SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 19, 1997
-----------------------------
Total Renal Care Holdings, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-4034 51-0354549
- -------------------------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503-5517
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 792-2600
----------------------------
Not Applicable
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
PAGE
----
Audited Financial Statements of the Nephrology Services Business of
Caremark International, Inc. F-1
Audited Financial Statements of New West Dialysis Clinics, Inc. F-12
Audited Combined Financial Statements of Southfield Dialysis
Facility, P.C., North Oakland Dialysis Facility, P.C., Macomb
Kidney Center, P.C., and Novi Kidney Center, P.C. F-23
Audited Financial Statements of Dialysis Care of North Carolina F-34
Audited Financial Statements of the Renal Dialysis Business of
The Rogosin Institute, Inc. F-42
(b) PRO FORMA FINANCIAL INFORMATION.
Unaudited Pro Forma Financial Statements F-53
2
(c) EXHIBITS.
10.1 Revolving Credit Agreement, dated as of October 24, 1997, by and
among Total Renal Care Holdings, Inc., the lenders party thereto, DLJ Capital
Funding, Inc., as Syndication Agent, First Union National Bank, as Documentation
Agent, and The Bank of New York, as Administrative Agent (the "Revolving Credit
Agreement").*
10.2 Amendment No. 1 and Consent No. 1, dated as of December 1, 1997,
to the Revolving Credit Agreement.
10.3 Term Loan Agreement, dated as of October 24, 1997, by and among Total
Renal Care Holdings, Inc., the lenders party thereto, DLJ Capital Funding, Inc.,
as Syndication Agent, First Union National Bank, as Documentation Agent, and The
Bank of New York, as Administrative Agent (the "Term Loan Agreement").*
10.4 First Amendment, Dated December 1, 1997, to the Term Loan
Agreement.
10.5 Subsidiary Guaranty dated as of October 24, 1997 by Total Renal
Care, Inc., TRC West, Inc. and Total Renal Care Acquisition Corp. in favor of
and for the benefit of The Bank of New York, as Collateral Agent, the lenders to
the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the
Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as
defined therein) and the Acknowledging Currency Exchangers (as defined therein).
10.6 Borrower Pledge Agreement dated as of October 24, 1997 and entered
into by and between Total Renal Care Holdings, Inc., and The Bank of New York,
as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders
to the Term Loan Agreement, the Term Agent (as defined therein), the
Acknowledging Interest Rate Exchangers (as defined therein) and the
Acknowledging Currency Exchangers (as defined therein).
10.7 Form of Subsidiary Pledge Agreement dated as of October 24, 1997 by
Total Renal Care, Inc., TRC West, Inc. and Total Renal Care Acquisition Corp.,
and The Bank of New York, as Collateral Agent, the lenders to the Revolving
Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as
defined therein), the Acknowledging Interest Rate Exchangers (as defined
therein) and the Acknowledging Currency Exchangers (as defined therein).
23.1 Consent of Price Waterhouse LLP.
3
- ------------
* The registrant agrees to furnish supplementally a copy of any schedule thereto
to the Commission upon its request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TOTAL RENAL CARE HOLDINGS, INC.
(Registrant)
Dated: December 19, 1997 By:/s/ John E. King
-----------------------------
John E. King
Vice President and Chief Financial Officer
4
Nephrology Services Business of
Caremark International Inc.
Financial Statements
Years Ended December 31, 1995 and 1994 and the
Month Ended December 31, 1993
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Caremark International Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations and business equity and of cash flows present fairly, in all
material respects, the financial position of Nephrology Services Business,
comprising the businesses of Caremark International Inc. as described in the
description of the business in Note 1 to the financial statements, at December
31, 1995 and 1994, and the results of its operations and its cash flows for
the years ended December 31, 1995 and 1994 and for the month ended December
31, 1993, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Caremark International Inc.'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 generally accepted auditing standards 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.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 28, 1996
F-2
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
DECEMBER 31, 1994 AND 1995
BALANCE SHEETS (IN THOUSANDS)
1994 1995
ASSETS
Cash........................................................... $ 1 $ 1
Accounts receivable, net of allowance for doubtful accounts of
$1,005 and $1,504 respectively................................ 10,378 14,516
Inventories.................................................... 1,040 666
Prepaid expenses and other current assets...................... 23 536
------- -------
Total current assets....................................... 11,442 15,719
Property and equipment, net.................................... 8,066 9,097
Goodwill and other intangibles................................. 15,462 17,683
Other assets................................................... 143 423
------- -------
$35,113 $42,922
======= =======
LIABILITIES AND BUSINESS EQUITY
Current portion of long-term obligations....................... $ 3,841 $ 1,910
Accounts payable and other liabilities......................... 3,531 4,465
------- -------
Total current liabilities.................................. 7,372 6,375
------- -------
Long-term obligations.......................................... 8,052 1,104
Other long-term liabilities.................................... 260 55
Commitments and contingencies (Note 9)......................... -- --
Business equity................................................ 19,429 35,388
------- -------
$35,113 $42,922
======= =======
See accompanying notes to financial statements.
F-3
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
MONTH ENDED DECEMBER 31, 1993 AND YEARS ENDED DECEMBER 31, 1994 AND 1995
STATEMENTS OF OPERATIONS AND BUSINESS EQUITY (IN THOUSANDS)
FOR THE MONTH FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
Net revenue............................ $2,677 $38,742 $46,832
------ ------- -------
Operating expenses:
Cost of goods and services sold...... 1,957 29,101 35,796
General and administrative........... 665 5,524 9,809
Provision for doubtful accounts...... 144 1,096 1,331
Depreciation and amortization........ 105 2,089 2,562
------ ------- -------
Total operating expenses........... 2,871 37,810 49,498
------ ------- -------
Income (loss) from operations.......... (194) 932 (2,666)
Sundry expense......................... -- 840 762
------ ------- -------
Income (loss) before income taxes...... (194) 92 (3,428)
Income tax expense (benefit)........... (80) 43 (1,394)
------ ------- -------
Net income (loss)...................... (114) 49 (2,034)
Business equity at beginning of period. -- 6,227 19,429
Net advances from Caremark
International Inc..................... 6,341 13,153 17,993
------ ------- -------
Business equity at end of period....... $6,227 $19,429 $35,388
====== ======= =======
See accompanying notes to financial statements.
F-4
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
MONTH ENDED DECEMBER 31, 1993 AND YEARS ENDED DECEMBER 31, 1994 AND 1995
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE MONTH FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
Cash flows from operating activities:
Net income (loss).................... $ (114) $ 49 $(2,034)
Adjustments for non-cash items:
Depreciation and amortization....... 105 2,089 2,562
Provision for doubtful accounts..... 144 1,096 1,331
Changes in balance sheet items:
Accounts receivable................ (369) (4,514) (5,269)
Inventories........................ (102) (377) 374
Prepaid expenses and other current
assets............................ (2) (932) (1,608)
Accounts payable and other
liabilities....................... 291 1,533 708
------- -------- -------
Net cash used in operating
activities....................... (47) (1,056) (3,936)
------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment.. (20) (2,171) (3,354)
Acquisitions, net of cash received... (6,274) (8,741) (1,845)
------- -------- -------
Net cash used in investing
activities....................... (6,294) (10,912) (5,199)
------- -------- -------
Cash flows from financing activities:
Net changes in debt and lease
obligations......................... -- 866 522
Payments of acquisition notes........ -- (2,050) (9,380)
Net advances from Caremark
International Inc................... 6,341 13,153 17,993
------- -------- -------
Net cash provided by financing
activities....................... 6,341 11,969 9,135
------- -------- -------
Net increase in cash.................. -- 1 --
Cash at beginning of period........... -- -- 1
------- -------- -------
Cash at the end of period............. $ -- $ 1 $ 1
======= ======== =======
Supplemental disclosure of cash flow
information:
Cash paid for interest................ $ -- $ 813 $ 724
Non-cash items:
Notes issued for acquisitions......... $ 8,906 $ 4,671 $ --
See accompanying notes to financial statements.
F-5
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
NOTES TO FINANCIAL STATMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business
The accompanying financial statements comprise Caremark International Inc.'s
("Caremark" or the "Company") Nephrology Services Business ("Nephrology
Services" or the "business") consisting of the Regional Kidney Disease Program
("RKDP") (purchased on December 1, 1993) and Chabot Dialysis Clinic ("Chabot")
(purchased on May 31, 1994). Nephrology Services operates kidney dialysis
centers and provides related dialysis services in and around Minnesota, South
Dakota, North Dakota and Oakland, California.
Basis of presentation
The accompanying financial statements reflect the "carve-out" financial
position, results of operations and cash flows of Nephrology Services for the
periods presented. The financial statements have been prepared as if
Nephrology Services had operated as a stand-alone entity for all periods
presented, and include those assets, liabilities, revenues and expenses
directly attributable to the Nephrology Services operations. Certain corporate
general and administrative expenses of Caremark International Inc. have been
allocated to the business on various bases which, in the opinion of
management, are reasonable. However, such expenses are not necessarily
indicative of, and it is not practical for management to estimate, the nature
and level of expenses which might have been incurred had the business been
operating as a separate company. The financial information included herein
does not necessarily reflect what the financial position or results of
operations of Nephrology Services would have been had it operated as a stand-
alone entity during the periods covered, and may not be indicative of future
operations or financial position.
The summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the financial statements. These
policies are in conformity with generally accepted accounting principles and
have been consistently applied in all material respects. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of consolidation
The financial statements include the accounts of the Nephrology Services
businesses. All material intercompany accounts and transactions have been
eliminated in consolidation.
Net revenues and accounts receivable allowances
Revenues are recognized when services and related products are provided to
patients.
Net revenues consist primarily of dialysis patient care revenues which are
reported at the amounts expected to be realized from patients, third-party
payors and others for services provided. Receivables which are deemed
uncollectible are reflected in bad debt expense as a component of operating
expenses in the statements of operations and business equity.
Medicare and Medicaid programs generally reimburse the business under
prospective payment systems at amounts different from the business'
established rates. Revenues under these programs are generally recognized at
prospective rates which are subject to annual adjustments by Federal and state
agencies. The business bills all other nongovernment third-party payors at
established rates, many of which are discounted.
F-6
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The business provides credit, in the normal course of business, to patients
from (i) the federal and state governments under the Medicare and Medicaid
programs representing approximately 64% and 69% of their dialysis revenue in
fiscal years 1994 and 1995, respectively, and approximately 50% and 54% of
their net accounts receivable at December 31, 1994 and 1995, respectively, and
(ii) private pay payors including insurance companies, private carriers and
other third-party payors.
