recapitalizations that would
increase the level of our debt, would not constitute a change of control under
the indenture for the notes.
For more details, see the heading "Certain covenants--Repurchase of Series
B Notes at the option of the holder upon a change of control" in the
"Description of Series B Notes" section.
Fraudulent transfer statutes may limit your rights as a noteholder.
Federal and state fraudulent transfer laws permit a court, in some
instances, to
. Avoid all or a portion of our obligations to you;
. Subordinate our obligations to you to our other existing and future
indebtedness, entitling other creditors to be paid in full before any
payment is made on the notes; and
. Take other action detrimental to you, including invalidating the notes
and directing the return of any amounts paid thereunder to us or to a
fund for the benefit of our creditors. In that event, we cannot assure
you that you would ever be repaid.
Under federal and state fraudulent transfer laws, in order to take any of
those actions, courts will typically need to find that, at the time the notes
were issued, or, in some states, when payments became due thereunder, we:
(1) Issued the notes with the intent of hindering, delaying or
defrauding current or future creditors; or
(2) Received less than fair consideration or reasonably equivalent
value for incurring the indebtedness represented by the notes; and
either
(a) Were insolvent or were rendered insolvent by reason of the
issuance of the notes;
(b) Were engaged, or about to engage, in a business or transaction
for which our assets were unreasonably small; or
(c) Intended to incur, or believed or should have believed we
would incur, debts beyond our ability to pay as such debts
mature.
Many of the foregoing terms are defined in or interpreted under those
fraudulent transfer statutes. To the extent that proceeds from the sale of the
notes were used to make payments to our former stockholders or to refinance
debt incurred to make such payments, a court could find that we did not receive
fair consideration or reasonably equivalent value for the incurrence of the
debt represented by the notes.
Various jurisdictions define "insolvency" differently. However, we
generally would be considered insolvent at the time we issued the notes if (1)
our liabilities exceeded our assets, at a fair valuation, or (2) the present
saleable value of our assets is less than the amount required to pay our total
existing debts and liabilities, including the probable liability related to
contingent liabilities, as they become absolute or matured. We cannot assure
you as to what standard a court would apply to determine whether we were
"insolvent" as of the date the notes were issued. Regardless of the method of
valuation, a court may determine that we were insolvent on that date or,
regardless of whether we were insolvent on the date the notes were issued, that
the payments constituted fraudulent transfers on another ground.
In addition, the subsidiary guarantees may also be subject to review under
various laws for the protection of creditors. It is possible that creditors of
the subsidiary guarantors may challenge the guarantees as a fraudulent transfer
or conveyance, applying the analysis set forth above. In addition, the
guarantees could also be subject to the claim that, because the guarantees were
incurred for our benefit, and only indirectly for the benefit of the
guarantors, the obligations of the guarantors were incurred for less than
reasonably equivalent
11
value or fair consideration. A court could void a guarantor's obligation under
its guarantee, subordinate the guarantee to the other indebtedness of a
guarantor, direct that holders of the notes return any amounts paid under a
guarantee to the relevant guarantor or to a fund for the benefit of its
creditors, or take other action detrimental to the holders of the notes. In
addition, the liability of each guarantor under the indenture will be limited
to the amount that will result in its guarantee not constituting a fraudulent
conveyance or improper corporate distribution, and there can be no assurance as
to what standard a court would apply in determining the maximum liability of
each guarantor.
No public trading market for the Series B Notes exists which could result in an
illiquid trading market and/or lower sales prices for your notes.
The Series B Notes are being offered to the holders of Series A Notes.
Prior to this exchange offer, there has been no public market for the Series A
Notes. There is currently no public market for the Series B Notes. An active
public market will likely never develop for the Series B Notes because the
Series B Notes are not investment grade and we will not apply to list the
Series B Notes on any exchange or Nasdaq. As a result, you may be required to
bear the financial risk of your investment in the Series B Notes indefinitely.
Any Series B Notes traded after they are initially issued may trade at a
discount from their initial offering price. The trading price of the Series B
Notes depends on prevailing interest rates, the market for similar securities
and other factors, including economic conditions and our financial condition,
performance and prospects. Historically, the market for noninvestment grade
debt has been subject to disruptions that have caused substantial fluctuations
in the prices of the securities.
Our obligation to register the Series A Notes will expire upon consummation of
the exchange offer.
Upon consummation of the exchange offer, we will have no further
obligation to register the Series A Notes. Thereafter, any holder of Series A
Notes who does not tender its Series A Notes in the exchange offer, including
any holder which is an affiliate, as that term is defined in Rule 405 of the
Securities Act, of us which cannot tender its Series A Notes in the exchange
offer, will continue to hold restricted securities which may not be offered,
sold or otherwise transferred, pledged or hypothecated except pursuant to Rule
144 and Rule 144A under the Securities Act or pursuant to any other exemption
from registration under the Securities Act relating to the disposition of
securities, provided that an opinion of counsel is furnished to us that such an
exemption is available.
Risks Relating to our Business
If the percentage of our patients paying at or near our list prices declines,
then our revenues, cash flows and net income would be substantially reduced.
Approximately 41% of our continental U.S. dialysis revenues in 1999 and
42% in 2000 were generated from patients who had private payors as the primary
payor. A minority of these patients have insurance policies that reimburse us
at or near our list prices, which are significantly higher than Medicare rates.
The remainder of these patients have insurance policies that reimburse us at
rates that are below our list prices but, in most cases, higher than Medicare
rates. We believe that pressure from private payors to decrease the rates at
which they pay us will increase. If the percentage of patients who have
insurance that pays us at or near our list prices decreases significantly, it
would have an adverse effect on our revenues, cash flows and net income.
If we are unable to renegotiate material contracts with managed care plans on
acceptable terms, we may experience a decline in same center growth.
We have contracts with some large managed care plans that include
unfavorable terms. Although we are attempting to renegotiate the terms of these
contracts, we cannot predict whether we will reach agreement on new terms or
whether we will renew these contracts. As a result, we may lose numerous
patients of these managed care plans and experience a decline in our same
center growth, which will negatively impact our revenues.
12
Over the long term, we expect the profit margins in the dialysis industry to
decline, which will have a negative impact on our net income and cash flows.
During the past few years, industry operating margins have increased due
to:
. Increased provision of ancillary services that have higher profit
margins;
. The extension of the period for which private payors remain the
primary insurer, until Medicare becomes the primary insurer; and
. Pricing increases for private pay patients.
We believe that the profit margins in ancillary services will not continue
to grow and that the additional profit from the extension of the private
insurance coverage period was a one-time event. Accordingly, we expect to see
declining profit margins in the dialysis industry.
Other forces that also may result in long-term industry margin compression
include increases in labor and supply costs at a faster rate than reimbursement
rate increases, reimbursement cuts for ancillary services and an inability to
achieve future pricing increases, or maintain current pricing, for both private
pay and managed care patients. We expect that our margins will decrease as a
result of these industry trends. Any significant decrease in our margins would
have a negative impact on our net income and cash flows.
Future declines, or the lack of further increases, in Medicare reimbursement
rates would reduce our net income and cash flows.
Approximately 54% of our continental U.S. dialysis revenues in 1999 and
53% in 2000 were generated from patients who had Medicare as their primary
payor. The Medicare ESRD program reimburses us for dialysis and ancillary
services at fixed rates. Unlike many other Medicare programs, the Medicare ESRD
program does not provide for periodic inflation increases in reimbursement
rates. These rates have declined over 70% in real dollars since 1972. Congress
recently enacted two separate increases of 1.2% to the Medicare composite
reimbursement rate for dialysis effective January 1, 2000 and January 1, 2001.
An additional 1.2% increase became effective April 1, 2001, plus an adjustment
factor designed to provide the benefits of the increase as if it had become
effective on January 1, 2001. These were the first increases in the composite
rate since 1991 and are significantly less than the cumulative rate of
inflation since 1991. The Medicare Payment Advisory Commission has also
recommended to Congress that there be no increase in the composite rate for
2002. Increases in operating costs that are subject to inflation, such as labor
and supply costs, have occurred and are expected to continue to occur without a
compensating increase in reimbursement rates. We cannot predict the nature or
extent of future rate changes, if any. To the extent these rates are not
adjusted for inflation, our net income and cash flows would be adversely
affected.
Future changes in the structure of, and reimbursement rates under, the Medicare
ESRD program could substantially reduce our net income and cash flows.
In legislation enacted in December 2000, Congress mandated government
studies on whether:
. The Medicare composite rate for dialysis should be modified to include
an annual inflation increase--study due July 2002;
. The Medicare composite rate for dialysis should be modified to include
additional services, such as laboratory and other diagnostic tests,
and the administration of EPO and other pharmaceuticals, in the
composite rate--study due July 2002; and
. Reimbursement for many outpatient prescription drugs that we
administer to dialysis patients should be reduced from the current
rate of 95% of the average wholesale price of each drug--study due
September 2001.
13
If Medicare began to include in its composite reimbursement rate any
ancillary services that it currently reimburses separately, our revenue would
decrease to the extent there was not a corresponding increase in that composite
rate. In particular, Medicare revenue from EPO was approximately 13% of our net
revenue in 1999 and 2000. If EPO were included in the composite rate, and if
the composite rate were not increased sufficiently, our revenue would decrease
substantially. Reductions in current reimbursement rates for EPO or other
outpatient prescription drugs would also reduce our revenue.
If a significant number of physicians were to cease referring patients to our
dialysis centers, whether due to regulatory or other reasons, our revenue and
earnings would decline.
If a significant number of physicians stop referring patients to our
centers, it could have a material adverse effect on our revenue and earnings.
Most physicians prefer to have their patients treated at centers where they or
other members of their practice supervise the overall care provided as medical
directors of the centers. As a result, the primary referral source for our
centers is typically the physician or physician group providing medical
director services to the center. If a medical director agreement terminates,
whether before or at the end of its term, it may negatively impact the former
medical director's decision to treat his or her patients at our centers.
Medical directors contract with us for fixed periods, generally five to
ten years. Unless extended, the agreements with medical directors at centers
serving approximately 3,600 patients will expire on or before December 31,
2002. Medical directors have no obligation to extend their agreements with us.
We also may take actions to restructure existing relationships or take
positions in negotiating extensions of relationships in order to assure
compliance with anti-kickback and similar laws. These actions could negatively
impact physicians' decisions to extend their medical director agreements with
us. For example, we have recalled stock options and we require monthly
statements from our medical directors certifying that they have performed their
contractual obligations. To our knowledge, we are the only major dialysis
provider to have done this. In addition, if the terms of an existing agreement
were found to violate applicable laws, we may not be successful in
restructuring the relationship, which could lead to the early termination of
the agreement.
Our rollout of new information technology systems will disrupt our billing and
collection activity, may not work as planned and could have a negative impact
on our results of operations and financial condition.
We intend to roll out new information technology systems in each of our
dialysis centers over the next few years. It is likely that this rollout will
disrupt our billing and collection activity and may cause other disruptions to
our business operations, which may negatively impact our cash flows.
We have experienced disruption of our billing and collection activity in
the past. From the time of our formation in 1994 through 1998, we expanded
aggressively through acquisitions. We experienced difficulty integrating our
operations with the newly acquired businesses, which negatively impacted
administrative functions, including billing and collection activity.
Also, the new systems may not work as planned or improve our billing and
collection processes. If they do not, we may have to spend substantial amounts
to enhance or replace these systems.
If the current shortage of skilled clinical personnel or our high level of
personnel turnover continues, we may experience disruptions in our business
operations.
We are experiencing difficulties in hiring nurses due to a nationwide
shortage of skilled clinical personnel. This shortage limits our ability to
expand our operations. We also have a high personnel turnover rate in our
dialysis centers and central billing and accounting offices. Turnover has been
the highest among our
14
reuse technicians, patient care technicians and unit secretaries. Recent
efforts to reduce this turnover may not succeed. If we are not successful, or
if we are unable to hire skilled clinical personnel when needed, our operations
and our same center growth will be negatively impacted.
Adverse developments with respect to EPO could materially reduce our net income
and cash flows and affect our ability to care for our patients.
Amgen is the sole supplier of EPO and may unilaterally decide to increase
its price for EPO. For example, Amgen increased its base price for EPO by 3.9%
effective March 1, 2000 and by an additional 3.9% effective May 9, 2001. Also,
we cannot predict whether we will continue to receive the same discount
structure for EPO that we currently receive, or whether we will continue to
achieve the same levels of discounts within that structure as we have
historically achieved. Recent developments in accepted clinical procedures with
respect to the administration of EPO may also decrease the frequency of EPO
administration, increase our administration costs or require us to purchase EPO
with preservative at a higher price. In addition, Amgen is developing a new
product that may replace EPO or reduce its use. We cannot predict when this
product may be introduced to the dialysis market, nor what its cost and
reimbursement structure will be. Increases in the cost of EPO, whether through
net price increases or higher administration costs, or the introduction of
Amgen's new product, could have a material adverse effect on our net income and
cash flows.
The cost of our medical supplies on a per-treatment basis has been increasing.
If this trend continues it could negatively impact our net income and cash
flows.
During the past two years, we have experienced an increase in the cost per
treatment of our medical supplies due to an increase in our utilization of
supplies and increases in pricing from suppliers. Two of our major competitors
are also major providers of medical supplies and equipment, and our largest
supplier, Fresenius Medical Care, is also the largest provider of dialysis
services in the world. In the past few years, the number of suppliers of
dialysis-specific medical supplies has declined due to consolidation among
these suppliers. If we are not able to manage our medical supply utilization
better or achieve cost savings from our suppliers, we may experience a
reduction in our net income and cash flows.
If we fail to adhere to all of the complex government regulations that apply to
our business, we could incur substantial fines or be excluded from
participating in government reimbursement programs.
Our dialysis operations are subject to extensive federal, state and local
government regulations, including federal and state anti-kickback laws. We
endeavor to structure all of our relationships with referring physicians to
comply with these laws. In many cases, our physician arrangements do not
satisfy all of the elements of the safe harbor protections from the anti-
kickback laws and could be found to violate these laws. If any of our
operations are found to violate these or other government regulations, we could
suffer severe penalties, including:
. Suspension of payments from government programs;
. Loss of required government certifications;
. Loss of authorizations to participate in or exclusion from government
reimbursement programs, such as the Medicare ESRD program and Medicaid
programs;
. Loss of licenses required to operate health care facilities in some of
the states in which we operate; and
. Fines or monetary penalties for anti-kickback law violations, submission
of false claims or other failures to meet reimbursement program
requirements.
15
The regulatory scrutiny of healthcare providers, including dialysis
providers, has increased significantly in recent years. For the fiscal year
ended September 30, 2000, the Department of Justice, or DOJ, announced total
recoveries of $840 million from healthcare civil fraud cases, including a $486
million settlement with one of our competitors as a result of an investigation
by the Office of the Inspector General of the Department of Health and Human
Services, or OIG, and DOJ into some of its business practices.
In addition, the frequency and intensity of Medicare certification surveys
and inspections of dialysis centers has markedly increased, consistent with
recommendations of the OIG included in its June 2000 testimony before the
Senate Special Committee on Aging regarding Medicare's system for the external
quality review of kidney dialysis centers. We have incurred increases in
administrative costs as a result of this regulatory activity. We expect this
regulatory scrutiny to continue, if not increase, which will result in
additional administrative expenses and could lead to penalties being assessed
against us or the loss of Medicare certification at affected centers.
The pending federal review of some of our historical practices could result in
substantial penalties against us.
We are voluntarily cooperating with the Civil Division of the United
States Attorney's Office for the Eastern District of Pennsylvania in a review
of some of our historical practices, including billing and other operating
procedures and our financial relationships with physicians. We are unable to
determine when this matter will be resolved, whether any additional areas of
inquiry will be opened or any outcome of this inquiry, financial or otherwise.
Any negative findings from this review could result in substantial financial
penalties against us and exclusion from future participation in the Medicare
and Medicaid programs.
We may never collect the payments suspended as a result of a third-party
carrier review of our laboratory subsidiary.
Our Florida-based laboratory subsidiary is the subject of a third-party
carrier review relating to claims the laboratory submitted for Medicare
reimbursement. In May 1998, the carrier suspended all further Medicare payments
to this laboratory. For the first six months of 2000, Medicare revenue from
this laboratory represented approximately 1% of our net revenues. Beginning in
the third quarter of 2000, we ceased recognizing current Medicare revenue from
this laboratory. Based on the carrier's overpayment determinations to date, we
estimate that our maximum potential cash exposure at March 31, 2001 was
$15 million. We may never recover the amounts withheld and we cannot predict
what action DOJ or the OIG may take in this matter. The government could impose
additional penalties or fines against us, which could be substantial.
Total assets, shareholders' equity and earnings could be materially reduced if
goodwill balances become impaired.
Our balance sheet includes an amount designated as "goodwill" that
represents 51% of our total assets and 213% of our shareholders' equity at
March 31, 2001. Goodwill arises when an acquiror pays more for a business than
the fair value of the tangible and separately measurable intangible net assets.
Generally accepted accounting principles require the amortization of goodwill
and all other intangible assets over the period benefitted. The current average
amortization period is 35 years for our goodwill. We routinely review cash
flows for the specific operations associated with the respective goodwill
balances to determine whether there are potential impairments of the
unamortized goodwill balances. If goodwill balances are determined to be
impaired and impairment losses are recorded, total assets, shareholders' equity
and earnings could be materially reduced.
16
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the Series B
Notes offered in the exchange offer. The Series B Notes will be exchanged for
Series A Notes as described in this prospectus upon our receipt of the Series A
Notes. The Series A Notes surrendered in exchange for Series B Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the
Series B Notes will not result in any increase in our indebtedness.
Net proceeds from the offering of the Series A Notes were approximately
$218.4 million, after deducting discounts, commissions and estimated expenses
related to the offering. We used the net proceeds of the offering to pay down
approximately $107.6 million outstanding under our revolving credit facility,
of which $156 million was outstanding as of March 31, 2001 and approximately
$110.8 million outstanding under our term loan facility, of which $300 million
was outstanding as of March 31, 2001. The outstanding borrowings under our
revolving credit facility accrued interest at an average rate of 9.8% and 8.2%
as of December 31, 2000 and March 31, 2001, respectively. The outstanding
borrowings under our term loan facility accrued interest at an average rate of
10.5% and 9.1% as of December 31, 2000 and March 31, 2001, respectively. These
outstanding borrowings were refinanced on May 4, 2001. See "Description of
Debt" for additional information about our credit facilities.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2000
and March 31, 2001 (1) on an actual basis and (2) pro forma to reflect the sale
of the Series A Notes and the application of the estimated net proceeds as
described under "Use of Proceeds" as well as the refinancing of our bank credit
facilities. The following should be read together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" incorporated by
reference from our Annual Report on Form 10-K for the year ended December 31,
2000, as amended on Form 10-K/A and our consolidated financial statements and
related notes included elsewhere in this prospectus.
December 31, 2000 March 31, 2001
---------------------- ----------------------
Actual Pro forma Actual Pro forma
---------- ---------- ---------- ----------
(dollars in thousands)
Cash and cash equivalents...... $ 31,207 $ 31,207 $ 17,443 $ 20,174
========== ========== ========== ==========
Long-term debt (including
current maturities):
Credit facilities (1)........ 498,800 35,625 456,300 --
Other debt................... 6,882 6,882 13,305 13,305
Notes offered hereby......... -- 225,000 -- 225,000
New credit facilities........ 250,000 -- 250,000
Convertible notes............ 470,000 470,000 470,000 470,000
---------- ---------- ---------- ----------
Total long-term debt....... 975,682 987,507 939,605 958,305
---------- ---------- ---------- ----------
Minority interests............. 18,876 18,876 21,045 21,045
Shareholders' equity:
Common stock, $0.001 par
value, 195,000,000 shares
authorized; 82,135,634 and
82,943,817 shares issued and
outstanding................. 82 82 83 83
Additional paid-in capital... 430,676 430,676 438,509 438,509
Notes receivable from
shareholders................ (83) (83) -- --
Accumulated deficit.......... (81,307) (81,307) (50,373) (50,373)
---------- ---------- ---------- ----------
Total shareholders'
equity.................... 349,368 349,368 388,219 388,219
---------- ---------- ---------- ----------
Total capitalization....... $1,343,926 $1,355,751 $1,348,869 $1,367,569
========== ========== ========== ==========
- --------
(1) As of December 31, 2000 and March 31, 2001, the available balance of $150
million under our then-existing revolving credit facility was unused.
On May 4, 2001, we completed a refinancing of our existing senior credit
facilities. The new credit facilities include $250 million of term loan
borrowings and a $150 million revolving credit facility, none of which was
initially drawn. With the refinancing, we paid off $223 million,
representing all of the remaining outstanding balances, on the then-
existing credit facilities.
17
EXCHANGE OFFER
In a registration rights agreement between us and the initial purchasers of
the Series A Notes, we agreed to:
. File a registration statement on or prior to 90 days after the closing
of the offering of the Series A Notes with respect to an offer to
exchange the Series A Notes for a new issue of securities, with terms
substantially the same as the Series A Notes but registered under the
Securities Act;
. Use our reasonable best efforts to cause the registration statement to
be declared effective by the Commission on or prior to 180 days after
the closing of the Series A Notes offering; and
. Use our reasonable best efforts to consummate the exchange offer and
issue the Series B Notes within 30 business days after the registration
statement is declared effective.
The registration rights agreement provides that, in the event we fail to
file the registration statement within 90 days after the closing date, have it
declared effective within 180 days after the closing date or consummate the
exchange offer within 30 business days thereafter, we will be required to pay
liquidated damages on the Series A Notes over and above the regular interest on
the Series A Notes. Once we complete this exchange offer, we will no longer be
required to pay liquidated damages on the Series A Notes.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of Series A Notes in any jurisdiction in which the
exchange offer or acceptance of the exchange offer would violate the securities
or blue sky laws of that jurisdiction.
Terms of the exchange offer; Period for tendering Series A Notes
This prospectus and the accompanying letter of transmittal contain the
terms and conditions of the exchange offer. Upon the terms and subject to the
conditions included in this prospectus and in the accompanying letter of
transmittal, which together are the exchange offer, we will accept for exchange
Series A Notes which are properly tendered on or prior to the expiration date,
unless you have previously withdrawn them.
. When you tender Series A Notes as provided below, our acceptance of the
Series A Notes will constitute a binding agreement between you and us
upon the terms and subject to the conditions in this prospectus and in
the accompanying letter of transmittal.
. For each $1,000 principal amount of Series A Notes surrendered to us in
the exchange offer, we will give you $1,000 principal amount of Series
B Notes.
. We will keep the exchange offer open for not less than 20 business
days, or longer if required by applicable law, after the date that we
first mail notice of the exchange offer to the holders of the Series A
Notes. We are sending this prospectus, together with the letter of
transmittal, on or about the date of this prospectus to all of the
registered holders of Series A Notes at their addresses listed in the
trustee's security register with respect to the Series A Notes.
. The exchange offer expires at 5:00 p.m., New York City time, on July
20, 2001; provided, however, that we, in our sole discretion, may
extend the period of time for which the exchange offer is open. The
term "expiration date" means July 20, 2001 or, if extended by us, the
latest time and date to which the exchange offer is extended.
. As of the date of this prospectus, $225 million in aggregate principal
amount of the Series A Notes were outstanding. The exchange offer is
not conditioned upon any minimum principal amount of Series A Notes
being tendered.
. Our obligation to accept Series A Notes for exchange in the exchange
offer is subject to the conditions that we describe in the section
called "Conditions to the exchange offer" below.
18
. We expressly reserve the right, at any time, to extend the period of
time during which the exchange offer is open, and thereby delay
acceptance of any Series A Notes, by giving oral or written notice of
an extension to the exchange agent and notice of that extension to the
holders as described below. During any extension, all Series A Notes
previously tendered will remain subject to the exchange offer unless
withdrawal rights are exercised. Any Series A Notes not accepted for
exchange for any reason will be returned without expense to the
tendering holder as promptly as practicable after the expiration or
termination of the exchange offer.
. We expressly reserve the right to amend or terminate the exchange
offer, and not to accept for exchange any Series A Notes that we have
not yet accepted for exchange, if any of the conditions of the
exchange offer specified below under "Conditions to the exchange
offer" are not satisfied.
. We will give oral or written notice of any extension, amendment,
termination or non-acceptance described above to holders of the Series
A Notes as promptly as practicable. If we extend the expiration date,
we will give notice by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the
business day after the previously scheduled expiration date. Without
limiting the manner in which we may choose to make any public
announcement and subject to applicable law, we will have no obligation
to publish, advertise or otherwise communicate any public announcement
other than by issuing a release to the New York Stock Exchange.
. Holders of Series A Notes do not have any appraisal or dissenters'
rights in connection with the exchange offer.
. Series A Notes which are not tendered for exchange or are tendered but
not accepted in connection with the exchange offer will remain
outstanding and be entitled to the benefits of the indenture, but will
not be entitled to any further registration rights under the
registration rights agreement.
. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
. By executing, or otherwise becoming bound by, the letter of
transmittal, you will be making the representations described below to
us. See "--Resales of the Series B Notes."
Important rules concerning the exchange offer
You should note that:
. All questions as to the validity, form, eligibility, time of receipt
and acceptance of Series A Notes tendered for exchange will be
determined by us in our sole discretion.
. We reserve the absolute right to reject any and all tenders of any
particular Series A Notes not properly tendered or to not accept any
particular Series A Notes for which acceptance might, in our judgment
or the judgment of our counsel, be unlawful.
. We also reserve the absolute right to waive any defects or
irregularities or conditions of the exchange offer as to any
particular Series A Notes either before or after the expiration date,
including the right to waive the ineligibility of any holder who seeks
to tender Series A Notes in the exchange offer. Unless we agree to
waive any defect or irregularity in connection with the tender of
Series A Notes for exchange, you must cure any defect or irregularity
within any reasonable period of time that we determine.
. Our interpretation of the terms and conditions of the exchange offer
as to any particular Series A Notes either before or after the
expiration date shall be final and binding on all parties.
. Neither we, the exchange agent nor any other person shall be under any
duty to give notification of any defect or irregularity with respect
to any tender of Series A Notes for exchange, nor shall we or they
incur any liability for failure to give any notification.
19
Procedures for tendering Series A Notes
What to submit and how
If you, as the registered holder of a Series A Note, wish to tender your
Series A Note for exchange in the exchange offer, you must transmit a properly
completed and duly executed letter of transmittal to United States Trust
Company of New York at the address set forth below under "Exchange agent" on or
prior to the expiration date of the exchange offer.
In addition,
. Certificates for Series A Notes must be received by the exchange agent
along with the letter of transmittal; or
. A timely confirmation of a book-entry transfer of Series A Notes, if
such procedure is available, into the exchange agent's account at the
Depository Trust Corporation, or DTC, using the procedure for book-
entry transfer described below, must be received by the exchange agent
prior to the expiration date; or
. You must comply with the guaranteed delivery procedures described
below.
The method of delivery of Series A Notes, letters of transmittal and
notices of guaranteed delivery is at your election and risk. If delivery is by
mail, we recommend that registered mail, properly insured, with return receipt
requested, be used. In all cases, sufficient time should be allowed to assure
timely delivery. No letters of transmittal or Series A Notes should be sent to
us.
Beneficial owners
If you hold Series A Notes and your Series A Notes are registered in the
name of a broker-dealer, commercial bank, trust company or other nominee and
you wish to tender your Series A Notes, you should contact the registered
holder promptly and instruct it to tender on your behalf.
If you hold Series A Notes that are registered as described above and you
want to tender on your own behalf, you must, before completing and executing
the letter of transmittal and delivering your Series A Notes, either make
appropriate arrangements to register ownership of the Series A Notes in your
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take a long time.
How to sign your letter of transmittal and other documents
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed unless the Series A Notes being surrendered for exchange are
tendered:
. By a registered holder of the Series A Notes who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal; or
. For the account of an eligible institution.
If signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, the guarantees must be by any of
the following eligible institutions:
. A firm which is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc.;
or
. A commercial bank or trust company having an office or correspondent
in the United States.
If the letter of transmittal is signed by a person or persons other than
the registered holder or holders of Series A Notes, the Series A Notes must be
endorsed or accompanied by appropriate powers of attorney, in
20
either case signed exactly as the name or names of the registered holder or
holders that appear on the Series A Notes and with the signature guaranteed.
If the letter of transmittal or any Series A Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-
fact, officers or corporations or others acting in a fiduciary or
representative capacity, the person should so indicate when signing and, unless
waived by us, proper evidence satisfactory to us of our authority to so act
must be submitted.
Acceptance of Series A Notes for exchange; Delivery of Series B Notes
Once all of the conditions to the exchange offer are satisfied or waived,
we will accept, promptly after the expiration date, all Series A Notes properly
tendered and will issue the Series B Notes promptly after acceptance of the
Series A Notes. See "Conditions to the exchange offer" below. For purposes of
the exchange offer, our giving of oral or written notice of our acceptance to
the exchange agent will be considered our acceptance of the Series A Notes.
In all cases, we will issue Series B Notes in exchange for Series A Notes
that are accepted for exchange only after timely receipt by the exchange agent
of:
. Certificates for Series A Notes; or
. A timely book-entry confirmation of transfer of Series A Notes into
the exchange agent's account at DTC using the book-entry transfer
procedures described below; and
. A properly completed and duly executed letter of transmittal.
If we do not accept any of your tendered Series A Notes for any reason
included in the terms and conditions of the exchange offer or if you submit
certificates representing Series A Notes in a greater principal amount than you
wish to exchange, we will return any unaccepted or non-exchanged Series A Notes
without expense to you or, in the case of Series A Notes tendered by book-entry
transfer into the exchange agent's account at DTC using the book-entry transfer
procedures described below, non-exchanged Series A Notes will be credited to an
account maintained with DTC as promptly as practicable after the expiration or
termination of the exchange offer.
Book-entry transfer
The exchange agent will make a request to establish an account with
respect to the Series A Notes at DTC for purposes of the exchange offer
promptly after the date of this prospectus. Any financial institution that is a
participant in DTC's systems may make book-entry delivery of Series A Notes by
causing DTC to transfer Series A Notes into the exchange agent's account in
accordance with DTC's Automated Tender Offer Program procedures for transfer.
However, the exchange for the Series A Notes so tendered will only be made
after timely confirmation of book-entry transfer of Series A Notes into the
exchange agent's account, and timely receipt by the exchange agent of an
agent's message, transmitted by DTC and received by the exchange agent and
forming a part of a book-entry confirmation. The agent's message must state
that DTC has received an express acknowledgment from the participant tendering
Series A Notes that are the subject of that book-entry confirmation that the
participant has received, and agrees to be bound by the terms of, the letter of
transmittal, and that we may enforce the agreement against that participant.
Although delivery of Series A Notes may be effected through book-entry
transfer into the exchange agent's account at DTC, the letter of transmittal,
or a facsimile copy, properly completed and duly executed, with any required
signature guarantees, must in any case be received by the exchange agent at its
address listed in this prospectus under "--Exchange Agent" on or prior to the
expiration date.
If your Series A Notes are held through DTC, you must complete a form
called "instructions to registered holder and/or book-entry participant," which
will instruct the DTC participant through whom you
21
hold your securities of your intention to tender your Series A Notes or not
tender your Series A Notes. Please note that delivery of documents to DTC in
accordance with its procedures does not constitute delivery to the exchange
agent and we will not be able to accept your tender of securities until the
exchange agent receives a letter of transmittal and a book-entry confirmation
from DTC with respect to your securities. A copy of that form is available from
the exchange agent.
Guaranteed delivery procedures
If you are a registered holder of Series A Notes and you want to tender
your Series A Notes but your Series A Notes are not immediately available, or
time will not permit your Series A Notes to reach the exchange agent before the
expiration date, or the procedure for book-entry transfer cannot be completed
on a timely basis, a tender may be effected if
. The tender is made through an eligible institution;
. Prior to the expiration date, the exchange agent receives, by
facsimile transmission, mail or hand delivery, from that eligible
institution a properly completed and duly executed letter of
transmittal and notice of guaranteed delivery, substantially in the
form provided by us, stating:
(1) The name and address of the holder of Series A Notes;
(2) The amount of Series A Notes tendered; and
(3) That tender is being made by delivering that notice and
guarantying that within three New York Stock Exchange trading days
after the date of execution of the notice of guaranteed delivery,
the certificates of all physically tendered Series A Notes, in
proper form for transfer, or a book-entry confirmation, as the
case may be, will be deposited by that eligible institution with
the exchange agent; and
. The certificates for all physically tendered Series A Notes, in proper
form for transfer, or a book-entry confirmation, as the case may be,
are received by the exchange agent within three New York Stock
Exchange trading days after the date of execution of the notice of
guaranteed delivery.
Withdrawal rights
You can withdraw your tender of Series A Notes at any time on or prior to
the expiration date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses listed below under
"Exchange agent." Any notice of withdrawal must specify:
. The name of the person having tendered the Series A Notes to be
withdrawn;
. The Series A Notes to be withdrawn;
. The principal amount of the Series A Notes to be withdrawn; and
. If certificates for Series A Notes have been delivered to the exchange
agent, the name in which the Series A Notes are registered, if
different from that of the withdrawing holder.
If certificates for Series A Notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of those
certificates, you must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an eligible institution unless you are an eligible institution.
If Series A Notes have been tendered using the procedure for book-entry
transfer described above, any notice of withdrawal must also specify the name
and number of the account at DTC to be credited with the withdrawn Series A
Notes and otherwise comply with the procedures of that facility.
22
Please note that all questions as to the validity, form, eligibility and
time of receipt of notices of withdrawal will be determined by us, and our
determination will be final and binding on all parties. Any Series A Notes so
withdrawn will be considered not to have been validly tendered for exchange for
purposes of the exchange offer.
If you have properly withdrawn Series A Notes and wish to re-tender them,
you may do so by following one of the procedures described under "Procedures
for tendering Series A Notes" above at any time on or prior to the expiration
date.