Management does not believe that there are any significant credit risks
associated with receivables from governmental agencies. The remaining net
receivable balance consists of receivables from various payors, subject to
differing economic conditions, and do not represent any concentrated credit
risks to the business. Furthermore, management continually monitors and
adjusts its reserves and allowances associated with these receivables as
necessary.
Inventories
Inventories are stated at the lower of cost (first-in first-out) or market
and consist principally of drugs and dialysis related supplies.
Property and equipment
Property and equipment are carried at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation is recognized on the straight-
line method over the estimated useful lives of the assets.
Depreciable lives of property and equipment are as follows:
ASSET LIFE
Leasehold improvements........................................ 5-10 years
Equipment..................................................... 5-7 years
Furniture and fixtures........................................ 5-7 years
Goodwill and other intangibles
Goodwill represents the excess of consideration paid for businesses acquired
in purchase transactions over the fair value of net assets acquired and is
amortized substantially over 40 years. Other intangible assets of $652,000 and
$1,724,000 as of December 31, 1994 and 1995, respectively, are amortized on a
straight-line basis over the lesser of their legal or estimated useful lives.
As of December 31, 1994 and 1995, intangible assets, including goodwill, are
stated net of accumulated amortization of $400,000 and $867,000, respectively.
The Company reviews the carrying value of intangibles and other long-lived
assets for impairment when events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. This review is
performed by comparing estimated undiscounted future cash flows from use or
sale of the asset to the recorded value of the asset.
Fair value of financial instruments
Financial instruments of the business primarily consist of receivables,
payables, and debt obligations. The carrying value of these financial
instruments approximated fair value at year-end.
Sundry expense
Sundry expense primarily consists of interest expense.
F-7
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income taxes
Nephrology Services' operations have been included in Caremark International
Inc.'s consolidated U.S. federal and state income tax returns. The provision
for income taxes shown in the accompanying financial statements has been
determined as if the business had filed separate tax returns under its
existing legal structure for the periods presented. All U.S. income taxes,
including deferred taxes, are settled with Caremark on a current basis through
the "Net advances from Caremark International Inc." account.
Income tax expense is based on pre-tax income for financial reporting
purposes, adjusted for the effects of permanent differences between such
income and that reported for tax return purposes. Deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities as measured by the enacted tax rates
which are expected to be in effect when these differences reverse. Deferred
tax expense is the result of changes in deferred tax assets and liabilities.
2. ACQUISITIONS
During 1995, the business acquired 100% interest in an acute dialysis
service partnership. On May 31, 1994, the business acquired substantially all
of the assets of Chabot Dialysis Clinic, Inc., San Leandro Dialysis Inc., East
Bay Peritoneal Dialysis, Inc., Dublin Dialysis Center and Union City Dialysis
Center (collectively "Chabot"). Regional Kidney Disease Program ("RKDP") was
acquired by the business on December 1, 1993. All acquisitions have been
accounted for using the purchase method of accounting and, accordingly, the
aggregate purchase price was allocated to assets and liabilities acquired
based on their fair values at the date of acquisition.
The results of operations of these clinics have been included in the results
of operations from the effective date of the acquisition. The following
unaudited pro forma results of operations of the business give effect to the
acquisitions as if the Chabot acquisition had occurred on January 1, 1994 and
the RKDP acquisition had occurred on January 1, 1993 (in thousands):
1993 1994
Net revenues............................................. $31,006 $44,357
Income before income taxes............................... 3,059 637
Net income............................................... 1,799 375
The above pro forma information is not necessarily indicative of the results
of operations that would have occurred had the acquisition been made as of
January 1, 1994 or of the results which may occur in the future.
Information with respect to the clinics acquired in 1993 and 1994 was as
follows (in thousands):
1993 1994
Cash paid (net of cash acquired).......................... $ 6,774 $ 8,029
Notes issued.............................................. 8,906 4,671
Liabilities assumed....................................... 1,578 391
------- -------
17,258 13,091
Fair value of assets acquired............................. 10,453 2,486
------- -------
Cost in excess of fair value of net assets acquired....... $ 6,805 $10,605
======= =======
F-8
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment comprise the following (in thousands):
1994 1995
Buildings and leasehold improvements.................... $ 2,816 $ 3,762
Machinery and other equipment........................... 6,470 7,950
Software................................................ 23 40
Construction in progress................................ 541 1,385
------- -------
9,850 13,137
Less accumulated depreciation and amortization.......... (1,784) (4,040)
------- -------
Net property and equipment............................ $ 8,066 $ 9,097
======= =======
4. LONG-TERM DEBT
Long-term debt comprise the following (in thousands):
1994 1995
Promissory notes........................................ $11,893 $ 3,014
Less current portion.................................... (3,841) (1,910)
------- -------
Long-term debt.......................................... $ 8,052 $ 1,104
======= =======
Promissory notes in the face amount of $10,000,000 were executed pursuant to
the acquisition of RKDP on December 1, 1993. Interest is calculated at 10% per
annum. The promissory notes were due 1994 through 1998 in annual installments
of $2,000,000. On October 16, 1995, the business voluntarily prepaid the
outstanding principal amount, together with accrued and unpaid interest, of
$7,300,000.
Promissory notes in the face amount of $5,269,000 were executed pursuant to
the acquisition of Chabot on May 31, 1994. Interest is calculated at 7% per
annum. As of December 31, 1995, the notes are due $2,107,000 on May 31, 1996
and $1,053,800 on May 31, 1997.
Interest expense of $813,000 and $724,000 for fiscal years 1994 and 1995,
respectively.
5. LEASES
The business leases certain facilities and equipment under operating leases
expiring at various dates. Most of the operating leases contain renewal
options. Total rent expense under operating leases approximated $71,000,
$2,005,000 and $2,610,000 for the month ended December 31, 1993 and for fiscal
years 1994 and 1995, respectively.
Future minimum lease payments under noncancelable leases as of December 31,
1995 are summarized as follows (in thousands):
1996.............................................................. $1,339
1997.............................................................. 1,250
1998.............................................................. 1,197
1999.............................................................. 887
2000.............................................................. 907
Thereafter........................................................ 2,588
------
Total obligations and commitments................................. $8,168
======
F-9
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. PROFIT SHARING PROGRAMS
The employees of Chabot are eligible to participate in a qualified 401(k)
and profit sharing plan sponsored by Chabot. Participants may contribute up to
15% of their annual compensation to the plan and Chabot matches the
participants' contributions up to 2.5% of compensation. In addition, Chabot
can make a discretionary profit sharing contribution.
The employees of RKDP are eligible to participate in a qualified profit
sharing plan sponsored by the clinic. Participants may make pre-tax
contributions of up to 12% of their eligible compensation to the plan and RKDP
matches the participants' contributions up to 3% of compensation. In addition,
RKDP will make a contribution of up to 3% of compensation based on years of
service to all eligible employees.
Profit sharing expense of $389,000 and $379,000 was recorded for fiscal
years 1994 and 1995.
7. INCOME TAXES
Income tax expense for the indicated years consists of the following (in
thousands):
1993 1994 1995
Current:
Federal........................................... $(205) $(66) $ (991)
State and local................................... (36) (11) (175)
----- ---- -------
Current income tax benefit......................... (241) (77) (1,166)
----- ---- -------
Deferred:
Federal........................................... 137 102 (194)
State and local................................... 24 18 (34)
----- ---- -------
Deferred income tax expense (benefit).............. 161 120 (228)
----- ---- -------
Income tax expense (benefit)....................... $ (80) $ 43 $(1,394)
===== ==== =======
Income tax expense applicable to pre-tax income for financial reporting
purposes differs from income tax expense calculated by using the U.S. federal
income tax rate primarily due to state and local taxes.
All income taxes related to the business have been paid by Caremark.
8. RELATED PARTY TRANSACTIONS
The business participates in a centralized cash management program
administered by Caremark. Advances from Caremark International Inc. or excess
cash sent to Caremark have been treated as an adjustment to Business Equity.
No interest has been charged on this balance. Intercompany receivables and
payables have historically been settled in the normal course of business,
usually within 90 days, and are not interest bearing. The net intercompany
balance has been included in the balance sheet as "Business Equity".
Caremark has provided to Nephrology Services certain legal, treasury,
regulatory and insurance benefits. Charges for these services to Nephrology
Services have been based on allocation of Caremark's actual direct and
indirect costs using varying allocation methods designed to estimate the
actual costs incurred by Caremark to render these services to the business.
The allocation methods used are as follows:
LEGAL--Estimated internal payroll and other direct costs of employees
directly performing services on behalf of the business as well as external
legal fees incurred on behalf of the business.
F-10
CAREMARK INTERNATIONAL INC.
NEPHROLOGY SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TREASURY--Bank fees based on estimated units of activity.
INSURANCE--Estimated based on the business' historical loss ratios.
BENEFITS--Estimated based on the business' payroll as a percentage of
Caremark's total payroll.
FACILITIES AND ADMINISTRATIVE SERVICES--The cost of shared facilities and
related administrative services are allocated based on the percentage of
square footage occupied by the business.
The allocation methodology is consistent with the method used by Caremark to
allocate the cost of similar services to its other business units. No costs
were allocated for the month ended December 31, 1993. The allocated costs of
these services as reflected as general and administrative expenses in the
statements of operations and business equity were $172,000 and $722,000 in
fiscal years 1994 and 1995, respectively. No provisions have been made for
possible incremental costs that may have been incurred had Nephrology Services
operated as a stand-alone entity for the periods presented.
9. CONTINGENCIES
The business is subject to various commitments, claims and routine
litigation arising in the ordinary course of business. Based on the advice of
counsel, management does not believe that the ultimate resolution of these
matters individually or in the aggregate will have a material adverse effect
on the business or its income, cash flows or financial condition.
10. SUBSEQUENT EVENTS
Subsequent to December 31, 1995, Caremark has entered into an agreement to
sell substantially all of the assets, other than cash, and certain liabilities
of its Nephrology Services Business to Total Renal Care, Inc., a subsidiary of
Total Renal Care Holdings, Inc. for cash consideration. The transaction is
expected to close in March 1996.
F-11
- --------------------------------------------------------------------------------
NEW WEST DIALYSIS CLINICS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
F-12
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Total Renal Care Holdings, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of New West Dialysis Clinics, Inc. at December
31, 1996 and the results of its operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards 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 audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Seattle, Washington
June 18, 1997
F-13
NEW WEST DIALYSIS CLINICS, INC.
BALANCE SHEET
- ---------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
1996 1997
(unaudited)
ASSETS
Cash $ 65,980 $ 4,036
Patient accounts receivables, less allowance for
doubtful accounts of $184,000 and $196,000,
respectively 3,791,884 4,011,791
Other receivables 255,233 163,959
Inventory 457,420 517,415
Prepaid expenses 41,067 14,958
---------- ----------
Total current assets 4,611,584 4,712,159
Property and equipment 2,971,653 3,088,714
Notes receivable from stockholders 61,386 61,386
Other assets 42,147 41,772
---------- ----------
$7,686,770 $7,904,031
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 857,509 $ 970,951
Accrued employee compensation and benefits 632,733 636,904
Other accrued liabilities 422,293 379,000
Line of credit 622,000 625,000
---------- ----------
Total current liabilities 2,534,535 2,611,855
---------- ----------
Long-term debt 166,685 66,686
---------- ----------
Stockholders' equity
Common stock, no par value, 600 shares authorized,
issued and outstanding 15,434 15,434
Retained earnings 4,970,116 5,210,056
---------- ----------
Total stockholders' equity 4,985,550 5,225,490
Commitments and contingencies (Note 8)
$7,686,770 $7,904,031
========== ==========
SEE THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-14
NEW WEST DIALYSIS CLINICS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
- -------------------------------------------------------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1996 1997
(unaudited) (unaudited)
Net operating revenues $22,883,133 $5,484,845 $5,990,377
----------- ---------- ----------
Operating expenses
Facilities 17,643,061 4,067,291 4,841,401
General and administrative 2,282,023 602,074 712,644
Provision for doubtful accounts 59,335 14,372 15,537
Depreciation and amortization 683,435 183,183 161,258
----------- ---------- ----------
Total operating expenses 20,667,854 4,866,920 5,730,840
----------- ---------- ----------
Operating income 2,215,279 617,925 259,537
Interest expense 65,248 18,176 16,191
Interest income 16,540 2,125 594
----------- ---------- ----------
Income before income taxes 2,166,571 601,874 243,940
Provision for income taxes 34,000 9,000 4,000
----------- ---------- ----------
Net income 2,132,571 592,874 239,940
Retained earnings, at beginning of period 4,397,545 4,397,545 4,970,116
Dividends paid (1,560,000)
----------- ---------- ----------
Retained earnings, at end of period $ 4,970,116 $4,990,419 $5,210,056
=========== ========== ==========
SEE THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-15
NEW WEST DIALYSIS CLINICS, INC.
STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1996 1997
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,132,571 $ 592,874 $ 239,940
Adjustments to reconcile net income
to net cash provided from operating
activities
Depreciation and amortization 683,435 183,183 161,258
Provision for doubtful accounts 59,335 14,372 15,537
Change in operating assets and liabilities
Patient accounts receivable (517,683) (29,607) (235,444)
Other receivables (17,834) 59,885 90,002
Inventory (21,590) (33,912) (59,995)
Prepaid expenses (6,071) 21,541 26,109
Other assets (33,500) 375 375
Accounts payable (139,862) (288,351) 113,442
Accrued employee compensation
and benefits (157,075) (246,488) 4,171
Other accrued liabilities 122,293 84,000 (43,293)
----------- ----------- ---------
Net cash provided by operating
activities 2,104,019 357,872 312,102
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments received on notes receivable 60,656 1,146 1,272
Purchase of property and equipment (808,179) (25,796) (278,319)
----------- ----------- ---------
Net cash used by investing
activities (747,523) (24,650) (277,047)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
SEE THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-16
NEW WEST DIALYSIS CLINICS, INC.
STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------
Principal payments on long-term debt (399,996) (99,999) (99,999)
Proceeds from bank credit facility 6,903,000 1,300,000 777,000
Payments on bank credit facility (6,281,000) (1,300,000) (774,000)
Distribution to stockholders (1,560,000)
----------- ----------- ---------
Net cash used by financing
activities (1,337,996) (99,999) (96,999)
----------- ----------- ---------
Net increase (decrease) in cash 18,500 233,223 (61,944)
Cash, beginning of period 47,480 47,480 65,980
----------- ----------- ---------
Cash, end of period $ 65,980 $ 280,703 $ 4,036
=========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for interest $ 65,248 $ 18,176 $ 16,191
Cash paid during period for income taxes $ 34,000 $ - $ -
SEE THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-17
NEW WEST DIALYSIS CLINICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
New West Dialysis Clinics, Inc. (the Company), a California corporation,
operates kidney dialysis facilities and provides related medical services
in Medicare certified dialysis facilities in Northern California.
Effective April 1, 1997, Total Renal Care, Inc. ("TRC"), a wholly owned
subsidiary of Total Renal Care Holdings, Inc. ("TRCH"), which operates
kidney dialysis facilities throughout the United States, its possessions
and the United Kingdom, purchased all of the assets (except cash and
accounts receivable), properties, and rights of the Company as discussed in
Note 10.
NET OPERATING REVENUES
Revenues are recognized when services and related products are provided to
patients in need of ongoing life sustaining kidney dialysis treatments.
Operating revenues consist primarily of dialysis and ancillary fees from
patient treatments. These amounts are reported at the amount expected to be
realized from governmental and third party payors, patients and others for
services provided. Receivables which are deemed uncollectible are reflected
in the provision for doubtful accounts as a component of operating expenses
in the statement of income.
Medicare and Medicaid programs funded by the U.S. Government generally
reimburse the Company under prospective payment systems at amounts
different from the Company's established private rate. Revenues under these
programs are generally recognized at prospective rates which are subject to
periodic adjustment by federal and state agencies. The Company bills non-
government third-party payors at established private rates. The Company has
contracts for the provision of dialysis services to members of certain
managed care organizations.
The Company provides credit, in the normal course of business, to patients
from (i) the federal and state government under the Medicare and Medicaid
programs representing approximately 70% of its dialysis revenue in 1996,
and (ii) private pay payors including insurance companies, private carriers
and other third party payors.
Management does not believe that there are any significant credit risks
associated with receivables from governmental agencies. The remaining net
receivable balance consists of receivables from various payors, subject to
differing economic conditions, and are not believed to represent any
concentrated credit risks to the Company. Furthermore, management adjusts
reserves associated with these receivables as necessary.
INVENTORY
Inventory, consisting of medical supplies, is stated at the lower of cost
or market. Cost is determined by the first-in, first-out method.
F-18
NEW WEST DIALYSIS CLINICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The policy of the Company is to
provide the depreciation over the estimated useful lives of the assets or
leasehold term, if shorter using the straight-line method. The estimated
useful lives range from 5 to 10 years.
INCOME TAXES
The Company, with the consent of its stockholders, elected under the
Internal Revenue and California tax codes to be an S corporation effective
December 1, 1986. For federal income tax purposes, in lieu of corporate
income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Accordingly, no
provision or liability for federal income taxes has been included in the
financial statements. The State of California taxes S corporations at a
rate of 1.5% of taxable income, which has been provided in the financial
statements.
CONCENTRATION OF CREDIT RISK
The Company is potentially subject to credit risk due to the concentration
of accounts receivable from patients covered by Medicare and MediCal. The
amounts due from these sources represented approximately 75% of the total
accounts receivable at December 31, 1996.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, notes receivable, accounts payable, employee compensation and
benefits, and other accrued liabilities. These balances, as presented in
the financial statements at December 31, 1996, approximate their fair
value. The Company's $1,000,000 credit facility, of which $622,000 was
outstanding as of December 31, 1996, and notes payable reflect fair value
as they are subject to fees and rates competitively determined in the
marketplace.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
UNAUDITED FINANCIAL STATEMENTS
The information presented as of March 31, 1997, and for the three months
ended March 31, 1997 and 1996, has not been audited. In the opinion of
management, the unaudited balance sheet and the unaudited statements of
income and cash flows include all adjustments, consisting solely of normal
recurring adjustments, necessary to present fairly the Company's balance
sheet as of March 31, 1997, and the Company's results of operations and
cash flows for the three months ended March 31, 1997 and 1996. The interim
results of operations are not necessarily indicative of results which may
occur for the full fiscal year.
F-19
NEW WEST DIALYSIS CLINICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
2. OTHER RECEIVABLES
Other receivables at December 31, 1996 consist of the following:
Rebates receivable 238,368
Advances to stockholders 2,865
Current portion of notes receivable from stockholders 14,000
-----------
$ 255,233
===========
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
Medical equipment $ 3,843,571
Leasehold improvements 2,969,479
Office furniture and equipment 1,278,454
Vehicles 105,615
Construction in progress 611,448
-----------
8,808,567
Less: Accumulated depreciation (5,836,914)
-----------
$ 2,971,653
===========
4. NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders at December 31, 1996 consist of the following:
Note receivable from stockholder, quarterly
instalments of $2,840, including interest at
10%, maturing January 2000, unsecured $ 29,130
Notes receivable from stockholder, in varying
instalments with interest ranging from 10% to
10.5%, due dates ranging from on demand
through 2000, unsecured 46,256
-----------
75,386
Less: Current portion (14,000)
---- ------------
$ 61,386
============
F-20
NEW WEST DIALYSIS CLINICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
5. LINE OF CREDIT
The Company has available a line-of-credit agreement for borrowing up to
$1,000,000. Interest is .5% above prime rate and amounts borrowed are due
on demand. The agreement is secured by trade receivables, inventory,
property and equipment, and is guaranteed by the stockholders of the
Company. The Company had borrowings outstanding of $622,000 at December 31,
1996.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1996 consist of the following:
Accrued profit-sharing contribution $300,000
Refunds due patients or payors 122,293
--------
$422,293
========
7. LONG-TERM DEBT
Long-term debt consists of a note payable of $166,685 at December 31, 1996.
The note is payable at $33,333 per month plus interest at .75% above the
bank prime rate, and is due August 1998. The Company has made advanced
payments in excess of the amount due during 1997, therefore, the balance is
classified as long-term on the balance sheet. The note is secured by trade
receivables, inventory, property and equipment, and personal guarantees of
the stockholders.
8. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company is obligated under equipment, office and clinical facility
leases which have been classified as operating leases. The terms of the
leases require monthly payments ranging from $1,091 to $19,872, are
noncancellable and expire at various dates ranging from March 1997 through
June 2005. The Company is responsible for substantially all costs
associated with maintenance, taxes, insurance and utilities for the
facility leases.
Minimum rentals under these leases are as follows for the years ending
December 31:
1997 $ 811,189
1998 776,271
1999 637,391
2000 529,201
2001 176,410
Thereafter 295,357
----------
$3,225,819
==========
F-21
NEW WEST DIALYSIS CLINICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Total rent expense under these leases was $859,049 for the year ended
December 31, 1996.
The stockholders of the Company have a minority interest in a limited
partnership which owns one of the primary office facilities leased by the
Company. Rents paid to this partnership were $277,532 for the year ended
December 31, 1996.