Conditions to the exchange offer
Notwithstanding any other provisions of the exchange offer, we will not be
required to accept for exchange, or to issue Series B Notes in exchange for,
any Series A Notes and may terminate or amend the exchange offer, if at any
time before the acceptance of Series A Notes for exchange or the exchange of
the Series B Notes for Series A Notes, that acceptance or issuance would
violate applicable law or any interpretation of the staff of the Commission.
The condition above is for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to that condition. Our failure at
any time to exercise the foregoing rights shall not be considered a waiver by
us of that right. Our rights described in the prior paragraph are ongoing
rights which we may assert at any time and from time to time.
In addition, we will not accept for exchange any Series A Notes tendered,
and no Series B Notes will be issued in exchange for any Series A Notes, if at
that time any stop order shall be threatened or in effect with respect to the
exchange offer to which this prospectus relates or the qualification of the
indenture under the Trust Indenture Act.
Exchange agent
United States Trust Company of New York, has been appointed as the
exchange agent for the exchange offer. All executed letters of transmittal
should be directed to the exchange agent at the address set forth below.
Questions and requests for assistance, requests for additional copies of this
prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent, addressed as
follows:
By Overnight Courier and by Hand
By Hand Delivery until 4:30 p.m. on
Delivery after 4:30 p.m. on Expiration Date: Expiration Date:
United States Trust Company of New York United States Trust Company of New York
30 Broad Street, 14th Floor 30 Broad Street, B-Level
New York, NY 10004-2304 New York, NY 10004-2304
By Accredited Investors Holding Physical
Securities,
the By Registered or Certified Mail address
is: By Registered or Certified Mail:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 84 P.O. Box 112
Bowling Green Station Bowling Green Station
New York, NY 10274-0084 New York, NY 10274-0084
Telephone Number: (800) 548-6565
Fascimile Number: (212) 422-0183 or (646) 458-8111
Delivery to an address other than as listed above or transmission of
instructions via facsimile other than as listed above does not constitute a
valid delivery.
23
Fees and expenses
The principal solicitation is being made by mail; however, additional
solicitation may be made by facsimile, telephone or in person by our officers,
regular employees and affiliates. We will not pay any additional compensation
to any of our officers and employees who engage in soliciting tenders. We will
not make any payment to brokers, dealers, or others soliciting acceptances of
the exchange offer. However, we will pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its reasonable out-
of-pocket expenses in connection with the exchange offer.
The estimated cash expenses to be incurred in connection with the exchange
offer, including legal, accounting, Commission filing, printing and exchange
agent expenses, will be paid by us and are estimated in the aggregate to be
$250,000.
Accounting treatment
We will record the Series B Notes at the same carrying value as the Series
A Notes as reflected in our accounting records on the date of exchange.
Therefore, we will not recognize a gain or loss for accounting purposes. We
will amortize the expenses of the exchange offer and the unamortized expenses
related to the issuance of the Series A Notes over the term of the notes.
Transfer taxes
Holders who tender their Series A Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct us to register Series B Notes in the name of, or request that Series A
Notes not tendered or not accepted in the exchange offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
No appraisal or dissenters' rights
In connection with the exchange offer, you do not have any appraisal or
dissenters' rights under the General Corporation Law of the State of Delaware
or the indenture governing the Series A Notes. We intend to conduct the
exchange offer in accordance with the registration rights agreement, the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission related to exchange offers.
Resale of the Series B Notes
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Series B Notes would in general
be freely transferable after the exchange offer without further registration
under the Securities Act. The relevant no-action letters include the Exxon
Capital Holdings Corporation letter, which was made available by the Commission
on May 13, 1988, and the Morgan Stanley & Co. Incorporated letter, made
available on June 5, 1991.
However, any purchaser of Series A Notes who is our "affiliate" under the
Securities Act or who intends to participate in the exchange offer for the
purpose of distributing the Series B Notes:
. Will not be able to rely on the interpretation of the staff of the
Commission;
. Will not be able to tender its Series A Notes in the exchange offer;
and
. Must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the
securities unless that sale or transfer is made using an exemption
from those requirements.
24
By executing, or otherwise becoming bound by, the Letter of Transmittal
each holder of the Series A Notes will represent that:
. It is not our "affiliate;"
. Any Series B Notes to be received by it were acquired in the ordinary
course of its business; and
. It has no arrangement or understanding with any person to participate,
and is not engaged in and does not intend to engage, in the
"distribution," within the meaning of the Securities Act, of the
Series B Notes.
In addition, in connection with any resales of Series B Notes, any broker-
dealer participating in the exchange offer who acquired securities for its own
account as a result of market-making or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act. The Commission has
taken the position in the Shearman & Sterling no-action letter, which it made
available on July 2, 1993, that participating broker-dealers may fulfill their
prospectus delivery requirements with respect to the Series B Notes, other than
a resale of an unsold allotment from the original sale of the Series A Notes,
with the prospectus contained in the exchange offer registration statement.
Under the registration rights agreement, we are required to allow participating
broker-dealers and other persons, if any, subject to similar prospectus
delivery requirements to use this prospectus as it may be amended or
supplemented from time to time, in connection with the resale of Series B
Notes.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the notes, including any broker-dealers, against some liabilities,
including liabilities under the Securities Act, as set forth in the
registration rights agreement.
25
SELECTED FINANCIAL DATA
The following tables present our selected financial data. The statement of
income data for each of the years ended December 31, 1998, 1999 and 2000 and
the summary balance sheet data as of December 31, 1999 and 2000 have been
derived from our audited consolidated financial statements and related notes
for the year ended December 31, 2000 included elsewhere in this prospectus. The
statement of income data for each of the years ended December 31, 1996 and 1997
and the balance sheet data as of December 31, 1996, 1997 and 1998 have been
derived from our audited consolidated financial statements and related notes
that are not included in this prospectus. The statement of income data and the
summary balance sheet data for the quarter ended March 31, 2001 have been
derived from our unaudited condensed consolidated financial statements and
related notes from our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001 included elsewhere in this prospectus. The pro forma income
statement data is calculated as if the offering of the Series A Notes and the
refinancing of our bank credit facilities and the application of the estimated
net proceeds had occurred on January 1 of each year. The pro forma balance
sheet data is calculated as if the offering of the Series A Notes and the
refinancing of our bank credit facilities and application of the estimated net
proceeds had occurred on such dates.
26
You should read the following information together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference from our Annual Report on Form 10-K for the year
ended December 31, 2000, as amended on Form 10-K/A, and our historical
consolidated financial statements and related notes included elsewhere in this
prospectus.
Year ended December 31, Quarter ended March 31,
--------------------------------------------------------------------- --------------------------------
Pro forma Pro forma
1996 1997 1998 1999 2000 2000 2000 2001 2001
-------- ---------- ---------- ----------- ---------- ---------- -------- ---------- ----------
(dollars in thousands, except per share data)
Income statement
data:
Net operating
revenues............ $496,651 $ 758,403 $1,203,738 $ 1,445,351 $1,486,302 $1,486,302 $372,113 $ 386,217 $ 386,217
Total operating
expenses(1)......... 428,698 646,816 1,068,825 1,509,333 1,311,587 1,311,587 331,796 310,750 310,750
-------- ---------- ---------- ----------- ---------- ---------- -------- ---------- ----------
Operating income
(loss).............. 67,953 111,587 134,913 (63,982) 174,715 174,715 40,317 75,467 75,467
Other income (loss).. 3,858 3,175 4,894 (1,895) (7,201) (7,201) 1,395 1,348 1,348
Debt expense(2)...... 13,670 29,082 84,003 110,797 116,637 106,333 33,165 19,724 19,273
Minority interests in
income of
consolidated
subsidiaries........ (3,578) (4,502) (7,163) (5,152) (5,942) (5,942) (998) (2,457) (2,457)
-------- ---------- ---------- ----------- ---------- ---------- -------- ---------- ----------
Income (loss) before
income taxes,
extraordinary item
and cumulative
effect of change in
accounting
principle........... 54,563 81,178 48,641 (181,826) 44,935 55,239 7,549 54,634 55,085
Income tax expense
(benefit)........... 22,031 35,654 38,449 (34,570) 27,960 32,169 3,702 23,700 23,884
-------- ---------- ---------- ----------- ---------- ---------- -------- ---------- ----------
Income (loss) before
extraordinary item
and cumulative
effect of change in
accounting
principle........... $ 32,532 $ 45,524 $ 10,192 $ (147,256) $ 16,975 $ 23,070 $ 3,847 $ 30,934 $ 31,201
======== ========== ========== =========== ========== ========== ======== ========== ==========
Net income
(loss)(3)........... $ 24,832 $ 45,524 $ (9,448) $ (147,256) $ 13,485 $ 3,847 $ 30,934
======== ========== ========== =========== ========== ======== ==========
Earnings (loss) per
common share:
Income (loss) before
extraordinary item
and cumulative
effect of change in
accounting
principle........... $ 0.43 $ 0.59 $ 0.12 $ (1.81) $ 0.21 $ 0.28 $ 0.05 $ 0.37 $ 0.38
======== ========== ========== =========== ========== ========== ======== ========== ==========
Net income
(loss)(3)........... $ 0.33 $ 0.59 $ (0.12) $ (1.81) $ 0.17 $ 0.05 $ 0.37
======== ========== ========== =========== ========== ======== ==========
Earnings (loss) per
common share
assuming dilution:
Income (loss) before
extraordinary item
and cumulative
effect of change in
accounting
principle........... $ 0.42 $ 0.57 $ 0.12 $ (1.81) $ 0.20 $ 0.27 $ 0.05 $ 0.35 $ 0.35
======== ========== ========== =========== ========== ========== ======== ========== ==========
Net income
(loss)(3)........... $ 0.32 $ 0.57 $ (0.12) $ (1.81) $ 0.16 $ 0.05 $ 0.35
======== ========== ========== =========== ========== ======== ==========
Ratio of earnings to
fixed charges(4).... 3.88:1 3.18:1 1.50:1 (See note 5) 1.34:1 1:20:1 3.27:1
Balance sheet data:
Working capital(6)... $185,904 $ 205,798 $ 388,064 $(1,043,796) $ 148,348 $ 148,348 $ 139,264 $ 141,995
Cash and cash
equivalents......... 21,327 6,700 41,487 107,981 31,207 31,207 17,443 20,174
Working capital
excluding cash and
cash equivalents.... 164,577 199,098 346,577 (1,151,777) 117,141 117,141 121,821 121,821
Total assets......... 664,799 1,279,261 1,911,619 2,056,718 1,596,632 1,608,457 1,625,737 1,637,562
Long-term debt(7).... 233,126 731,192 1,225,781 5,696 974,006 977,975 932,025 938,725
Shareholders'
equity.............. 358,677 422,446 473,864 326,404 349,368 349,368 388,219 388,219
- -------
(1) Total operating expenses include impairments and valuation losses of $4,556
in 2000 and $139,805 in 1999 and merger related costs of $78,188 in 1998.
(2) Debt expense includes a write-off of deferred financing costs of $1,601 in
1999 and $1,192 in 2000 and a loss of $9,823 on termination of interest
rate swap agreements related to refinanced debt in 1998.
27
(3) Extraordinary losses associated with early extinguishment of debt were
$7,700 ($0.10 per share) in 1996, $12,744 ($0.16 per share) in 1998 and
$3,490 ($0.04 per share) in 2000.
In 1998 we adopted Statement of Position No. 98-5, Reporting on the Costs
for Start-up Activities, or SOP 98-5, which requires that pre-opening and
organization costs be expensed as incurred. As a result, unamortized
deferred pre-opening and organizational costs of $6,896 ($0.08 per share)
were written-off as a cumulative effect of a change in accounting principle
in 1998.
(4) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings. Earnings for this purpose is defined as pretax
income from continuing operations adjusted by adding non-capitalized fixed
charges during the period. Fixed charges is defined for this purpose as the
total of interest expense, amortization of deferred financing costs and the
estimated interest component of rental expense on operating leases.
(5) Due to our loss in 1999, the ratio coverage in 1999 was less than 1:1. We
would have had to generate additional earnings of $181,826 to achieve a
coverage of 1:1.
(6) The working capital calculation as of December 31, 1999 includes long-term
debt that was potentially callable under covenant provisions of $1,425,610.
(7) Long-term debt excludes $1,425,610 as of December 31, 1999 that was
potentially callable under covenant provisions. In July 2000, the debt was
restructured and the subsequent periods long-term debt reflects scheduled
debt maturities, consistent with periods presented prior to December 31,
1999.
28
DESCRIPTION OF DEBT
This summary highlights certain provisions of our debt instruments except
for our Series A Notes, which are described in the "Description of Series B
Notes" section of this prospectus.
Credit facilities
Our credit facilities are with Credit Suisse First Boston, as syndication
agent, Bank of America, N.A., as administrative agent, and various banks, as
lenders. The following is a summary description of the principal terms of our
credit facilities.
Structure
Our credit facilities consist of two term loans and a revolving facility.
The outstanding balances of the Term A loan and Term B loan as of May 4, 2001
were $50 million and $200 million, respectively. The revolving facility
currently provides for revolving credit commitments of $150 million, none of
which had been drawn upon by us as of May 4, 2001. Under the revolving credit
facility, up to $25 million in short-term funds may be borrowed the same day
that notice is given to the banks under a "swing line" facility.
Security; Guarantees
Each of our existing direct and indirect wholly owned domestic
subsidiaries and future direct and indirect wholly owned domestic subsidiaries
have guaranteed the obligations under our credit facilities. Our credit
facilities and the guarantees are secured by substantially all of the personal
property assets of the guarantor subsidiaries. In addition, our credit
facilities are secured by a pledge of all of the capital stock, or similar
equity interests, of our wholly owned subsidiaries and, subject to a few
exceptions, the capital stock, or similar equity interests we, or our wholly
owned subsidiaries, own in our existing direct and indirect non-wholly owned
subsidiaries and future direct and indirect non-wholly owned subsidiaries.
Interest rate
In general, borrowings under our credit facilities bear interest at one of
two floating rates selected by us:
. The base rate, defined as the higher of Bank of America's prime rate or
the federal funds rate plus 0.5%, plus a margin ranging from .75% to
2.00% for borrowings under the revolving credit facility and the Term A
facility and a margin of 1.75% for borrowings under the Term B
facility.
. The eurodollar rate, defined generally as the rate at which deposits in
U.S. Dollars appear on the Dow Jones Telerate Screen two business days
before the first day of the applicable interest period, adjusted for
statutory reserves, plus a margin ranging from 1.75% to 3.00% for
borrowings under the revolving credit facility and the Term A loan and
a margin of 2.75% for borrowings under the Term B loan.
The applicable margin used in determining the interest rate for borrowings
under the revolving facility and the Term A loan is based on our leverage
ratio. Currently, the applicable margin is near the top of the ranges listed
above. The applicable margin used in determining the interest rate for
borrowings under the Term B loan is fixed for the term of the loan.
Swing line borrowings bear interest at a rate negotiated by us and Bank of
America as the swing line lender.
Maturity
We are required to repay the entire amount borrowed under the Term A loan
in equal quarterly installments of $2.5 million due at the end of each
calender quarter through March 31, 2006. Payments of $500,000 each are due at
the end of each calendar quarter through December 31, 2005 under the Term B
loan,
29
with the remaining balance of $190,500,000 to be paid when the Term B loan
matures on March 31, 2006. However, if the maturity of the 5 5/8% convertible
notes described below has been extended on or before March 1, 2006 to a date
not earlier than June 1, 2007, or if those notes are converted into equity
interests by March 1, 2006, then the maturity date of the Term B loan will be
extended one year. In that case, the quarterly payments of $500,000 will
continue through December 31, 2006 and the remaining balance of $188,500,000
will be due on March 31, 2007.
Any scheduled quarterly payment due under the term loans may be fully or
partially prepaid at any time upon proper notice.
Fees
We are required to pay the lenders under our revolving facility a
commitment fee based on the daily average unused portion of the revolving
credit commitments and the outstanding balances under the swing line facility.
We are also obligated to pay letter of credit fees on the aggregate stated
amount of outstanding letters of credit.
Covenants
Our credit facilities contain a number of covenants, in addition to the
financial covenants, that, among other things, restrict our ability and that of
our subsidiaries to:
. Dispose of assets;
. Incur additional debt;
. Prepay other debt, subject to specified exceptions, or amend specified
debt instruments;
. Pay dividends;
. Create liens on assets;
. Issue additional equity interests;
. Make investments, loans or advances;
. Make acquisitions;
. Engage in mergers or consolidations;
. Change the business conducted by us or our subsidiaries;
. Purchase shares of our outstanding common stock or equity interests of
our subsidiaries; and
. Otherwise undertake various corporate activities.
In addition, our credit facilities contain financial covenants that
require us to satisfy, on a consolidated basis, specified financial tests
including a minimum fixed charge coverage ratio, a minimum net worth test and a
maximum leverage ratio.
Events of default
Our credit facilities contain customary events of default, including:
. Nonpayment of principal, interest or fees;
. Material inaccuracy of representations and warranties;
. Violation of covenants;
. Cross-defaults to other debt;
30
. Events of bankruptcy and insolvency;
. Employee Retirement Income Security Act of 1974 matters;
. Material judgments; and
. Invalidity of any guarantee or security interest.
In addition, if we or any of our subsidiaries become ineligible for
participation in, or are suspended from receiving reimbursement under, Medicare
or Medicaid programs resulting in a material adverse effect on our business or
a decrease of more than 5% in our consolidated net operating revenues, we will
be in default under our credit facilities.
Mandatory prepayment
In addition, the term loans and the revolving facility must each be repaid
in full upon a change of control of us. Based upon formulas stated in the
credit agreement, all or a portion of the proceeds from our issuance of public
debt, subordinated debt or preferred stock or our sale of a material amount of
our assets must be used to pay down the outstanding balances under our credit
facilities.
7% convertible notes
In November 1998 we issued $345 million principal amount of 7% convertible
subordinated notes due 2009 in a private placement offering. These notes are
convertible into shares of our common stock at a conversion price of $32.81 per
share. They are general unsecured obligations that rank junior to all of our
existing and future senior debt and, effectively, all existing and future
liabilities of our subsidiaries. The Series B Notes will rank senior to these
convertible notes. All of the notes issued are currently outstanding and,
although they do not mature until 2009, we may repurchase any or all of them at
our option at any time after November 14, 2001. The repurchase price, expressed
as a percentage of the principal amount of the notes, is shown below for the
12-month periods beginning November 15:
Year Percentage Year Percentage
---- ---------- ---- ----------
2001........................ 104.90% 2005........................ 102.10%
2002........................ 104.20% 2006........................ 101.40%
2003........................ 103.50% 2007........................ 100.70%
2004........................ 102.80% 2008 and thereafter......... 100.00%
In addition, upon a change of control of us, we generally must make an
irrevocable and unconditional offer to purchase all of these notes.
5 5/8% convertible notes and related guaranty
We have guaranteed the $125 million outstanding 5 5/8% convertible
subordinated notes due 2006 of Renal Treatment Centers, Inc., or RTC, our
wholly-owned subsidiary. These notes are convertible into shares of our common
stock at an effective conversion price of $25.62 per share. Although these
notes do not mature until 2006, RTC may repurchase them at its option at any
time. The repurchase price, expressed as a percentage of the principal amount
of the notes, is shown below for 12-month periods beginning July 15:
Year Percentage Year Percentage
---- ---------- ---- ----------
2001........................ 102.81% 2004........................ 101.13%
2002........................ 102.25% 2005........................ 100.56%
2003........................ 101.69% 2006........................ 100.00%
Our guarantee of these notes ranks equally with trade payables and is
junior to our credit facilities and any future debt we may incur, other than
debt that is expressly subordinated to senior debt, unless it otherwise states.
The Series B Notes will rank equally with our guarantee.
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DESCRIPTION OF SERIES B NOTES
The Series A Notes were, and the Series B Notes will be, issued pursuant
to an indenture dated April 11, 2001, among us, our subsidiaries acting as
guarantors and U.S. Trust Company of Texas, National Association, as trustee.
You can find the definitions of certain capitalized terms in this section
under the subheading "--Certain definitions." For purposes of this section,
references to "we," "our," or "us" include only DaVita Inc., not its
subsidiaries, except pursuant to the terms of the Guarantees.
The terms of the Series B Notes include those stated in the indenture and
those made part of the indenture by reference to the Trust Indenture Act of
1939, as amended. The Series B Notes are subject to all such terms, and holders
of Series B Notes are referred to the indenture and the Trust Indenture Act for
a statement thereof. A copy of the form of indenture is available from us upon
request.
The terms of the Series B Notes and the Series A Notes are identical in
all material respects, except the Series B Notes will:
. Have a different CUSIP number;
. Have been registered under the Securities Act;
. Not contain transfer restrictions and registration rights that relate
to the Series A Notes; and
. Not contain provisions relating to the payment of liquidated damages
to be made to the holders of the Series A Notes under circumstances
related to the timing of the exchange offer.
Any Series A Notes that remain outstanding after the exchange offer,
together with Series B Notes, will be treated as a single class of securities
under the indenture for voting purposes. Holders of the Series B Notes will not
be entitled to any registration rights under the registration rights agreement
because these rights will terminate when the exchange offer is completed.
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
a holder of the Series B Notes.
Brief description of the Series B Notes and the Guarantees
The Series B Notes
The Series B Notes will be:
. Our unsecured general obligations;
. Ranked junior in right of payment with all of our existing and future
Senior Debt;
. Ranked equal in right of payment to all of our existing and future
senior subordinated indebtedness;
. Ranked senior in right of payment to all of our existing and future
Subordinated Indebtedness; and
. Unconditionally guaranteed by the Guarantors.
The Series B Notes will rank junior to debt outstanding under the Credit
Agreement. The Series B Notes are guaranteed on a senior subordinated basis by
all of our wholly owned domestic subsidiaries, including RTC. RTC's guarantee
of the Series B Notes is senior to RTC's obligations under its 5 5/8%
convertible subordinated notes. We, but none of our operating subsidiaries,
have guaranteed RTC's notes. Our guarantee of RTC's notes is equal to our
obligations under the Series B Notes offered hereby. The Series B
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Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof.
The term "Subsidiaries" as used in this section does not include
Unrestricted Subsidiaries. As of the date of the indenture, none of our
Subsidiaries will be Unrestricted Subsidiaries. However, under certain
circumstances, we will be able to designate current or future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to the
restrictive covenants set forth in the indenture. Substantially all of our
operations are conducted through our Subsidiaries and Unrestricted
Subsidiaries.
The guarantees
The Series B Notes will be jointly and severally irrevocably and
unconditionally guaranteed on a senior subordinated basis by each of our
present and future Subsidiaries, other than Non-Guarantor Subsidiaries and
Foreign Subsidiaries. If we create a Non-Guarantor Subsidiary, our Consolidated
Minority Adjusted EBITDA Ratio for the four fiscal quarters immediately
preceding such creation must be at least 0.80 to 1.00. For the year ended
December 31, 2000, our Consolidated Minority Adjusted EBITDA Ratio was 0.98 to
1.00. The obligations of each Guarantor under its Guarantee, however, will be
limited in a manner intended to avoid it being deemed a fraudulent conveyance
under applicable law. See "Certain bankruptcy limitations" below.
Principal maturity and interest
We will issue Series B Notes with a maximum aggregate principal amount of
$225 million. The indenture provides, in addition to the $225 million aggregate
principal amount of Series B Notes being issued on the Issue Date, for the
issuance of additional Series B Notes having identical terms and conditions to
the Series B Notes offered hereby, subject to compliance with the terms of the
indenture, including the covenant "Limitation on incurrence of additional
indebtedness." Interest will accrue on the additional notes issued pursuant to
the indenture from and including the date of issuance of such additional notes.
Any such additional notes will be issued on the same terms as the Series B
Notes and will constitute part of the same series of securities as the Series B
Notes and will vote together as one series on all matters with respect to the
Series B Notes. All references to Series B Notes herein include the additional
notes. We will issue Series B Notes in denominations of $1,000 and integral
multiples of $1,000.
The Series B Notes will mature on April 15, 2011. The Series B Notes will
bear interest at the rate per annum stated on the cover page hereof from the
date of issuance or from the most recent date to which interest has been paid
or provided for, payable semi-annually in arrears on April 15 and October 15 of
each year, commencing October 15, 2001 to the Persons in whose names such
Series B Notes are registered at the close of business on the April 1 or
October 1 immediately preceding such interest payment date. Interest will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Methods of receiving payments on the Series B Notes
Principal of, premium, if any, and interest, and Liquidated Damages, if
any, on the Series B Notes will be payable, and the Series B Notes may be
presented for registration of transfer or exchange, at our office or agency
maintained for such purpose, which office or agency shall be maintained in the
Borough of Manhattan, The City of New York. Except as set forth below, at our
option, payment of interest may be made by check mailed to the holders of the
Series B Notes at the addresses set forth upon our registry books. No service
charge will be made for any registration of transfer or exchange of Series B
Notes, but we may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Until otherwise designated
by us, our office or agency will be the corporate trust office of the Trustee
presently located at the office of the Trustee in the Borough of Manhattan, The
City of New York.
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Subordination
The Series B Notes and the Guarantees will be our and the Guarantor's
general, unsecured obligations, respectively, contractually subordinated in
right of payment to all of our Senior Debt and the Senior Debt of the
Guarantors, as applicable. This effectively means that holders of Senior Debt
must be paid in full before any amounts are paid to the holders of the Series
B Notes in the event we become bankrupt or are liquidated and that holders of
Senior Debt can block payments to the holders of the Series B Notes in the
event of a default by us on such Senior Debt, all as more fully described
below.
On a pro forma basis, as of March 31, 2001, after giving effect to the
issuance of the Series B Notes and the application of the proceeds therefrom,
we would have had outstanding an aggregate of approximately $287 million of
Senior Debt, $280 million of which Indebtedness is secured. We also would have
been able to borrow an additional $150 million under our Credit Agreement, all
of which would have been Senior Debt. The Guarantors would have had
outstanding an aggregate of approximately $287 million of Senior Debt,
$280 million of which Indebtedness is secured, all of which constituted
guarantees of our Indebtedness.
The rights of holders will be subordinated by operation of law to all
existing and future indebtedness and preferred stock of our subsidiaries that
are not Guarantors, of which, on a pro forma basis as of March 31, 2001, there
was none.
We may not, and the Guarantors may not, make payment, by set-off or
otherwise, as applicable, on account of the principal of, premium, if any, or
interest on the Series B Notes, or Liquidated Damages, or on account of the
redemption provisions of the Series B Notes, including any repurchases of
Series B Notes, for cash or property, other than Junior Securities:
(1) Upon the maturity of any of our Senior Debt or any Senior Debt of such
Guarantor, as applicable, by lapse of time, acceleration, unless waived, or
otherwise, unless and until all principal of, premium, if any, and the
interest on, and all other amounts owing in respect of, such Senior Debt are
first paid in full in cash or Cash Equivalents, or such payment is duly
provided for, or otherwise to the extent holders accept satisfaction of
amounts due by settlement in other than cash or Cash Equivalents; or
(2) In the event of default in the payment of any principal of, premium,
if any, or interest on our Senior Debt or Senior Debt of such Guarantor, as
applicable, when it becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration or otherwise, unless and until such
payment default has been cured or waived or otherwise has ceased to exist.
Upon (1) the happening of an event of default other than a payment default
that permits the holders of any Designated Senior Debt to declare such
Designated Senior Debt to be due and payable and (2) written notice of such
event of default given to us and the Trustee by the holders of such Designated
Senior Debt or their representative, then, unless and until such event of
default has been cured or waived or otherwise has ceased to exist, no payment,
by set-off or otherwise, may be made by us or on our behalf or by or on behalf
of any Guarantor which is an obligor under such Designated Senior Debt on
account of the principal of, premium, if any, or interest, or Liquidated
Damages, on the Series B Notes, including any repurchases of any of the Series
B Notes, or on account of the redemption provisions of the Series B Notes, in
any such case, other than payments made with Junior Securities.
Notwithstanding the foregoing, unless the Designated Senior Debt in respect of
which such event of default exists has been declared due and payable in its
entirety within 179 days after the payment notice is delivered as set forth
above, and such declaration has not been rescinded or waived, at the end of
the payment blockage period, we shall and the Guarantors shall be required to
pay all sums not previously paid to the holders of the Series B Notes during
the payment blockage period due to the foregoing prohibitions and to resume
all other payments as and when due on the Series B Notes.
Any number of payment notices may be given; provided, however, that:
(1) Not more than one payment notice shall be given within a period of any
360 consecutive days; and
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(2) No non-payment default that existed upon the date of such payment
notice or the commencement of such payment blockage period, whether or not such
event of default is on the same issue of Designated Senior Debt, shall be made
the basis for the commencement of any other payment blockage period, for
purposes of this provision, any subsequent action, or any subsequent breach of
any financial covenant for a period commencing after the expiration of such
payment blockage period that, in either case, would give rise to a new event of
default, even though it is an event that would also have been a separate breach
pursuant to any provision under which a prior event of default previously
existed, shall constitute a new event of default.
Upon any distribution of our assets or any Guarantor's assets upon any
dissolution, winding up, total or partial liquidation or reorganization of us
or a Guarantor, whether voluntary or involuntary, in bankruptcy, insolvency,
receivership or a similar proceeding or upon assignment for the benefit of
creditors or any marshaling of assets or liabilities:
(1) The holders of all of our or such Guarantor's Senior Debt, as
applicable, will first be entitled to receive payment in full in cash or Cash
Equivalents, or have such payment duly provided for, or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents before the holders are entitled to receive any payment on
account of the principal of, premium, if any, and interest on the Series B
Notes or Liquidated Damages, other than Junior Securities; and
(2) Any payment or distribution of our or such Guarantor's assets of any
kind or character from any source, whether in cash, property or securities,
other than Junior Securities, to which the holders or the Trustee on behalf of
the holders would be entitled, by set-off or otherwise, except for the
subordination provisions contained in the indenture, will be paid by the
liquidating trustee or agent or other Person making such a payment or
distribution directly to the holders of such Senior Debt or their
representative to the extent necessary to make payment in full, or have such
payment duly provided for, on all such Senior Debt remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of such
Senior Debt.
In the event that, notwithstanding the foregoing, any payment or
distribution of our or any Guarantor's assets, other than Junior Securities,
shall be received by the Trustee or the holders at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held for the benefit of the holders of such Senior Debt,
and shall be paid or delivered by the Trustee or such holders, as the case may
be, to the holders of such Senior Debt remaining unpaid or unprovided for or to
their representative or representatives, or to the trustee or trustees under
any indenture pursuant to which any instruments evidencing any of such Senior
Debt may have been issued, ratably according to the aggregate principal amounts
remaining unpaid on account of such Senior Debt held or represented by each,
for application to the payment of all such Senior Debt remaining unpaid, to the
extent necessary to pay or to provide for the payment of all such Senior Debt
in full in cash or Cash Equivalents or otherwise to the extent holders accept
satisfaction of amounts due by settlement in other than cash or Cash
Equivalents after giving effect to any concurrent payment or distribution to
the holders of such Senior Debt.
No provision contained in the indenture or the Series B Notes will affect
our obligation or the obligation of the Guarantors, which is absolute and
unconditional, to pay, when due, principal of, premium, if any, and interest
and Liquidated Damages, if any, on, the Series B Notes. The subordination
provisions of the indenture and the Series B Notes will not prevent the
occurrence of any Default or Event of Default under the indenture or limit the
rights of the Trustee or any holder to pursue any other rights or remedies with
respect to the Series B Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of our creditors or a marshaling of
our assets and liabilities, holders of the Series B Notes may receive ratably
less than other creditors.
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Certain bankruptcy limitations
We conduct our operations through our Subsidiaries and Unrestricted
Subsidiaries. Accordingly, our ability to meet our cash obligations is
dependent upon the ability of our subsidiaries to make cash distributions to
us. Furthermore, any right we have to receive the assets of any such subsidiary
upon such subsidiary's liquidation or reorganization, and the consequent right
of the holders of the Series B Notes to participate in the distribution of the
proceeds of those assets, effectively will be subordinated by operation of law
to the claims of such subsidiary's creditors, including trade creditors, and
holders of its preferred stock, except to the extent that we are recognized as
a creditor or preferred stockholder of such subsidiary, in which case our
claims would still be subordinate to any indebtedness or preferred stock of
such subsidiary senior in right of payment to that held by us. Our Non-
Guarantor Subsidiaries, Foreign Subsidiaries and Unrestricted Subsidiaries will
not guarantee our obligations under the Series B Notes.
Holders of the Series B Notes will be direct creditors of each Guarantor
by virtue of its Guarantee. Nonetheless, in the event of the bankruptcy or
financial difficulty of a Guarantor, such Guarantor's obligations under its
Guarantee may be subject to review and avoidance under state and federal
fraudulent transfer laws. Among other things, such obligations may be avoided
if a court concludes that such obligations were incurred for less than
reasonably equivalent value or fair consideration at a time when the Guarantor
was insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that a Guarantor did not
receive reasonably equivalent value or fair consideration to the extent that
the aggregate amount of its liability on its Guarantee exceeds the economic
benefits it receives in the offering of the Series A Notes and the exchange of
the Series A Notes for Series B Notes. The obligations of each Guarantor under
its Guarantee will be limited in a manner intended to cause it not to be a
fraudulent conveyance under applicable law, although no assurance can be given
that a court would give the holder the benefit of such provision. See "Risk
Factors--Fraudulent transfer statutes may limit your rights as a noteholder."
If the obligations of a Guarantor under its Guarantee were avoided,
holders of Series B Notes would have to look to the assets of any remaining
Guarantors for payment. There can be no assurance in that event that such
assets would suffice to pay the outstanding principal and interest on the
Series B Notes.
Optional redemption
We will not have the right to redeem any Series B Notes prior to April 15,
2006, other than out of the Net Cash Proceeds of any Public Equity Offering of
our common stock, as described below.
At any time on or after April 15, 2006, we may redeem the Series B Notes
for cash at our option, in whole or in part, upon not less than 30 days nor
more than 60 days notice to each holder of Series B Notes, at the following
redemption prices, expressed as percentages of the principal amount, if
redeemed during the 12-month period commencing April 15 of the years indicated
below, in each case together with accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of redemption of the Series B Notes:
Year Percentage
---- ----------
2006............................................................. 104.625%
2007............................................................. 103.083%
2008............................................................. 101.542%
2009 and thereafter.............................................. 100.000%
At any time on or prior to April 15, 2004, upon any Public Equity Offering
of our common stock for cash, up to 35% of the aggregate principal amount of
the Series B Notes issued pursuant to the indenture may be redeemed at our
option within 90 days of such Public Equity Offering, on not less than 30 days,
but not more than 60 days, notice to each holder of the Series B Notes to be
redeemed, with cash received by us from the Net Cash Proceeds of such Public
Equity Offering, at a redemption price equal to 109.25% of principal, together
with accrued and unpaid interest and Liquidated Damages, if any, thereon to the
redemption date;
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provided, however, that immediately following such redemption not less than 65%
of the aggregate principal amount of the Series B Notes originally issued
pursuant to the indenture on the Issue Date remain outstanding.
If the Redemption Date hereunder is on or after an interest record date on
which the holders of record have a right to receive the corresponding Interest
due and Liquidated Damages, if any, and on or before the associated Interest
Payment Date, any accrued and unpaid interest and Liquidated Damages, if any,
due on such Interest Payment Date will be paid to the Person in whose name a
Series B Note is registered at the close of business on such record date on the
corresponding Interest Payment Date.
Mandatory redemption
The Series B Notes will not have the benefit of any sinking fund and we
will not be required to make any mandatory redemption payments with respect to
the Series B Notes.
Selection and notice
In the case of a partial redemption, the Trustee shall select the Series B
Notes or portions thereof for redemption on a pro rata basis, by lot or in such
other manner it deems appropriate and fair. The Series B Notes may be redeemed
in part in multiples of $1,000 only.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
holder of each Series B Note to be redeemed to such holder's last address as
then shown upon the registry books of our registrar. Any notice which relates
to a Series B Note to be redeemed in part only must state the portion of the
principal amount equal to the unredeemed portion thereof and must state that on
and after the date of redemption, upon surrender of such Series B Note, a new
Series B Note or Series B Notes in a principal amount equal to the unredeemed
portion thereof will be issued. On and after the date of redemption, interest
will cease to accrue on the Series B Notes or portions thereof called for
redemption, unless we default in the payment thereof.
Certain covenants
The indenture contains certain covenants that will, among other things,
restrict our ability to borrow money, pay dividends on or repurchase capital
stock, make investments and sell assets or enter into mergers or
consolidations.
Repurchase of Series B Notes at the option of the holder upon a change of
control
The indenture provides that in the event that a change of control has
occurred, each holder of Series B Notes will have the right, at such holder's
option, pursuant to an offer, subject only to conditions required by applicable
law, if any, by us to require us to repurchase all or any part of such holder's
Series B Notes, provided, that the principal amount of such Series B Notes must
be $1,000 or an integral multiple thereof, on a date that is no later than 60
days after the occurrence of such change of control, at a cash price equal to
101% of the principal amount thereof, together with accrued and unpaid interest
and Liquidated Damages, if any, to the change of control purchase date.
The change of control offer shall be made within 30 days following a
change of control and shall remain open for 20 business days following its
commencement. Upon expiration of the change of control offer period, we shall
promptly purchase all Series B Notes properly tendered in response to the
change of control offer.
As used herein, a "change of control" means:
(1) Any sale, transfer, conveyance or other disposition, other than by way
of merger or consolidation, of all or substantially all of our assets, on a
consolidated basis, in one transaction or a series of related transactions, to
any "person," including any group that is deemed to be a "person;"
37
(2) The consummation of any transaction, including, without limitation,
any merger or consolidation, whereby any "person," including any group that is
deemed to be a "person," is or becomes the "beneficial owner," directly or
indirectly, of more than 35% of the aggregate Voting Equity Interests of the
surviving entity or entities;
(3) The Continuing Directors cease for any reason to constitute a majority
of our board of directors then in office; or
(4) We adopt a plan of liquidation.
As used in this covenant, "person," including any group that is deemed to
be a "person," has the meaning given by Sections 13(d) of the Exchange Act,
whether or not applicable.
Notwithstanding the foregoing, we will not be required to make a change of
control offer upon a change of control if a third party makes the change of
control offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the indenture applicable to a change of control offer
made by us, including any requirements to repay in full all Indebtedness under
the Credit Agreement, any Senior Debt or Senior Debt of any Guarantor or
obtains the consents of such lenders to such change of control offer as set
forth in the following paragraph of this section, and purchases all Series B
Notes validly tendered and not withdrawn under such change of control offer.
The indenture provides that, prior to the commencement of a change of
control offer, but in any event within 30 days following any change of control,
we will:
(1) (a) repay in full, and terminate all commitments under, all
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a change of control or (b) offer to repay in full,
and terminate all commitments under, all Indebtedness under the Credit
Agreement and all such other Senior Debt and repay the Indebtedness owed to
each lender that has accepted such offer in full; or
(2) Obtain the requisite consents under the Credit Agreement and all such
other Senior Debt to permit the repurchase of the Series B Notes as provided
herein.
Our failure to comply with the preceding sentence shall constitute an
Event of Default described in clause (3) under "Events of default" below, but
without giving effect to the stated exceptions in such clause.
The occurrence of the events that would constitute a change of control
would also constitute a default under the Credit Agreement. Our future Senior
Debt and our Subsidiaries, future Senior Debt may also contain prohibitions of,
or defaults by virtue of, certain events that would constitute a change of
control or require such Senior Debt to be repurchased upon a change of control.
Moreover, the exercise by the holders of their right to require us to
repurchase the Series B Notes could cause a default under such Senior Debt,
even if the change of control itself did not, due to the financial effect of
such repurchase on us. Finally, our ability to pay cash to the holders upon a
repurchase may be limited by our then existing financial resources. There can
be no assurance that sufficient funds will be available when necessary to make
any required repurchases. Even if sufficient funds were otherwise available,
the terms of the Credit Agreement will, and other Senior Debt may, prohibit our
repurchase of the Series B Notes prior to their scheduled maturity.
Consequently, if we are not able to prepay the Credit Agreement and any other
Senior Debt containing similar restrictions or obtain requisite consents, as
described above, we will be unable to fulfill our repurchase obligations if
holders of the Series B Notes exercise their repurchase rights following a
change of control, thereby resulting in a default under the indenture.
On or before the change of control purchase date, we will:
(1) Accept for payment Series B Notes or portions thereof properly
tendered pursuant to the change of control offer,
38
(2) Deposit with the paying agent for us cash sufficient to pay the change
of control purchase price, together with accrued and unpaid interest and
Liquidated Damages, if any, of all Series B Notes so tendered, and
(3) Deliver to the Trustee the Series B Notes so accepted together with an
officers' certificate listing the Series B Notes or portions thereof being
purchased by us.
The paying agent promptly will pay the holders of Series B Notes so
accepted an amount equal to the change of control purchase price, together with
accrued and unpaid interest and Liquidated Damages, if any, and the Trustee
promptly will authenticate and deliver to such holders a new Series B Note
equal in principal amount to any unpurchased portion of the Series B Note
surrendered. Any Series B Notes not so accepted will be delivered promptly by
us to the holder thereof. We publicly will announce the results of the change
of control offer on or as soon as practicable after the change of control
purchase date.
The change of control purchase feature of the Series B Notes may make more
difficult or discourage a takeover of us, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of our assets will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of our
assets has occurred. In addition, no assurances can be given that we will be
able to acquire Series B Notes tendered upon the occurrence of a change of
control.
Any change of control offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable federal and
state securities laws. To the extent that the provisions of any securities laws
or regulations conflict with the provisions of this covenant, our compliance or
compliance by any of the Guarantors with such laws and regulations shall not in
and of itself cause a breach of their obligations under such covenant.
If the change of control purchase date is on or after an interest payment
record date and on or before the associated Interest Payment Date, any accrued
and unpaid interest, and Liquidated Damages, if any, due on such Interest
Payment Date will be paid to the Person in whose name a Series B Note is
registered at the close of business on such record date on the corresponding
Interest Payment Date.
Limitation on incurrence of additional indebtedness
The indenture provides that, except as set forth in this covenant, we will
not and the Guarantors will not, and neither we nor the Guarantors will permit
any of our Subsidiaries to, directly or indirectly, issue, assume, guarantee,
incur, become directly or indirectly liable with respect to, including as a
result of an Acquisition, or otherwise become responsible for, contingently or
otherwise, individually and collectively, to "incur" or, as appropriate, an
"incurrence," any Indebtedness, including Disqualified Capital Stock and
Acquired Indebtedness, other than Permitted Indebtedness.
Notwithstanding the foregoing if:
(1) No Default or Event of Default shall have occurred and be continuing
at the time of, or would occur after giving effect on a pro forma basis to,
such incurrence of Indebtedness; and
(2) On the date of such incurrence, our Consolidated Coverage Ratio for
the Reference Period immediately preceding the incurrence date, after giving
effect on a pro forma basis to such incurrence of such Indebtedness and, to the
extent set forth in the definition of Consolidated Coverage Ratio, the use of
proceeds thereof, would be at least 2.5 to 1.0,
then we and the Guarantors may incur such Indebtedness, including Disqualified
Capital Stock.
39
In addition, the foregoing limitations of the first paragraph of this
covenant will not prohibit:
(a) Our incurrence or the incurrence by any Guarantor or Non-Guarantor
Subsidiary of Capital Expenditure Indebtedness; provided, that:
(1) The aggregate amount of such Indebtedness incurred and
outstanding at any time pursuant to this paragraph (a), plus any Refinancing
Indebtedness issued to retire, defease, refinance, replace or refund such
Indebtedness, shall not exceed $25 million; and
(2) In each case, such Indebtedness shall not constitute more than
100% of our cost or the cost to such Guarantor or Non-Guarantor Subsidiary,
determined in accordance with GAAP, as applicable, of the property so acquired,
constructed, installed, improved or leased;
(b) If no Event of Default shall have occurred and be continuing, our
incurrence or the incurrence by any Guarantor or Non-Guarantor Subsidiary of
Indebtedness in an aggregate amount incurred and outstanding at any time
pursuant to this paragraph (b), plus any Refinancing Indebtedness incurred to
retire, defease, refinance, replace or refund such Indebtedness, of up to $25
million; and
(c) Our incurrence or the incurrence by any Guarantor of Indebtedness
pursuant to the Credit Agreement in an aggregate amount incurred and
outstanding at any time pursuant to this paragraph (c), plus any Refinancing
Indebtedness incurred to retire, defease, refinance, replace or refund such
Indebtedness, of up to $600 million, minus the amount of any such Indebtedness
(1) retired with the Net Cash Proceeds from any asset sale applied to
permanently reduce the outstanding amounts or the commitments with respect to
such Indebtedness pursuant to clause (1)(b)(ii) of the first paragraph of the
covenant "Limitation on sale of assets and subsidiary stock" or (2) assumed by
a transferee in an asset sale so long as neither we nor such Guarantor
continues to be an obligor under such Indebtedness.
Indebtedness, including Disqualified Capital Stock, of any Person which is
outstanding at the time such Person becomes one of our Subsidiaries, including
upon designation of any subsidiary or other Person as a Subsidiary, or is
merged with or into or consolidated with us or one of our Subsidiaries shall be
deemed to have been incurred at the time such Person becomes or is designated
one of our Subsidiaries or is merged with or into or consolidated with us or
one of our Subsidiaries as applicable.
Notwithstanding any other provision of this covenant, but only to avoid
duplication, a guarantee of our Indebtedness or of the Indebtedness of a
Guarantor or a Non-Guarantor Subsidiary incurred in accordance with the terms
of the indenture issued at the time such Indebtedness was incurred or if later
at the time the guarantor thereof became one of our Subsidiaries will not
constitute a separate incurrence, or amount outstanding, of Indebtedness. Upon
each incurrence we may designate pursuant to which provision of this covenant
such Indebtedness is being incurred and we may subdivide an amount of
Indebtedness and designate more than one provision pursuant to which such
amount of Indebtedness is being incurred and such Indebtedness shall not be
deemed to have been incurred or outstanding under any other provision of this
covenant, except as stated otherwise in the foregoing provisions.
Limitation on restricted payments
The indenture provides that we will not and the Guarantors will not, and
neither we nor the Guarantors will permit any of our Subsidiaries to, directly
or indirectly, make any Restricted Payment if, after giving effect to such
Restricted Payment on a pro forma basis:
(1) A Default or an Event of Default shall have occurred and be
continuing;
(2) We are not permitted to incur at least $1.00 of additional
Indebtedness pursuant to the debt incurrence ratio in the covenant "Limitation
on incurrence of additional indebtedness;" or
40
(3) The aggregate amount of all Restricted Payments made by us and our
Subsidiaries, including after giving effect to such proposed Restricted
Payment, on and after the Issue Date, would exceed, without duplication, the
sum of:
(a) $25 million; plus
(b) 50% of our aggregate Consolidated Net Income for the period, taken as
one accounting period, commencing on the first day of the fiscal quarter
including the Issue Date, to and including the last day of the fiscal quarter
ended immediately prior to the date of each such calculation for which our
consolidated financial statements are required to be delivered to the Trustee
or, if sooner, filed with the Commission, or, in the event Consolidated Net
Income for such period is a deficit, then minus 100% of such deficit; plus
(c) The aggregate Net Cash Proceeds received by us from the sale of our
Qualified Capital Stock, other than (i) to one of our Subsidiaries and (ii) to
the extent applied in connection with a Qualified Exchange or a Permitted
Investment pursuant to clause (f) thereof or, to avoid duplication, otherwise
given credit for in any provision of the following paragraph, after the Issue
Date; plus
(d) Except in each case, in order to avoid duplication, to the extent any
such payment or proceeds have been included in the calculation of Consolidated
Net Income, an amount equal to the net reduction in Investments, other than
returns of or from Permitted Investments, in any Person resulting from
distributions on or repayments of any Investments, including payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
distributions or other transfers of assets, in each case to us or any of our
Subsidiaries or from the Net Cash Proceeds from the sale of any such
Investment or from redesignations of Unrestricted Subsidiaries as
Subsidiaries, valued in each case as provided in the definition of
"Investments," not to exceed, in each case, the amount of Investments
previously made by us or any Subsidiary in such Person, including, if
applicable, such Unrestricted Subsidiary, less the cost of disposition.
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit:
(v) Restricted Payments in an amount not to exceed $25 million in the
aggregate, exclusive of any accrued and unpaid interest payable in connection
with repurchases of Subordinated Indebtedness, consisting solely of
repurchases of our Capital Stock and our Subordinated Indebtedness on and
after the Issue Date;
(w) In addition to the amounts permitted under clause (v) above,
Restricted Payments in an amount not to exceed $50 million in the aggregate,
excluding accrued and unpaid interest, consisting solely of repurchases of our
Capital Stock and our Subordinated Indebtedness on and after the Issue Date,
provided, that, after giving effect to any such repurchase on a pro forma
basis, on the date of any such repurchase, our Consolidated Coverage Ratio for
the Reference Period immediately preceding the date of repurchase would be at
least 3.25 to 1.0;
and the provisions of the immediately preceding paragraph will not prohibit,
(x) Any dividend, distribution or other payments by any of our
Subsidiaries on its Equity Interests that is paid pro rata to all holders of
such Equity Interests;
(y) A Qualified Exchange; or
(z) The payment of any dividend on Qualified Capital Stock within 60 days
after the date of its declaration if such dividend could have been made on the
date of such declaration in compliance with the foregoing provisions.
The full amount of any Restricted Payment made pursuant to the foregoing
clauses (x) and (z), but not pursuant to clause (v) or (w) or (y), of the
immediately preceding sentence, however, will be counted as Restricted
Payments made for purposes of the calculation of the aggregate amount of
Restricted Payments available to be made referred to in clause (3) of the
first paragraph under the heading "--Limitation on restricted payments."
41
For purposes of this covenant, the amount of any Restricted Payment made
or returned, if other than in cash, shall be the fair market value thereof, as
determined in the good faith reasonable judgment of our board of directors,
unless stated otherwise, at the time made or returned, as applicable.
Additionally, (a) concurrently with each Restricted Payment in excess of $10
million and (b) on February 15 of each year, or if such day is not a Business
Day, the next succeeding Business Day, with respect to all Restricted Payments
made during the preceding 12-month period and not previously reported pursuant
to clause (a) of this paragraph, we shall deliver an Officers' Certificate to
the Trustee describing in reasonable detail the nature of such Restricted
Payment, stating that the Restricted Payment is permitted and setting forth the
basis upon which the calculations required by this covenant were computed.
Limitation on dividends and other payment restrictions affecting subsidiaries
The indenture provides that we will not and the Guarantors will not, and
neither we nor the Guarantors will permit any of our Subsidiaries to, directly
or indirectly, create, assume or suffer to exist any consensual restriction on
the ability of any of our Subsidiaries (w) to pay dividends or make other
distributions to or on behalf of, or (x) to pay any obligation to or on behalf
of, or (y) otherwise to transfer assets or property to or on behalf of, or (z)
to make or pay loans or advances to or on behalf of, us or any of our
Subsidiaries, except:
(1) Restrictions imposed by the Series B Notes or the indenture or by our
other Indebtedness, which may also be guaranteed by the Guarantors, ranking
senior to the Series B Notes or the Guarantees, as applicable; provided, that
such restrictions are no more restrictive than those imposed by the indenture
and the Series B Notes;
(2) Restrictions imposed by applicable law;
(3) Existing restrictions under Existing Indebtedness;
(4) Restrictions under any Acquired Indebtedness not incurred in violation
of the indenture or any agreement, including any Equity Interest, relating to
any property, asset, or business acquired by us or any of our Subsidiaries,
which restrictions in each case existed at the time of acquisition, were not
put in place in connection with or in anticipation of such acquisition and are
not applicable to any Person, other than the Person acquired, or to any
property, asset or business, other than the property, assets and business so
acquired;
(5) Any restriction imposed by Indebtedness incurred under the Credit
Agreement pursuant to clause (c) of the covenant "Limitation on incurrence of
additional indebtedness;" provided, that such restriction or requirement is no
more restrictive than that imposed by the Credit Agreement as of the Issue
Date;
(6) Restrictions with respect solely to any of our Subsidiaries imposed
pursuant to a binding agreement which has been entered into for the sale or
disposition of all or substantially all of the Equity Interests or assets of
such Subsidiary; provided, that such restrictions apply solely to the Equity
Interests or assets of such Subsidiary which are being sold;
(7) Restrictions on transfer contained in Capital Expenditure Indebtedness
incurred pursuant to clause (a) of the covenant "Limitation on incurrence of
additional indebtedness;" provided, that such restrictions relate only to the
transfer of the property financed with the proceeds of such Capital Expenditure
Indebtedness; and
(8) In connection with and pursuant to permitted Refinancings,
replacements of restrictions imposed pursuant to clauses (1), (3), (4) or (7)
or this clause (8) of this paragraph that are not more restrictive than those
being replaced and do not apply to any other Person or assets than those that
would have been covered by the restrictions in the Indebtedness so refinanced;
and
(9) Solely with respect to Non-Guarantor Subsidiaries, restrictions under
the organizational documents governing such Subsidiary:
(a) With respect to existing Non-Guarantor Subsidiaries, existing on
the Issue Date; and
42
(b) With respect to Non-Guarantor Subsidiaries created after the Issue
Date:
(i) Prohibiting such Subsidiary from guaranteeing our Indebtedness
or another Subsidiary's Indebtedness;
(ii) On dividend payments and other distributions solely to permit
pro rata dividends and other distributions in respect of any Equity Interests
of such Subsidiary; and
(iii) With respect to clauses (y) and (z) above, limiting such
transactions to those with terms that are fair and reasonable to such
Subsidiary and no less favorable to such Subsidiary than could have been
obtained in an arm's length transaction with an unrelated third party.
Notwithstanding the foregoing, in the case of clause (y) above,
encumbrances or restrictions (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is subject to
a lease, license or similar contract entered into in the ordinary course of
business, or the assignment or transfer of any lease, license or contract
entered into in the ordinary course of business, (B) by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any of
our Subsidiaries' property or assets not otherwise prohibited by the indenture
in respect of the assets subject thereto or (C) contained in security
agreements or mortgages securing Indebtedness to the extent such encumbrances
or restrictions restrict the transfer of the property subject to such security
agreements or mortgages may be subject to customary restrictions on the
transfer or disposition thereof pursuant to such Lien.
Limitations on layering indebtedness
The indenture provides that we will not and the Guarantors will not, and
neither we nor the Guarantors will permit any of our Subsidiaries to, directly
or indirectly, incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is contractually subordinate in right of
payment to any of our other Indebtedness or any other Indebtedness of a
Guarantor unless, by its terms, such Indebtedness is contractually subordinate
in right of payment to, or ranks pari passu with, the Series B Notes or the
Guarantee, as applicable.
Limitation on liens securing indebtedness
We will not and the Guarantors will not, and neither we nor the Guarantors
will permit any of our Subsidiaries to, create, incur, assume or suffer to
exist any Lien of any kind, other than Permitted Liens, upon any of their
respective assets now owned or acquired on or after the date of the indenture
or upon any income or profits therefrom securing any of our Indebtedness or any
Indebtedness of any Guarantor, unless we provide, and cause our Subsidiaries to
provide, concurrently therewith, that the Series B Notes and the applicable
Guarantees are equally and ratably so secured; provided that if such
Indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated
Indebtedness shall be contractually subordinate and junior to the Lien securing
the Series B Notes, and any related applicable Guarantees, with the same
relative priority as such Subordinated Indebtedness shall have with respect to
the Series B Notes, and any related applicable Guarantees.
43
Limitation on sale of assets and subsidiary stock
The indenture provides that we will not and the Guarantors will not, and
neither we nor the Guarantors will permit any of our Subsidiaries to, in one or
a series of related transactions, convey, sell, lease, transfer, assign or
otherwise dispose of, directly or indirectly, any of their property, business
or assets, including by merger or consolidation, in the case of a Guarantor or
one of our Subsidiaries, and including any sale or other transfer or issuance
of any Equity Interests of any of our Subsidiaries or Unrestricted
Subsidiaries, whether by us or one of our Subsidiaries or Unrestricted
Subsidiaries or through the issuance, sale or transfer of Equity Interests by
one of our Subsidiaries or Unrestricted Subsidiaries and including any sale and
leaseback transaction, unless:
(1) (a) The Net Cash Proceeds therefrom are applied within 365 days after
the date of such asset sale, to the extent not applied in accordance with
paragraph (b) below, to the:
(i) Optional redemption of the Series B Notes in accordance with
the terms of the indenture and our other Indebtedness ranking on a parity with
the Series B Notes and with similar provisions requiring us to redeem such
Indebtedness with the proceeds from such asset sale, pro rata in proportion to
the respective principal amounts (or accreted values in the case of
Indebtedness issued with an original issue discount) of the Series B Notes and
such other Indebtedness then outstanding; or
(ii) Repurchase of the Series B Notes and such other Indebtedness
ranking on a parity with the Series B Notes and with similar provisions
requiring us to make an offer to purchase such Indebtedness with the proceeds
from such asset sale pursuant to a cash offer, subject only to conditions
required by applicable law, if any, pro rata in proportion to the respective
principal amounts, or accreted values in the case of Indebtedness issued with
an original issue discount, of the Series B Notes and such other Indebtedness
then outstanding, at a purchase price of 100% of the principal amount, or
accreted value in the case of Indebtedness issued with an original issue
discount, together with accrued and unpaid interest and Liquidated Damages, if
any, to the date of payment, made within 335 days of such asset sale; or
(b) Within 365 days following such asset sale, the asset sale offer
amount is:
(i) Invested in assets or property, other than notes, bonds,
obligations and securities, except in connection with the acquisition of a
Wholly Owned Subsidiary that immediately becomes a Guarantor in a Related
Business, which will constitute or be a part of a Related Business of ours or
such Subsidiary, if it continues to be a Subsidiary, immediately following such
transaction; or
(ii) Used to retire Senior Debt and to permanently reduce the
amount of such Senior Debt outstanding on the Issue Date or permitted pursuant
to paragraphs (b) and (c) of the covenant "Limitation on incurrence of
additional indebtedness," including that in the case of a revolver or similar
arrangement that makes credit available, such commitment is so permanently
reduced by such amount;
provided, however, that with respect to any asset sale occurring during 2001,
the asset sale offer amount received therefrom may be applied as provided in
(a) or (b) above at any time prior to December 31, 2002, and any asset sale
offer made in accordance with (a)(ii) above may be made at any time prior to
December 1, 2002,
(2) At least 75% of the total consideration for such asset sale or series
of related asset sales consists of cash or Cash Equivalents, provided, that up
to one-third of such 75% may consist of notes or other obligations received by
us or such Subsidiary from such transferee that are converted by us or such
Subsidiary into cash, to the extent of the cash received, within 365 days after
receipt, which shall constitute Net Cash Proceeds attributable to the original
asset sale for which such notes or other obligations were received, and
provided further that any of our Indebtedness or of any Subsidiary, as shown on
our or such Subsidiary's most recent balance sheet, other than Subordinated
Indebtedness, that is assumed by the transferee of any such assets shall
constitute cash for purposes hereof, so long as we and all of our Subsidiaries
are fully and unconditionally released therefrom; and
(3) We receive, or such Subsidiary receives, fair market value for such
asset sale, such determination to be made in good faith by our board of
directors for asset sales exceeding $25 million.
44
Pending the final application of any Net Cash Proceeds, we may temporarily
reduce revolving credit borrowings or otherwise invest the Net Cash Proceeds in
any manner that is not prohibited by the indenture.
The indenture provides that an acquisition of Series B Notes pursuant to
an asset sale offer may be deferred until the accumulated Net Cash Proceeds
from asset sales not applied as set forth in 1(a)(i) or 1(b) above exceeds $10
million and that each asset sale offer shall remain open for at least 20
Business Days following its commencement.
Upon expiration of the asset sale offer period, we shall apply the asset
sale offer amount plus an amount equal to accrued and unpaid interest and
Liquidated Damages, if any, to the purchase of all Indebtedness properly
tendered in accordance with the provisions hereof, on a pro rata basis if the
asset sale offer amount is insufficient to purchase all Indebtedness so
tendered at the asset sale offer price, together with accrued interest and
Liquidated Damages, if any. To the extent that the aggregate amount of Series B
Notes and such other pari passu Indebtedness tendered pursuant to an asset sale
offer is less than the asset sale offer amount, we may use any remaining Net
Cash Proceeds for general corporate purposes as otherwise permitted by the
indenture and following the consummation of each asset sale offer the excess
proceeds amount shall be reset to zero.
Notwithstanding, and without complying with, the provisions of this
covenant:
(1) We may and our Subsidiaries may, in the ordinary course of business,
(a) convey, sell, transfer, assign or otherwise dispose of inventory and other
assets acquired and held for resale in the ordinary course of business and (b)
liquidate Cash Equivalents;
(2) We may and our Subsidiaries may convey, sell, transfer, assign or
otherwise dispose of assets pursuant to and in accordance with the covenant
"Limitation on merger, sale or consolidation;"
(3) We may and our Subsidiaries may sell or dispose of damaged, worn out
surplus or obsolete personal property in the ordinary course of business so
long as such property is no longer necessary for the proper conduct of our
business or the business of such Subsidiary, as applicable;
(4) We may and our Subsidiaries may convey, sell, lease, transfer, assign
or otherwise dispose of assets to us or any of the Guarantors;
(5) We may and our Subsidiaries may, in the ordinary course of business,
convey, sell, lease, transfer, assign, or otherwise dispose of assets, or
related assets in related transactions, with a fair market value of less than
$1 million;
(6) We may and each of our Subsidiaries may settle or release litigation
claims in the ordinary course of business or grant Liens not prohibited by the
indenture;
(7) We may and our Subsidiaries may exchange assets held by us or such
Subsidiaries for assets held by any Person or entity; provided, that (a) at the
time of or when entering into any such exchange of assets and immediately after
giving effect thereto, no Default or Event of Default shall have occurred and
be continuing or would occur as a consequence thereof, (b) the assets received
by us or such Subsidiaries in any such exchange will immediately constitute, be
a part of, or be used in, a Related Business of ours or such Subsidiaries,
(c) with respect to transactions involving assets with a fair market value of
$25 million or more, our board of directors has determined that the terms of
any exchange are fair and reasonable, and (d) any such exchange shall be deemed
to be an asset sale to the extent that we or any of our Subsidiaries receives
cash or Cash Equivalents in such exchange; and
(8) We and our Subsidiaries may enter into operating leases of real or
personal property in the ordinary course of business.
45
In addition to the foregoing and notwithstanding anything herein to the
contrary, we will not, and will not permit any of our Subsidiaries to,
directly or indirectly, make any asset sale of any of the Equity Interests of
any of our Subsidiaries (other than to us or to a Wholly Owned Subsidiary that
is a Guarantor) except:
(i) Pursuant to an asset sale of all the Equity Interests of such
Subsidiary; or
(ii) Provided, that after such sale we or our Subsidiaries own a
majority of the voting and economic Equity Interests of such Subsidiary, an
asset sale of Equity Interests with no preferences or special rights or
privileges and with no redemption or prepayment provisions; or
(iii) Up to $10 million in the aggregate per fiscal year, not to
exceed $50 million in the aggregate, of sales of Equity Interests in excess of
50% of the Equity Interests of such Subsidiary, provided, that (x) such
Subsidiary exists solely for the purpose of owning and operating one or more
dialysis centers and providing services related thereto, (y) we or our
Subsidiaries own at least 20% of the voting and economic Equity Interests in
such Subsidiary after such asset sale, and (z) we or a Subsidiary of ours
enters into a management contract with respect to all of the dialysis centers
owned by the Subsidiary that was the subject of the asset sale.
In the case of clause (iii) of the preceding sentence, to the extent that the
aggregate amount available for sales of Equity Interests has been reduced as a
result of such sales, and we, a Guarantor or a Non-Guarantor Subsidiary
thereafter shall either (A) sell in an asset sale in compliance with the
provisions of this covenant all of the remaining Equity Interests in such
Subsidiary owned by us and our Subsidiaries or (B) repurchase Equity Interests
of such Subsidiary such that we, a Guarantor and/or a Non-Guarantor Subsidiary
own(s) in the aggregate in excess of 50% of the Equity Interests of such
Subsidiary upon repurchase, then an amount equal to the sales price received
for such Equity Interests sold in the case of clause (A), or the purchase
price paid for such Equity Interests so repurchased in the case of clause (B),
in either case as determined in good faith, shall increase the aggregate
amount available for future sales under such clause (iii); provided, that
(a) The amount added back to the aggregate amount shall not exceed the
amount originally deducted therefrom upon the original sale of the Equity
Interests in such Subsidiary;
(b) The aggregate amount available shall in no event exceed $50 million
at any time;
(c) The aggregate amount available per year shall in no event exceed
$10 million in any year; and
(d) To the extent a Non-Guarantor Subsidiary repurchases such Equity
Interests, such repurchase shall be deemed a formation of a Non-Guarantor
Subsidiary on the date of repurchase for purposes of the definition of Non-
Guarantor Subsidiary.
Any asset sale offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the
Exchange Act and the rules and regulations thereunder and all other applicable
federal and state securities laws. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of this paragraph,
our compliance or the compliance of any of our subsidiaries with such laws and
regulations shall not in and of itself cause a breach of our obligations under
such covenant.
If the payment date in connection with an asset sale offer hereunder is on
or after an interest payment record date and on or before the associated
Interest Payment Date, any accrued and unpaid interest, and Liquidated
Damages, if any, due on such Interest Payment Date will be paid to the Person
in whose name a Series B Note is registered at the close of business on such
record date on the corresponding Interest Payment Date.
46
Limitation on transactions with affiliates
The indenture provides that neither we nor any of our Subsidiaries will be
permitted on or after the Issue Date to enter into or suffer to exist any
contract, agreement, arrangement or transaction with any Affiliate, or any
series of related Affiliate transactions, other than Exempted Affiliate
Transactions:
(1) Unless it is determined that the terms of such Affiliate transaction
are fair and reasonable to us, and no less favorable to us than could have been
obtained in an arm's length transaction with a non-Affiliate; and
(2) If involving consideration to either party in excess of $5 million,
unless such Affiliate transaction(s) is evidenced by an Officers' Certificate
addressed and delivered to the Trustee certifying that such Affiliate
transaction(s) has been approved by a majority of the members of our board of
directors who are disinterested in such transaction, if there are any directors
who are so disinterested; and
(3) If involving consideration to either party in excess of $10 million,
unless in addition we, prior to the consummation thereof, obtain a written
favorable opinion as to the fairness of such transaction to us from a financial
point of view from an independent investment banking firm of national
reputation in the United States or, if pertaining to a matter for which such
investment banking firms do not customarily render such opinions, an
accounting, appraisal or valuation firm of national reputation in the United
States.
Limitation on merger, sale or consolidation
The indenture provides that we will not consolidate with or merge with or
into another Person or, directly or indirectly, sell, lease, convey or transfer
all or substantially all of our assets such amounts to be computed on a
consolidated basis, whether in a single transaction or a series of related
transactions, to another Person or group of affiliated Persons, unless:
(1) Either (a) we are the continuing entity or (b) the resulting,
surviving or transferee entity is a corporation organized under the laws of the
United States, any state thereof or the District of Columbia and expressly
assumes by supplemental indenture all of our obligations in connection with the
Series B Notes and the indenture;
(2) No Default or Event of Default shall exist or shall occur immediately
after giving effect on a pro forma basis to such transaction;
(3) Unless such transaction is solely the merger of us and one of our
previously existing Subsidiaries and which transaction is not for the purpose
of evading this provision and not in connection with any other transaction,
immediately after giving effect to such transaction on a pro forma basis, the
consolidated resulting, surviving or transferee entity would immediately
thereafter be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the debt incurrence ratio set forth in the first paragraph of the
covenant "Limitation on incurrence of additional indebtedness;" and
(4) Each Guarantor shall have by amendment to the indenture confirmed that
its Guarantee shall apply to our obligations or the surviving entity in
accordance with the Series B Notes and the indenture.