The Company is subject to various claims and lawsuits in the ordinary
course of business. In the opinion of management, the ultimate resolution
of these matters will not have a material adverse effect on the Company's
financial condition, results of operations, or cash flows.
9. RETIREMENT PLAN
The Company has established a profit-sharing plan covering substantially
all full-time employees. Contributions are made to the plan at the
discretion of the Company's Board of Directors up to a maximum of 15% of
eligible compensation. The Company contribution for the year ended December
31, 1996 was $300,000.
10. SUBSEQUENT EVENTS
Effective February 1, 1997, the Company entered into an Interim Operating
Management Agreement (the Management Agreement) whereby Total Renal Care
Holdings, Inc. (TRCH) agreed to provide the Company with management,
consulting and advisory services with respect to personnel, operational
policies, equipment and improvements, billing, accounting, funds management
and other advice as agreed between TRCH and the Company. The Management
Agreement remained in effect until the date that TRCH acquired
substantially all of the Company's assets. TRCH received a fee equal to the
operating income of the Company for the period the Management Agreement was
in effect. In April 1997, the Company entered into an Asset Purchase
Agreement (Purchase Agreement) to sell all of the assets (except cash and
accounts receivable), properties and rights of the Company to Total Renal
Care, Inc. (TRC), a subsidiary of TRCH. Under the Purchase Agreement, TRC
assumed only accounts payable and contracts incurred within the ordinary
course of business. TRC did not assume, and is not liable for any other
debt, obligations, or liabilities of the Company.
F-22
MICHIGAN KIDNEY CENTERS
THE COMBINED FINANCIAL STATEMENTS OF
SOUTHFIELD DIALYSIS FACILITY, P.C.,
NORTH OAKLAND DIALYSIS FACILITY, P.C.,
MACOMB KIDNEY CENTER, P.C., and
NOVI KIDNEY CENTER, P.C.
DECEMBER 31, 1996
F-23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Total Renal Care Holdings, Inc.
In our opinion, the accompanying combined balance sheet and the related combined
statements of income and retained earnings and of cash flows present fairly, in
all material respects, the financial position of Michigan Kidney Centers (the
combined financial statements of Southfield Dialysis Facility, P.C., North
Oakland Dialysis Facility, P.C., Macomb Kidney Center, P.C., and Novi Kidney
Center, P.C.; collectively the Company) at December 31, 1996 and the results of
its operations and cash flows for the year then ended, in conformity with
generally accepted accounting principles. 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 audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards 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
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Seattle, Washington
November 20, 1997
F-24
MICHIGAN KIDNEY CENTERS
COMBINED BALANCE SHEET
- ------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
1996 1997
(unaudited)
ASSETS
Cash $ 392,744 $ 490,518
Patient accounts receivable, less allowance for
doubtful accounts of $321,417 and $307,536,
respectively 2,921,250 2,572,152
Due from related parties 40,618 423,829
Other receivables 83,337 27,347
Inventory 245,987 176,413
Prepaid expenses 114,821 66,074
---------- -----------
Total current assets 3,798,757 3,756,333
Property and equipment, net 3,225,415 3,193,525
Deposits 32,202 32,202
Other assets 136,280 181,549
---------- -----------
$7,192,654 $ 7,163,609
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 413,511 $ 869,392
Accrued employee compensation and benefits 258,114 166,067
Other accrued liabilities 60,890 30,819
Line of credit 248,570 248,570
Current portion of long-term debt 602,485 710,636
Current portion of note payable to stockholders 230,000
Current portion of capital lease obligations 31,002
---------- -----------
Total current liabilities 1,614,572 2,255,484
---------- -----------
Long-term debt, less current portion 1,354,384 1,194,047
Note payable to stockholders 230,000
Capital lease obligations, less current portion 58,753
---------- -----------
1,643,137 1,194,047
---------- -----------
Stockholders' equity
Common stock 627,000 627,000
Retained earnings 3,307,945 3,087,078
---------- -----------
Total stockholders' equity 3,934,945 3,714,078
Commitments and contingencies (Note 8)
---------- -----------
$7,192,654 $7,163,609
========== ==========
SEE THE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
F-25
MICHIGAN KIDNEY CENTERS
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
- ---------------------------------------------------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1996 1997
(unaudited) (unaudited)
Net operating revenues $13,729,945 $3,099,373 $3,599,803
----------- ---------- ----------
Operating expenses
Facilities 10,829,118 2,496,104 2,770,576
General and administrative 681,278 156,607 174,590
Provision for doubtful accounts 26,940 9,659 9,305
Depreciation and amortization 606,487 130,501 139,369
----------- ---------- ----------
Total operating expenses 12,143,823 2,792,871 3,093,840
----------- ---------- ----------
Operating income 1,586,122 306,502 505,963
Interest expense (265,195) (46,284) (57,453)
Interest income 56,204 9,012 7,820
Other income (expense) 184,689 3,482 (1,268)
----------- ---------- ----------
Income before income taxes 1,561,820 272,712 455,062
Provision for income taxes 47,154 11,789 15,929
----------- ---------- ----------
Net income 1,514,666 260,923 439,133
Retained earnings, beginning of period 3,693,279 3,693,279 3,307,945
Dividends paid (1,900,000) (200,000) (660,000)
----------- ---------- ----------
Retained earnings, end of period $ 3,307,945 $3,754,202 $3,087,078
=========== ========== ==========
SEE THE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
F-26
MICHIGAN KIDNEY CENTERS
COMBINED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1996 1997
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,514,666 $ 260,923 $ 439,133
Adjustments to reconcile net income
to net cash provided from operating
activities
Depreciation and amortization 606,487 130,501 139,369
Change in operating assets and liabilities
Patient accounts receivable (365,470) 410,182 349,098
Due from related parties 11,328 9,773 (383,211)
Other receivables (8,553) (24,878) 55,990
Inventory (121,383) (5,299) 69,574
Prepaid expenses (32,755) 22,504 48,747
Other assets (56,074) (91,427) (45,269)
Deposits 3,262
Accounts payable 172,324 763,104 455,881
Accrued employee compensation
and benefits 59,941 (62,220) (92,047)
Other accrued liabilities (5,223) (66,349) (30,071)
----------- ---------- ----------
Net cash provided by operating
activities 1,778,550 1,346,814 1,007,194
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (951,040) (655,341) (107,479)
----------- ---------- ----------
Net cash used by investing
activities (951,040) (655,341) (107,479)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (583,514) (81,657) (141,941)
Proceeds from bank credit facility 110,419
Proceeds from long-term notes payable 1,046,419 673,412
Distribution to shareholders (1,900,000) (200,000) (660,000)
----------- ---------- ----------
Net cash used by financing
activities (1,326,676) 391,755 (801,941)
----------- ---------- ----------
Net increase (decrease) in cash (499,166) 1,083,228 97,774
Cash, beginning of period 891,910 891,910 392,744
----------- ---------- ----------
Cash, end of period $ 392,744 $1,975,138 $ 490,518
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for interest $ 242,892 $ 47,920 $ 67,599
Cash paid during period for income taxes $ 46,621 $ $ 16,061
SEE THE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
F-27
MICHIGAN KIDNEY CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Michigan Kidney Centers (the Company) operates kidney dialysis facilities
and provides related medical services in Medicare certified dialysis
facilities in the Detroit Metropolitan area. The Company comprises the
following entities: Southfield Dialysis Facility, P.C., North Oakland
Facility, P.C., Macomb Kidney Center, P.C. and Novi Kidney Centers, P.C.
Effective April 30, 1997, Total Renal Care, Inc. (TRC), a wholly owned
subsidiary of Total Renal Care Holdings, Inc. (TRCH), which operates kidney
dialysis facilities throughout the United States, its possessions and the
United Kingdom, purchased certain assets and liabilities of the Company as
discussed in Note 8.
BASIS OF PRESENTATION
The combined financial statements include the accounts of Southfield
Dialysis Facility, P.C., North Oakland Dialysis Facility, P.C., Macomb
Kidney Center, P.C. and Novi Kidney Center, P.C. The Center's financial
statements are combined as a result of common ownership. However, each of
the four facilities are separate legal entities. All significant
intercompany transactions and balances between these entities have been
eliminated upon combination.
NET OPERATING REVENUES
Revenues are recognized when services and related products are provided to
patients in need of ongoing life sustaining kidney dialysis treatments.
Operating revenues consist primarily of dialysis and ancillary fees from
patient treatments. These amounts are reported at the amount expected to be
realized from governmental and third party payors, patients and others for
services provided. Receivables which are deemed uncollectible are reflected
in the provision for doubtful accounts as a component of operating expenses
in the statement of income.
Medicare and Medicaid programs funded by the U.S. Government generally
reimburse the Company under prospective payment systems at amounts
different from the Company's established private rate. Revenues under these
programs are generally recognized at prospective rates which are subject to
periodic adjustment by federal and state agencies. The Company bills
nongovernment third party payors at established private rates. The Company
has contracts for the provision of dialysis services to members of certain
managed care organizations.
The Company provides credit, in the normal course of business, to patients
from (i) federal and state governments under Medicare and Medicaid programs
representing approximately 85% of its dialysis revenue in 1996, and (ii)
private pay payors including insurance companies, private carriers and
other third party payors.
Management does not believe that there are any significant credit risks
associated with receivables from governmental agencies. The remaining net
receivable balance consists of receivables from various payors, subject to
differing economic conditions, and are not believed to represent any
concentrated credit risks to the Company. Furthermore, management adjusts
reserves associated with these receivables as necessary.
F-28
MICHIGAN KIDNEY CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INVENTORY
Inventory, consisting of medical supplies, is stated at the lower
of cost or market. Cost is determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The policy of the Company is to
provide depreciation over the lesser of the estimated useful lives of the
assets or the lease term using an accelerated method. The estimated useful
lives range from five to seven years.
INCOME TAXES
The Company, with the consent of its stockholders, elected under the
Internal Revenue and Michigan tax codes to be an S corporation effective
December 1, 1986. For federal income tax purposes, in lieu of corporation
income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Accordingly, no
provision or liability for federal income taxes has been included in the
financial statements. The Company provides for the single business tax
imposed by the state of Michigan.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, accrued liabilities, stockholder loans and
other debt obligations. These balances, as presented in the financial
statements at December 31, 1996, approximate their fair value. The
Company's credit facility and long-term debt reflect fair value as they are
subject to fees and rates competitively determined in the marketplace.
STOCKHOLDERS' EQUITY
Retained earnings represent undistributed earnings of
the companies, which are all S corporations. The following summarizes the
capital structure of the combined entities:
SHARES
SHARES ISSUED AND
AUTHORIZED OUTSTANDING PAR VALUE AMOUNT
Southfield Dialysis Facility, P.C. 50,000 1,000 $ 1.00 $ 1,000
North Oakland Dialysis Facility, P.C. 50,000 1,000 1.00 1,000
Macomb Kidney Center, P.C. 10,000 2,000 112.50 225,000
Novi Kidney Center, P.C. 10,000 4,000 400,000
------- ----- --------
120,000 8,000 $627,000
======= ===== ========
F-29
MICHIGAN KIDNEY CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
UNAUDITED FINANCIAL STATEMENTS
The information presented as of March 31, 1997, and for the three months
ended March 31, 1997 and 1996, has not been audited. In the opinion of
management, the unaudited financial statements include all adjustments,
consisting solely of normal recurring adjustments, necessary to present
fairly the Company's financial position as of March 31, 1997, and the
Company's results of operations and cash flows for the three months ended
March 31, 1997 and 1996.
2. OTHER RECEIVABLES
Other receivables at December 31, 1996 consist of the following:
Rebates receivable $ 76,850
Other 6,487
--------
$ 83,337
========
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
Medical equipment $ 1,736,602
Leasehold improvements 3,152,384
Office equipment 199,220
Furniture and fixtures 437,463
Vehicles 21,087
-----------
5,546,756
Less: Accumulated depreciation (2,321,341)
-----------
$ 3,225,415
===========
Assets under capital lease were $160,187 with accumulated depreciation of
$97,560 at December 31, 1996.
F-30
MICHIGAN KIDNEY CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. LINE OF CREDIT
The Company has available a line-of-credit agreement for borrowing up to
$1,350,000. The borrowings bear interest at .5% over prime (8.25% at
December 31, 1996) and are payable on demand. The agreement is secured by
patient receivables, inventory, property and equipment, and is guaranteed
by the stockholders of the Company. The Company had borrowings outstanding
of $248,570 at December 31, 1996.
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1996 consists of the following:
Interest $ 51,393
Payroll taxes 3,425
City and state taxes 6,072
----------
$ 60,890
==========
6. LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
Notes payable - Bank, payable in monthly instalments,
bearing interest ranging from 8.91% to 10.5% per annum,
maturing October 1997 through October 2001. The notes
are secured by equipment. $1,440,377
Notes payable - Bank, payable in monthly instalments,
bearing interest at 9.19% per annum, maturing March
through May of 2000. The notes are secured by leasehold
improvements. 506,840
Note payable - Bank, payable in monthly instalments,
bearing interest at 9.75% per annum, maturing May 1998.
The loan is secured by a vehicle (Note 3). 9,652
----------
1,956,869
Less: Current portion (602,485)
----------
Long-term debt $1,354,384
==========
F-31
MICHIGAN KIDNEY CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Principal maturities of long-term debt are as follows for the years ending
December 31:
1997 $ 602,485
1998 448,662
1999 417,946
2000 313,778
2001 173,998
----------
$1,956,869
==========
7. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company is obligated under equipment, office and clinical facility
leases which have been classified as operating leases. The leases are
noncancellable and expire at various dates ranging from December 1997
through June 2006. The Company is responsible for substantially all costs
associated with maintenance, taxes, insurance and utilities for the
facility leases. The Company is also obligated under various capital leases
for equipment.
Minimum payments under these leases are as follows for the years ending
December 31:
CAPITAL OPERATING
LEASES LEASES
1997 $ 30,998 $ 448,667
1998 34,226 307,133
1999 35,629 300,199
2000 6,886 306,030
2001 314,832
Thereafter 1,049,543
-------- ----------
Total minimum lease payments 107,739 $2,726,404
==========
Amounts representing interest (17,984)
--------
Present value of minimum payments 89,755
Current portion (31,002)
--------
$ 58,753
========
Total rent expense was $859,049 for the year ended December 31, 1996.
F-32
MICHIGAN KIDNEY CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has a minority interest in a limited partnership which owns one
of the facilities leased by the Company. The investment of $68,771 is
accounted for using the equity method and is included in other assets.
Income from distributions was $51,858 for the year ended December 31, 1996.
Rents paid to this partnership were $24,686 for the year ended December 31,
1996.
In 1995, certain stockholders loaned $230,000 to the Company. The loans are
unsecured and bear interest at 12% interest and are payable in full in
February 1998. Accrued interest on the loans at December 31, 1996 was
$6,938. These loans were paid in full during April 1997. As of December 31,
1997, the Company had a receivable balance of $40,618 due from a related
party, Michigan Kidney Consultants, P.C., the physician's practice which
refers dialysis patients to the facilities. The amount represents charges
for general and administrative services.
As of March 31, 1997, the Company had a receivable balance of $365,000 due
from a related company, Brighton, P.C., which is another dialysis facility
still under construction at the time. This amount was incurred during the
first three months of 1997 relating to the construction and other start-up
costs paid by the Michigan Kidney Centers on behalf of Brighton. This
amount was paid in full during April 1997.
8. SUBSEQUENT EVENTS
Effective March 1, 1997, the Company entered into an Interim Operating
Management Agreement (the Management Agreement) whereby Total Renal Care
Holdings, Inc. (TRCH) agreed to provide the Company with management,
consulting and advisory services with respect to personnel, operational
policies, equipment and improvements, billing, accounting, funds management
and other advice as agreed between TRCH and the Company. The Management
Agreement remained in effect until the date TRCH acquired certain assets of
the Company. TRCH received a fee equal to the operating income of the
Company for the period the Management Agreement was in effect.
Effective April 30, 1997, the stockholders and the Company entered into an
Asset Purchase Agreement to sell all of the assets (except cash, accounts
receivable, prepaid expenses, insurance policies and rebates due from
vendors), properties and rights of the Company to TRC. Under the purchase
agreement, TRC assumed only accounts payable and contracts incurred within
the ordinary course of business. TRC did not assume and is not liable for
any other debt, obligations, or liabilities of the Company.
F-33
DIALYSIS CARE
OF NORTH CAROLINA
FINANCIAL STATEMENTS
DECEMBER 31, 1996
F-34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Total Renal Care Holdings, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Dialysis Care of North Carolina at December
31, 1996 and the results of its operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards 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 audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Phoenix, Arizona
December 12, 1997
F-35
DIALYSIS CARE OF NORTH CAROLINA
BALANCE SHEET
- ------------------------------------------------------------------------------
December 31, September 30,
1996 1997
(unaudited)
Assets
Cash $ 145,964 $ 72,215
Patient accounts receivables, less allowance for
doubtful accounts of $355,813 and $80,813 2,767,954 2,635,939
Other receivables 35,000 -
Inventory 30,000 452,202
Prepaid expenses 19,094 35,785
---------- ----------
Total current assets 2,998,012 3,196,141
Property and equipment, net 4,945,508 4,875,999
Receivables from stockholders 612,484 612,484
Other assets - 13,577
---------- ----------
$8,556,004 $8,698,201
---------- ----------
Liabilities and Stockholders' Equity
Current portion of long-term debt $1,017,144 $1,848,927
Accounts payable 2,055,408 2,095,354
Patient refunds payable 132,000 -
Accrued employee compensation and benefits 208,446 26,202
Other accrued liabilities 65,150 -
---------- ----------
Total current liabilities 3,478,148 3,970,483
Obligations to related parties 1,453,522 1,483,395
Long-term debt 1,554,151 303,514
---------- ----------
Total liabilities 6,485,821 5,757,392
---------- ----------
Stockholders' equity
Common stock,no par value, 1,000 shares authorized
issued and outstanding
Retained earnings 2,070,183 2,940,809
---------- ----------
Total stockholders' equity 2,070,183 2,940,809
---------- ----------
$8,556,004 $8,698,201
========== ==========
The accompanying notes are an integral part of these financial statements.
F-36
DIALYSIS CARE OF NORTH CAROLINA
STATEMENT OF INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
Year ended Nine months ended
December 31, September 30,
1996 1996 1997
(unaudited) (unaudited)
Net operating revenues $17,301,269 $15,020,122 $16,484,806
----------- ----------- -----------
Operating expenses
Facilities 12,072,359 9,635,415 10,441,439
General and administrative 2,030,866 1,454,227 3,070,133
Provision for doubtful accounts 275,000 203,770 383,269
Depreciation and amortization 1,800,420 1,796,203 1,558,817
----------- ----------- -----------
Total operating expenses 16,178,645 13,089,615 15,453,658
----------- ----------- -----------
Operating income 1,122,624 1,930,507 1,031,148
Interest expense (215,234) (216,034) (165,000)
Other income - - 4,478
----------- ----------- -----------
Net income 907,390 1,714,473 870,626
Retained earnings, at beginning of period 1,162,793 1,162,793 2,070,183
----------- ----------- -----------
Retained earnings, at end of period $ 2,070,183 $ 2,877,266 $ 2,940,809
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-37
DIALYSIS CARE OF NORTH CAROLINA
Statement of Cash Flows
- --------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net income $ 907,390 $ 1,714,473 $ 870,626
Adjustment to reconcile net income
to net cash provided from operating activities
Depreciation and amortization 1,800,420 1,796,203 1,558,817
Provision for doubtful accounts 275,000 203,770 383,269
Change in operating assets and liabilities
Patient accounts receivable 350,585 203,605 (119,254)
Other receivables (31,407) (14,125) 35,000
Inventory - (378,541) (422,202)
Prepaid expenses (6,974) 56,570 (16,690)
Other assets 5,534 (2,400) (13,577)
Accounts payable 454,846 139,240 39,872
Patient refunds payable 132,000 - (132,000)
Accrued employee compensation
and benefits 43,222 35,103 (182,244)
Other accrued liabilities 42,826 28,288 (65,150)
----------- ----------- -----------
Net cash provided by operating activities 3,973,442 3,782,186 1,936,467
----------- ----------- -----------
Cash flows used from investing activities
Purchase of property and equipment (3,211,533) (3,376,503) (1,591,362)
----------- ----------- -----------
Cash flows used from financing activities
Principal payments on long-term debt (615,945) (405,683) (448,727)
Obligations to related parties - - 29,873
----------- ----------- -----------
Net cash used by financing activities (615,945) (405,683) (418,854)
----------- ----------- -----------
Net increase (decrease) in cash 145,964 - (73,749)
Cash, beginning of period - - 145,964
----------- ----------- -----------
Cash, end of period $ 145,964 $ - $ 72,215
----------- ----------- -----------
Supplemental disclosure of cash flow information
Cash paid during period for interest $ 219,559 $ 200,000 $ 180,000
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-38
DIALYSIS CARE OF NORTH CAROLINA
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dialysis Care of North Carolina (the Company), a North Carolina
corporation, operates kidney dialysis facilities and provides related
medical services in Medicare certified dialysis facilities in North
Carolina.