Upon any consolidation or merger or any transfer of all or substantially
all of our assets in accordance with the foregoing, the successor corporation
formed by such consolidation or into which we are merged or to which such
transfer is made shall succeed to and, except in the case of a lease, be
substituted for, and may exercise every right and power of, us under the
indenture with the same effect as if such successor corporation had been named
therein as us, and, except in the case of a lease, we shall be released from
the obligations under the Series B Notes and the indenture except with respect
to any obligations that arise from, or are related to, such transaction.
For purposes of the foregoing, the transfer, by lease, assignment, sale or
otherwise, of all or substantially all of the properties and assets of one or
more Subsidiaries, our interest in which constitutes all or substantially all
of our properties and assets, shall be deemed to be the transfer of all or
substantially all of our properties and assets.
47
Limitation on lines of business
The indenture provides that neither we nor any of our Subsidiaries will
directly or indirectly engage to any substantial extent in any line or lines of
business activity other than that which is a Related Business.
Subsidiary guarantors
The indenture provides that all of our present and future Subsidiaries,
other than Non-Guarantor Subsidiaries and Foreign Subsidiaries, jointly and
severally will guarantee all principal, premium, if any, and interest, and
Liquidated Damages, if any, on the Series B Notes on a senior subordinated
basis. If we create a Non-Guarantor Subsidiary, our Consolidated Minority
Adjusted EBITDA Ratio for the four fiscal quarters immediately preceding such
creation must be at least 0.80 to 1.00. As of March 31, 2001, our Consolidated
Minority Adjusted EBITDA Ratio was 0.98 to 1.00.
Notwithstanding anything herein or in the indenture to the contrary, if
any of our Subsidiaries that is not a Guarantor guarantees any of our other
Indebtedness or any other Indebtedness of any of our Subsidiaries, or we or any
of our Subsidiaries, individually or collectively, pledges, directly or
indirectly, more than 65% of the Voting Equity Interests of such Subsidiary to
a lender, other than pledges of Equity Interests of Non-Guarantor Subsidiaries
pursuant to the Credit Agreement, then such Subsidiary must become a Guarantor.
Release of guarantors
The indenture provides that no Guarantor will consolidate or merge with or
into, whether or not such Guarantor is the surviving Person, another Person
unless, subject to the provisions of the following paragraph and the other
provisions of the indenture, (1) the Person formed by or surviving any such
consolidation or merger, if other than such Guarantor, assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee, pursuant to which such Person shall
guarantee, on a senior subordinated basis, all of such Guarantor's obligations
under such Guarantor's Guarantee on the terms set forth in the indenture; and
(2) immediately before and immediately after giving effect to such transaction
on a pro forma basis, no Default or Event of Default shall have occurred or be
continuing. The provisions of the covenant shall not apply to the merger of any
Guarantors with and into each other or with or into us.
Upon the sale or disposition, whether by merger, stock purchase, Asset
Sale or otherwise, of a Guarantor, as an entity, to an entity which is not, and
is not required to become, a Guarantor, or the designation of a Subsidiary to
become an Unrestricted Subsidiary, or upon a Guarantor becoming a Non-Guarantor
Subsidiary which transaction is otherwise in compliance with the indenture,
including, without limitation, the provisions of the covenant Limitations on
Sale of Assets and Subsidiary Stock, such Guarantor will be deemed released
from its obligations under its Guarantee of the Series B Notes and such
Guarantee will terminate; provided, however, that any such termination shall
occur only to the extent that all obligations of such Guarantor under all of
its guarantees of, and under all of its pledges of assets or other security
interests that secure, any of our Indebtedness or any Indebtedness of any other
of our Subsidiaries shall also terminate upon such release, sale or transfer
and none of such Guarantor's Equity Interests are pledged for the benefit of
any holder of any of our Indebtedness or any Indebtedness of any of our
Subsidiaries, other than pledges of Equity Interests of Non-Guarantor
Subsidiaries pursuant to the Credit Agreement.
Limitation on status as investment company
The indenture prohibits us and our Subsidiaries from being required to
register as an "investment company," as that term is defined in the Investment
Company Act of 1940, as amended.
48
Reports
The indenture provides that whether or not we are subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, we will deliver to the
Trustee and, to each holder and to prospective purchasers of Series B Notes
identified to us by an initial purchaser, within five days after we are or
would have been, if we were subject to such reporting obligations, required to
file such with the Commission, annual and quarterly financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the Commission, if we were subject to the requirements of
Section 13 or 15(d) of the Exchange Act, including, with respect to annual
information only, a report thereon by our certified independent public
accountants as such would be required in such reports to the Commission, and,
in each case, together with a management's discussion and analysis of financial
condition and results of operations which would be so required and, unless the
Commission will not accept such reports, file with the Commission the annual,
quarterly and other reports which it is or would have been required to file
with the Commission.
Events of default and remedies
The indenture defines an "Event of Default" as:
(1) Our failure to pay any installment of interest, or Liquidated Damages,
if any, on the Series B Notes as and when the same becomes due and payable and
the continuance of any such failure for 30 days;
(2) Our failure to pay all or any part of the principal, or premium, if
any, on the Series B Notes when and as the same becomes due and payable at
maturity, redemption, by acceleration or otherwise, including, without
limitation, payment of the change of control purchase price or the asset sale
offer price on Series B Notes validly tendered and not properly withdrawn
pursuant to a change of control offer or asset sale offer, as applicable;
(3) Our failure or the failure by any of our Subsidiaries to observe or
perform any other covenant or agreement contained in the Series B Notes or the
indenture and, except for the provisions under "Limitation on merger, sale or
consolidation" and "Limitation on restricted payments," the continuance of such
failure for a period of 30 days after written notice is given to us by the
Trustee or to us and the Trustee by the holders of at least 25% in aggregate
principal amount of the Series B Notes outstanding;
(4) Certain events of bankruptcy, insolvency or reorganization in respect
of us or any of our Significant Subsidiaries;
(5) A default in our Indebtedness or the Indebtedness any of our
Subsidiaries with an aggregate amount outstanding in excess of $10 million (a)
resulting from the failure to pay principal at the stated maturity of such
Indebtedness or (b) as a result of which the maturity of such Indebtedness has
been accelerated prior to its stated maturity;
(6) Final unsatisfied judgments not covered by insurance aggregating in
excess of $5 million, at any one time rendered against us or any of our
Subsidiaries and not stayed, bonded or discharged within 60 days; and
(7) Any Guarantee of a Guarantor ceases to be in full force and effect or
becomes unenforceable or invalid or is declared null and void or any Guarantor
denies or disaffirms its obligations under its Guarantee, in any case, other
than in accordance with the terms of the Guarantee and the indenture.
The indenture provides that if a Default occurs and is continuing, the
Trustee must, within 90 days after the occurrence of such Default, give to the
holders notice of such Default.
If an Event of Default occurs and is continuing, other than an Event of
Default specified in clause (4) above relating to us or any of our Significant
Subsidiaries, then and in every such case, unless the principal of all of the
Series B Notes shall have already become due and payable, either the Trustee or
the holders of at least 25% in aggregate principal amount of the Series B Notes
then outstanding, by notice in writing to us, and to the Trustee if given by
holders, may declare all principal, determined as set forth below, and accrued
interest,
49
and Liquidated Damages, if any, thereon to be due and payable immediately;
provided, however, that if any Senior Debt is outstanding pursuant to the
Credit Agreement, upon a declaration of such acceleration, such principal and
interest shall be due and payable upon the earlier of (x) the fifth Business
Day after sending us and the representative such written notice, unless such
Event of Default is cured or waived prior to such date and (y) the date of
acceleration of any Senior Debt under the Credit Agreement. In the event a
declaration of acceleration resulting from an Event of Default described in
clause (5) above with respect to any Senior Debt has occurred and is
continuing, such declaration of acceleration shall be automatically annulled if
such default is cured or waived or the holders of the Indebtedness which is the
subject of such default have rescinded their declaration of acceleration in
respect of such indebtedness within 10 days thereof and the Trustee has
received written notice of such cure, waiver or rescission and no other Event
of Default described in clause (5) above has occurred that has not been cured
or waived within 10 days of the declaration of such acceleration in respect of
such Indebtedness. If an Event of Default specified in clause (4) above
relating to us or any of our Significant Subsidiaries occurs, all principal and
accrued interest, and Liquidated Damages, if any, thereon will be immediately
due and payable on all outstanding Series B Notes without any declaration or
other act on the part of the Trustee or the holders. The holders of a majority
in aggregate principal amount of Series B Notes generally are authorized to
rescind such acceleration if all existing Events of Default, other than the
non-payment of the principal of, premium, if any, and interest on the Series B
Notes which have become due solely by such acceleration, have been cured or
waived.
The holders of a majority in aggregate principal amount of the Series B
Notes at the time outstanding may waive on behalf of all the holders any
Default, except a Default with respect to any provision requiring a
supermajority approval to amend, which Default may only be waived by such a
supermajority, and except a Default in the payment of principal of or interest
on any Series B Note not yet cured or a Default with respect to any covenant or
provision which cannot be modified or amended without the consent of the holder
of each outstanding Series B Note affected. Subject to the provisions of the
indenture relating to the duties of the Trustee, the Trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request, order or direction of any of the holders, unless such holders have
offered to the Trustee reasonable security or indemnity.
Subject to all provisions of the indenture and applicable law, the holders
of a majority in aggregate principal amount of the Series B Notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee.
Legal defeasance and covenant defeasance
The indenture provides that we may, at our option and at any time, elect
to have our obligations and the obligations of the Guarantors discharged with
respect to the outstanding Series B Notes. Such legal defeasance means that we
shall be deemed to have paid and discharged the entire indebtedness represented
by the Series B Notes, and the indenture shall cease to be of further effect as
to all outstanding Series B Notes and Guarantees, except as to:
(1) Rights of holders to receive payments in respect of the principal of,
premium, if any, and interest, and Liquidated Damages, if any, on such Series B
Notes when such payments are due from the defeasance trust funds;
(2) Our obligations with respect to such Series B Notes concerning issuing
temporary Series B Notes, registration of Series B Notes, mutilated, destroyed,
lost or stolen Series B Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) The rights, powers, trust, duties, and immunities of the Trustee, and
our obligations in connection therewith; and
(4) The legal defeasance provisions of the indenture.
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In addition, we may, at our option and at any time, elect to have our
obligations and the obligations of the Guarantors released with respect to
most of the covenants under the indenture, except as described otherwise in
the indenture, and thereafter any omission to comply with such obligations
shall not constitute a Default or Event of Default with respect to the Series
B Notes. In the event covenant defeasance occurs, certain events, not
including non-payment, non-payment of guarantees, and bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Series B Notes. We may exercise our legal defeasance option regardless of
whether we previously exercised covenant defeasance.
In order to exercise either legal defeasance or covenant defeasance:
(1) We must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of the Series B Notes, U.S. legal tender, U.S.
Government Obligations or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest,
and Liquidated Damages, if any, on such Series B Notes on the stated date for
payment thereof or on the redemption date of such principal or installment of
principal of, premium, if any, or interest, and Liquidated Damages, if any, on
such Series B Notes, and the holders of Series B Notes must have a valid,
perfected, exclusive security interest in such trust;
(2) In the case of legal defeasance, we shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that:
(A) We have received from, or there has been published by the Internal
Revenue Service, a ruling; or
(B) Since the date of the indenture, there has been a change in the
applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the holders of such Series B Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such legal
defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
legal defeasance had not occurred;
(3) In the case of covenant defeasance, we shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
such Trustee confirming that the holders of such Series B Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such covenant defeasance had not occurred;
(4) No Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit;
(5) Such legal defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under the indenture or any
other material agreement or instrument to which we or any of our Subsidiaries
are a party or by which we or any of our Subsidiaries are bound;
(6) We shall have delivered to the Trustee an Officers' Certificate
stating that the deposit was not made by us with the intent of preferring the
holders of such Series B Notes over any other of our creditors or with the
intent of defeating, hindering, delaying or defrauding any other of our
creditors or others; and
(7) We shall have delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that the conditions precedent provided for
in, in the case of the Officers' Certificate, (1) through (6) and, in the case
of the opinion of counsel, clauses (1), with respect to the validity and
perfection of the security interest, (2), (3) and (5) of this paragraph have
been complied with and we shall have delivered to the Trustee an Officers'
Certificate, subject to such qualifications and exceptions as the Trustee
deems appropriate, to the effect that, assuming no holder of the Series B
Notes is an insider of ours, the trust funds will not be subject to the effect
of any applicable federal bankruptcy, insolvency, reorganization or similar
laws affecting creditors' right generally.
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If the funds deposited with the Trustee to effect covenant defeasance are
insufficient to pay the principal of, premium, if any, and interest, and
Liquidated Damages, if any, on the Series B Notes when due, then our
obligations and the obligations of Guarantors under the indenture will be
revived and no such defeasance will be deemed to have occurred.
Amendments and supplements
The indenture contains provisions permitting us, the Guarantors and the
Trustee to enter into a supplemental indenture for certain limited purposes
without the consent of the holders, including to:
(a) Cure any ambiguity, defect, or inconsistency;
(b) Add to our covenants or the Guarantors' covenants for the benefit of
the holders, or to surrender any right or power conferred upon us or the
Guarantors by the indenture or the Series B Notes or make any other change that
does not materially adversely affect the rights of any holder;
(c) Provide for collateral for or additional Guarantors of the Series B
Notes;
(d) Evidence the succession of another Person to us, and the assumption by
any such successor of our obligations under the indenture and the Series B
Notes, in accordance with the terms of the indenture;
(e) Comply with the Trust Indenture Act;
(f) Evidence the succession of another corporation to any Guarantor and
assumption by any such successor of the Guarantee of such Guarantor pursuant to
the indenture;
(g) Evidence the release of any Guarantor; or
(h) Evidence and provide for the acceptance of appointment of a successor
Trustee with respect to the Series B Notes.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt, or any group or
representative thereof authorized to give a consent, consent to such amendment.
With the consent of the holders of not less than a majority in aggregate
principal amount of the Series B Notes at the time outstanding, we, the
Guarantors and the Trustee are permitted to amend or supplement the indenture
or any supplemental indenture or modify the rights of the holders; provided,
that no such modification may, without the consent of each holder affected by
the modification:
(1) Change the Stated Maturity on any Series B Note, or reduce the
principal amount thereof or the rate, or extend the time for payment, of
interest thereon or any premium payable upon the redemption thereof at our
option, or change the city of payment where, or the coin or currency in which,
any Series B Note or any premium or the interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment on or after
the Stated Maturity thereof, or, in the case of redemption at our option, on or
after the Redemption Date, or reduce the change of control purchase price or
the asset sale offer price after the corresponding asset sale or change of
control has occurred or alter the provisions, including the defined terms used
therein, regarding our right to redeem the Series B Notes as a right, or at our
option or the provisions, including the defined terms used therein, of the
"Repurchase of Series B Notes at the option of the holder upon a change of
control" covenant in a manner adverse to the holders; or
(2) Reduce the percentage in principal amount of the outstanding Series B
Notes, the consent of whose holders is required for any such amendment,
supplemental indenture or waiver provided for in the indenture; or
(3) Modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the indenture cannot
be modified or waived without the consent of the holder of each outstanding
Series B Note affected thereby.
52
Governing law
The indenture provides that it and the Series B Notes will be governed by,
and construed in accordance with, the laws of the State of New York including,
without limitation, Sections 5-1401 and 5-1402 of the New York General
Obligations Law and New York Civil Practice Laws and Rules 327(b).
No personal liability
The indenture provides that no direct or indirect stockholder, partner,
member, employee, manager, officer or director, as such, past, present or
future of us, the Guarantors or any successor entity shall have any personal
liability in respect of our obligations or the obligations of the Guarantors
under the indenture or the Series B Notes solely by reason of his or its status
as such stockholder, partner, member, employee, manager, officer or director,
except that this provision shall in no way limit the obligation of any
Guarantor pursuant to any guarantee of the Series B Notes.
Certain definitions
"Acquired Indebtedness" means Indebtedness, including Disqualified Capital
Stock, of any Person existing at the time such Person becomes our Subsidiary,
including by designation, or is merged or consolidated into or with us or one
of our Subsidiaries.
"Acquisition" means the purchase or other acquisition of any Person or all
or substantially all the assets of any Person or an operating business unit of
any Person by any other Person, whether by purchase, merger, consolidation, or
other transfer, and whether or not for consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with us. For purposes
of this definition, the term "control" means the power to direct the management
and policies of a Person, directly or through one or more intermediaries,
whether through the ownership of voting securities, by contract, or otherwise;
provided, that with respect to ownership interest in us and our Subsidiaries, a
Beneficial Owner of 10% or more of the total voting power normally entitled to
vote in the election of directors, managers or trustees, as applicable, shall
for such purposes be deemed to constitute control. Notwithstanding the
foregoing, Affiliate shall not include Wholly Owned Subsidiaries.
"Attributable Indebtedness" means in respect of a Sale-Leaseback
Transaction, as at the time of determination, the present value, discounted at
the interest rate borne by the Series B Notes, compounded annually, of the
total obligations of the lessee for rental payments during the remaining term
of the lease included in such Sale-Leaseback Transaction, including any period
for which such lease has been extended.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (1) the sum of the
products (a) of the number of years from the date of determination to the date
or dates of each successive scheduled principal or redemption, payment of such
security or instrument and (b) the amount of each such respective principal or
redemption, payment by (2) the sum of all such principal or redemption,
payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definition of
change of control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act, as in effect on the Issue Date, whether or
not applicable.
"Board of Directors" means, with respect to any Person, the board of
directors, or, if not a corporation, the equivalent board of managers or
members or body performing similar functions, of such Person or any committee
of the board of directors of such Person authorized, with respect to any
particular matter, to exercise the power of the board of directors of such
Person.
53
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Expenditure Indebtedness" of any Person means any Indebtedness of
such Person to any seller or other Person incurred solely to finance the
acquisition, including in the case of a Capitalized Lease Obligation, the
lease, construction, installation or improvement of any real or personal
tangible property or computer software which is directly related to a Related
Business of ours and which is incurred within 180 days of such acquisition or
concurrently with completion of such construction, installation or improvement
and which is secured only by the assets so financed and any attachments thereto
or proceeds thereof.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means, with respect to any corporation, any and all
shares, interests, rights to purchase, other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock, warrants, options,
participations or other equivalents of or interests, however designated, in
stock issued by that corporation.
"Cash Equivalent" means:
(1) Securities issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof, provided,
that the full faith and credit of the United States of America is pledged in
support thereof; or
(2) U.S. dollar denominated and Eurodollar time deposits, bankers'
acceptances and certificates of deposit and commercial paper issued by the
parent corporation of any domestic commercial bank of recognized standing
having capital and surplus in excess of $500 million; or
(3) Commercial paper issued by others rated at least A-2 or the equivalent
thereof by S&P or at least P-2 or the equivalent thereof by Moody's; or
(4) Readily marketable direct obligations issued by any state of the
United States of America or any political subdivision thereof having one of the
two highest rating categories obtainable from either Moody's or S&P; or
(5) Repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1) and (2) above
entered into with any financial institution meeting the qualifications
specified in clause (2) above; or
(6) Interests in regulated money market mutual funds that invest at least
95% of their funds in assets or securities of the type described in clauses (1)
through (5) above,
and in the case of each of (1), (2), (3) and (4) maturing within one year after
the date of acquisition.
"Consolidated Coverage Ratio" of any Person on any date of determination
means the ratio, on a pro forma basis, of (a) the aggregate amount of
Consolidated EBITDA of such Person attributable to continuing operations and
businesses, exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of, for the Reference Period to (b) the
aggregate Consolidated Fixed Charges of such Person, exclusive of amounts
attributable to operations and businesses permanently discontinued or disposed
of, but only to the extent that the obligations giving rise to such
Consolidated Fixed Charges would no longer be obligations contributing to such
Person's Consolidated Fixed Charges subsequent to the Transaction Date, during
the Reference Period; provided, that for purposes of such calculation:
(1) Acquisitions which occurred during the Reference Period or subsequent
to the Reference Period and on or prior to the Transaction Date shall be
assumed to have occurred on the first day of the Reference Period
54
without regard to the effect of clause (c) of the definition of "Consolidated
Net Income," and any pro forma adjustments shall be made in accordance with
Regulation S-X promulgated by the Commission;
(2) Transactions giving rise to the need to calculate the Consolidated
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period without regard to the effect of clause (c) of the definition
of "Consolidated Net Income;"
(3) Other than with respect to Indebtedness under revolving credit
facilities incurred in the ordinary course of business for general corporate
purposes and not for Acquisitions, (i) the incurrence of any Indebtedness,
including issuance of any Disqualified Capital Stock, and the application of
proceeds therefrom to the extent used to refinance or retire other
Indebtedness, or (ii) the repayment of any Indebtedness with the Net Cash
Proceeds from any Asset Sale applied to permanently reduce the outstanding
amounts or the commitments with respect to such Indebtedness pursuant to clause
(1)(b)(ii) of the first paragraph of the covenant "Limitation on sale of assets
and subsidiary stock," in each case, during the Reference Period or subsequent
to the Reference Period and on or prior to the Transaction Date shall be
assumed to have occurred on the first day of the Reference Period; and
(4) The Consolidated Fixed Charges of such Person attributable to interest
on any Indebtedness or dividends on any Disqualified Capital Stock bearing a
floating interest, or dividend, rate shall be computed on a pro forma basis as
if the average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless
such Person or any of its Subsidiaries is a party to an Interest Swap or
Hedging Obligation, which shall remain in effect for the 12-month period
immediately following the Transaction Date, that has the effect of fixing the
interest rate on the date of computation, in which case such rate, whether
higher or lower, shall be used.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the Consolidated Net Income of such Person for such period adjusted to exclude
all losses that are either extraordinary, as determined in accordance with
GAAP, or are either unusual or nonrecurring and to add thereto, to the extent
deducted from net revenues in determining Consolidated Net Income, without
duplication, the sum of
(1) Consolidated income tax expense;
(2) Consolidated depreciation and amortization expense;
(3) Consolidated Fixed Charges;
(4) All other non-recurring non-cash charges of such Person and its
Consolidated Subsidiaries;
(5) Goodwill Impairment Charges; and
(6) Minority Interest,
less the amount of all cash payments made by such Person or any of its
Subsidiaries during such period to the extent such payments relate to non-
recurring non-cash charges that were added back in determining Consolidated
EBITDA for such period or any prior period; provided, that consolidated income
tax expense and depreciation and amortization and other non-recurring non-cash
charges of a Subsidiary that is a less than Wholly Owned Subsidiary shall only
be added to the extent of the equity interest of such Person in such
Subsidiary, and with respect to the Company, any cash payments made by us or
one of our Subsidiaries, not exceeding $15 million in the aggregate, paid to
settle or otherwise finally resolve the Florida Overpayment Dispute shall not
be so subtracted.
"Consolidated Fixed Charges" of any Person means, for any period, the
aggregate amount, without duplication and determined in each case in accordance
with GAAP, of:
(a) Interest expensed or capitalized, paid, accrued, or scheduled to be
paid or accrued, including, in accordance with the following sentence, interest
attributable to Capitalized Lease Obligations, of such Person and its
Consolidated Subsidiaries during such period, including (1) original issue
discount and non-cash interest payments or accruals on any Indebtedness, (2)
the interest portion of all deferred payment obligations, and
55
(3) all commissions, discounts and other fees and charges owed with respect to
bankers' acceptances and letters of credit financings and currency and
Interest Swap and Hedging Obligations, in each case to the extent attributable
to such period; and
(b) The amount of dividends accrued or payable or guaranteed, by such
Person or any of its Consolidated Subsidiaries in respect of Preferred Stock,
other than by Subsidiaries of such Person to such Person or such Person's
Consolidated Subsidiaries, excluding all non-cash dividends which, pursuant to
the terms of the Preferred Stock in respect thereof, may not be converted to
or otherwise paid in cash prior to 91 days after the Stated Maturity.
For purposes of this definition, (x) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
in good faith by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guarantee by such Person
or a Subsidiary of such Person of an obligation of another Person shall be
deemed to be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Minority Adjusted EBITDA Ratio" of any Person on any date
of determination means the ratio, on a pro forma basis, of (a) the aggregate
amount of Consolidated EBITDA of such Person attributable to continuing
operations and businesses, exclusive of amounts attributable to operations and
businesses permanently discontinued or disposed of, for the Reference Period,
less the Minority Interest of such Person, to (b) the aggregate amount of
Consolidated EBITDA of such Person attributable to continuing operations and
businesses, exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of, for the Reference Period.
"Consolidated Net Income" means, with respect to any Person for any
period, the net income or loss, of such Person and its Consolidated
Subsidiaries, determined on a consolidated basis in accordance with GAAP, for
such period, adjusted to exclude, only to the extent included in computing
such net income or loss, and without duplication:
(a) All gains, but not losses, that are either extraordinary, as
determined in accordance with GAAP, or are either unusual or nonrecurring,
including any gain from the sale or other disposition of assets outside the
ordinary course of business or from the issuance or sale of any capital stock;
(b) The net income, if positive, of any Person, other than a Consolidated
Subsidiary, in which such Person or any of its Consolidated Subsidiaries has
an interest, except to the extent of the amount of any dividends or
distributions actually paid in cash to such Person or a Consolidated
Subsidiary of such Person during such period, but in any case not in excess of
such Person's pro rata share of such Person's net income for such period;
(c) The net income or loss of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition;
(d) The net income, if positive, of any of such Person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the terms
of its charter or bylaws or any other agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such
Consolidated Subsidiary;
(e) The net income of, and all dividends and distributions from, any
Unrestricted Subsidiary; and
(f) The cumulative effect of a change in accounting principles.
"Consolidated Subsidiary" means, for any Person, each Subsidiary of such
Person, whether now existing or hereafter created or acquired, the financial
statements of which are consolidated for financial statement reporting
purposes with the financial statements of such Person in accordance with GAAP.
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"Consolidation" means, with respect to us, the consolidation of the
accounts of the Subsidiaries with our accounts, all in accordance with GAAP;
provided, that "consolidation" will not include consolidation of the accounts
of any Unrestricted Subsidiary with our accounts. The term "consolidated" has a
correlative meaning to the foregoing.
"Continuing Director" means during any period of 12 consecutive months
after the Issue Date, individuals who at the beginning of any such 12-month
period constituted our board of directors, together with any new directors
whose election by such board of directors or whose nomination for election by
our stockholders was approved by a vote of a majority of the directors then
still in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved, including
new directors designated in or provided for in an agreement regarding the
merger, consolidation or sale, transfer or other conveyance, of all or
substantially all of our assets, if such agreement was approved by a vote of
such majority of directors.
"Credit Agreement" means the Second Amended and Restated Revolving Credit
Agreement and the Second Amended and Restated Term Loan Agreement, each dated
as of July 14, 2000, by and among us and certain financial institutions and
agents party thereto, and, in each case, any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such credit agreement and/or related documents may be amended,
restated, supplemented, renewed, replaced or otherwise modified from time to
time whether or not with the same agent, trustee, representative lenders or
holders, and, subject to the proviso to the next succeeding sentence,
irrespective of any changes in the terms and conditions thereof. Without
limiting the generality of the foregoing, the term "Credit Agreement" shall
include agreements in respect of Interest Swap and Hedging Obligations with
lenders party to the Credit Agreement, or any Affiliate of such lenders, and
shall also include any amendment, amendment and restatement, renewal,
extension, restructuring, supplement or modification to any Credit Agreement
and all refundings, refinancings and replacements in whole or in part of any
Credit Agreement with any other credit agreement, including any credit
agreement:
(1) Extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby;
(2) Adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of us and our Subsidiaries and our or
their respective successors and assigns;
(3) Increasing the amount of Indebtedness incurred thereunder or available
to be borrowed thereunder; provided, that on the date such Indebtedness is
incurred it would not be prohibited by paragraph (c) of the covenant
"Limitation on incurrence of additional indebtedness;" or
(4) Otherwise altering the terms and conditions thereof in a manner not
prohibited by the terms of the indenture.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) all Indebtedness outstanding under the
Credit Agreement and (ii) any other Senior Indebtedness permitted to be
incurred under this indenture that (a) at the time of determination exceeds $20
million in aggregate principal amount outstanding and (b) is specifically
designated in the instrument evidencing such Senior Indebtedness as "Designated
Senior Indebtedness" by us.
"Disqualified Capital Stock" means with respect to any Person, (a) Equity
Interests of such Person that, by its terms or by the terms of any security
into which it is convertible, exercisable or exchangeable, is, or upon the
happening of an event or the passage of time or both would be, required to be
redeemed or repurchased (including at the option of the holder thereof) by such
Person or any of its Subsidiaries, in whole or in part, on or prior to 91 days
following the Stated Maturity of the Series B Notes and (b) any Equity
Interests of any Subsidiary of such Person other than any common equity with no
preferences, privileges, and no redemption or repayment provisions; provided,
however, that any Equity Interest that would constitute
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Disqualified Capital Stock solely because the holders thereof have the right to
require the issuer to repurchase such Disqualified Capital Stock upon the
occurrence of a change of control shall not constitute Disqualified Capital
Stock if the terms of such Equity Interest provide that (i) any such
repurchases may not be made sooner than 10 days after the change of control
purchase date for the Series B Notes and (ii) such Equity Interests so
repurchased are fully and absolutely subordinated to the indefeasible payment
in full of all principal, interest and other amounts due under the Series B
Notes repurchased on such change of control purchase date, and any Equity
Interest not so repurchased shall remain so fully and absolutely subordinated
to the Series B Notes not so repurchased.
"Equity Interests" means Capital Stock or partnership, participation or
membership interests and all warrants, options or other rights to acquire
Capital Stock or partnership, participation or membership interests (but
excluding any debt security that is convertible into, or exchangeable for,
Capital Stock or partnership, participation or membership interests).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Exempted Affiliate Transaction" means:
. The payment of reasonable fees and compensation to and indemnity
provided for the benefit of our or any Guarantor's directors, officers
or employees in the ordinary course of business;
. Transactions solely between us and any of our Consolidated
Subsidiaries or solely among our Consolidated Subsidiaries;
. Any issuance of securities pursuant to, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding
of, employment arrangements, stock option and stock ownership plans
approved by our board of directors;
. Loans or advances to employees in the ordinary course of business in
accordance with our past practices of or those of any Guarantor, but
in any event not to exceed $10 million in the aggregate outstanding at
any one time;
. The issuance or sale of any of our Qualified Capital Stock approved by
a majority of the members of the board of directors and, if any, a
majority of the independent members of such board of directors;
. Restricted Payments and Investments permitted by the provisions of the
indenture described above under the caption "Limitation on restricted
payments;" and
. Transactions between us and any owner of a Special Purpose Licensed
Entity or between any Special Purpose Licensed Entity and any of its
owners, in each case, in the ordinary course of business to facilitate
the operations of such Special Purpose Licensed Entity.
"Existing Indebtedness" means our or any of our Subsidiaries'
Indebtedness, other than Indebtedness under the Credit Agreement, in existence
on the Issue Date, reduced to the extent such amounts are repaid, refinanced or
retired.
"Florida Overpayment Dispute" means the third-party carrier review
relating to claims that our Florida-based laboratory subsidiary submitted for
Medicare reimbursement, pursuant to which the carrier has suspended Medicare
payments and issued formal overpayment determinations.
"Foreign Subsidiary" means any Subsidiary of ours which (a) is not
organized under the laws of the United States, any state thereof or the
District of Columbia and (b) conducts substantially all of its business
operations outside the United States of America.
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"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date as set forth in:
(1) The opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants;
(2) Statements and pronouncements of the Financial Accounting Standards
Board;
(3) Such other statements by such other entity as approved by a
significant segment of the accounting profession in the United States; and
(4) The rules and regulations of the Commission governing the inclusion of
financial statements, including pro forma financial statements, in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and similar
written statements from the accounting staff of the Commission.
All ratios and computations based on GAAP contained in the indenture shall be
computed in conformity with GAAP.
"Goodwill Impairment Charges" means with respect to any Person, impairment
and valuation losses, as reflected on such Person's consolidated financial
statements.
"Guarantor" means each of our present and future Subsidiaries, other than
Non-Guarantor Subsidiaries and Foreign Subsidiaries, that at the time are
guarantors of the Series B Notes in accordance with the indenture.
"Indebtedness" of any Person means, without duplication,
(a) All liabilities and obligations, contingent or otherwise, of such
Person, to the extent such liabilities and obligations would appear as a
liability upon the consolidated balance sheet of such Person in accordance with
GAAP, (1) in respect of borrowed money, whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof, (2) evidenced by bonds, notes, debentures or similar instruments, (3)
representing the balance deferred and unpaid of the purchase price of any
property or services, except those incurred in the ordinary course of its
business that would constitute ordinarily a trade payable to trade creditors;
(b) All liabilities and obligations, contingent or otherwise, of such
Person (1) evidenced by bankers' acceptances or similar instruments issued or
accepted by banks, or (2) evidenced by a letter of credit or a reimbursement
obligation of such Person with respect to any letter of credit;
(c) All net obligations of such Person under Interest Swap and Hedging
Obligations;
(d) All Capitalized Lease Obligations and Attributable Indebtedness of
such Person;
(e) All liabilities and obligations of others of the kind described in the
preceding clause (a), (b) (c) or (d) to the extent that such Person has
guaranteed or provided credit support or that is otherwise its legal liability;
(f) All liabilities and obligations of others of the kind described in the
preceding clause (a), (b), (c), (d) or (e) secured by any Lien on any property
or assets of such Person, whether or not such obligation is assumed by such
Person, the amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation so secured;
(g) Any and all deferrals, renewals, extensions, refinancing and
refundings, whether direct or indirect, of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b), (c), (d), (f), or this clause (g), whether or not between or
among the same parties; and
(h) All Disqualified Capital Stock of such Person, measured at the greater
of its voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends.