Effective December, 1997, Total Renal Care, Inc. ("TRC"), a wholly owned
subsidiary of Total Renal Care Holdings, Inc. ("TRCH"), which operates
kidney dialysis facilities throughout the United States, its possessions
and the United Kingdom and Italy, purchased all of the assets (except
cash, accounts receivable, and personal property disposed of prior to
closing date), properties, and rights of the Company as discussed in Note
6.
NET OPERATING REVENUES
Revenues are recognized when services and related products are provided to
patients in need of ongoing life sustaining kidney dialysis treatments.
Operating revenues consist primarily of dialysis and ancillary fees from
patient treatments. These amounts are reported at the amount expected to
be realized from governmental and third party payors, patients and others
for services provided. Receivables which are deemed uncollectible are
reflected in the provision for doubtful accounts as a component of
operating expenses in the statement of income.
Medicare and Medicaid programs funded by the U.S. Government generally
reimburse the Company under prospective payment systems at amounts
different from the Company's established private rates. Revenues under
these programs are generally recognized at prospective rates which are
subject to periodic adjustment by federal and state agencies. The Company
bills non-government third-party payors at established private rates. The
Company has contracts for the provision of dialysis services to members of
certain managed care organizations.
The Company provides credit, in the normal course of business, to patients
from (i) the federal and state government under the Medicare and Medicaid
programs representing approximately 90% of its dialysis revenue in 1996,
and (ii) private pay payors including insurance companies, private carriers
and other third party payors.
Management does not believe that there are any significant credit risks
associated with receivables from governmental agencies. The remaining net
receivable balance consists of receivables from various payors, subject to
differing economic conditions, and are not believed to represent any
concentrated credit risks to the Company. Furthermore, management adjusts
reserves associated with these receivables as necessary.
INVENTORY
Inventory, consisting of medical supplies, is stated at the lower of cost
or market. Cost is determined by the first-in, first-out method.
F-39
DIALYSIS CARE OF NORTH CAROLINA
Notes to Financial Statements
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The policy of the Company is to
provide depreciation over the estimated useful lives of the assets using
the straight-line method. The estimated useful lives range from 3 to 10
years.
INCOME TAXES
The Company, with the consent of its stockholders, elected under the
Internal Revenue and North Carolina tax codes to be an S corporation. For
federal and state income tax purposes, in lieu of corporate income taxes,
the shareholders of an S corporation are taxed on their proportionate share
of the Company's taxable income. Accordingly, no provision or liability
for federal or state income taxes has been included in the financial
statements.
CONCENTRATION OF CREDIT RISK
The Company is potentially subject to credit risk due to the concentration
of accounts receivable from patients covered by Medicare and Medicaid. The
amounts due from these sources represented approximately 90% of the total
accounts receivable at December 31, 1996.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, accrued employee compensation and benefits,
and other accrued liabilities. These balances, as presented in the
financial statements at December 31, 1996, approximate their fair value.
The Company's notes payable reflect fair value as they are subject to fees
and rates competitively determined in the marketplace.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
UNAUDITED FINANCIAL STATEMENTS
The information presented as of September 30, 1997, and for the nine months
ended September 30, 1997 and 1996, has not been audited. In the opinion of
management, the unaudited balance sheet and the unaudited statements of
income and cash flows include all adjustments, consisting solely of normal
recurring adjustments, necessary to present fairly the Company's balance
sheet as of September 30, 1997, and the Company's results of operations and
cash flows for the nine months ended September 30, 1997 and 1996. The
interim results of operations are not necessarily indicative of results
which may occur for the full fiscal year.
F-40
DIALYSIS CARE OF NORTH CAROLINA
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
Land $ 363,871
Buildings 2,434,662
Equipment 5,501,570
----------
8,300,103
Less: Accumulated depreciation 3,354,595
----------
$4,945,508
==========
3. RECEIVABLES FROM STOCKHOLDERS
Receivables from stockholders of $612,484 at December 31, 1996 included
$348,500 from Robert Hill, Sr. and $217,500 from Stephen Hill. These
amounts are non-interest bearing and are due upon demand. The Company does
not intend to collect during the next twelve months.
4. OBLIGATIONS TO RELATED PARTIES
Obligations to related parties of $1,453,522 at December 31, 1996, consist
of payables to other companies related due to common shareholders,
including approximately $1.4 million payable to Robert Hill Construction.
These amounts are non-interest bearing and are due upon demand. Based on
the related parties' representations, the Company does not expect to pay
these obligations during the next twelve months.
5. LONG-TERM DEBT
Long-term debt consists of various notes payable aggregating $2,571,295 at
December 31, 1996. The aggregate monthly payments of principal and
interest for the notes payable approximate $149,000 per month. Interest
rates are generally variable rates ranging from prime (8.25%) to prime +1%
(9.25%). The terms of the notes vary from 35 to 83 months. Substantially
all of the notes will expire during 1998 and 1999. The notes are secured
by a building and medical equipment.
6. SUBSEQUENT EVENTS
Effective November 1, 1997, the Company entered into an Asset Purchase
Agreement (Purchase Agreement) to sell all of the assets (except cash,
accounts receivable and personal property disposed of prior to closing
date), properties and rights of the Company to TRC, a subsidiary of TRCH.
Under the Purchase Agreement, TRC assumed only accounts payable and
contracts incurred within the ordinary course of business. TRC did not
assume, and is not liable for any other debt, obligations, or liabilities
of the Company.
F-41
THE RENAL DIALYSIS
BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
F-42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Total Renal Care Holdings, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of The Renal Dialysis Business of The Rogosin
Institute, Inc. at December 31, 1996 and the results of its operations and its
cash flows for the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the The Renal
Dialysis Business' management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards 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 audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
December 18, 1997
F-43
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
BALANCE SHEET
- --------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
(unaudited)
ASSETS
Cash $ 2,858 $ 3,688
Patient accounts receivables, less
allowance for doubtful accounts of
$1,396,589 and $1,390,167, respectively 4,731,588 5,518,400
Inventory 210,394 169,585
Other assets 62,460 49,522
---------- ----------
Total current assets 5,007,300 5,741,195
Property and equipment (Note 3) 1,965,458 2,911,344
---------- ----------
$6,972,758 $8,652,539
========== ==========
LIABILITIES AND BUSINESS EQUITY
Current portion of long term lease (Note 4) $ 84,393 $ 115,881
Accounts payable and accrued expenses 1,886,790 1,790,370
Accrued employee compensation and benefits 333,083 283,374
---------- ----------
Total current liabilities 2,304,266 2,189,625
Deferred rent (Note 4) 486,675 488,403
Long term lease payable (Note 4) 131,005 325,258
---------- ----------
Total liabilities 2,921,946 3,003,286
---------- ----------
Commitments and contingencies (Note 4)
Business equity (Note 5) 4,050,812 5,649,253
---------- ----------
$6,972,758 $8,652,539
========== ==========
See accompanying notes to the financial statements
F-44
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
STATEMENT OF OPERATIONS AND BUSINESS EQUITY
- --------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
(unaudited) (unaudited)
Net operating revenues $16,816,175 $12,493,092 $13,254,309
----------- ----------- -----------
Operating expenses
Facilities 9,590,165 6,933,167 7,389,936
General and administrative 4,919,339 3,597,538 4,917,597
Provision for doubtful accounts 732,125 547,320 712,648
Depreciation and amortization 234,961 199,300 331,280
----------- ----------- -----------
Total expenses 15,476,590 11,277,325 13,351,461
----------- ----------- -----------
Net income (loss) 1,339,585 1,215,767 (97,152)
Net (withdrawals) advances from Rogosin (1,323,005) (1,600,141) 1,695,593
Business equity, at beginning of period 4,043,232 4,043,232 4,050,812
----------- ----------- -----------
Business equity, at end of period $ 4,050,812 $ 3,658,858 $ 5,649,253
=========== =========== ===========
See accompanying notes to the financial statements
F-45
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,339,585 $ 1,215,767 $ (97,152)
Adjustments to reconcile net income
to net cash provided from operating
activities
Depreciation and amortization 234,961 199,300 331,280
Deferred rent escalation 2,316 1,731 1,728
Change in operating assets and liabilities
Patient accounts receivable 137,981 347,969 (786,812)
Inventory 191,680 27,617 40,809
Other assets (6,891) (5,166) 12,938
Accounts payable and accrued expenses 155,890 163,202 (96,420)
Accrued employee compensation
and benefits (16,291) (53,227) (49,709)
----------- ----------- ----------
Net cash provided (used) by operating
activities 2,039,211 1,897,193 (643,338)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (697,372) (7,264) (898,841)
----------- ----------- ----------
Net cash used by investing
activities (697,372) (7,264) (898,841)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capitalized leases (78,258) (58,136) (152,584)
Net (withdrawals) advances from Rogosin (1,332,005) (1,900,141) 1,695,593
----------- ----------- ----------
Net cash (used) provided by financing
activities (1,410,263) (1,958,277) 1,543,009
----------- ----------- ----------
Net (decrease) increase in cash (68,404) (68,348) 830
Cash, beginning of period 71,262 71,262 2,858
----------- ----------- ----------
Cash, end of period $ 2,858 $ 2,914 $ 3,688
=========== =========== ==========
Supplemental disclosure of cash flow
information
Cash paid during period for interest $ 19,555 $ 15,223 $ 24,877
See accompanying notes to the financial statements
F-46
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying financial statements comprise The Rogosin Institute Inc.'s
("Rogosin") Dialysis Business - The Renal Dialysis Business, (the
"Business"), a division of The Rogosin Institute. The Business operates
three kidney dialysis facilities and provides related medical services in
Medicare and Medicaid certified dialysis facilities in New York City.
Prior to December 2, 1997, The Renal Dialysis Business represented the
dialysis business of The Rogosin Institute, Inc. and its operations were
included in Rogosin's financial statements. Effective December 2, 1997, TRC
of New York ("TRC"), a wholly owned subsidiary of Total Renal Care
Holdings, Inc. ("TRCH"), which operates kidney dialysis facilities
throughout the United States, its possessions, the United Kingdom and
Italy, purchased 80% of the assets, properties and the rights of The Renal
Dialysis Business as discussed in Note 8. In connection with this
acquisition, the Business will be contributed to a limited partnership
where TRC will be the general partner (80% ownership interest) and The
Rogosin Institute, Inc. will be the sole limited partner (20% ownership
interest).