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For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified Capital Stock
as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value to be determined in good
faith by the board of directors of the issuer, or managing general partner of
the issuer, of such Disqualified Capital Stock.
The amount of any Indebtedness outstanding as of any date shall be (1) the
accreted value thereof, in the case of any Indebtedness issued with original
issue discount, but the accretion of original issue discount in accordance with
the original terms of Indebtedness issued with an original issue discount will
not be deemed to be an incurrence and (2) the principal amount thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such Person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any Person in any other Person means, without duplication:
(a) The acquisition, whether by purchase, merger, consolidation or
otherwise, by such Person, whether for cash, property, services, securities or
otherwise, of Equity Interests, capital stock, bonds, notes, debentures,
partnership or other ownership interests or other securities, including any
options or warrants, of such other Person or any agreement to make any such
acquisition;
(b) The making by such Person of any deposit with, or advance, loan or
other extension of credit to, such other Person, including the purchase of
property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person, or any
commitment to make any such advance, loan or extension, but excluding accounts
receivable, endorsements for collection or deposits arising in the ordinary
course of business;
(c) Other than guarantees of our Indebtedness or Indebtedness of any
Guarantor to the extent permitted by the covenant "Limitation on incurrence of
additional indebtedness," the entering into by such Person of any guarantee of,
or other credit support or contingent obligation with respect to, Indebtedness
or other liability of such other Person;
(d) The making of any capital contribution by such Person to such other
Person; and
(e) The designation by our board of directors of any Person to be an
Unrestricted Subsidiary.
We shall be deemed to make an Investment in an amount equal to the fair
market value of the net assets of any subsidiary, or, if neither we nor any of
our Subsidiaries has theretofore made an Investment in such subsidiary, in an
amount equal to the Investments being made, at the time that such subsidiary is
designated an Unrestricted Subsidiary, and any property transferred to an
Unrestricted Subsidiary from us or our Subsidiary shall be deemed an Investment
valued at its fair market value at the time of such transfer. We or any of our
Subsidiaries shall be deemed to have made an Investment in a Person that is or
was required to be a Guarantor if, upon the issuance, sale or other disposition
of any portion of our or our Subsidiary's ownership in the Capital Stock of
such Person, such Person ceases to be a Guarantor. The fair market value of
each Investment shall be measured at the time made or returned, as applicable.
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"Issue Date" means the date of first issuance of the Series B Notes under
the indenture.
"Junior Security" means any Qualified Capital Stock and any of our
Indebtedness or Indebtedness of a Guarantor, as applicable, that is
contractually subordinated in right of payment to Senior Debt at least to the
same extent as the Series B Notes or the Guarantee, as applicable, and has no
scheduled installment of principal due, by redemption, sinking fund payment or
otherwise, on or prior to the Stated Maturity of the Series B Notes; provided,
that in the case of subordination in respect of Senior Debt under the Credit
Agreement, "Junior Security" shall mean any Qualified Capital Stock and any of
our Indebtedness or Indebtedness of a Guarantor, as applicable, that:
(1) Has a final maturity date occurring after the final maturity date of,
all Senior Debt outstanding under the Credit Agreement on the date of issuance
of such Qualified Capital Stock or Indebtedness;
(2) Is unsecured;
(3) Has an Average Life longer than the security for which such Qualified
Capital Stock or Indebtedness is being exchanged; and
(4) By their terms or by law are subordinated to Senior Debt outstanding
under the Credit Agreement on the date of issuance of such Qualified Capital
Stock or Indebtedness at least to the same extent as the Series B Notes.
"Lien" means any mortgage, charge, pledge, lien, statutory or otherwise,
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable,
now owned or hereafter acquired.
"Liquidated Damages" means all liquidated damages then owing pursuant to
the registration rights agreement.
"Minority Interest" means, with respect to any Person, interests in income
of such Person's Consolidated Subsidiaries held by Persons other than such
Person or another Subsidiary of such Person, as reflected on such Person's
consolidated financial statements.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by us in the case of a sale of Qualified Capital Stock and by us and
our Subsidiaries in respect of an asset sale plus, in the case of an issuance
of Qualified Capital Stock upon any exercise, exchange or conversion of our
securities, including options, warrants, rights and convertible or exchangeable
debt, that were issued for cash on or after the Issue Date, the amount of cash
originally received by us upon the issuance of such securities, including
options, warrants, rights and convertible or exchangeable debt, less, (1) in
each case, the sum of all payments, fees, commissions and, in the case of asset
sales, reasonable, expenses, including, without limitation, the fees and
expenses of legal counsel and investment banking fees and expenses, incurred in
connection with such asset sale or sale of Qualified Capital Stock, and (2) in
the case of an asset sale only, less
(a) The amount, estimated reasonably and in good faith by us, of income,
franchise, sales and other applicable taxes required to be paid by us or any of
our respective Subsidiaries in connection with such asset sale in the taxable
year that such sale is consummated or in the immediately succeeding taxable
year the computation of which shall take into account, estimated reasonably and
in good faith by us, the reduction in tax liability resulting from any
available operating losses and net operating loss carryovers, tax credits and
tax credit carryforwards, and similar tax attributes. The determination of the
available tax attributes shall be estimated reasonably and in good faith by us
and, in connection therewith, we may exclude from its determination those
available tax attributes as to which there exists an issue of law or fact which
may ultimately result in such attributes not being available to effectuate a
reduction in the asset sale tax liability,
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(b) Amounts used to retire Indebtedness, other than Subordinated
Indebtedness, secured by the asset that was the subject of the asset sale,
(c) Any distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such asset
sale,
(d) Appropriate amounts to be provided by us or any Subsidiary as a
reserve against any liabilities, other than tax liabilities, associated with
such asset sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such
asset sale, all as determined in conformity with GAAP.
"Non-Guarantor Subsidiary" means each non-Wholly Owned Subsidiary of ours
that is not a Foreign Subsidiary, provided, that
(a) Any Equity Interest in such Subsidiary not owned by us or any
Guarantor is owned by a physician, physician group or other strategic joint
venture partner;
(b) Such Subsidiary was formed to and exists solely for the purpose of
owning and operating one or more dialysis centers and providing services
related thereto; and
(c) On each date that a non-Wholly Owned Subsidiary is formed or a Wholly
Owned Subsidiary becomes a non-Wholly Owned Subsidiary, our Consolidated
Minority Adjusted EBITDA Ratio for the Reference Period immediately preceding
such date would be at least 0.80 to 1.00, on a pro forma basis after giving
effect to such formation or transformation to a non-Wholly Owned Subsidiary.
"Non-Recourse Indebtedness" means Indebtedness (a) as to which neither we
nor any of our Subsidiaries (1) provides credit support of any kind, including
any undertaking, agreement or instrument that would constitute Indebtedness,
(2) is directly or indirectly liable, as a guarantor or otherwise, or (3)
constitutes the lender, and (b) no default with respect to which, including any
rights that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary, would permit, upon notice, lapse of time or both, any
holder of any other Indebtedness of us or any of our Subsidiaries to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Offering" means the offering of the Series B Notes by us.
"Officers' Certificate" means the officers' certificate to be delivered
upon the occurrence of certain events as set forth in the indenture.
"Permitted Indebtedness" means that:
(a) We and the Guarantors may incur Indebtedness evidenced by the Series B
Notes and the Guarantees issued pursuant to the indenture up to the amounts
being issued on the original Issue Date, less any amounts repaid or retired;
(b) We and the Guarantors, as applicable, may incur Refinancing
Indebtedness with respect to any Existing Indebtedness or any Indebtedness,
including Disqualified Capital Stock, described in clause (a) of this
definition or incurred pursuant to the debt incurrence ratio test of the
covenant "Limitation on incurrence of additional indebtedness," or which was
refinanced pursuant to this clause (b);
(c) We and our Subsidiaries may incur Indebtedness solely in respect of
bankers' acceptances, performance bonds and letters of credit to the extent not
drawn upon, to the extent that such incurrence does not result in the
incurrence of any obligation to repay any obligation relating to borrowed money
or other Indebtedness, all in the ordinary course of business in accordance
with customary industry practices, in amounts and for the purposes customary in
our industry; provided, that the aggregate principal amount outstanding of such
Indebtedness, including any Refinancing Indebtedness and any other Indebtedness
issued to retire, refinance, refund, defease or replace such Indebtedness,
shall at no time exceed $15 million;
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(d) We may incur Indebtedness owed to, borrowed from, any Subsidiary, and
any Subsidiary may incur Indebtedness owed to, borrowed from, any other
Subsidiary or us; provided, that (i) the aggregate amount of Indebtedness that
may be incurred and outstanding at any one time, including any Refinancing
Indebtedness issued to retire, defease, refinance, replace or refund such
Indebtedness, pursuant to this clause (d) by Subsidiaries that are not
Guarantors shall not exceed $35 million, and (ii) in the case of our
indebtedness, such obligations shall be unsecured and contractually
subordinated in all respects to our obligations pursuant to the Series B Notes
and any event that causes any Guarantor no longer to be a Guarantor, including
by designation to be an Unrestricted Subsidiary, shall be deemed to be a new
incurrence by such issuer of such Indebtedness and any guarantor thereof
subject to the covenant "Limitation on incurrence of additional indebtedness;"
and
(e) We and the Guarantors may incur Interest Swap and Hedging Obligations
that are incurred for the purpose of fixing or hedging interest rate or
currency risk with respect to any fixed or floating rate Indebtedness that is
permitted by the indenture to be outstanding or any receivable or liability the
payment of which is determined by reference to a foreign currency, and not for
the purpose of speculation; provided, that the notional amount of any such
Interest Swap and Hedging Obligation does not exceed the principal amount of
Indebtedness to which such Interest Swap and Hedging Obligation relates.
"Permitted Investment" means:
(a) Any Investment in any of the Series B Notes;
(b) Any Investment in Cash Equivalents;
(c) Intercompany Indebtedness to the extent permitted under clause (d) of
the definition of "Permitted indebtedness;"
(d) Any Investment in us or in a Guarantor, or by us or any Guarantor in a
Person in a Related Business if as a result of such Investment such Person
immediately becomes a Guarantor or a Non-Guarantor Subsidiary or such Person is
immediately merged with or into us or a Guarantor;
(e) Other Investments in any Person or Persons, provided, that after
giving pro forma effect to each such Investment, the aggregate amount of all
such Investments made on and after the Issue Date pursuant to this clause (e)
that are outstanding, after giving effect to any such Investments that are
returned to us or the Guarantor that made such prior Investment, without
restriction, in cash on or prior to the date of any such calculation, but only
up to the amount of the Investment made under this clause (e) in such Person,
at any time does not in the aggregate exceed $35 million, measured by the value
attributed to the Investment at the time made or returned, as applicable; and
(f) Any asset exchange permitted under clause (7) of the covenant "--
Limitation on sale of assets and subsidiary stock."
"Permitted Lien" means:
(a) Liens existing on the Issue Date;
(b) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in good
faith and by appropriate proceedings, if adequate reserves with respect thereto
are maintained on our books in accordance with GAAP;
(c) Statutory liens of carriers, warehousemen, mechanics, material men,
landlords, repairmen or other like Liens arising by operation of law in the
ordinary course of business provided that (1) the underlying obligations are
not overdue for a period of more than 60 days, or (2) such Liens are being
contested in good faith and by appropriate proceedings and adequate reserves
with respect thereto are maintained on our books in accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts, other than
for borrowed money, leases, statutory obligations, tenders, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
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(e) Easements, rights-of-way, zoning, similar restrictions and other
similar encumbrances or title defects which, singly or in the aggregate, do not
in any case materially detract from the value of the property, subject thereto,
as such property is used by us or any of our Subsidiaries, or materially
interfere with the ordinary conduct of our or any of our Subsidiaries'
business;
(f) Liens arising from the rendering of a final judgment, only to the
extent, for an amount and for a period not resulting in an Event of Default
with respect thereto;
(g) Pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types
of social security legislation;
(h) Liens securing the Series B Notes;
(i) Liens securing Indebtedness of a Person existing at the time such
Person becomes a Subsidiary or is merged with or into us or a Subsidiary or
Liens securing Indebtedness incurred in connection with an Acquisition,
provided, that such Liens were in existence prior to the date of such
acquisition, merger or consolidation, were not incurred in anticipation
thereof, and do not extend to any other assets;
(j) Liens arising from Capital Expenditure Indebtedness permitted to be
incurred pursuant to clause (a) of the covenant "Limitation on incurrence of
additional indebtedness" provided such Liens relate solely to the property
which is subject to such Capital Expenditure Indebtedness or the proceeds
thereof;
(k) Leases or subleases granted to other Persons in the ordinary course of
business not materially interfering with the conduct of our or any of our
Subsidiaries' business or materially detracting from the value of the relative
assets of us or any Subsidiary;
(l) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by us or any of our
Subsidiaries in the ordinary course of business;
(m) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse to the
holders of the Series B Notes than the terms of the Liens securing such
refinanced Indebtedness, and provided that the Indebtedness secured is not
increased and the Lien is not extended to any additional assets or property
that would not have been security for the Indebtedness refinanced;
(n) Liens securing our or any Guarantor's Senior Debt or any Guarantor,
including Indebtedness incurred under the Credit Agreement in accordance with
the terms of the covenant "Limitation on incurrence of additional
indebtedness;" and
(o) Liens securing reimbursement obligations with respect to letters of
credit that encumber only documents and other property relating to such letters
of credit and the products and proceeds thereof.
"Person" or "person" means any corporation, individual, limited liability
company, joint stock company, joint venture, partnership, unincorporated
association, governmental regulatory entity, country, state or political
subdivision thereof, trust, municipality or other entity.
"Preferred Stock" means any Equity Interest of any class or classes of a
Person, however designated, which is preferred as to payments of dividends, or
as to distributions upon any liquidation or dissolution, over Equity Interests
of any other class of such Person.
"Pro Forma" or "pro forma" shall have the meaning set forth in Regulation
S-X of the Securities Act of 1933, as amended, unless otherwise specifically
stated herein.
"Public Equity Offering" means an underwritten public offering for cash
pursuant to a registration statement filed with the Commission in accordance
with the Securities Act of 1933, as amended, of our Qualified Capital Stock.
"Qualified Capital Stock" means any of our Capital Stock that is not
Disqualified Capital Stock.
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"Qualified Exchange" means:
(1) Any legal defeasance, redemption, retirement, repurchase or other
acquisition of Capital Stock, or our Indebtedness, other than to a Subsidiary,
with the Net Cash Proceeds received by us from the substantially concurrent
sale of our Qualified Capital Stock; or
(2) Any issuance of our Qualified Capital Stock in exchange for any
Capital Stock or our Indebtedness.
"Reference Period" with regard to any Person means the four full fiscal
quarters ended immediately preceding any date upon which any determination is
to be made pursuant to the terms of the Series B Notes or the indenture.
"Refinancing Indebtedness" means Indebtedness, including Disqualified
Capital Stock, (a) issued in exchange for, or the proceeds from the issuance
and sale of which are used substantially concurrently to repay, redeem,
defease, refund, refinance, discharge or otherwise retire for value, in whole
or in part, or (b) constituting an amendment, modification or supplement to,
or a deferral or renewal of ((a) and (b) above are, collectively, a
"Refinancing"), any Indebtedness, including Disqualified Capital Stock, in a
principal amount or, in the case of Disqualified Capital Stock, liquidation
preference, not to exceed, after deduction of reasonable fees and expenses
incurred in connection with the Refinancing plus the amount of any premium
paid in connection with such Refinancing in accordance with the terms of the
documents governing the Indebtedness refinanced without giving effect to any
modification thereof made in connection with or in contemplation of such
refinancing, the lesser of (1) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, of the Indebtedness,
including Disqualified Capital Stock, so Refinanced and (2) if such
Indebtedness being Refinanced was issued with an original issue discount, the
accreted value thereof, as determined in accordance with GAAP, at the time of
such Refinancing; provided, that (A) such Refinancing Indebtedness is incurred
by us or by the Subsidiary who is the obligor on the Indebtedness being
refinanced, (B) such Refinancing Indebtedness shall (x) not have an Average
Life shorter than the Indebtedness, including Disqualified Capital Stock, to
be so refinanced at the time of such Refinancing and (y) in all respects, be
no less contractually subordinated or junior, if applicable, to the rights of
Holders of the Series B Notes than was the Indebtedness, including
Disqualified Capital Stock, to be refinanced, (C) such Refinancing
Indebtedness shall have a final stated maturity or redemption date, as
applicable, no earlier than the final stated maturity or redemption date, as
applicable, of the Indebtedness, including Disqualified Capital Stock, to be
so refinanced or, if sooner, 91 days after the Stated Maturity of the Series B
Notes, and (D) such Refinancing Indebtedness shall be secured, if secured, in
a manner no more adverse to the holders of the Series B Notes than the terms
of the Liens, if any, securing such refinanced Indebtedness, including,
without limitation, the amount of Indebtedness secured shall not be increased.
"Registration Rights Agreement" means the registration rights agreement,
dated as of the Issue Date, by and among us and the other parties named on the
signature pages thereof, as such agreement may be amended, modified or
supplemented from time to time.
"Related Business" means the business conducted, or proposed to be
conducted, by us and our Subsidiaries as of the Issue Date and any and all
businesses that in the good faith judgment of our board of directors are
related businesses.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than Permitted Investments.
"Restricted Payment" means, with respect to any Person:
(a) The declaration or payment of any dividend or other distribution in
respect of Equity Interests of such Person or any parent of such Person;
65
(b) Any payment, except to the extent with Qualified Capital Stock, on
account of the purchase, redemption or other acquisition or retirement for
value of Equity Interests of such Person or any or parent of such Person;
(c) Other than with the proceeds from the substantially concurrent sale
of, or in exchange for, Refinancing Indebtedness, any purchase, redemption, or
other acquisition or retirement for value of, any payment in respect of any
amendment of the terms of or any defeasance of, any Subordinated Indebtedness,
directly or indirectly, by such Person or a parent or Subsidiary of such
Person prior to the scheduled maturity, any scheduled repayment of principal,
or scheduled sinking fund payment, as the case may be, of such Indebtedness;
and
(d) Any Restricted Investment by such Person;
provided, however, that the term "Restricted Payment" does not include (1) any
dividend, distribution or other payment on or with respect to Equity Interests
of an issuer to the extent payable solely in shares of Qualified Capital Stock
of such issuer, or (2) any dividend, distribution or other payment to us, or
to any Guarantors, by any Subsidiary of ours.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
and its successors.
"Sale-Leaseback Transaction" means any arrangement with any Person
providing for the leasing, other than operating leases in the ordinary course
of business, by us or any Subsidiary of any real or tangible personal property
owned by us or a Subsidiary of ours as of the Issue Date or thereafter
acquired, which property has been or is to be sold or transferred by us or
such Subsidiary to a Person and leased back from such Person.
"Senior Debt" of ours or of any Guarantor means Indebtedness, including
any monetary obligation in respect of the Credit Agreement, and interest,
whether or not allowable, accruing on Indebtedness incurred pursuant to the
Credit Agreement after the filing of a petition initiating any proceeding
under any bankruptcy, insolvency or similar law, of us or such Guarantor,
including Indebtedness arising under the Credit Agreement, unless by the terms
of the instrument creating or evidencing such Indebtedness, such Indebtedness
is expressly designated equal or junior in right of payment to the Series B
Notes or the applicable Guarantee; provided, that in no event shall Senior
Debt include:
(a) Indebtedness to any Subsidiary of us or any officer, director or
employee of us or any Subsidiary of us;
(b) Indebtedness incurred in violation of the terms of the indenture;
(c) Indebtedness to trade creditors;
(d) Disqualified Capital Stock; and
(e) Any liability for taxes owed or owing by us or such Guarantor.
"Significant Subsidiary" shall have the meaning provided under Regulation
S-X of the Securities Act, as in effect on the Issue Date.
"Special Purpose Licensed Entity" means any Person in a Related Business
that (i) we and our Subsidiaries are prohibited from engaging in directly
under applicable law, including provisions of state law (a) prohibiting the
ownership of healthcare facilities by public companies, (b) prohibiting the
corporate practice of medicine or (c) otherwise restricting our ability or the
ability of one of our Subsidiaries to acquire directly a required license to
operate a healthcare facility, and (ii) has entered into a transaction or
series of transactions with us or any of our Subsidiaries under which
(x) We or any of our Subsidiaries provides management, administrative or
consulting services to the Special Purpose Licensed Entity;
66
(y) The owners of the Special Purpose Licensed Entity are prohibited from
transferring any of their interests in the Special Purpose Licensed Entity
without our consent or the consent of one of our Subsidiaries; and
(z) We or one of our Subsidiaries has the right to require the owners of
the Special Purpose Licensed Entity to transfer all of their interests in the
Special Purpose Licensed Entity to a Person designated by us or one of our
Subsidiaries.
"Stated Maturity," when used with respect to any Series B Note, means
April 15, 2011.
"Subordinated Indebtedness" means Indebtedness of us or a Guarantor that
is subordinated in right of payment by its terms or the terms of any document
or instrument relating thereto to the Series B Notes or such Guarantee, as
applicable, in any respect.
"Subsidiary," with respect to any Person, means:
(1) A corporation a majority of whose Equity Interests with voting power,
under ordinary circumstances, to elect directors is at the time, directly or
indirectly, owned by such Person, by such Person and one or more Subsidiaries
of such Person or by one or more Subsidiaries of such Person;
(2) Any other Person, other than a corporation, in which such Person, one
or more Subsidiaries of such Person, or such Person and one or more
Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof has a majority ownership interest; or
(3) A partnership in which such Person or a Subsidiary of such Person is,
at the time, a general partner. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not be a Subsidiary of ours or of any of our Subsidiaries and
any Special Purpose Licensed Entity shall be considered a Subsidiary of ours.
Unless the context requires otherwise, Subsidiary means each direct and
indirect Subsidiary of ours.
"Unrestricted Subsidiary" means any subsidiary of ours that does not own
any Capital Stock of, or own or hold any Lien on any property of, ours or of
any other Subsidiary of ours and that, at the time of determination, shall be
an Unrestricted Subsidiary, as designated by our board of directors; provided,
that such Subsidiary at the time of such designation:
(a) Has no Indebtedness other than Non-Recourse Indebtedness;
(b) Is not party to any agreement, contract, arrangement or understanding
with us or any Subsidiary of ours unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to us or such
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of ours;
(c) Is a Person with respect to which neither we nor any of our
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; and
(d) Has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of us or any of our Subsidiaries. Our board of
directors may designate any Unrestricted Subsidiary to be a Subsidiary,
provided, that (1) no Default or Event of Default is existing or will occur as
a consequence thereof and (2) immediately after giving effect to such
designation, on a pro forma basis, we could incur at least $1.00 of
Indebtedness pursuant to the debt incurrence ratio of the covenant "Limitation
on incurrence of additional indebtedness."
Each such designation shall be evidenced by filing with the Trustee a certified
copy of the resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions. Any subsidiary of an Unrestricted Subsidiary must also be an
Unrestricted Subsidiary.
"U.S. Government Obligations" means direct non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.
67
"Voting Equity Interests" means Equity Interests which at the time are
entitled to vote in the election of, as applicable, directors, members or
partners generally.
"Wholly Owned Subsidiary" means a Subsidiary all the Equity Interests of
which, other than directors' qualifying Shares, are owned by us or one or more
of our Wholly Owned Subsidiaries or a combination thereof.
Book-entry; Delivery; Form and transfer
The Series B Notes will be in the form of one or more registered global
notes without interest coupons. Upon issuance, the U.S. Global Notes will be
deposited with the Trustee, as custodian for The Depository Trust Company, or
DTC, in New York, New York, and registered in the name of DTC or its nominee
for credit to the accounts of DTC's Direct and Indirect Participants, as
defined below.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Series B Notes in certificated form in certain limited
circumstances. See "--Transfer of interests in Global Notes for Certificated
Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Series
B Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
Depositary procedures
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations, collectively, the Direct
Participants, and to facilitate the clearance and settlement of transactions in
those securities between Direct Participants through electronic book-entry
changes in accounts of Direct Participants. The Direct Participants include
securities brokers and dealers, including the initial purchasers, banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and Clearstream. Access to DTC's system is also available to other
entities that clear through or maintain a direct or indirect, custodial
relationship with a Direct Participant, collectively, Indirect Participants.
DTC has advised us that, pursuant to DTC's procedures:
(i) Upon deposit of the Global Notes, DTC will credit the accounts of the
Direct Participants designated by the initial purchasers with portions of the
principal amount of the Global Notes that have been allocated to them by the
initial purchasers; and
(ii) DTC will maintain records of the ownership interests of such Direct
Participants in the Global Notes and the transfer of ownership interests by and
between Direct Participants.
DTC will not maintain records of the ownership interests of, or the transfer of
ownership interests by and between, Indirect Participants or other owners of
beneficial interests in the Global Notes. Direct Participants and Indirect
Participants must maintain their own records of the ownership interests of, and
the transfer of ownership interests by and between, Indirect Participants and
other owners of beneficial interests in the Global Notes. Investors in the U.S.
Global Notes may hold their interests therein directly through DTC if they are
Direct Participants in DTC or indirectly through organizations that are Direct
Participants in DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that
they own. This may limit or curtail the ability to transfer beneficial
interests in a Global Note to such persons. Because DTC can act only on behalf
of Direct Participants, which in turn act on behalf of Indirect Participants
and others, the ability of a person having a beneficial interest in a Global
Note to pledge such interest to persons or entities that are not Direct
Participants in DTC, or to otherwise take actions in respect of such interests,
may be affected by the lack of physical
68
certificates evidencing such interests. For certain other restrictions on the
transferability of the Series B Notes see "--Transfers of interests in Global
Notes for Certificated Notes."
Except as described in "--Transfers of interests in Global Notes for
Certificated Notes," owners of beneficial interests in the Global Notes will
not have Series B Notes registered in their names, will not receive physical
delivery of Series B Notes in certificated form and will not be considered the
registered owners or holders thereof under the indenture for any purpose.
Under the terms of the indenture, we, the Guarantors and the Trustee will
treat the persons in whose names the Series B Notes are registered, including
Series B Notes represented by Global Notes, as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, Liquidated Damages, if any, and
interest on Global Notes registered in the name of DTC or its nominee will be
payable by the Trustee to DTC or its nominee as the registered holder under the
indenture. Consequently, neither we, the Trustee nor any of our or the
Trustee's agents has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Direct Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
of DTC's records or any Direct Participant's or Indirect Participant's records
relating to the beneficial ownership interests in any Global Note or (ii) any
other matter relating to the actions and practices of DTC or any of its Direct
Participants or Indirect Participants.
DTC has advised us that its current payment practice, for payments of
principal, interest and the like, with respect to securities such as the Series
B Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Series B Notes will be governed by standing
instructions and customary practices between them and will not be the
responsibility of DTC, the Trustee, us or the Guarantors. Neither we, the
Guarantors nor the Trustee will be liable for any delay by DTC or its Direct
Participants or Indirect Participants in identifying the beneficial owners of
the Series B Notes, and we and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the Series B Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants, other than Indirect
Participants who hold an interest in the Series B Notes through Euroclear or
Clearstream, who hold an interest through a Direct Participant will be effected
in accordance with the procedures of such Direct Participant but generally will
settle in immediately available funds. Transfers between and among Indirect
Participants who hold interests in the Series B Notes through Euroclear and
Clearstream will be effected in the ordinary way in accordance with their
respective rules and operating procedures.
DTC has advised us that it will take any action permitted to be taken by a
holder of Series B Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Series
B Notes to which such Direct Participant or Direct Participants has or have
given direction. However, if there is an Event of Default under the Series B
notes, DTC reserves the right to exchange Global Notes, without the direction
of one or more of its Direct Participants, for legended notes in certificated
form, and to distribute such certificated forms of Series B Notes to its Direct
Participants. See "--Transfers of interests in Global Notes for Certificated
Notes."
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interests in the U.S. Global Notes among Direct Participants, they
are under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. Neither we, the
Guarantors, the initial purchasers nor the Trustee shall have any
responsibility for the performance by DTC or its respective Direct
69
and Indirect Participants of its respective obligations under the rules and
procedures governing any of their operations.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy thereof.
Transfers of interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive Series B Notes in
registered, certificated form without interest coupons, or Certificated Notes,
if
(i) DTC (x) notifies us that it is unwilling or unable to continue as
depositary for the Global Notes and we thereupon fail to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act;
(ii) We, at our option, notify the Trustee in writing that we elect to
cause the issuance of Certificated Notes; or
(iii) There shall have occurred and be continuing a Default or an Event of
Default with respect to the Series B Notes.
In any such case, we will notify the Trustee in writing that, upon surrender by
the Direct and Indirect Participants of their interest in such Global Note,
Certificated Notes will be issued to each person that such Direct and Indirect
Participants and the DTC identify as being the beneficial owner of the related
Series B Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by
such Direct Participant, for itself or on behalf of an Indirect Participant, to
the Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants, in accordance with DTC's
customary procedures.
Neither we, the guarantors nor the Trustee will be liable for any delay by
the holder of any Global Note or DTC in identifying the beneficial owners of
Series B Notes, and we and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Note or DTC
for all purposes.
Same day settlement and payment
The indenture will require that payments in respect of the Series B Notes
represented by the Global Notes, including principal, premium, if any, interest
and Liquidated Damages, if any, be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests
in such Global Note. With respect to Certificated Notes, we will make all
payments of principal, premium, if any, interest and Liquidated Damages, if
any, by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by
mailing a check to each such holder's registered address. We expect that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
70
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The exchange of your Series A Notes for Series B Notes in the exchange
offer should not constitute a taxable event for United States federal income
tax purposes. Consequently, you should not recognize gain or loss upon your
receipt of Series B Notes, the holding period of the Series B Notes you receive
should include the holding period of your Series A Notes and the basis of the
Series B Notes you receive should be the same as the basis of your Series A
Notes immediately before the exchange.
IN ANY EVENT, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF YOUR PARTICULAR
SITUATION AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER
TAXING JURISDICTION.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series B Notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Series B Notes received in
exchange for Series A Notes where such Series A Notes were acquired as a result
of market-making activities or other trading activities and not acquired
directly from us. We have agreed that for a period of one year after the date
of effectiveness of the exchange offer or until all Series B Notes covered by
the registration statement of which this prospectus is a part have been sold
pursuant thereto, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until June 21, 2002, all dealers effecting transactions in the
Series B Notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of Series B Notes by
broker-dealers.
Series B Notes received by broker-dealers for their own account pursuant
to the exchange offer may be sold from time to time in one or more transactions
. In the over-the-counter market;
. In negotiated transactions;
. Through the writing of options on the Series B Notes or a combination
of such methods of resale; or
. At market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices.
Any resale may be made
. Directly to purchasers; or
. To or through brokers or dealers who may receive compensation in the
form of commissions or concessions from any broker-dealer and/or
purchasers of any such Series B Notes.
Any broker-dealer that resells Series B Notes that were received by it for
its own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of the Series B Notes may be deemed to be an
underwriter within the meaning of the Securities Act, and any profit on any
resale of Series B Notes and any commissions or concessions received by any
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver,
and by delivering, a prospectus, a broker-dealer will not be deemed to admit
that it is an underwriter within the meaning of the Securities Act.
For a period of one year after the date of effectiveness of the exchange
offer, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer
71
that requests them in the letter of transmittal. We have agreed to pay the
expenses incident to the exchange offer and to our performance of, or
compliance with, the registration rights agreement other than commissions or
concessions of any brokers or dealers and will indemnify the holders of the
Series B Notes against certain liabilities, including liabilities under the
Securities Act, in connection with the exchange offer. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and persons controlling the registrant
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the Commission the indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against liabilities other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of the issue.
LEGAL MATTERS
The validity of the Series B Notes offered hereby will be passed upon for
us by Riordan & McKinzie, Los Angeles, California.
EXPERTS
The consolidated financial statements of DaVita Inc. as of December 31,
2000 and for the year then ended are included in this prospectus and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, included herein upon the authority of said firm
as experts in accounting and auditing.
The financial statements of DaVita Inc. (formerly Total Renal Care
Holdings, Inc.) as of December 31, 1999 and for each of the two years in the
period ended December 31, 1999, included in this prospectus, have been audited
by PricewaterhouseCoopers LLP, independent accountants, as stated in their
report appearing herein.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act and
we file reports, proxy statements and other information with the Commission.
You may inspect and copy these reports, proxy statements and other information
at the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, its public reference rooms in New York, New York or
Chicago, Illinois, or on the Commission's web site located at
http://www.sec.gov. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. You may also
inspect these reports, proxy statements and other information at the office of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
We are incorporating by reference our annual report on Form 10-K for the
fiscal year ended December 31, 2000, as amended on Form 10-K/A, our quarterly
report on Form 10-Q for the quarter ended March 31, 2001 and our current report
on Form 8-K dated February 5, 2001, each of which we have filed with the
Commission. All documents filed by us pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this prospectus and prior
to the termination of this exchange offer shall be deemed to be incorporated by
reference into this prospectus and to be a part hereof from the date of filing
of such documents. This means that we are disclosing important information to
you by referring you to these documents. The information incorporated by
reference is an important part of this prospectus. The information that we file
later with the Commission will automatically update and supersede information
in this prospectus.
We will provide without charge, upon written or oral request, a copy of
any of the documents that are incorporated by reference into this prospectus.
Requests should be directed to: DaVita Inc., Attention: Secretary, 21250
Hawthorne Boulevard, Suite 800, Torrance, California, 90503, telephone number:
(310) 792-2600.