BASIS OF PRESENTATION
The accompanying financial statements reflect the "carve-out" financial
position, results of operations and cash flows of The Renal Dialysis
Business for the year ended December 31, 1996. The financial statements
have been prepared as if The Renal Dialysis Business had operated as a
stand-alone entity for all periods presented, and include those assets,
liabilities, revenues and expenses directly attributable to The Renal
Dialysis Business operations. Certain expenses incurred by Rogosin have
been allocated to the Business on a basis which management believes
represents a reasonable allocation in order to present The Renal Dialysis
Business as a stand-alone entity. These allocations consist of corporate
general and administrative expenses, facilities expense, and insurance
expense. Corporate general and administrative expenses have been allocated
based on an estimate of Rogosin personnel time dedicated to the operations
and management of the Business. Facilities expense has been allocated based
on square footage of space utilized. Revenues for the year represent
revenues from specific treatment provided by the dialysis centers of
Rogosin. Rogosin's funding of The Renal Dialysis Business' operations prior
to January 1, 1996 is shown as divisional equity in the accompanying
balance sheet.
The Renal Dialysis Business financial statements represent the "carve-out"
financial position, results of operations and cash flows for the periods
presented. The financial information of The Renal Dialysis Business
presented herein does not necessarily reflect what the financial position
and results of operations of the Business would have been had it operated
as a stand alone entity during the periods covered and may not be
indicative of future operations or financial position.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented below to assist
the reader in understanding and evaluating the financial statements.
F-47
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NET OPERATING REVENUES
Revenues are recognized when services and related products are provided to
patients in need of ongoing life sustaining kidney dialysis treatments.
Operating revenues consist primarily of dialysis and ancillary fees from
patient treatments. These amounts are reported at the amount expected to
be realized from governmental and third party payors, patients and others
for services provided. Receivables which are deemed uncollectible are
reflected in the provision for doubtful accounts as a component of
operating expenses in the statement of income.
Medicare and Medicaid programs funded by the U.S. Government generally
reimburse the Business under prospective payment systems at amounts
different from the Business' established private rate. Revenues under these
programs are generally recognized at prospective rates which are subject to
periodic adjustment by federal and state agencies. The Business bills non-
government third-party payors at established private rates. The Business
has contracts for the provision of dialysis services to members of certain
managed care organizations.
The Business provides credit, in the normal course of business, to patients
from (i) the federal and state government under the Medicare and Medicaid
programs which represent approximately 81% of its dialysis revenue in 1996
and approximately 44% of its net accounts receivable at December 31, 1996,
and (ii) private pay payors including insurance companies, private carriers
and other third party payors.
Management does not believe that there are any significant credit risks
associated with receivables from governmental agencies. The remaining net
receivable balance consists of receivables from various payors, subject to
differing economic conditions, and are not believed to represent any
concentrated credit risks to the Business. Furthermore, management adjusts
reserves associated with these receivables as necessary.
CASH
Cash represents an imprest account used for minor disbursements (petty
cash).
INVENTORY
Inventory, consisting of medical supplies, is stated at the lower of cost
(determined using first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Capitalized leased assets are
recorded at the present value of the minimum lease payments at the
inception of the lease. Maintenance and repairs are charged to expense as
incurred. Depreciation and amortization are calculated and recorded using
the straight-line method over the estimated useful lives of the assets and
for capitalized leases over the lesser of the estimated useful life or
lease term. The useful lives of the property and equipment are:
Leasehold improvements 5 to 15 years
Machinery 5 to 15 years
Furniture and fixtures 5 years
F-48
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
BENEFITS AND INSURANCE
Estimated amounts are accrued for claims incurred but not reported (IBNR),
based on Rogosin's specific experience, relative to the self insured
medical and hospitalization benefit plans and the workers' compensation
retrospective premium arrangement.
INCOME TAXES
The Business' operations have been included in The Rogosin Institute Inc.'s
federal and state informational returns. The Institute is exempt from
income taxes under Section 501(c)(3) of the Internal Revenue Code. As such
no provision for income taxes has been recorded for the Business.
CONCENTRATION OF CREDIT RISK
The Business is potentially subject to credit risk due to the concentration
of accounts receivable from patients covered by Medicare and Medicaid and
Blue Cross/Blue Shield. The amounts due from these sources represented
approximately 44% and 22%, respectively, of the total accounts receivable
at December 31, 1996.
FINANCIAL INSTRUMENTS
The Business' financial instruments consist primarily of cash, accounts
receivable, other receivables, accounts payable, accrued employee
compensation and benefits, and other accrued liabilities. Those balances,
as presented in the financial statements at December 31, 1996, approximate
their fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the periods presented. Actual results could differ from those
estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The information presented as of September 30, 1997 and for the nine months
ended September 30, 1996 and 1997 has not been audited. In the opinion of
management, the unaudited interim financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Business' financial position as of September 30, 1997
and the results of the Business' operations and cash flows for the nine
months ended September 30, 1996 and 1997, respectively. The interim results
of operations are not necessarily indicative of results which may occur for
the full fiscal year.
F-49
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
Medical equipment $ 2,046,223
Leasehold improvements 1,319,976
Office furniture 253,312
Construction in progress 709,362
-----------
4,328,873
Less: Accumulated depreciation (2,363,415)
---- -----------
$ 1,965,458
===========
4. LEASE COMMITMENTS, DEFERRED RENT AND CONTINGENCIES
The Business is obligated under equipment leases which have been classified
as capital leases. The Business also acquired $337,000 of medical equipment
via capital lease in March 1997. The Business is also obligated under
facilities leases for the space in the Helmsely medical tower and Brooklyn
locations. These leases are classified as operating and expire at various
dates ranging from December 31, 2001 through December 31, 2011. The
Business is responsible for substantially all costs associated with
maintenance, taxes, insurance and utilities for the facility leases.
Future minimum payments, by year and in the aggregate, under a capitalized
lease and non-cancelable operating leases for the years ending December 31
are as follows:
Capitalized Operating
Leases Leases
----------- ----------
1997 $ 97,813 $ 848,471
1998 97,813 896,407
1999 40,755 911,942
2000 927,631
2001 892,773
Thereafter 3,967,474
-------- ----------
Total minimum lease payments 236,381 $8,444,698
==========
Less amount representing imputed interest at 7.6% 20,983
--------
Present value of minimum lease payments
reflected as long-term debt $215,398
--------
Total rent expense under these leases was $748,109 for the year ended
December 31, 1996. One of the rental agreements provides for reduced rent
in the early years and an escalation in the later years. The Business
records the rent expense on a straight line basis, therefore, the deferred
balance which is created relates to rent expense which has been recorded in
excess of the amounts paid.
F-50
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
The Business is subject to various claims and lawsuits in the ordinary
course of business. In the opinion of management, the ultimate resolution
of these matters will not have a material adverse effect on the Business'
financial condition, results of operations, or cash flows.
5. RELATED PARTY TRANSACTIONS
The business participates in a centralized cash management program
administered by Rogosin. Advances from Rogosin or excess cash sent to
Rogosin has been treated as an adjustment to business equity. No interest
has been charged on this balance. Intercompany receivables and payables
have historically been settled in the normal course of business and are not
interest bearing. The net intercompany balance has been included in the
balance sheet as "Business Equity".
Rogosin has provided to The Renal Dialysis Business certain legal, general
and administrative services (regulatory, cash management, and insurance).
Charges for these services have been based on allocation of Rogosin's
actual direct and indirect costs incurred by Rogosin to render these
services to the business. The allocation methods used are as follows:
Legal - Estimated cost of legal fees is based on a percentage of
historical use of the legal fees incurred on behalf of the business.
Employee Benefits - Estimated based on business' payroll as a percentage of
Rogosin's total payroll.
Facilities - The cost of the shared facilities are allocated based on a
percentage of square footage occupied by Rogosin.
General and Administrative - Estimated based on wages and benefits of
employees and related time incurred working with each facility of Rogosin.
The allocation methodology is consistent with the method used by Rogosin to
allocate the cost of similar services to its other "programs". Total
allocated costs for the year ended December 31, 1996 were $7,182,100. No
provisions have been made for possible incremental costs that may have been
incurred had The Renal Dialysis Business operated as a stand-alone entity
for the period presented.
F-51
THE RENAL DIALYSIS BUSINESS OF
THE ROGOSIN INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
6. PROFESSIONAL LIABILITIES INSURANCE
Rogosin purchases professional liabilities and general liabilities
insurance through a related party which participates in a captive insurance
company. The premiums are based on a modified claims made coverage and are
actuarially determined based on the actual experience of the captive,
Institute specific experience, and estimated current expense. Rogosin
allocated a portion of the premiums to the Business, in the amount of
$31,250 for the year ended December 31, 1996. The premium has been fully
funded in each fiscal year. For the period November 1, 1983 through
December 31, 1996, Rogosin's professional liabilities coverage has been
provided on a modified claims made basis and Rogosin, based on historical
and current information, estimates that incurred but not reported claims
are minimal and, accordingly, has recorded no liability nor allocated such
liability to The Renal Dialysis Business for such possible claims.
7. RETIREMENT PLAN
The Business' defined contribution retirement plan, which covers
substantially all of its employees, provides for the Institute to make
regular contributions based on the percentage of salaried employees to
total employees. Payments upon retirement or termination of employment are
based on amounts credited to individual accounts. The contribution
allocated to The Renal Dialysis Business for the year ended December 31,
1996 was $260,450.
8. SUBSEQUENT EVENTS
Effective December 2, 1997, Rogosin entered into an Asset Purchase
Agreement (Purchase Agreement) to sell 80% of the assets (except "Operating
Licenses", cash and accounts receivable), properties and rights of The
Renal Dialysis Business to TRC. Under the Purchase Agreement, TRC assumed
only designated liabilities identified within the Purchase agreement
(accounts payable, lease obligations, employees compensation and benefits).
TRC did not assume, and is not liable for any other debt, obligations, or
liabilities of Rogosin.
F-52
TOTAL RENAL CARE HOLDINGS, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Combined Balance Sheet of Total Renal Care
Holdings, Inc. as of September 30, 1997 gives effect to the acquisition by the
Company of the following businesses as if such businesses were acquired on
September 30, 1997: Dialysis Care of North Carolina, which was acquired on
November 1, 1997 (the "North Carolina Facilities"); the Renal Dialysis Business
of The Rogosin Institute Inc., which was acquired on December 2, 1997 (the
"Rogosin Facilities"); and certain other individually insignificant acquisitions
consummated during the period from October 1, 1997 through December 19, 1997,
and individually insignificant acquisitions which were probable as of December
19, 1997.