72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Year ended December 31, 2000
- ----------------------------
Reports of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and December 31,
1999..................................................................... F-3
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 2000, December 31, 1999 and December 31, 1998......... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
2000, December 31, 1999 and December 31, 1998............................ F-5
Consolidated Statements of Shareholders' Equity........................... F-6
Notes to Consolidated Financial Statements................................ F-7
Quarter ended March 31, 2001
- ----------------------------
Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000.... F-34
Consolidated Statements of Income and Comprehensive Income for the three
months ended
March 31, 2001 and March 31, 2000........................................ F-35
Consolidated Statements of Cash Flows for the three months ended March 31,
2001 and
March 31, 2000........................................................... F-36
Notes to Condensed Consolidated Financial Statements...................... F-37
F-1
REPORTS OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
DaVita Inc.:
We have audited the accompanying consolidated balance sheet of DaVita Inc.
and subsidiaries as of December 31, 2000, and the related consolidated
statements of income and comprehensive income, shareholders' equity, and cash
flows for the year ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DaVita Inc.
and subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for the year ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Seattle, Washington
February 20, 2001, except for Note 20 which is as of April 6, 2001
----------------
To the Board of Directors and Shareholders of
DaVita Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income and comprehensive income, of
shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of DaVita Inc. (formerly Total Renal Care
Holdings, Inc.) and its subsidiaries at December 31, 1999, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Our report dated March 22, 2000, included an explanatory paragraph
indicating the Company was out of compliance with several debt covenants which
raised substantial doubt about the Company's ability to continue as a going
concern. As discussed in Note 10, on July 14, 2000, the Company restructured
its primary borrowing arrangements resulting in the elimination of the debt
covenant violations and the associated uncertainty about the Company's ability
to continue as a going concern. Accordingly, our present opinion on the 1999
financial statements as presented herein is different from that expressed in
our previous report in that the explanatory paragraph is no longer required.
PricewaterhouseCoopers LLP
Seattle, Washington
March 22, 2000, except for the first paragraph of
Note 10 as to which the date is July 14, 2000
F-2
DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
----------------------
2000 1999
---------- ----------
ASSETS
------
Cash and cash equivalents.............................. $ 31,207 $ 107,981
Accounts receivable, less allowance of $61,619 and
$67,315............................................... 290,412 390,329
Inventories............................................ 20,641 32,916
Other current assets................................... 10,293 32,082
Income taxes receivable................................ 2,830 45,645
Deferred income taxes.................................. 42,492 45,795
---------- ----------
Total current assets............................... 397,875 654,748
Property and equipment, net............................ 236,659 285,449
Intangible assets, net................................. 921,623 1,069,672
Investments in third-party dialysis businesses......... 34,194 35,552
Other long-term assets................................. 1,979 4,744
Deferred income taxes.................................. 4,302 6,553
---------- ----------
$1,596,632 $2,056,718
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable....................................... $ 74,882 $ 121,561
Other liabilities...................................... 102,563 77,141
Accrued compensation and benefits...................... 70,406 47,647
Current portion of long-term debt...................... 1,676 26,585
Long-term debt potentially callable under covenant
provisions............................................ 1,425,610
---------- ----------
Total current liabilities.......................... 249,527 1,698,544
Long-term debt, less $1,425,610 potentially callable
classified as current in 1999......................... 974,006 5,696
Other long-term liabilities............................ 4,855 3,497
Minority interests..................................... 18,876 22,577
Commitments and contingencies
Shareholders' equity:
Preferred stock ($0.001 par value; 5,000,000 shares
authorized; none issued or outstanding).............
Common stock ($0.001 par value, 195,000,000 shares
authorized; 82,135,634 and 81,193,011 shares issued
and outstanding).................................... 82 81
Additional paid-in capital........................... 430,676 426,025
Notes receivable from shareholders .................. (83) (192)
Accumulated other comprehensive loss................. (4,718)
Accumulated deficit.................................. (81,307) (94,792)
---------- ----------
Total shareholders' equity......................... 349,368 326,404
---------- ----------
$1,596,632 $2,056,718
========== ==========
See notes to consolidated financial statements.
F-3
DAVITA INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
Year ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Net operating revenues.................... $1,486,302 $1,445,351 $1,203,738
Operating expenses:
Dialysis centers and labs............... 1,032,153 993,239 779,740
General and administrative.............. 123,624 130,555 75,686
Depreciation and amortization........... 111,605 112,481 90,353
Provision for uncollectible accounts.... 39,649 133,253 44,858
Impairment and valuation losses......... 4,556 139,805
Merger related costs.................... 78,188
---------- ---------- ----------
Total operating expenses.............. 1,311,587 1,509,333 1,068,825
---------- ---------- ----------
Operating income (loss)................... 174,715 (63,982) 134,913
Other income (loss)....................... (7,201) (1,895) 4,894
Debt expense.............................. 116,637 110,797 84,003
Minority interests in income of
consolidated subsidiaries................ (5,942) (5,152) (7,163)
---------- ---------- ----------
Income (loss) before income taxes,
extraordinary item and change in
accounting principle................... 44,935 (181,826) 48,641
Income tax expense (benefit).............. 27,960 (34,570) 38,449
---------- ---------- ----------
Income (loss) before extraordinary item
and change in accounting principle..... 16,975 (147,256) 10,192
Extraordinary loss related to early
extinguishment of debt, net of tax of
$2,222 and $7,668, respectively.......... (3,490) (12,744)
Cumulative effect of change in accounting
principle, net of tax of $4,300.......... (6,896)
---------- ---------- ----------
Net income (loss)....................... $ 13,485 $ (147,256) $ (9,448)
========== ========== ==========
Earnings (loss) per common share--basic:
Income (loss) before extraordinary item
and change in accounting principle..... $ 0.21 $ (1.81) $ 0.12
Extraordinary loss, net of tax.......... (0.04) (0.16)
Cumulative effect of change in
accounting principle, net of tax....... (0.08)
---------- ---------- ----------
Net income (loss)....................... $ 0.17 $ (1.81) $ (0.12)
========== ========== ==========
Weighted average number of common shares
outstanding.............................. 81,581,000 81,152,000 80,143,000
========== ========== ==========
Earnings (loss) per common share--assuming
dilution:
Income (loss) before extraordinary item
and change in accounting principle..... $ 0.20 $ (1.81) $ 0.12
Extraordinary loss, net of tax.......... (0.04) (0.16)
Cumulative effect of change in
accounting principle, net of tax....... (0.08)
---------- ---------- ----------
Net income (loss)....................... $ 0.16 $ (1.81) $ (0.12)
========== ========== ==========
Weighted average number of common shares
and equivalents outstanding--assuming
dilution................................. 83,157,000 81,152,000 81,701,000
========== ========== ==========
STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)....................... $ 13,485 $ (147,256) $ (9,448)
Other comprehensive income:
Foreign currency translation.......... 4,718 (4,718)
---------- ---------- ----------
Comprehensive income (loss)............. $ 18,203 $ (151,974) $ (9,448)
========== ========== ==========
See notes to consolidated financial statements.
F-4
DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss)..................... $ 13,485 $ (147,256) $ (9,448)
Non-cash items included in net income
(loss):
Depreciation and amortization........ 111,605 112,481 90,353
Impairment and valuation losses...... 4,556 139,805
Gain on divestitures................. (2,875)
Deferred income taxes................ 8,906 (21,546) (17,577)
Non-cash debt expense................ 3,008 2,563 1,376
Stock option expense and tax
benefits............................ 2,908 2,280 33,912
Equity investment losses (income).... 931 140 (157)
Foreign currency exchange loss....... 4,718
Minority interests in income of
consolidated subsidiaries........... 5,942 5,152 7,163
Extraordinary loss................... 3,490 20,412
Cumulative effect of change in
accounting principle................ 11,196
Changes in operating assets and
liabilities, net of effect of
acquisitions and divestitures:
Accounts receivable.................. 59,564 28,486 (155,393)
Inventories.......................... 9,402 (8,742) (7,152)
Other current assets................. 15,150 14,171 (30,104)
Other long-term assets............... 2,683 5,503 8,414
Accounts payable..................... (28,716) 72,694 10,131
Accrued compensation and benefits.... 26,365 11,541 8,933
Other liabilities.................... 19,445 5,200 36,580
Income taxes......................... 45,473 (52,464) 11,004
Other long-term liabilities.......... 1,608 1,498 (7,725)
----------- ----------- -----------
Net cash provided by operating
activities........................ 307,648 171,506 11,918
----------- ----------- -----------
Cash flows from investing activities:
Additions of property and equipment,
net.................................. (41,088) (106,657) (82,820)
Acquisitions and divestitures, net.... 1,120 (154,226) (338,164)
Divestitures of non-continental U.S.
operations........................... 133,177
Investments in affiliates, net........ 488 (25,380) (16,785)
Intangible assets..................... (342) (5,184) (14,555)
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. 93,355 (291,447) (452,324)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings............................ 1,913,893 2,337,790 1,570,620
Payments on long-term debt............ (2,390,929) (2,136,273) (1,443,325)
Proceeds from convertible notes....... 345,000
Deferred financing costs.............. (3,092) (8,546) (17,631)
Interest rate swap liquidation
proceeds............................. 6,257
Net proceeds from issuance of common
stock................................ 2,658 2,234 24,157
Distributions to minority interests... (6,564) (4,052) (3,628)
----------- ----------- -----------
Net cash provided by (used in)
financing activities.............. (477,777) 191,153 475,193
Foreign currency translation loss in
comprehensive income................... (4,718)
----------- ----------- -----------
Net increase (decrease) in cash ........ (76,774) 66,494 34,787
Cash and cash equivalents at beginning
of year ............................... 107,981 41,487 6,700
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 31,207 $ 107,981 $ 41,487
=========== =========== ===========
See notes to consolidated financial statements.
F-5
DAVITA INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Notes Accumulated
Common Stock Additional receivable other Retained
------------- paid-in from comprehensive earnings
Shares Amount capital shareholders income (loss) (deficit) Total
------ ------ ---------- ------------ ------------- --------- --------
Balance at December 31,
1997................... 77,992 $78 $363,486 $(3,030) $ 61,912 $422,446
Shares issued in
acquisitions........... 99 2,796 2,796
Shares issued to
employees and others... 49 1,085 1,085
Options exercised....... 2,890 3 36,396 36,399
Repayment of notes
receivable, net of
interest accrued....... 2,674 2,674
Income tax benefit on
stock options
exercised.............. 14,199 14,199
Grant of stock options.. 128 128
Stock option expense.... 3,585 3,585
Net loss................ (9,448) (9,448)
------ --- -------- ------- ------- -------- --------
Balance at December 31,
1998................... 81,030 81 421,675 (356) 52,464 473,864
Shares issued to
employees and others... 77 1,937 1,937
Options exercised....... 86 109 109
Repayment of notes
receivable, net of
interest accrued....... 164 164
Income tax benefit on
stock options
exercised.............. 375 375
Grant of stock options.. 813 813
Stock option expense.... 1,116 1,116
Foreign currency
translation............ $(4,718) (4,718)
Net loss................ (147,256) (147,256)
------ --- -------- ------- ------- -------- --------
Balance at December 31,
1999................... 81,193 81 426,025 (192) (4,718) (94,792) 326,404
Shares issued to
employees and others... 126 720 720
Options exercised....... 817 1 2,080 2,081
Repayment of notes
receivable, net of
interest accrued....... 109 109
Income tax benefit on
stock options
exercised.............. 1,977 1,977
Stock option expense
(benefit) ............. (126) (126)
Foreign currency
translation............ 4,718 4,718
Net income.............. 13,485 13,485
------ --- -------- ------- ------- -------- --------
Balance at December 31,
2000................... 82,136 $82 $430,676 $ (83) $ 0 $(81,307) $349,368
====== === ======== ======= ======= ======== ========
See notes to consolidated financial statements.
F-6
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Organization and summary of significant accounting policies
Organization
DaVita Inc. (formerly Total Renal Care Holdings, Inc.) operates kidney
dialysis centers and provides related medical services in dialysis centers in
the United States. These operations represent a single business segment. See
Note 2 regarding the Company's divestiture of its operations outside the
continental United States during 2000.
Basis of presentation
These consolidated financial statements include the Company's wholly-
owned and majority-owned subsidiaries and partnerships, as well as other
entities in which the Company maintains a controlling financial interest. Non-
consolidated equity investments are recorded under the equity method of
accounting, unless DaVita's equity interest is less than 20% and it does not
exercise significant influence over the operations of the investee. For all
periods presented, the annual results of our operations outside the U.S. are
based on the twelve-month period ended November 30 to accommodate our
consolidated reporting time schedules.
Net operating revenues
Revenues are recognized as services are provided to patients. Operating
revenues consist primarily of reimbursement for dialysis and ancillary
services to patients. A usual and customary fee schedule is maintained for our
dialysis treatment and other patient services; however, actual collectible
revenue is normally at a discount to the fee schedule. Medicare and Medicaid
programs are billed at pre-determined net realizable rates per treatment that
are established by statute or regulation. Most non-governmental payors,
including contracted managed care payors, are billed at our usual and
customary rates, but a contractual allowance is recorded to reflect the
expected net realizable revenue for services provided. Contractual and bad
debt allowances are established based upon credit risk of specific third-party
payors, contractual terms and collection experience. Net revenue recognition
and allowances for uncollectible billings require the use of estimates, and
any changes in these estimates are reflected as they become known.
Management services are provided to dialysis centers not owned by the
Company. The management fees are typically determined as a percentage of the
centers' patient revenues and are included in net operating revenues as
earned. Any costs incurred in performing these management services are
recognized in facility operating and general and administrative expenses.
Other income
Other income includes interest income on cash investments, earnings and
losses from non-consolidated equity investments and other non-operating gains
and losses.
Cash and cash equivalents
Cash equivalents are highly liquid investments with maturities at
purchase of three months or less.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist principally of drugs and dialysis related supplies.
F-7
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Property and equipment
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation and amortization expense are
computed using the straight-line method over the useful lives of the assets
estimated as follows: buildings, 20 to 40 years; leasehold improvements, over
the shorter of their estimated useful life or the lease term; and equipment, 3
to 15 years. Disposition gains and losses are included in current earnings.
Capitalized interest
Applicable interest charges incurred during significant facility expansion
and construction are capitalized as one of the elements of cost and are
amortized over the assets' estimated useful lives. Interest capitalized was
$1,125, $709 and $804 for 2000, 1999 and 1998, respectively.
Intangible assets
The excess of aggregate purchase price over the fair value of the net
assets of businesses acquired in purchase transactions is recorded as goodwill.
Goodwill is amortized over 15 to 40 years using the straight-line method. As of
December 31, 2000, the blended average life of goodwill is 35 years. Business
acquisition costs allocated to patient lists are amortized generally over five
to eight years using the straight-line method. Business acquisition costs
allocated to covenants not to compete are amortized over the terms of the
agreements, typically three to ten years, using the straight-line method.
Deferred debt issuance costs are amortized over the term of the related debt
using the effective interest method.
Impairment of long-lived assets
Long-lived assets including goodwill, other intangible assets, property
and equipment, and investment balances are reviewed for possible impairment
whenever significant events or changes in circumstances, including changes in
our business strategy and plans, indicate a potential impairment may have
occurred, and when the sum of the expected future undiscounted net cash flows
identifiable to that asset or group of assets is less than book value. For
potential impairment of goodwill balances, cash flows are reviewed for the
specific facility operations compared to the goodwill balance that resulted
from the acquisition of that specific group of centers. Impairment losses are
determined based on net realizable values or projections of net cash flows.
Interest is not accrued on impaired loans unless the estimated recovery amounts
justify such accruals. Cash flows of facility operations are routinely reviewed
for indications of potential impairment.
Income taxes
Federal, state and foreign income taxes are computed at current tax rates,
less tax credits. Taxes are adjusted both for items that do not have tax
consequences and for the cumulative effect of any changes in tax rates from
those previously used to determine deferred tax assets or liabilities. Tax
provisions include amounts that are currently payable, plus changes in deferred
tax assets and liabilities that arise because of temporary differences between
the timing of when items of income and expense are recognized for financial
reporting and income tax purposes.
Minority interests
Minority interests represent the proportionate equity interest of other
partners and shareholders in consolidated entities which are not wholly-owned.
As of December 31, 2000, these included 16 active partnerships and
corporations.
F-8
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Stock-based compensation
Stock-based compensation for employees is determined in accordance with
APB No. 25 as allowed under FAS 123. Stock option grants to employees do not
result in an expense if the exercise price is at least equal to the market
price at the date of grant. Stock option expense is also measured and recorded
for certain modifications to stock options as required under FIN 44.
Stock options issued to non-employees are valued using the Black-Scholes
model and attributed to the respective vesting periods using the FIN 28 expense
attribution method, except that for options granted prior to the second quarter
of 1997 (effective date of EITF 96-18) such expense was a fixed amortization of
the grant date fair value.
Earnings per share
Basic earnings per share is calculated by dividing net income before
extraordinary items and the cumulative effect of changes in accounting
principle by the weighted average number of shares of common stock outstanding.
Earnings per common share assuming dilution includes the dilutive effects of
stock options and warrants, using the treasury stock method, in determining the
weighted average number of shares of common stock outstanding. The convertible
debt was antidilutive in all periods presented and therefore not included in
the diluted earnings per share calculation.
Interest rate swap agreements
The Company has from time to time entered into interest rate swap
agreements (see Note 10) as a means of managing interest rate exposure. These
agreements have not been for trading or speculative purposes, and had the
effect of converting a portion of our variable rate debt to a fixed rate. Net
amounts paid or received have been reflected as adjustments to interest
expense. The Company had no interest rate swap agreements as of December 31,
2000.
Foreign currency translation
Until sold in June 2000 the Company's principal operations outside of the
United States were in Argentina and were relatively self-contained and
integrated within Argentina. The currency in Argentina, which was considered
the functional currency, is tied to the U.S. dollar. Other operations outside
the U.S. were translated into U.S. dollars at period-end exchange rates and any
unrealized gains and losses were accounted for as a component of other
comprehensive income. Unrealized gains or losses on debt denominated in foreign
currency, which was considered a hedge of the net investment in foreign
operations, were accounted for as a component of other comprehensive income
until June 2000 when we divested our non-continental operations.
Derivative instruments and hedging activities
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133, as amended by SFAS 137
and 138, will be adopted effective January 1, 2001. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair values.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. As of December 31, 2000, the Company is not party to any
derivative instruments that will have a significant impact on the Company's
reported financial condition or results of operation upon adoption of this
statement.
F-9
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on reported
earnings.
2. Impairments and valuation losses
Impairment and valuation losses for the year ended December 31, 2000 and
1999 consisted of the following:
Year ended
December 31,
----------------
2000 1999
------ --------
Non-continental U.S. operations........................... $ (616) $ 82,812
Continental U.S. operations............................... 5,172 56,993
------ --------
$4,556 $139,805
====== ========
During the fourth quarter of 1999, the Company announced its intention to
sell its dialysis operations outside the continental United States resulting in
an impairment charge of $82,812 representing the estimated losses on the sales
of these operations, including the costs of buying out minority interests and
the direct transaction costs of completing the sale. The divestitures were
substantially completed in the second quarter of 2000.
The impairment and valuation losses of $56,993 recorded in 1999 associated
with dialysis centers within the continental U.S. similarly relate to actions
taken and decisions made during 1999. The Company established a plan to curtail
new facility acquisitions and developments and to close centers not supporting
the Company's new strategic direction. The losses principally related to
centers identified for closure or sale during the first half of 2000, new
facility plans terminated and projects abandoned, and impairments of loans to
and investments in third-party dialysis-related businesses. Additional charges
on continental U.S. operations were taken in 2000. The closure and abandonment
losses averaged less than $1,000 per facility, and were principally associated
with the impairment of leasehold improvements and intangible assets
specifically identified with these centers. The Company's new strategic
direction and curtailed new center acquisition had also affected the valuation
of several partnership investments in third-party dialysis-related businesses.
We do not expect recovery of the impairment losses even through potential
bankruptcy processes.
Other than in connection with the impairment losses discussed above, we
determined that there were no goodwill impairments as of year-end 2000.
3. Accounts receivable
The total provisions for uncollectible accounts were $39,649, $133,253 and
$44,858 for 2000, 1999 and 1998, respectively. The Company's rapid growth
through acquisitions through 1998 and the merger with RTC
F-10
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
in 1998 had a significant impact on the Company's administrative functions,
including billing and cash collection processes, which at times operated below
optimal levels of efficiency and effectiveness. The backlog of aged accounts
receivable continued to increase during the first half of 1999 due to high
turnover of billing and collection personnel and process inefficiencies. The
subsequent collection rates for the older billings did not match our earlier
projections and estimates. Those earlier estimates had been based on prior
collection experience, but the build-up of the backlog of aged accounts
receivable not processed on a timely basis created collection difficulties at a
level not previously experienced or anticipated.
During 2000, 1999 and 1998, the Company received approximately 58%, 59%
and 57%, respectively, of dialysis revenues in the continental U.S. from
Medicare and Medicaid programs. Accounts receivable from Medicare and Medicaid
were approximately $120,000 and $150,000, including the Florida lab receivables
as of December 31, 2000 and 1999, respectively. Medicare historically pays
approximately 80% of government established rates for services provided. The
remaining 20% typically is paid by state Medicaid programs, private insurance
companies or directly by the patients receiving the services. (See Note 15
regarding the Florida lab receivables.)
4. Other current assets
Other current assets were comprised of the following:
December 31,
---------------
2000 1999
------- -------
Supplier rebates and other non-trade receivables........... $ 4,289 $19,043
Operating advances to managed centers...................... 3,394 8,310
Prepaid expenses........................................... 2,248 4,391
Deposits................................................... 362 338
------- -------
$10,293 $32,082
======= =======
Operating advances to managed centers are generally unsecured and interest
bearing under the terms of the applicable management agreements.
5. Property and equipment
Property and equipment were comprised of the following:
December 31,
--------------------
2000 1999
--------- ---------
Land.................................................. $ 1,033 $ 1,193
Buildings............................................. 6,940 9,846
Leasehold improvements................................ 152,978 150,067
Equipment............................................. 229,408 248,428
Construction in progress.............................. 15,142 17,575
--------- ---------
405,501 427,109
Less accumulated depreciation and amortization........ (168,842) (141,660)
--------- ---------
Property and equipment, net........................... $ 236,659 $ 285,449
========= =========
Depreciation and amortization expense on property and equipment was
$56,330, $51,045 and $40,032 for 2000, 1999 and 1998, respectively.
F-11
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
6. Intangible assets
Intangible assets were comprised of the following:
December 31,
----------------------
2000 1999
---------- ----------
Goodwill.......................................... $ 896,769 $ 971,344
Patient lists..................................... 121,208 137,469
Noncompetition agreements......................... 103,532 112,378
Deferred debt issuance costs, net of deferred
gains on swap terminations....................... 14,182 24,524
---------- ----------
1,135,691 1,245,715
Less accumulated amortization..................... (214,068) (176,043)
---------- ----------
$ 921,623 $1,069,672
========== ==========
Amortization expense applicable to intangible assets was $55,275, $61,436
and $50,321 for 2000, 1999 and 1998, respectively.
In April 1998, Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities, or SOP 98-5, was issued. We adopted SOP 98-5 effective
January 1, 1998. SOP 98-5 requires that start-up and organization costs
incurred in conjunction with facility pre-opening activities, which had
previously been treated as deferred costs and amortized over five years, should
be expensed as incurred. As a result of the adoption of SOP 98-5, all remaining
unamortized pre-opening, development and organizational costs existing prior to
January 1, 1998 of $11,196 ($6,896 net of tax) were recognized as the
cumulative effect of a change in accounting principle in 1998.
7. Investments in third-party dialysis businesses
During 1997 and 1998, the Company entered into various agreements to
provide funding for expansion to companies that provide dialysis-related
services.
Investments in third-party dialysis businesses and related advances were
as follows:
December 31,
---------------
2000 1999
------- -------
Investments in non-consolidated businesses................. $ 8,975 $ 3,782
Acquisition advances and loans generally convertible to
equity investments, less allowance of $16,326 in 2000 and
$14,000 in 1999........................................... 25,219 31,770
------- -------
$34,194 $35,552
======= =======
The loans to third-party dialysis businesses are in the form of notes
receivable that are secured by the assets and operations of these companies and
are convertible to equity investments. The notes receivable as of December 31,
2000 bear interest at the prime rate plus 1.5%. The valuation assessments
assume that the conversion options will be exercised in most instances.
Additional loan losses of $2,326 were recognized during 2000.
F-12
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
8. Other liabilities
Other accrued liabilities were comprised of the following:
December 31,
----------------
2000 1999
-------- -------
Payor deferrals............................................ $ 60,964 $40,505
Accrued interest........................................... 10,703 14,664
Disposition accruals....................................... 8,019
Other...................................................... 22,877 21,972
-------- -------
$102,563 $77,141
======== =======
9. Income taxes
Income tax expense (benefit) consisted of the following:
Year ended December 31,
-------------------------
2000 1999 1998
------- -------- -------
Current
Federal........................................ $12,307 $(11,497) $46,061
State.......................................... 4,288 (2,527) 8,913
Foreign........................................ 2,459 1,000 1,052
Deferred
Federal........................................ 6,730 (18,199) (15,557)
State.......................................... 2,176 (3,347) (2,020)
------- -------- -------
$27,960 $(34,570) $38,449
======= ======== =======
Temporary differences which gave rise to deferred tax assets and
liabilities were as follows:
December 31,
------------------
2000 1999
-------- --------
Asset impairment losses............................... $ 45,532 $ 46,291
Receivables, primarily allowance for doubtful
accounts............................................. 28,768 34,991
Accrued expenses...................................... 15,938 10,890
Other................................................. 14,269 6,941
-------- --------
Gross deferred tax assets........................... 104,507 99,113
-------- --------
Property and equipment................................ (1,354) (4,134)
Intangible assets..................................... (18,332) (10,842)
Other................................................. (3,691) (1,197)
-------- --------
Gross deferred tax liabilities...................... (23,377) (16,173)
-------- --------
Valuation allowance................................. (34,336) (30,592)
-------- --------
Net deferred tax assets............................. $ 46,794 $ 52,348
======== ========
At December 31, 2000, the Company had state net operating loss
carryforwards of approximately $15,000 that expire through 2015. At December
31, 2000, the Company also had federal capital loss carryforwards of
approximately $50,000 that expire in 2005, and foreign tax credit carryforwards
of
F-13
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
approximately $200 that expire in 2002. The utilization of state net operating
loss carryforwards may be limited in future years based on the profitability
of certain subsidiary corporations. The utilization of capital loss
carryforwards and foreign tax credits may be limited in future years based on
the amount of capital gain and foreign source income generated in those years.
The Company has also recorded certain impairment losses that, when recognized
for tax purposes, will generate additional capital losses. The Company has
recorded a valuation allowance of $34,300, principally associated with these
deferred tax assets. The valuation allowance was increased by $3,700 in 2000.
The reconciliation between our effective tax rate and the U.S. federal
income tax rate is as follows:
Year ended
December 31,
------------------
2000 1999 1998
---- ----- ----
Federal income tax rate............................... 35.0% 35.0 % 35.0%
State taxes, net of federal benefit................... 5.9 3.7 3.1
Foreign income taxes.................................. 3.6 (0.7)
Write off of deferred tax asset associated with
cancellation of medical director stock options....... 6.3
Nondeductible amortization of intangible assets....... 5.6 (2.1) 2.0
Valuation allowance................................... 2.4 (15.6)
Other................................................. 3.4 (1.3)
---- ----- ----
Effective tax rate before merger costs................ 62.2 19.0 40.1
Merger charges........................................ 38.9
---- ----- ----
Effective tax rate.................................... 62.2% 19.0 % 79.0%
==== ===== ====
The effective tax rate for 1999 represents the tax benefit associated
with the pre-tax loss for the year ended December 31, 1999. The 15.6%
reduction in the effective income tax rate for the valuation allowance in 1999
represents an increase to the valuation allowance.
10. Long-term debt
As of December 31, 1999, the Company was not in compliance with several
formula-based covenants in its credit facilities. As a result of this non-
compliance, all debt outstanding under the credit facilities and the
convertible subordinated notes as of December 31, 1999 was potentially
callable and due within one year, and therefore had been reclassified from
long-term debt to a current classification. On July 14, 2000, a restructuring
of the credit facilities was completed, and the Company became in compliance
with all of the credit facilities covenants.
F-14
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Long-term debt was comprised of the following:
December 31,
---------------------
2000 1999
-------- -----------
Credit facilities.................................. $498,800 $ 959,610
Convertible subordinated notes, 7%, due 2009....... 345,000 345,000
Convertible subordinated notes, 5 5/8%, due 2006... 125,000 125,000
Acquisition obligations and other notes payable.... 829 21,482
Capital lease obligations (see Note 11)............ 6,053 6,799
-------- -----------
975,682 1,457,891
Less current portion and long-term debt potentially
callable under covenant provisions in 1999........ (1,676) (1,452,195)
-------- -----------
$974,006 $ 5,696
======== ===========
Scheduled maturities of long-term debt were as follows:
2001................................................................ 1,676
2002................................................................ 15,097
2003................................................................ 232,519
2004................................................................ 70,212
2005................................................................ 70,198
Thereafter.......................................................... 585,980
Included in debt expense was interest expense, net of capitalized
interest, of $112,180, $106,633 and $72,804 for 2000, 1999, and 1998,
respectively. Also included in debt expense were amortization and write-off of
deferred financing costs of $4,457, $4,164 and $1,376 for 2000, 1999, and 1998,
respectively, and interest rate swap early termination costs of $9,823 in 1998.
Credit facilities
In July 2000, the major terms of the credit facilities were restructured
which included the collateralization of the debt with substantially all of the
Company's assets, a reduction in the revolving credit availability to $150,000
together with conversion of $299,000 of the revolving facility into a term
loan, a new quarterly amortization schedule beginning September 30, 2000, and
the immediate permanent pay-down of $50,000. Total outstanding debt under the
credit facilities consisted of the following:
December 31,
-----------------
2000 1999
-------- --------
Term loan................................................ $301,460 $392,000
Revolving credit facility................................ 567,610
Revolving credit facility--term tranche.................. 197,340
-------- --------
$498,800 $959,610
======== ========
In conjunction with the restructuring, the associated interest rates
returned to the lower LIBOR-based rate formulas in effect prior to the non-
compliance. The new financial covenants reflected the Company's financial
position and projected operating results and plans at the time of the
restructuring. As a result of the
F-15
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
restructuring, related financing costs were written off. These write-offs were
recorded in 2000 as an extraordinary loss of $3,490, net of tax, and pre-tax
debt expenses of $1,192.
In 1998, the then existing credit facilities were replaced with an
aggregate of $1,350,000 in two senior bank facilities. As a result of this
refinancing, remaining net deferred financing costs of $16,018 net of tax were
recognized as an extraordinary loss in 1998.
Several of the Company's subsidiaries, including subsidiaries owning
substantially all of the Company's dialysis center assets, have guaranteed the
obligations under the credit facilities.
At the time of the merger, RTC also had a credit agreement which provided
for a $350,000 revolving credit/term facility available to fund acquisitions
and general working capital requirements. The RTC credit agreement was
terminated and repaid with borrowings under the credit facilities on February
27, 1998 in connection with the completion of our merger with RTC. The
remaining net unamortized deferred financing costs in the amount of $4,393
related to the RTC credit agreement were recognized as an extraordinary loss in
1998.
7% convertible subordinated notes
In November 1998, $345,000 of 7% convertible subordinated notes due 2009
were issued in a private placement offering subject to subsequent registration
for resale. The notes are convertible, at the option of the holder, at any time
into common stock at a conversion price of $32.81 principal amount per share,
and the notes may be redeemed on or after November 15, 2001. The notes are
general, unsecured obligations junior to all existing and future senior debt
and effectively all existing and future liabilities of the Company and its
subsidiaries. Commencing May 18, 1999, the Company incurred monetary penalties
on a weekly basis until the registration of the notes under the Securities Act
of 1933 was declared effective. Penalties of $976 were included in debt expense
for the year ended December 31, 1999. The Company's registration statement
covering the resale of the notes was declared effective on February 1, 2000.
5 5/8% convertible subordinated notes
In June 1996, RTC (a wholly-owned subsidiary following the merger with the
Company in 1998) issued $125,000 of 5 5/8% convertible subordinated notes due
2006. These notes are convertible, at the option of the holder, at any time
after August 12, 1996 through maturity, unless previously redeemed or
repurchased, into our common stock at a conversion price of $25.62 principal
amount per share. After July 17, 1999, all or any part of these notes are
redeemable at the Company's option on at least 15 and not more than 60 days'
notice as a whole or, from time to time, in part at redemption prices ranging
from 103.94% to 100% of the principal amount thereof, depending on the year of
redemption, together with accrued interest to, but excluding, the date fixed
for redemption. These notes are guaranteed by DaVita Inc.
Condensed consolidating financial statements for the Company, including
summarized financial information of RTC (a wholly-owned subsidiary) are
disclosed in Note 20.
Interest rate swap agreements
In April 1998, in conjunction with the refinancing of senior credit
facilities, the existing two interest rate swap agreements were cancelled. The
loss associated with the early cancellation of those swaps was $9,823 and was
included in debt expense for 1998.
In May 1998, the Company entered into cancelable interest rate swap
agreements with a combined notional amount of $800,000. During 1999 two of the
swap agreement counterparties exercised their right to
F-16
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
cancel agreements in the aggregate notional amount of $100,000. During 2000 two
more of the swap counterparties exercised their right to cancel agreements with
notional amounts totaling $100,000.
During 2000, the Company liquidated or cancelled all of the remaining
interest rate swap agreements which had notional amounts of $600,000. The
Company received approximately $7,454 in the settlement of these swap
agreements and recorded an associated gain of $6,297, which is being amortized
over the remaining contractual life of the credit facilities.
11. Leases
The majority of the Company's facilities are leased under noncancelable
operating leases expiring in various years through 2021. Most lease agreements
cover periods from five to ten years and contain renewal options of five to ten
years at the fair rental value at the time of renewal or at rates subject to
periodic consumer price index increases. In the normal course of business,
operating leases are generally renewed or replaced by similar leases at
replacement centers. Some equipment is leased under capital lease agreements.
Future minimum lease payments under noncancelable operating leases and
under capital leases are as follows:
Operating Capital
leases leases
--------- -------
2001................................................... $ 45,109 $ 1,411
2002................................................... 40,783 1,192
2003................................................... 38,047 1,049
2004................................................... 35,610 579
2005................................................... 31,637 545
Thereafter............................................. 100,304 4,676
-------- -------
$291,490 9,452
========
Less portion representing interest..................... (3,399)
-------
Total capital lease obligation, including current
portion............................................... $ 6,053
=======
Rental expense under all operating leases for 2000, 1999 and 1998 was
$51,421, $52,504 and $38,975, respectively. The net book value of property and
equipment under capital lease was $6,192 and $7,719 at December 31, 2000 and
1999, respectively. Capital lease obligations are included in long-term debt
(see Note 10).
F-17
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
12. Shareholders' equity
Earnings per share
The reconciliation of the numerators and denominators used to calculate
earnings per share, or EPS, is as follows:
Year ended December 31,
---------------------------
2000 1999 1998
------- --------- -------
(in thousands, except per
share)
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle--basic:
As reported..................................... $16,975 $(147,256) $10,192
======= ========= =======
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle--assuming dilution:
As reported..................................... $16,975 $(147,256) $10,192
======= ========= =======
Applicable common shares:
Weighted average outstanding during the year.... 81,593 81,168 80,156
Reduction in shares in connection with notes
receivable from Employees...................... (12) (16) (13)
------- --------- -------
Weighted average number of shares outstanding for
use in computing basic earnings per share........ 81,581 81,152 80,143
Outstanding stock options (based on the treasury
stock method).................................. 1,576 1,558
------- --------- -------
Adjusted weighted average number of common and
common share equivalent shares outstanding--
assuming dilution.............................. 83,157 81,152 81,701
======= ========= =======
Earnings (loss) per common share--basic........... $ 0.17 $ (1.81) $ (0.12)
Earnings (loss) per common share--assuming
dilution......................................... $ 0.16 $ (1.81) $ (0.12)
Options to purchase 7,887,079 and 4,726,975 shares of common stock at
$6.70 to $33.50 per share and $28.43 to $36.13 per share, were outstanding
during 2000 and 1998, respectively, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares or the effect was anti-dilutive. All options
to purchase common stock were excluded from the 1999 EPS calculation because
they were anti-dilutive. The shares of common stock from the assumed conversion
of the 7% convertible subordinated notes and the 5 5/8% convertible
subordinated notes (see Note 10) were not included in the computation of
diluted EPS for any period because the effect was anti-dilutive.
Stock-based compensation plans
The Company's stock-based compensation plans are described below.
1994 plan. The 1994 Equity Compensation Plan provides for grants of
nonqualified stock options to purchase common stock and other rights to
purchase shares of common stock to certain employees, directors, consultants
and facility medical directors. In December 1999, the plan was amended so that
no further grants may be made under this plan.
There are 1,447,426 unexercised options outstanding under the 1994 plan.
Original options granted generally vest on the ninth anniversary of the date of
grant, subject to accelerated vesting in the event that
F-18
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
certain performance criteria are met. In April 1996, the vesting schedule was
changed for new options granted so that options vest over four years from the
date of grant. The exercise price of each option equals the market price of our
stock on the date of grant, and an option's maximum term is ten years.
Purchase rights to acquire 1,314,450 common shares for $0.90-$3.60 per
share were granted to certain employees under the 1994 plan. All of these
rights were exercised and the Company received notes for the uncollected
portion of the purchase proceeds. These notes bear interest at the lesser of
The Bank of New York's prime rate or 8%, are full recourse to the employees,
and are secured by the employees' stock. The notes are repayable four years
from the date of issuance, subject to certain prepayment requirements. At
December 31, 2000 and 1999 the outstanding notes plus accrued interest totaled
$83 and $192, respectively.
1995 plan. The 1995 Equity Compensation Plan provides for grants of stock
options and the issuance of restricted stock to certain employees, directors
and other individuals providing services. In December 1999, the plan was
amended so that no further grants may be made under this plan. There are
712,640 unexercised options outstanding under the 1995 plan. Options granted
generally vest over four years from the date of grant and an option's maximum
term is ten years, subject to certain restrictions. Awards were generally
issued with the exercise prices equal to the market price of the stock on the
date of grant.
1997 plan. The 1997 Equity Compensation Plan provides for grants of stock
options and the issuance of restricted stock to certain employees, directors
and other individuals providing services. In February 1998, the shares reserved
for issuance under the 1997 plan were increased to 7,166,667 common shares.
Options granted generally vest over four years from the date of grant and an
option's maximum term is ten years. Grants are generally issued with the
exercise prices equal to the market price of the stock on the date of grant.
1999 plans. The 1999 Equity Compensation Plan provides for grants of stock
options to employees, directors and other individuals providing services. There
are 3,000,000 common shares reserved for issuance under this plan. Options
granted under this plan generally vest over four years from the date of grant
and an option's maximum term is seven years, subject to certain restrictions.
Grants under this plan are generally issued with the exercise prices equal to
the market price of the stock on the date of grant.
The 1999 Non-Executive Officer and Non-Director Equity Compensation Plan
provides for grants of stock options to employees other than executive officers
and to other individuals providing services. There are 4,000,000 common shares
reserved for issuance under this plan. Options granted under this plan
generally vest over four years from the date of grant, subject to certain
restrictions. Grants under this plan are generally issued with the exercise
prices equal to the market price of the stock on the date of grant.
Special Purpose Option Plan (RTC Plans). Upon consummation of the merger
with RTC, all outstanding options under RTC plans were converted to Total Renal
Care Holdings Inc. Special Purpose Option Plan options. This plan provides for
grants of incentive and nonqualified stock options in exchange for outstanding
RTC stock plan options. Options under this plan have the same provisions and
terms provided for in the RTC stock plans, including acceleration provisions
upon certain sales of assets, mergers and consolidations. On the merger date,
there was a conversion of 2,156,426 options. Further, options for
1,305,738 shares became fully vested due to change in control vesting
acceleration provisions that were contained in the original grants. Options for
1,780,193 shares were exercised subsequent to the merger date. In December
1999, the plan was amended so that no further grants may be made under this
plan.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
grants for 2000, 1999, and 1998, respectively: dividend yield of 0% for all
periods; weighted average expected volatility of 72.05%, 50.01%, and 33.98%;
risk-free interest rates of 6.13%, 5.63%, and 5.51% and weighted average
expected lives of 3.5, 6.0 and 6.0 years.
F-19
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Stock options issued under these plans to non-employees and modifications
to previous grants to employees resulted in stock option expense of $126,
$1,116, and $3,585 for the years ended December 31, 2000, 1999, and 1998,
respectively.
A combined summary of the status of the plans is presented below:
Year ended December 31,
--------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning
of year................ 10,421,845 $15.79 10,415,417 $23.85 8,325,030 $14.90
Granted................. 9,619,400 4.70 4,575,000 9.35 5,570,567 31.10
Exercised............... (817,546) 2.55 (84,723) 1.23 (3,155,438) 12.61
Forfeited............... (4,555,120) 16.74 (4,483,849) 28.22 (324,742) 27.61
---------- ------ ---------- ------ ---------- ------
Outstanding at end of
year................... 14,668,579 $ 8.96 10,421,845 $15.79 10,415,417 $23.85
========== ====== ========== ====== ========== ======
Options exercisable at
year end............... 5,006,908 4,004,675 2,208,871
========== ========== ==========
Weighted-average fair
value of options
granted during the
year................... $ 2.61 $12.74 $13.67
====== ====== ======
Effective September 20, 1999, 1,750,000 options with exercise prices
greater than $30 per share were forfeited for the right to participate in a
retention bonus program. Retention compensation expense of $2.6 million was
recognized in 1999, and no replacement options were awarded within six months.
Effective December 31, 2000, 910,000 options with exercise prices over $15.00
were voluntarily relinquished and no replacement options have been issued.
The following table summarizes information about fixed stock options
outstanding at December 31, 2000:
Weighted
Options average Weighted Weighted
outstanding remaining average Exercisable average
as of contractual exercise as of exercise
Range of Exercise Prices 12/31/00 life price 12/31/00 price
- ------------------------ ----------- ----------- -------- ----------- --------
$ 0.01-$ 5.00............ 4,676,844 4.1 $ 2.66 1,181,539 $ 2.51
$ 5.01-$10.00............ 6,433,119 6.2 7.24 1,291,244 7.42
$10.01-$15.00............ 465,237 6.1 11.36 47,237 11.94
$15.01-$20.00............ 2,146,347 4.8 18.52 1,912,213 18.52
$20.01-$25.00............ 236,612 6.5 23.11 145,957 22.70
$25.01-$30.00............ 167,113 7.3 26.67 100,096 26.81
$30.01-$35.00............ 543,307 6.8 32.11 328,622 32.08
---------- --- ------ --------- ------
14,668,579 5.4 $ 8.96 5,006,908 $12.99
========== === ====== ========= ======
Stock purchase plan. The Employee Stock Purchase Plan entitles qualifying
employees to purchase up to $25 of common stock during each calendar year. The
amounts used to purchase stock are accumulated through payroll withholdings or
through an optional lump sum payment made in advance of the first day of the
plan. The plan allows employees to purchase stock for the lesser of 100% of the
fair market value on the first
F-20
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
day of the purchase right period or 85% of the fair market value on the last
day of the purchase right period. Each purchase right period begins on January
1 or July 1, as elected by the employee and ends on December 31. Payroll
withholdings related to the plan, included in accrued employee compensation and
benefits, were $631 and $1,937 at December 31, 2000 and 1999, respectively.
Subsequent to December 31, 2000, and December 31, 1999, 99,648 and 77,106
shares, respectively, were issued to satisfy obligations under the plan.
The fair value of the employees' purchase rights was estimated on the
beginning dates of the purchase right periods using the Black-Scholes model
with the following assumptions for grants on July 1, 2000, January 1, 2000,
July 1, 1999, January 1, 1999, July 1, 1998, and January 1, 1998, respectively:
dividend yield of 0% for all periods; expected volatility of 75% in 2000, 54%
in 1999 and 42% in 1998; risk-free interest rate of 6.0%, 6.4%, 5.5%, 4.6%,
5.5%, and 5.7%; and expected lives of 0.5 and 1.0 years. Using these
assumptions, the weighted-average fair value of purchase rights granted were
$1.33, $2.11, $2.50, $6.84, $6.24 and $7.84, respectively.
Pro forma net income and earnings per share. The Company applies APB
Opinion No. 25 and related interpretations in accounting for all of our
employee stock compensation plans. Had compensation cost for our stock-based
compensation plans been determined under the provisions of SFAS 123, net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
Year ended December 31,
----------------------------
2000 1999 1998
------- --------- --------
(in thousands, except per
share)
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle...................................... $(3,492) $(162,472) $ 4,004
Extraordinary loss............................ (3,490) (12,744)
Cumulative effect of change in accounting
principle.................................... (6,896)
------- --------- --------
Net income (loss)............................. $(6,982) $(162,472) $(15,636)
======= ========= ========
Earnings (loss) per common share--basic:
Income (loss) before extraordinary item....... $ (0.05) $ (2.00) $ 0.04
Extraordinary loss............................ (0.04) (0.16)
Cumulative effect of change in accounting
principle.................................... (0.08)
------- --------- --------
Net income (loss)............................. $ (0.09) $ (2.00) $ (0.20)
======= ========= ========
Weighted average number of common shares and
equivalents outstanding........................ 81,581 81,152 80,143
======= ========= ========
Earnings (loss) per common share--assuming
dilution:
Income (loss) before extraordinary item....... $ (0.05) $ (2.00) $ 0.05
Extraordinary loss............................ (0.04) (0.16)
Cumulative effect of change in accounting
principle.................................... (0.08)
------- --------- --------
Net income (loss)............................. $ (0.09) $ (2.00) $ (0.19)
======= ========= ========
Weighted average number of common shares and
equivalents outstanding--Assuming dilution..... 81,581 81,152 81,076
======= ========= ========
F-21
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
13. Transactions with related parties
Richard K. Whitney, our Chief Financial Officer, received a loan from the
Company in the principal amount of $65,000 in July 1997. In February 2001 Mr.
Whitney prepaid this loan in full, with a $65,000 payment for the outstanding
principal. Under the terms of the loan, Mr. Whitney was required to pay
interest only on the note on a monthly basis from August 1997 at the rate of 7%
per year through July 2002, at which time the unpaid principal balance was due
in full. The loan was secured by all of Mr. Whitney's options to purchase our
common stock. Mr. Whitney used the proceeds of this loan in the purchase of his
principal residence.
Joseph C. Mello, our Chief Operating Officer, received a loan from the
Company in the principal amount of $275,000 in December 2000. Mr. Mello is
required to pay quarterly interest only on the note from March 2001 through
September 2002 at a rate of 7% per year. Thereafter, Mr. Mello is required to
make quarterly interest and principal payments of approximately $15,800 through
September 2007, at which time the unpaid principal balance will be repaid in
full. The loan is secured by all of Mr. Mello's options to purchase our common
stock. Mr. Mello used the proceeds of this loan in the purchase of his
principal residence.
Tenet
Tenet Healthcare Corporation, or Tenet, owns less than 5% of our common
stock. The Company provides dialysis services to Tenet hospital patients under
agreements with terms of one to three years. The contract terms are comparable
to contracts with unrelated third parties. Included in accounts receivable are
amounts related to these services of $459 and $1,211 at December 31, 2000 and
1999, respectively. Net operating revenues received from Tenet for these
services were $4,903, $7,037, and $2,424, for 2000, 1999, and 1998,
respectively.
CSFB
A managing director of Credit Suisse First Boston Corporation, or CSFB,
has served on the Company's board of directors since August 1994 and, prior to
August 1997, an affiliate of CSFB held an ownership interest in the Company.
Effective with the August 1997 public offering of common stock, CSFB and its
affiliates no longer own an interest in the Company. During 1998, CSFB advised
the Company on the acquisition of RTC and assisted us in the issuance of the 7%
notes.
Prior to November 2000 the Company maintained a business arrangement with
CSFB under which the Company managed third-party dialysis centers with options
to acquire the centers at future dates and guaranteed third-party debt of
approximately $11 million as of December 31, 1999. The Company purchased these
dialysis centers from CSFB and accordingly cancelled these guarantees in
November 2000.
14. Employee benefit plans
The Company has a savings plan for substantially all employees, which has
been established pursuant to the provisions of Section 401(k) of the Internal
Revenue Code, or IRC. The plan provides for employees to contribute from 1% to
15% of their base annual salaries on a tax-deferred basis not to exceed IRC
limitations. The Company may make a contribution under the plan each fiscal
year as determined by our board of directors. Company matched contributions
were $91, $76, and $58 for the years ended December 31, 2000, 1999, and 1998,
respectively, in accordance with specific state requirements.
F-22
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
RTC had a defined contribution savings plan covering substantially all of
its employees. RTC's contributions under the plan were approximately $641 for
the year ended December 31, 1998. Effective July 1, 1998, the plan was
terminated and merged into the Company's savings plan.
During 2000, the Company established the DaVita Inc. Profit Sharing Plan
and is in the process of applying to have it qualified under Section 401(a) of
the IRC. Contributions to this plan are made solely by the Company. All
contributions by the Company to the plan require the approval of the Board of
Directors and are deposited into an irrevocable trust. The profit sharing award
for each eligible participant is calculated as a percentage of base salary and
is based upon the achievement of certain employee specific and corporate
financial and operating goals. During 2000, the Company recognized expense of
$15,806 and made contributions of $7,088 to the trust.
15. Contingencies
Health care providers' revenues may be subject to adjustment as a result
of (1) examination by government agencies or contractors, for which the
resolution of any matters raised may take extended periods of time to finalize;
(2) differing interpretations of government regulations by different fiscal
intermediaries; (3) differing opinions regarding a patient's medical diagnosis
or the medical necessity of services provided; and (4) retroactive implications
or interpretations of governmental requirements.
The Company's Florida-based laboratory subsidiary is the subject of a
third-party carrier review of its Medicare reimbursement claims. The carrier
has issued formal overpayment determinations in the amount of $5.6 million for
the review period from January 1995 to April 1996, and $15 million for the
review period from May 1996 to March 1998. The carrier has suspended all
payments of Medicare claims from this laboratory since May 1998. The carrier
has also determined that $16.1 million of the suspended claims for the review
period from April 1998 to August 1999 were not properly supported by the
prescribing physicians' medical justification. The carrier has alleged that 99%
of the tests the laboratory performed during the review period from January
1995 to April 1996, 96% of the tests performed in the period from May 1996 to
March 1998, and 70% of the tests performed in the period from April 1998 to
August 1999 were not properly supported by the prescribing physicians' medical
justification. In August 2000, the carrier requested additional records with
respect to the time period August 1999 to May 2000.
The Company is disputing the overpayment determinations and has provided
supporting documentation of its claims. The Company has initiated the process
of a formal review of each of the carrier's determinations. The first step in
this formal review process is a hearing before a hearing officer at the
carrier. The Company received minimal responses from the carrier to its
repeated requests for clarification and information regarding the continuing
payment suspension. The hearing regarding the initial review period from
January 1995 to April 1996 was held in July 1999. In January 2000 the hearing
officer issued a decision upholding the overpayment determination of $5.6
million. The hearing regarding the second review period from May 1996 to March
1998 was held in April 2000. In July 2000 the hearing officer issued a decision
upholding $14.2 million, or substantially all of the overpayment determination.
The Company has filed appeals of both decisions to a federal administrative law
judge, and has moved to consolidate the two appeals. At this time, we have not
received a scheduled date for a hearing with an administrative law judge,
although HHS has informed us that we can expect a hearing by the second quarter
of 2001.
In February 1999, our Florida-based laboratory subsidiary filed a
complaint against the carrier and HHS seeking a court order to lift the payment
suspension. In July 1999, the court dismissed our complaint because we had not
exhausted all administrative remedies, that is, the carrier review and
administrative law judge processes described above.
F-23
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
In addition to the formal appeal process with a federal administrative law
judge, beginning in the third quarter of 1999 we sought a meeting with the
Department of Justice, or DOJ, to begin a process to resolve this matter. The
carrier had previously informed the local office of the DOJ and HHS of this
matter, and we had provided requested information to the DOJ. The Company met
with the DOJ in February 2001, at which time the DOJ requested additional
information which will be provided.
Timing of the final resolution of this matter is highly uncertain, and
beyond the Company's control or influence. Beginning in the third quarter of
2000, the Company stopped accruing additional Medicare revenue from this
laboratory until the uncertainties regarding both the timing of resolution and
the ultimate revenue valuations are at least substantially eliminated. The
amount of potential Medicare revenue not accrued beginning in the third quarter
of 2000 was approximately $4 million per quarter. As of June 30, 2000, the
cumulative recognized gross revenue associated with the withheld billings was
approximately $38 million. We estimate that the potential cash exposure as of
December 31, 2000 was not more than $15 million based on the carrier's
overpayment findings noted above. In addition, the government could impose
additional fines and penalties, which could be substantial.
In February 2001, the Civil Division of the United States Attorney's
Office for the Eastern District of Pennsylvania contacted us and requested that
the Company cooperate in a review of some of our historical practices,
including billing and other operating procedures and our financial
relationships with physicians.
The Civil Division has requested that we provide a wide range of
information responding to the areas of review. The Civil Division has not
initiated any legal process or served any subpoena on the Company. The Civil
Division has indicated that it is not making any allegation of wrongdoing at
this time and that no criminal action against the Company or any individual is
contemplated. The Company is cooperating in this review.
The inquiry appears to be at an early stage. As it proceeds, the Civil
Division could expand its areas of concern. If a court determines there has
been wrongdoing, the penalties under applicable statutes could be substantial.
Following the announcement on February 18, 1999 of the Company's
preliminary results for the fourth quarter of 1998 and the full year then
ended, class action lawsuits were filed alleging violations of the federal
securities laws arising from allegedly false and misleading statements during a
class period of March 11, 1997 to July 18, 1999. During 2000 the consolidated
lawsuit was settled. Under a stipulation of settlement the Company contributed
$10.8 million and our insurance carriers contributed $14.2 million for a $25
million settlement fund. The Company agreed to implement corporate governance
principles and procedures to ensure the accountability of the Company's board
and management to its shareholders. The Company admitted to no wrongdoing or
liability in the stipulation of settlement.
In addition, DaVita is subject to claims and suits in the ordinary course
of business for which the Company is believed to be covered by insurance.
Management believes that the ultimate resolution of these additional pending
proceedings, whether the underlying claims are covered by insurance or not,
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
16. Mergers, acquisitions and divestitures
Merger
On February 27, 1998 the Company merged with Renal Treatment Centers,
Inc., or RTC. In connection with the merger, the Company issued 34,565,729
shares of its common stock in exchange for all of the
F-24
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
outstanding shares of RTC common stock. In addition, the Company guaranteed
$125,000 of RTC's 5 5/8% convertible subordinated notes. In conjunction with
this transaction, an additional 140,000 shares of common stock were authorized
by the shareholders.
The RTC merger transaction was accounted for as a pooling of interests
and these consolidated financial statements have been restated to include the
results of operations and account balances of RTC for all periods presented.
There were no transactions between RTC and the Company prior to the
combination.
As a result of the merger, RTC's revolving credit agreement was
terminated and the outstanding balance of approximately $297,228 was paid off
through additional borrowings under our credit facilities. The remaining net
unamortized deferred financing costs in the amount of $4,393, less tax of
$1,580, related to RTC's revolving credit agreement were recognized as an
extraordinary loss in 1998.
Merger and related costs recorded during 1998 included transaction costs,
integration costs, employee severance and other directly associated
compensation expense.
A summary of merger and related costs and accrual activity through
December 31, 2000 is as follows:
Severance
Direct and Costs to
transaction employment integrate
costs costs operations Total
----------- ---------- ---------- --------
Initial expense................ $ 21,580 $ 41,960 $ 15,895 $ 79,435
Amounts utilized during 1998... (22,885) (37,401) (13,137) (73,423)
Adjustment of estimates........ 1,305 (959) (1,593) (1,247)
-------- -------- -------- --------
Accrual, December 31, 1998..... 3,600 1,165 4,765
Amounts utilized during 1999... (600) (377) (977)
-------- -------- -------- --------
Accrual, December 31, 1999..... 3,000 788 3,788
Amounts utilized during 2000... (788) (788)
-------- -------- -------- --------
Accrual, December 31, 2000..... $ -- $ 3,000 $ -- $ 3,000
======== ======== ======== ========
Direct transaction costs consisted primarily of investment banking fees,
legal and accounting costs and filing costs. Severance and other compensation
costs directly resulting from the merger included termination of employment
contracts; severance payments; the exercise of RTC stock options with tendered
shares (less than six months from exercise date); and special merger bonuses.
Integration costs of the combined operations were principally associated with
the elimination of the following RTC departments: human resources, managed
care, laboratory, and all finance functions with the exception of patient
accounting. In addition, RTC's laboratory, located in Las Vegas, Nevada, was
closed prior to its commencement of operation. Integration costs included
termination of a long-term laboratory management service agreement, write-off
of leasehold improvements and other capitalized costs, and incremental costs
of integrating operations.
The remaining accrual balance is included in other liabilities.
F-25
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Acquisitions
The following is a summary of acquisitions that were accounted for as
purchases:
Year ended December 31,
-------------------------
2000 1999 1998
------- -------- --------
Number of centers acquired ..................... 8 45 76
Number of common shares issued ................. 98,549
Estimated fair value of common shares issued ... $ 2,796
Deferred purchase payments and acquisition
obligations ................................... $ 12,737 15,233
Cash paid, net of cash acquired ................ $12,895 154,226 338,164
------- -------- --------
Aggregate purchase price ....................... $12,895 $166,963 $356,193
======= ======== ========
The assets and liabilities of the acquired entities in the preceding table
were recorded at their estimated fair market values at the dates of
acquisition. The results of operations of these centers have been included in
the financial statements from their effective acquisition dates. The nearest
month-end has been used as the effective date for recording acquisitions that
close during the month because there were no partial month accounting cutoffs
and partial month results associated with these acquisitions would not have a
material impact on consolidated operating results. The Company acquired all of
its foreign operations and several domestic operations through purchases of
capital stock. Any settlement with tax authorities relating to pre-acquisition
income tax liabilities may result in an adjustment to goodwill attributable to
that acquisition.
The initial allocations of fair value are based upon available information
for the acquired businesses and are finalized when the contingent acquisition
amounts are determined. The final allocations did not differ materially from
the initial allocations. Allocations were as follows:
Year ended December 31,
---------------------------
2000 1999 1998
------- -------- --------
Identified intangible assets .................. $ 18,061 $ 39,992
Goodwill....................................... 140,111 315,655
Tangible assets................................ $13,006 20,359 30,650
Liabilities assumed............................ (111) (11,568) (30,104)
------- -------- --------
Total purchase price......................... $12,895 $166,963 $356,193
======= ======== ========
F-26
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The following summary, prepared on a pro forma basis, combines the results
of operations as if the acquisitions had been consummated as of the beginning
of each of the periods presented, after including the impact of certain
adjustments such as amortization of intangibles, interest expense on
acquisition financing and income tax effects.
Year ended December 31,
----------------------------------
2000 1999 1998
(unaudited) (unaudited) (unaudited)
----------- ---------- ----------
Net revenues ............................. $1,497,979 $1,476,727 $1,285,546
Net income (loss) before extraordinary
item and cumulative effect of change in
accounting principle .................... $ 19,035 $ (145,246) $ 15,587
Net income (loss)......................... 15,545 (145,246) (4,053)
Pro forma net income (loss) per share
before extraordinary item and cumulative
effect of change in accounting principle
......................................... $ 0 .23 $ (1.79) $ 0.19
Pro forma net income (loss) per share
before extraordinary item and cumulative
effect of change in accounting
principle--assuming dilution ............ $ 0.23 $ (1.79) $ 0.19
Pro forma net income (loss) per share..... 0.19 (1.79) (0.05)
Pro forma net income (loss) per share--
assuming dilution ....................... 0.19 (1.79) (0.05)
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been completed prior to
the beginning of the periods presented. In addition, they are not intended to
be a projection of future results and do not reflect the synergies, additional
revenue-generating services or direct facility operating expense reduction that
might be achieved from combined operations.
Divestitures
During the fourth quarter of 1999, the Company announced its intention to
sell its dialysis operations outside the continental U.S. and recorded an
impairment loss of $82,812 associated with the non-continental U.S. operations.
Assets and liabilities of the non-continental U.S. operations as of December
31, 1999 were $259,596 and $34,294 respectively.
On June 19, 2000, the Company completed the sales of its operations
outside the continental U.S. with the exception of operations in Puerto Rico
and Guam. The definitive sale agreement for the Puerto Rico operations was
signed in the first quarter of 2000 and amended in the second quarter of 2000,
and the sale will be completed upon the receipt of required regulatory
approvals and third-party consents. The sales completed in June 2000
represented approximately 90% of the total value of the non-continental
operations being divested. An additional impairment loss of $3,000 was
recognized as of June 30, 2000 attributable to the completion of these sales.
The Company recognized a foreign currency translation loss of $4,700 associated
with non-continental U.S. operations divested during the second quarter. The
foreign currency translation loss had previously been recognized in other
comprehensive income.
On November 1, 2000 the Company completed the sales of its interests in
operations on the island of Guam for a gain of approximately $1,600. Also in
the fourth quarter, the Company recognized accounts receivable recoveries on
the non-continental U.S. accounts receivable not sold of $1,100 and reversal of
$900 in transaction costs accrued for the sale of the non-continental U.S.
operations. Accruals for transaction costs and associated obligations amounted
to $7,843 as of December 31, 2000. Future charges or credits resulting from the
ultimate resolution of divestitures, indemnities and other estimated costs are
not expected to be material.
F-27
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Net cash proceeds from the sales of non-continental U.S. operations in
2000 were $133,177. Of these proceeds, $125,000 was immediately applied to our
credit facilities debt in accordance with the conditions under which we
received consent from the lenders to consummate the sales.
Operating results for the non-continental U.S. operations excluding
impairment charges were as follows (in thousands):
Year ended December 31,
-------------------------
2000 1999 1998
------- -------- -------
Net operating revenue............................ $74,453 $124,410 $88,978
Operating expenses
Dialysis centers and labs...................... 59,264 100,204 70,873
General and administrative..................... 3,640 7,396 3,940
Depreciation and amortization.................. 8,181 12,629 7,531
Provision for uncollectible accounts........... 1,728 5,717 2,734
------- -------- -------
72,813 125,946 85,078
------- -------- -------
Operating income (loss).......................... $ 1,640 $ (1,536) $ 3,900
======= ======== =======
17. Fair value of financial instruments
Financial instruments consist primarily of cash, accounts receivable,
notes receivable, accounts payable, accrued compensation and benefits, and
other accrued liabilities. The balances of these financial instruments as
presented in the financial statements at December 31, 2000 approximate their
fair values. Borrowings under credit facilities, of which $498,800 was
outstanding as of December 31, 2000, reflect fair value as they are subject to
fees and adjustable rates competitively determined in the marketplace. The fair
value of the 7% convertible subordinated notes and the RTC 5 5/8% convertible
subordinated notes were approximately $293,000 and $110,000 at December 31,
2000 based on quoted market prices.
18. Supplemental cash flow information
The table below provides supplemental cash flow information:
Year ended December 31,
--------------------------
2000 1999 1998
-------- -------- -------
Cash paid (received) for:
Income taxes ................................ $(28,585) $ 32,324 $13,676
Interest..................................... 117,856 102,125 66,409
Non-cash investing and financing activities:
Estimated value of stock and options issued
in acquisitions 2,796
Fixed assets acquired under capital lease
obligations ................................ 3,405 583
Contribution to consolidated partnerships ... 25 2,195 2,592
Deferred financing cost write-off............ 1,192 1,601
F-28
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
19. Selected quarterly financial data (unaudited)
Summary unaudited quarterly financial data for 2000 and 1999 is as
follows:
2000 1999
------------------------------------------- -------------------------------------------
December 31 September 30 June 30 March 31 December 31 September 30 June 30 March 31
----------- ------------ -------- -------- ----------- ------------ -------- --------
Net operating revenues
....................... $372,746 $362,535 $378,908 $372,113 $ 373,120 $367,168 $352,819 $352,244
Operating income (loss)
....................... 51,649 49,906 32,843 40,317 (154,864) 35,107 (6,353) 62,128
Income (loss) before
extraordinary item..... 15,333 13,150 (15,355) 3,847 (150,664) 2,259 (22,059) 23,207
Net income (loss) ...... 15,333 9,660 (15,355) 3,847 (150,664) 2,259 (22,059) 23,207
Income (loss) per common
share--basic:
Income (loss) before
extraordinary item.... $ 0.19 $ 0.16 $ (0.19) $ 0.05 $ (1.86) $ 0.03 $ (0.27) $ 0.29
Extraordinary loss .... (0.04)
-------- -------- -------- -------- --------- -------- -------- --------
Net income (loss) per
share ................ $ 0.19 $ 0.12 $ (0.19) $ 0.05 $ (1.86) $ 0.03 $ (0.27) $ 0.29
======== ======== ======== ======== ========= ======== ======== ========
Income (loss) per common
share--assuming
dilution:
Income (loss) before
extraordinary item.... $ 0.18 $ 0.16 $ (0.19) $ 0.05 $ (1.86) $ 0.03 $ (0.27) $ 0.28
Extraordinary loss..... (0.04)
-------- -------- -------- -------- --------- -------- -------- --------
Net income (loss) per
share................. $ 0.18 $ 0.12 $ (0.19) $ 0.05 $ (1.86) $ 0.03 $ (0.27) $ 0.28
======== ======== ======== ======== ========= ======== ======== ========
20. Condensed consolidating financial statements
The following information is presented as required under the Securities
and Exchange Commission Financial Reporting Release No. 55 in connection with
the Company's publicly traded debt. This information is not routinely prepared
for use by management. The operating and investing activities of the separate
legal entities included in the consolidated financial statements are fully
interdependent and integrated. Accordingly, the operating results of the
separate legal entities are not representative of what the operating results
would be on a stand-alone basis. Revenues and operating expenses of the
separate legal entities include intercompany charges for management and other
services.
F-29
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The $125,000 5 5/8% Convertible Subordinated Notes Due 2006, issued by the
wholly-owned subsidiary Renal Treatments Center, Inc., or RTC, are guaranteed
by DaVita Inc. The $225,000 9 1/4% Senior Subordinated Notes issued in April
2001 by DaVita Inc., are guaranteed by all its wholly-owned domestic
subsidiaries. Non-wholly-owned subsidiaries, joint ventures and partnerships
are not guarantors of either obligation. The financial positions and results of
operations of the respective guarantors are based upon the guarantor
relationship as of the end of the year and respective interim periods.
Condensed consolidating balance sheets
Wholly-owned
subsidiaries
-------------------
DaVita Non-participating Consolidating Consolidated
Inc. RTC All others subsidiaries adjustments total
---------- -------- ---------- ----------------- ------------- ------------
As of December 31, 2000
Cash and cash
equivalents............ $ 16,553 $ 1,871 $ 12,783 $ 31,207
Accounts receivable,
net.................... 83,313 180,263 $ 26,836 290,412
Other current assets.... 2,014 15,967 55,947 2,328 76,256
---------- -------- ---------- -------- ----------- ----------
Total current assets.. 18,567 101,151 248,993 29,164 397,875
Property and equipment,
net.................... 5,377 61,686 146,959 22,637 236,659
Investments in
subsidiaries........... 199,079 $ (199,079)
Receivables from
subsidiaries........... 938,183 (938,183)
Intangible assets, net.. 9,548 299,813 493,946 118,316 921,623
Other assets............ 37,692 2,146 593 44 40,475
---------- -------- ---------- -------- ----------- ----------
Total assets.......... $1,208,446 $464,796 $ 890,491 $170,161 $(1,137,262) $1,596,632
========== ======== ========== ======== =========== ==========
Current liabilities..... 15,278 23,996 206,275 3,978 249,527
Payables to
subsidiaries/parent.... 146,877 746,892 44,414 (938,183)
Long-term liabilities... 843,800 125,000 5,311 4,750 978,861
Minority interests...... 18,876 18,876
Shareholders' equity
(deficit).............. 349,368 168,923 (67,987) 117,019 (217,955) 349,368
---------- -------- ---------- -------- ----------- ----------
Total liabilities and
shareholders'
equity............... $1,208,446 $464,796 $ 890,491 $170,161 $(1,137,262) $1,596,632
========== ======== ========== ======== =========== ==========
As of December 31, 1999
Cash and cash
equivalents............ $ 90,544 $ 4,118 $ 13,319 $ 107,981
Accounts receivable,
net.................... 115,442 234,951 $ 39,936 390,329
Other current assets.... 9,599 11,946 129,393 5,500 156,438
---------- -------- ---------- -------- ----------- ----------
Total current assets.. 100,143 131,506 377,663 45,436 654,748
Property and equipment,
net.................... 5,850 86,572 157,827 35,200 285,449
Investments in
subsidiaries........... 166,227 $ (166,227)
Receivables from
subsidiaries........... 1,316,530 (1,316,530)
Intangible assets, net.. 28,862 346,756 543,441 150,613 1,069,672
Other assets............ 40,038 167 5,444 1,200 46,849
---------- -------- ---------- -------- ----------- ----------
Total assets.......... $1,657,650 $565,001 $1,084,375 $232,449 $(1,482,757) $2,056,718
========== ======== ========== ======== =========== ==========
Current liabilities..... $1,328,180 $237,424 $ 116,767 $ 16,173 $1,698,544
Payables to
subsidiaries/parent.... 161,720 1,065,620 89,190 (1,316,530)
Long-term liabilities... 3,066 1,504 1,197 3,426 9,193
Minority interests...... 22,577 22,577
Shareholders' equity
(deficit).............. 326,404 164,353 (99,209) 123,660 (188,804) 326,404
---------- -------- ---------- -------- ----------- ----------
Total liabilities and
shareholders'
equity............... $1,657,650 $565,001 $1,084,375 $232,449 $(1,482,757) $2,056,718
========== ======== ========== ======== =========== ==========
F-30
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Condensed consolidating statements of income
Wholly-owned
subsidiaries
--------------------
All Non-participating Consolidating Consolidated
DaVita Inc. RTC others subsidiaries Adjustments Total
----------- --------- --------- ----------------- ------------- ------------
For the year ended
December 31, 2000
Net operating revenues.. $ 117,111 $ 442,940 $ 875,464 $159,974 $(109,187) $1,486,302
Operating expenses...... 27,457 426,069 839,595 127,653 (109,187) 1,311,587
--------- --------- --------- -------- --------- ----------
Operating income ....... 89,654 16,871 35,869 32,321 174,715
Other income (loss)..... (7,920) (578) 1,297 (7,201)
Interest expense, net... 108,644 7,040 (6,082) 7,035 116,637
Minority interests...... (5,942) (5,942)
Income taxes............ (11,033) 5,261 33,836 (104) 27,960
Equity in earnings of
consolidated
subsidiaries........... 32,852 20,745 (53,597)
Extraordinary loss...... (3,490) (3,490)
--------- --------- --------- -------- --------- ----------
Net income ............ $ 13,485 $ 4,570 $ 28,282 $ 26,687 $ (59,539) $ 13,485
========= ========= ========= ======== ========= ==========
For the year ended
December 31, 1999
Net operating revenues.. $ 100,344 $ 496,380 $ 743,147 $198,391 $ (92,911) $1,445,351
Operating expenses...... 51,668 499,560 880,969 170,047 (92,911) 1,509,333
--------- --------- --------- -------- --------- ----------
Operating income
(loss)................ 48,676 (3,180) (137,822) 28,344 (63,982)
Other income (loss)..... (514) (3,639) 2,464 (206) (1,895)
Interest expense, net... 100,798 7,988 (3,529) 5,540 110,797
Minority interests...... (5,152) (5,152)
Income taxes............ (10,132) 9,296 (33,971) 237 (34,570)
Equity in earnings
(losses) of
consolidated
subsidiaries........... (104,752) 17,209 87,543
--------- --------- --------- -------- --------- ----------
Net income (loss)...... $(147,256) $(24,103) $ (80,649) $ 22,361 $ 82,391 $ (147,256)
========= ========= ========= ======== ========= ==========
For the year ended
December 31, 1998
Net operating revenues.. $ 78,212 $ 472,355 $ 546,123 $161,039 $ (53,991) $1,203,738
Operating expenses...... 48,015 446,367 496,240 132,194 (53,991) 1,068,825
--------- --------- --------- -------- --------- ----------
Operating income ...... 30,197 25,988 49,883 28,845 134,913
Other income............ 595 4,287 12 4,894
Interest expense, net... 73,306 8,993 (4,104) 5,808 84,003
Minority interests...... (7,163) (7,163)
Income taxes............ 4,597 19,959 14,063 (170) 38,449
Equity in earnings of
consolidated
subsidiaries........... 47,595 15,425 (63,020)
Extraordinary loss...... (9,932) (2,812) (12,744)
Cumulative effect of
accounting change...... (3,993) (2,272) (631) (6,896)
--------- --------- --------- -------- --------- ----------
Net income (loss)...... $ (9,448) $ (9,769) $ 57,364 $ 22,588 $ (70,183) $ (9,448)
========= ========= ========= ======== ========= ==========
F-31
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Condensed consolidated statements of cash flows
Wholly-owned
subsidiaries
-------------------- Non-participating Consolidating Consolidated
DaVita Inc. RTC All Others subsidiaries adjustments total
----------- -------- ---------- ----------------- ------------- ------------
Year ended December 31,
2000
Cash flows from
operating activities:
Net income............. $ 13,485 $ 4,570 $ 28,282 $ 26,687 $(59,539) $ 13,485
Changes in operating
and intercompany
assets and liabilities
and non cash items
included in net income
...................... 364,575 (99,917) (10,644) (19,390) 59,539 294,163
--------- -------- --------- -------- -------- ---------
Net cash provided by
(used in) operating
activities......... 378,060 (95,347) 17,638 7,297 -- 307,648
--------- -------- --------- -------- -------- ---------
Cash flows from
investing activities:
Purchase of property
and equipment, net.... (722) (12,242) (19,297) (8,827) (41,088)
Acquisitions and
divestitures, net..... 105,342 28,955 134,297
Other items............ (342) 488 146
--------- -------- --------- -------- -------- ---------
Net cash provided by
(used in) investing
activities......... (1,064) 93,100 10,146 (8,827) 93,355
--------- -------- --------- -------- -------- ---------
Cash flows from
financing activities:
Long-term debt......... (456,810) (21,756) 1,530 (477,036)
Other items............ 5,823 (6,564) (741)
--------- -------- --------- -------- -------- ---------
Net cash provided by
(used in) financing
activities......... (450,987) (28,320) 1,530 (477,777)
--------- -------- --------- -------- -------- ---------
Net decrease in cash... (73,991) (2,247) (536) -- (76,774)
Cash at the beginning
of the year........... 90,544 4,118 13,319 107,981
--------- -------- --------- -------- -------- ---------
Cash at the end of the
year.................. $ 16,553 $ 1,871 $ 12,783 $ -- $ -- $ 31,207
========= ======== ========= ======== ======== =========
Year ended December 31,
1999
Cash flows from
operating activities:
Net income (loss)...... $(147,256) $(24,103) $ (80,649) $ 22,361 $ 82,391 $(147,256)
Changes in operating
and intercompany
assets and liabilities
and non cash items
included in net income
(loss)................ 40,079 50,684 321,287 (10,897) (82,391) 318,762
--------- -------- --------- -------- -------- ---------
Net cash provided by
(used in) operating
activities......... (107,177) 26,581 240,638 11,464 -- 171,506
--------- -------- --------- -------- -------- ---------
Cash flows from
investing activities:
Purchases of property
and equipment, net.... (5,133) (27,660) (62,770) (11,094) (106,657)
Acquisitions and
divestitures, net..... (154,226) (154,226)
Other items............ (30,564) (30,564)
--------- -------- --------- -------- -------- ---------
Net cash used in
investing
activities......... (5,133) (27,660) (247,560) (11,094) (291,447)
--------- -------- --------- -------- -------- ---------
Cash flows from
financing activities:
Long-term debt......... 203,263 (199) (1,177) (370) 201,517
Other items............ (6,312) (4,052) (10,364)
--------- -------- --------- -------- -------- ---------
Net cash provided by
(used in) financing
activities......... 196,951 (199) (5,229) (370) 191,153
Foreign currency
translation loss...... (4,718) (4,718)
--------- -------- --------- -------- -------- ---------
Net increase (decrease)
in cash............... 84,641 (1,278) (16,869) -- 66,494
Cash at the beginning
of the year........... 5,903 5,396 30,188 41,487
--------- -------- --------- -------- -------- ---------
Cash at the end of the
year.................. $ 90,544 $ 4,118 $ 13,319 $ -- $ -- $ 107,981
========= ======== ========= ======== ======== =========
F-32
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Condensed consolidating statements of cash flows--(continued)
Wholly-owned
subsidiaries
--------------------- Non-participating Consolidating Consolidated
DaVita Inc. RTC All Others subsidiaries adjustments total
----------- --------- ---------- ----------------- ------------- ------------
Year Ended December 31,
1998
Cash flows from
operating activities:
Net income (loss)...... $ (9,448) $ (9,769) $ 57,364 $ 22,588 $(70,183) $ (9,448)
Changes in operating
and intercompany
assets and liabilities
and non cash items
included in net income
(loss)................ (722,378) 316,072 371,835 (14,346) 70,183 21,366
--------- --------- --------- -------- -------- ---------
Net cash provided by
(used) in operating
activities......... (731,826) 306,303 429,199 8,242 -- 11,918
--------- --------- --------- -------- -------- ---------
Cash flows from
investing activities:
Purchases of property
and equipment, net.... (449) (15,526) (58,166) (8,679) (82,820)
Acquisitions and
divestitures, net..... (17,871) (320,293) (338,164)
Other items............ (14,555) (16,785) (31,340)
--------- --------- --------- -------- -------- ---------
Net cash used in
investing
activities......... (15,004) (33,397) (395,244) (8,679) (452,324)
--------- --------- --------- -------- -------- ---------
Cash flows from
financing activities:
Long term debt......... 744,744 (268,253) (4,633) 437 472,295
Other items............ 6,526 (3,628) 2,898
--------- --------- --------- -------- -------- ---------
Net cash provided by
(used in) financing
activities......... 751,270 (268,253) (8,261) 437 475,193
--------- --------- --------- -------- -------- ---------
Net increase in cash... 4,440 4,653 25,694 -- 34,787
Cash at the beginning
of the year........... 1,463 743 4,494 6,700
--------- --------- --------- -------- -------- ---------
Cash at the end of the
year.................. $ 5,903 $ 5,396 $ 30,188 $ -- $ -- $ 41,487
========= ========= ========= ======== ======== =========
F-33
DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
March 31, December 31,
2001 2000
---------- ------------
ASSETS
Cash and cash equivalents............................. $ 17,443 $ 31,207
Accounts receivable, less allowance of $60,790 and
$61,619.............................................. 299,424 290,412
Inventories........................................... 45,566 20,641
Other current assets.................................. 14,259 10,293
Income taxes receivable............................... 2,830
Deferred income taxes................................. 42,265 42,492
---------- ----------
Total current assets.............................. 418,957 397,875
Property and equipment, net........................... 242,797 236,659
Intangible assets, net................................ 947,946 921,623
Investments in third-party dialysis businesses........ 12,203 34,194
Other long-term assets................................ 2,205 1,979
Deferred income taxes................................. 1,629 4,302
---------- ----------
$1,625,737 $1,596,632
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable...................................... $ 77,345 $ 74,882
Other current liabilities............................. 106,781 102,563
Accrued compensation and benefits..................... 72,484 70,406
Current portion of long-term debt..................... 7,580 1,676
Income taxes payable.................................. 15,503
---------- ----------
Total current liabilities......................... 279,693 249,527
Long-term debt........................................ 932,025 974,006
Other long-term liabilities........................... 4,755 4,855
Minority interests.................................... 21,045 18,876
Shareholders' equity:
Preferred stock ($0.001 par value; 5,000,000 shares
authorized; none issued or outstanding)............
Common stock ($0.001 par value, 195,000,000 shares
authorized; 82,943,817 and 82,135,634 shares issued
and outstanding)................................... 83 82
Additional paid-in capital.......................... 438,509 430,676
Notes receivable from shareholders.................. (83)
Accumulated deficit................................. (50,373) (81,307)
---------- ----------
Total shareholders' equity........................ 388,219 349,368
---------- ----------
$1,625,737 $1,596,632
========== ==========
See notes to condensed consolidated financial statements.
F-34
DAVITA INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands, except per share data)
Three months
ended March 31
------------------
2001 2000
-------- --------
Net operating revenues..................................... $386,217 $372,113
Operating expenses:
Dialysis centers and labs................................ 260,974 259,298
General and administrative............................... 31,813 31,921
Depreciation and amortization............................ 26,148 27,718
Provision for uncollectible accounts..................... (8,185) 12,859
-------- --------
Total operating expenses............................... 310,750 331,796
-------- --------
Operating income........................................... 75,467 40,317
Other income, net.......................................... 1,348 1,395
Debt expense............................................... 19,724 33,165
Minority interests in income of consolidated subsidiaries.. (2,457) (998)
-------- --------
Income before income taxes................................. 54,634 7,549
Income tax expense......................................... 23,700 3,702
-------- --------
Net income................................................. $ 30,934 $ 3,847
======== ========
Earnings per common share--basic........................... $ 0.37 $ 0.05
======== ========
Earnings per common share--assuming dilution............... $ 0.35 $ 0.05
======== ========
COMPREHENSIVE INCOME
Net income and comprehensive income........................ $ 30,934 $ 3,847
======== ========
See notes to condensed consolidated financial statements.
F-35
DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three months ended
March 31
-------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net income................................................................... $ 30,934 $ 3,847
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.............................................. 26,148 27,718
Gain on divestures......................................................... (2,107)
Deferred income taxes...................................................... 2,900 156
Non-cash debt expense...................................................... 500 852
Stock option expense and tax benefits...................................... 3,287 88
Equity investment losses (income).......................................... (694) 396
Minority interests in income of consolidated subsidiaries.................. 2,457 998
Changes in operating assets and liabilities, net of acquisitions and
divestitures:
Accounts receivable........................................................ (2,846) 24,031
Inventories................................................................ (24,418) 7,517
Other current assets....................................................... (3,540) (4,541)
Other long-term assets..................................................... 49 1,993
Accounts payable........................................................... 2,160 (22,116)
Accrued compensation and benefits.......................................... (1,539) (261)
Other current liabilities.................................................. 4,200 (2,001)
Income taxes............................................................... 18,333 25,978
Other long-term liabilities................................................ (100) (208)
--------- --------
Net cash provided by operating activities................................ 57,831 62,340
--------- --------
Cash flows from investing activities:
Additions of property and equipment, net..................................... (6,755) (16,677)
Acquisitions and divestitures, net........................................... (50,667) 14,791
Investments in affiliates, net............................................... 19,593 (2,194)
--------- --------
Net cash used in investing activities.................................... (37,829) (4,080)
--------- --------
Cash flows from financing activities:
Borrowings................................................................... 814,813
Payments on long-term debt................................................... (851,667) (15,223)
Deferred financing costs..................................................... (50)
Net proceeds from issuance of common stock................................... 4,630 867
Distributions to minority interests.......................................... (1,492) (1,508)
--------- --------
Net cash used in financing activities.................................... (33,766) (15,864)
--------- --------
Net increase (decrease) in cash................................................ (13,764) 42,396
Cash and cash equivalents at beginning of period............................... 31,207 107,981
--------- --------
Cash and cash equivalents at end of period..................................... $ 17,443 $150,377
========= ========
See notes to condensed consolidated financial statements.
F-36
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
Unless otherwise indicated in this prospectus "the Company", "we", "us",
"our" and similar terms refer to DaVita Inc. and its subsidiaries.
1. Condensed consolidated interim financial statements
The condensed consolidated interim financial statements included in this
report have been prepared by the Company without audit. In the opinion of
management, all adjustments necessary for a fair presentation are reflected in
these interim financial statements. These adjustments are of a normal and
recurring nature. The results of operations for the period ended March 31, 2001
are not necessarily indicative of the operating results for the full year. The
interim financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
2000 Form 10-K as amended by Form 10-K/A. Certain reclassifications have been
made to prior periods to conform with current reporting.
2. Earnings per share calculation
The reconciliation of the numerators and denominators used to calculate
earnings per common share for the periods presented is as follows:
Three months
ended March 31
--------------
2001 2000
------- ------
Basic:
Net income................................................... $30,934 $3,847
======= ======
Weighted average number of shares outstanding during the
period...................................................... 82,537 81,352
Reduction in shares in connection with notes receivable from
employees................................................... (37)
------- ------
Weighted average number of shares outstanding for earnings
per share--basic............................................ 82,537 81,315
======= ======
Earnings per share--basic.................................... $ 0.37 $ 0.05
======= ======
Assuming dilution:
Net income................................................... $30,934 $3,847
Interest, net of tax resulting from dilutive effect of
convertible debt............................................ 4,662
------- ------
Net income--assuming dilution.............................. $35,596 $3,847
======= ======
Weighted average number of shares outstanding for earnings
per share--basic............................................ 82,537 81,315
Incremental shares from stock option plans................. 4,270 429
Incremental shares from convertible debt................... 15,394
------- ------
Weighted average outstanding and incremental shares for
earnings per share--assuming dilution....................... 102,201 81,744
======= ======
Earnings per share--assuming dilution........................ $ 0.35 $ 0.05
======= ======
Stock options with exercise prices greater than the average market price
of shares outstanding during the period were not included in the calculation of
earnings per share assuming dilution because they would have been anti-
dilutive. The stock options not included in the calculation totaled 2,207,367
and 10,428,517 shares at exercise prices ranging from $16.77 to $33.50 per
share and $4.23 to $36.13 per share for the three months ended March 31, 2001
and 2000, respectively. The calculation of earnings per share assuming dilution
includes the dilutive effect of both the 5 5/8% and the 7% convertible
subordinated notes on an "if-converted"
F-37
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(dollars in thousands except per share data)
basis for the three months ended March 31, 2001. Both the 5 5/8% and the 7%
convertible subordinated notes were anti-dilutive on an "if-converted" basis
for the three months ended March 31, 2000.
3. Subsequent events
On April 6, 2001 the Company completed the sale of $225,000 9 1/4% Senior
Subordinated Notes in a private offering. The Notes mature on April 15, 2011
and will be callable by the Company on or after April 15, 2006. Net proceeds of
$219,375 from the offering were used to pay down amounts outstanding under the
Company's then existing senior credit facilities. On May 4, 2001 the Company
completed a refinancing of its existing senior credit facilities. The new
credit facilities consist of a Term A loan of $50,000, a Term B loan of
$200,000 and a $150,000 undrawn revolving credit facility. As a result of these
refinancings, the write-off of deferred financing costs and accelerated
recognition of deferred swap liquidation gains associated with the refinanced
debt will be reported as a net extraordinary gain for the quarter ending June
30, 2001.
4. Contingencies
Health care providers' revenues may be subject to adjustment as a result
of (1) examination by government agencies or contractors, for which the
resolution of any matters raised may take extended periods of time to finalize;
(2) differing interpretations of government regulations by different fiscal
intermediaries; (3) differing opinions regarding a patient's medical diagnosis
or the medical necessity of services provided; and (4) retroactive applications
or interpretations of governmental requirements.
The Company's Florida-based laboratory subsidiary is the subject of a
third-party carrier review of its Medicare reimbursement claims. The carrier
has issued formal overpayment determinations in the amount of $5.6 million for
the review period from January 1995 to April 1996, and $15 million for the
review period from May 1996 to March 1998. The carrier has suspended all
payments of Medicare claims from this laboratory since May 1998. The carrier
has also determined that $16.1 million of the suspended claims for the review
period from April 1998 to August 1999 and $11.6 million of the suspended claims
for the review period from August 1999 to May 2000 were not properly supported
by the prescribing physicians' medical justification. The carrier has alleged
that 99% of the tests the laboratory performed during the review period from
January 1995 to April 1996, 96% of the tests performed in the period from May
1996 to March 1998, 70% of the tests performed in the period from April 1998 to
August 1999, and 72% of the tests performed in the period from August 1999 to
May 2000 were not properly supported by the prescribing physicians' medical
justification.
The Company is disputing the overpayment determinations and has provided
supporting documentation of its claims. The Company has initiated the process
of a formal review of each of the carrier's determinations. The first step in
this formal review process is a hearing before a hearing officer at the
carrier. The Company received minimal responses from the carrier to its
repeated requests for clarification and information regarding the continuing
payment suspension. The hearing regarding the initial review period from
January 1995 to April 1996 was held in July 1999. In January 2000 the hearing
officer issued a decision upholding the overpayment determination of $5.6
million. The hearing regarding the second review period from May 1996 to March
1998 was held in April 2000. In July 2000 the hearing officer issued a decision
upholding $14.2 million, or substantially all of the overpayment determination.
The Company has filed appeals of both decisions to a federal administrative law
judge, and has moved to consolidate the two appeals. At this time, the Company
has not received a scheduled date for a hearing with an administrative law
judge, although the Department of Health and Human Services, or HHS, has
informed the Company that it can expect a hearing in the second quarter of
2001.
F-38
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(dollars in thousands except per share data)
In February 1999, our Florida-based laboratory subsidiary filed a
complaint against the carrier and HHS seeking a court order to lift the payment
suspension. In July 1999, the court dismissed our complaint because we had not
exhausted all administrative remedies, that is, the carrier review and
administrative law judge processes described above.
In addition to the formal appeal process with a federal administrative law
judge, beginning in the third quarter of 1999 we sought a meeting with the
Department of Justice, or DOJ, to begin a process to resolve this matter. The
carrier had previously informed the local office of the DOJ and HHS of this
matter, and we had provided requested information to the DOJ. The Company met
with the DOJ in February 2001 at which time the DOJ requested additional
information, which the Company is providing.
Timing of the final resolution of this matter is highly uncertain, and
beyond the Company's control or influence. Beginning in the third quarter of
2000, the Company stopped recognizing Medicare revenue from this laboratory
until the uncertainties regarding both the timing of resolution and the
ultimate revenue valuations are at least substantially eliminated. The amount
of potential Medicare revenue not accrued beginning in the third quarter of
2000 was approximately $4 million per quarter. We estimate that the potential
cash exposure as of March 31, 2001 is not more than $15 million based on the
carrier's overpayment findings noted above. If this matter is resolved in a
manner adverse to the Company, the government could impose additional fines and
penalties, which could be substantial.
In February 2001, the Civil Division of the United States Attorney's
Office for the Eastern District of Pennsylvania contacted us and requested that
the Company cooperate in a review of some of our historical practices,
including billing and other operating procedures and our financial
relationships with physicians. The Civil Division has requested that we provide
a wide range of information responding to the areas of review. The Civil
Division has not initiated any legal process or served any subpoena on the
Company. The Civil Division has indicated that it is not making any allegation
of wrongdoing at this time and that no criminal action against the Company or
any individual is contemplated. The Company is cooperating in this review. The
inquiry appears to be at an early stage. As it proceeds, the Civil Division
could expand its areas of concern. If a court determines there has been
wrongdoing, the penalties under applicable statutes could be substantial.
In addition to the foregoing, DaVita is subject to claims and suits in the
ordinary course of business. Management believes that the ultimate resolution
of these additional matters, whether the underlying claims are covered by
insurance or not, will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
5. Condensed consolidating financial statements
The following information is presented as required under the Securities
and Exchange Commission Financial Reporting Release No. 55 in connection with
the Company's publicly traded debt. This information is not routinely prepared
for use by management. The operating and investing activities of the separate
legal entities included in the consolidated financial statements are fully
interdependent and integrated. Accordingly, the operating results of the
separate legal entities are not representative of what the operating results
would be on a stand-alone basis. Revenues and operating expenses of the
separate legal entities include intercompany charges for management and other
services.
F-39
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(dollars in thousands except per share data)
The $125,000 5 5/8% Convertible Subordinated Notes Due 2006, issued by the
wholly-owned subsidiary Renal Treatment Centers, Inc., or RTC, are guaranteed
by DaVita Inc. The $225,000 9 1/4% Senior Subordinated Notes issued in April
2001 by DaVita Inc., are guaranteed by all its wholly-owned domestic
subsidiaries. Non-wholly-owned subsidiaries, joint ventures and partnerships
are not guarantors of either obligations.
Condensed Consolidating Balance Sheets
Wholly-owned
subsidiaries
DaVita ------------------- Non-participating Consolidating Consolidated
Inc. RTC All others subsidiaries adjustments total
---------- -------- ---------- ----------------- ------------- ------------
As of March 31, 2001
- --------------------
Cash and cash
equivalents............ $ 6,848 $ 7 $ 10,588 $ 17,443
Accounts receivable,
net.................... 84,446 185,524 $ 29,454 299,424
Other current assets.... 2,533 14,382 83,113 2,062 102,090
---------- -------- -------- -------- ----------- ----------
Total current assets.. 9,381 98,835 279,225 31,516 418,957
Property and equipment,
net.................... 5,021 58,673 154,784 24,319 242,797
Investments in
subsidiaries........... 234,670 (234,670)
Receivables from
subsidiaries........... 940,517 (940,517)
Intangible assets, net.. 9,105 294,506 527,151 117,184 947,946
Other assets............ 12,541 5,325 (1,873) 44 16,037
---------- -------- -------- -------- ----------- ----------
Total assets.......... $1,211,235 $457,339 $959,287 $173,063 $(1,175,187) $1,625,737
========== ======== ======== ======== =========== ==========
Current liabilities..... 21,674 24,285 230,179 3,555 279,693
Payables to
subsidiaries/parent.... 129,053 774,275 37,189 (940,517)
Long-term liabilities... 801,300 125,000 5,122 5,358 936,780
Minority interests...... 21,045 21,045
Shareholders' equity.... 388,261 179,001 (50,289) 126,961 (255,715) 388,219
---------- -------- -------- -------- ----------- ----------
Total liabilities and
shareholders'
equity............... $1,211,235 $457,339 $959,287 $173,063 $(1,175,187) $1,625,737
========== ======== ======== ======== =========== ==========
As of December 31, 2000
- -----------------------
Cash and cash
equivalents............ $ 16,553 $ 1,871 $ 12,783 $ 31,207
Accounts receivable,
net.................... 83,313 180,263 $ 26,836 290,412
Other current assets.... 2,014 15,967 55,947 2,328 76,256
---------- -------- -------- -------- ----------- ----------
Total current assets.. 18,567 101,151 248,993 29,164 397,875
Property and equipment,
net.................... 5,377 61,686 146,959 22,637 236,659
Investments in
subsidiaries........... 199,079 (199,079)
Receivables from
subsidiaries........... 938,183 (938,183)
Intangible assets, net.. 9,548 299,813 493,946 118,316 921,623
Other assets............ 37,692 2,146 593 44 40,475
---------- -------- -------- -------- ----------- ----------
Total assets.......... $1,208,446 $464,796 $890,491 $170,161 $(1,137,262) $1,596,632
========== ======== ======== ======== =========== ==========
Current liabilities..... 15,278 23,996 206,275 3,978 249,527
Payables to
subsidiaries/parent.... 146,877 746,892 44,414 (938,183)
Long-term liabilities... 843,800 125,000 5,311 4,750 978,861
Minority interests...... 18,876 18,876
Shareholders' equity.... 349,368 168,923 (67,987) 117,019 (217,955) 349,368
---------- -------- -------- -------- ----------- ----------
Total liabilities and
shareholders'
equity............... $1,208,446 $464,796 $890,491 $170,161 $(1,137,262) $1,596,632
========== ======== ======== ======== =========== ==========
F-40
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(dollars in thousands except per share data)
Condensed Consolidating Statements of Income
Wholly-owned
subsidiaries
-----------------
All Non-participating Consolidating Consolidated
DaVita Inc. RTC others subsidiaries adjustments total
----------- -------- -------- ----------------- ------------- ------------
For the quarter ended
March 31, 2001
- ---------------------
Net operating revenues.. $33,567 $117,789 $222,583 $44,147 $(31,869) $386,217
Operating expenses...... 10,123 98,563 201,059 32,874 (31,869) 310,750
------- -------- -------- ------- -------- --------
Operating income........ 23,444 19,226 21,524 11,273 75,467
Other income............ 228 58 1,062 1,348
Debt expense............ 18,132 1,743 (1,482) 1,331 19,724
Minority interests...... (2,457) (2,457)
Income taxes............ 2,382 7,463 13,855 23,700
Equity earnings in
consolidated
subsidiaries........... 27,776 7,485 (35,261)
------- -------- -------- ------- -------- --------
Net income............ $30,934 $ 10,078 $ 17,698 $ 9,942 $(37,718) $ 30,934
======= ======== ======== ======= ======== ========
For the quarter ended
March 31, 2000
- ---------------------
Net operating revenues.. $21,201 $124,734 $206,125 $39,505 $(19,452) $372,113
Operating expenses...... 6,780 114,427 196,726 33,315 (19,452) 331,796
------- -------- -------- ------- -------- --------
Operating income...... 14,421 10,307 9,399 6,190 40,317
Other income............ 385 48 950 12 1,395
Debt expense............ 31,647 1,728 (3,351) 3,141 33,165
Minority interests...... (998) (998)
Income taxes............ (6,905) 3,424 7,223 (40) 3,702
Equity earnings in
consolidated
subsidiaries........... 13,783 2,103 (15,886)
------- -------- -------- ------- -------- --------
Net income............ $ 3,847 $ 5,203 $ 8,580 $ 3,101 $(16,884) $ 3,847
======= ======== ======== ======= ======== ========
F-41
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(dollars in thousands except per share data)
Condensed Consolidating Statements of Cash Flows
Wholly-owned
subsidiaries
------------------
All Non-participating Consolidating Consolidated
DaVita Inc. RTC others subsidiaries adjustments total
----------- -------- -------- ----------------- ------------- ------------
Quarter ended March 31,
2001
Cash flows from
operating activities:
Net income.............. $ 30,934 $ 10,078 $ 17,698 $ 9,942 $(37,718) $ 30,934
Changes in operating and
intercompany assets and
liabilities and non
cash items included in
net income............. (2,610) (10,903) 8,953 (6,261) 37,718 26,897
-------- -------- -------- ------- -------- --------
Net cash provided by
(used in) operating
activities: 28,324 (825) 26,651 3,681 -- 57,831
-------- -------- -------- ------- -------- --------
Cash flows from
investing activities:
Purchases of property
and equipment, net..... (109) (1,039) (2,779) (2,828) (6,755)
Acquisitions and
divestitures, net...... (50,667) (50,667)
Other items............. 19,568 25 19,593
-------- -------- -------- ------- -------- --------
Net cash used in
investing activities.. (109) (1,039) (33,878) (2,803) (37,829)
-------- -------- -------- ------- -------- --------
Cash flows from
financing activities:
Long-term debt.......... (42,500) 5,032 614 (36,854)
Other items............. 4,580 (1,492) 3,088
-------- -------- -------- ------- -------- --------
Net cash provided (used
in) financing
activities............ (37,920) 5,032 (878) (33,766)
-------- -------- -------- ------- -------- --------
Net decrease in cash.... (9,705) (1,864) (2,195) -- (13,764)
Cash at the beginning of
the period............. 16,553 1,871 12,783 31,207
-------- -------- -------- ------- -------- --------
Cash at the end of the
period................. $ 6,848 $ 7 $ 10,588 $ -- $ -- $ 17,443
======== ======== ======== ======= ======== ========
Quarter ended March 31,
2000
Cash flows from
operating activities:
Net income.............. $ 3,847 $ 5,203 $ 8,580 $ 3,101 $(16,884) $ 3,847
Changes in operating and
intercompany assets and
liabilities and non
cash items included in
net loss............... (56,284) (362) 98,844 (589) 16,884 58,493
-------- -------- -------- ------- -------- --------
Net cash provided by
(used in) operating
activities............ (52,437) 4,841 107,424 2,512 -- 62,340
-------- -------- -------- ------- -------- --------
Cash flows from
investing activities:
Purchases of property
and equipment, net..... (337) (4,661) (10,044) (1,635) (16,677)
Acquisitions and
divestitures, net...... 14,791 14,791
Other items............. (2,194) (2,194)
-------- -------- -------- ------- -------- --------
Net cash provided by
(used in) investing
activities............ (337) (4,661) 2,553 (1,635) (4,080)
-------- -------- -------- ------- -------- --------
Cash flows from
financing activities:
Long-term debt.......... (11,885) (2,461) (877) (15,223)
Other items............. 867 (1,508) (641)
-------- -------- -------- ------- -------- --------
Net cash used in
financing activities.. (11,018) (3,969) (877) (15,864)
-------- -------- -------- ------- -------- --------
Net increase (decrease)
in cash................ (63,792) 180 106,008 42,396
Cash at the beginning of
the period............. 90,544 4,118 13,319 107,981
-------- -------- -------- ------- -------- --------
Cash at the end of the
period................. $ 26,752 $ 4,298 $119,327 $ -- $ -- $150,377
======== ======== ======== ======= ======== ========
F-42
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June 21, 2001
[LOGO OF DAVITA]
DaVita Inc.
$225,000,000 Principal Amount
9 1/4% Senior Subordinated Notes due 2011
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PROSPECTUS
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No dealer, salesperson or any other person has been authorized to give any
information or to make any representation not contained in this prospectus and,
if given or made, such information or representations must not be relied upon
as having been authorized by the company or by any of the initial purchasers.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered hereby, nor does it
constitute an offer to sell or a solicitation of an offer to buy any securities
offered hereby to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information herein is correct as of any time subsequent to the date hereof.
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