The Unaudited Pro Forma Combined Statement of Income for the nine months
ended September 30, 1997 gives effect to the acquisition by the Company of the
following businesses as if such businesses were acquired on January 1, 1997: New
West Dialysis Clinics, Inc., which was acquired on April 1, 1997 (the "New West
Facilities"); Michigan Kidney Centers, which was acquired on May 1, 1997 (the
"Michigan Facilities"); the North Carolina Facilities; the Rogosin Facilities;
and other individually insignificant acquisitions consummated during the period
January 1, 1997 through December 19, 1997, and individually insignificant
acquisitions which were probable as of December 19, 1997.
The Unaudited Pro Forma Combined Statement of Income for the nine months
ended September 30, 1996 gives effect to the acquisition by the Company of the
following businesses as if such businesses were acquired on January 1, 1996: the
Nephrology Services Business of Caremark International Inc., which was acquired
on March 15, 1996 (the "Caremark Facilities"); Upstate Dialysis, Inc., which was
acquired on March 15, 1996, and Greer Kidney Center, Inc., which was acquired on
November 1, 1996 (the "South Carolina Facilities"); the New West Facilities; the
Michigan Facilities; the North Carolina Facilities; the Rogosin Facilities; and
other individually insignificant acquisitions consummated during the period
January 1, 1997 through December 19, 1997, and individually insignificant
acquisitions which were probable as of December 19, 1997. The Unaudited Pro
Forma Combined Statement of Income for the nine months ended September 30, 1996
also gives effect to the retirement of all outstanding Senior Subordinated
Discount Notes in July and September 1996 (the "Debt Retirement") as if it
occurred on January 1, 1996.
The Unaudited Pro Forma Combined Statement of Income for the year ended
December 31, 1996 gives effect to the acquisition by the Company of the
following businesses as if such businesses were acquired on January 1, 1996: the
Caremark Facilities; the South Carolina Facilities; the New West Facilities; the
Michigan Facilities; the North Carolina Facilities; the Rogosin Facilities; and
other individually insignificant acquisitions consummated during the period
January 1, 1997 through December 19, 1997, and individually insignificant
acquisitions which were probable as of December 19, 1997. The Unaudited Pro
Forma Combined Statement of Income for the year ended December 31, 1996 also
gives effect to the Debt Retirement as if it occurred on January 1, 1996.
The Unaudited Pro Forma Combined Financial Statements are presented for
informational purposes only and do not purport to represent what the Company's
financial position as of September 30, 1997 or the Company's results of
operations for the nine month periods ended September 30, 1997 and 1996 or for
the year ended December 31, 1996 would actually have been had the applicable
acquisitions and Debt Retirement, in fact, occurred on September 30, 1997,
January 1, 1997 or January 1, 1996, respectively, or what the Company's
financial position or results of operations will be for any future period. The
Unaudited Pro Forma Information should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
in this Prospectus and the information set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company"
included in the Total Renal Care Holdings, Inc. Form 10-K for the year ended
December 31, 1996.
F-53
TOTAL RENAL CARE HOLDINGS, INC.
Unaudited Pro Forma Combined Balance Sheet
September 30, 1997
(in thousands)
The North Other
Company Carolina Rogosin Insignificant Pro Forma
(Historical) Facilities Facilities Acquisitions Adjustments Combined
Cash and cash equivalents $ 15,455 $ 72 $ 4 $ 2,050 $ (2,126)(b) $ 15,455
Accounts receivable, net 131,744 2,636 5,519 3,925 (11,049)(b) 132,775
Other current assets 24,778 488 219 603 (1,060)(b) 25,028
-------- ------ ------ ------- -------- --------
Total current assets 171,977 3,196 5,742 6,578 (14,235) 173,258
Property & equipment, net 84,846 4,876 2,911 3,371 (1,680)(b) 94,324
Intangible assets, net 286,210 - - - 131,686 (a) 417,896
Other assets 11,784 626 - 231 (857)(b) 11,784
-------- ------ ------ ------- -------- --------
$554,817 $8,698 $8,653 $10,180 $114,914 $697,262
======== ====== ====== ======= ======== ========
Current liabilities $ 28,784 $3,970 $2,190 $ 1,995 $ (7,940)(b) $ 28,999
Long-term debt 253,880 304 - 1,848 (2,152)(b) 393,464
139,584 (a)
Other long-term liabilities 2,856 1,483 814 100 (2,397)(b) 2,856
Minority interest 7,640 - - - 2,646 (c) 10,286
Common stock 44 - - 120 (120)(d) 44
Additional paid-in capital 260,157 - - 1,510 (1,510)(d) 260,157
Notes receivable from
stockholders (2,975) - - - - (2,975)
Retained earnings 4,431 2,941 5,649 4,607 (13,197)(d) 4,431
-------- ------ ------ ------- -------- --------
$554,817 $8,698 $8,653 $10,180 $114,914 $697,262
======== ====== ====== ======= ======== ========
F-54
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
1. BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Balance Sheet of Total Renal Care Holdings,
Inc. as of September 30, 1997 gives effect to the acquisition of the North
Carolina Facilities, the Rogosin Facilities and other Insignificant
Acquisitions, in each case as if such acquisitions were consummated on
September 30, 1997. The pro forma adjustments are based on consideration
exchanged, including the estimated fair value of assets acquired and
liabilities assumed. The actual adjustments, which will be based on
valuations of fair value as of the date of acquisition, may differ from those
made herein. The Company does not believe the effect of any adjustments would
be material.
2. PRO FORMA ADJUSTMENTS
a) To record the acquisition of the North Carolina Facilities, the Rogosin
Facilities and the other Insignificant Acquisitions as follows (in
thousands):
NORTH OTHER
CAROLINA ROGOSIN INSIGNIFICANT
FACILITIES FACILITIES ACQUISITIONS TOTAL
Purchase Price $49,300 $18,290 $71,994 $139,584
Net book value of assets acquired 3,000 1,912 2,986 7,898
------- ------- ------- --------
Purchase price allocated to intangible assets $46,300 $16,378 $69,008 $131,686
======= ======= ======= ========
The purchase prices of the North Carolina Facilities, the Rogosin Facilities
and the other Insignificant Acquisitions were assumed to be borrowed under
the Senior Credit Facility (or will be borrowed, in the case of those
acquisitions which are considered probable at December 19, 1997).
b) To reflect assets and liabilities not acquired by the Company.
c) The Company purchased a less than 100% interest in two partnerships which are
consolidated for financial reporting purposes. This entry is to record the
minority interest in such partnerships.
d) To eliminate the equity of the acquired businesses.
F-55
TOTAL RENAL CARE HOLDINGS, INC.
Unaudited Pro Forma Combined Statement of Income
Nine months ended September 30, 1997
(in thousands)
New West Michigan North Carolina
The Company Facilities Facilities Facilities
Nine months ended Three months ended Four months ended Nine months ended
September 30, 1997 March 31, 1997 April 30, 1997 September 30, 1997
(Historical) (Historical) (Historical) (Historical)
Net operating revenues $307,450 $5,990 $4,800 $16,485
Operating expenses 251,703 5,730 4,125 15,454
-------- ------ ------ -------
Operating income 55,747 260 675 1,031
Interest expense, net 7,738 16 68 160
-------- ------ ------ -------
Income before income taxes,
minority interests and extraordinary item 48,009 244 607 871
Income taxes 18,255 4 21 -
-------- ------ ------ -------
Income before minority interest and
extraordinary item 29,754 240 586 871
Minority interest in income of
consolidated subsidiaries 3,193 - - -
-------- ------ ------ -------
Income before extraordinary item $ 26,561 $ 240 $ 586 $ 871
======== ====== ====== =======
Income per share before extraordinary item $ 0.59
========
Weighted average number of common shares and
equivalents outstanding 45,146
========
Rogosin Facilities Other
Nine months ended Insignificant
September 30, 1997 Acquisitions Pro Forma
(Historical) (Historical) Adjustments Combined
Net operating revenues $13,254 $39,005 $ (1,534)(b) $385,450
Operating expenses 13,351 33,567 5,153 (c) 329,083
------ ------- -------- --------
Operating income (97) 5,438 (6,687) 56,367
Interest expense, net - (40) (604)(d) 19,375
12,037 (e)
------ ------- -------- --------
Income before income taxes,
minority interests and extraordinary item (97) 5,478 (18,120) 36,992
Income taxes - 512 (5,033)(f) 13,759
------ ------- -------- --------
Income before minority interest and
extraordinary item (97) 4,966 (13,087) 23,233
Minority interest in income of
consolidated subsidiaries - - (17)(g) 3,176
------ ------- -------- --------
Income before extraordinary item $ (97) $ 4,966 $(13,070) $ 20,057
====== ======= ======== ========
Income per share before extraordinary item $ 0.44
========
Weighted average number of common shares and
equivalents outstanding 45,146
========
F-56
TOTAL RENAL CARE HOLDINGS, INC.
Unaudited Pro Forma Combined Statement of Income
Nine months ended September 30, 1996
(in thousands)
Caremark South Carolina New West
The Company Facilities Facilities Facilities
9 months ended 2 months ended 2 months ended 9 months ended
September 30, 1996 Debt February 28, 1996 February 28, 1996 September 30, 1996
(Historical) Retirement (a) (Historical) (Historical) (Historical)
Net operating revenues $188,153 $ -- $7,805 $1,133 $17,162
Operating expenses 153,920 -- 8,250 1,055 15,501
-------- ------ ------ ------ -------
Operating income 34,233 -- (445) 78 1,661
Interest expense, net 3,862 (804) 127 (1) 37
-------- ------ ------ ------ -------
Income before income taxes,
minority interests and
extraordinary item 30,371 804 (572) 79 1,624
Income taxes 11,537 -- (232) -- 26
-------- ------ ------ ------ -------
Income before minority interest
and extraordinary item 18,834 804 (340) 79 1,598
Minority interest in income of
consolidated subsidiaries 2,296 -- -- -- --
-------- ------ ------ ------ -------
Income before extraordinary item $ 16,538 $ 804 $ (340) $ 79 $ 1,598
======== ====== ====== ====== =======
Income per share before
extraordinary item $ 0.39
========
Weighted average number of common
shares and equivalents outstanding 42,348
========
Michigan North Carolina Rogosin
Facilities Facilities Facilities Other
9 months ended 9 months ended 9 months ended Insignificant
September 30, 1996 September 30, 1996 September 30, 1996 Acquisitions Pro Forma
(Historical) (Historical) (Historical) (Historical) Adjustments Combined
Net operating revenues $10,298 $15,020 $12,493 $49,864 $ (66) (b) $301,862
Operating expenses 9,108 13,090 11,277 44,275 7,410 (c) 263,886
------- ------- ------- ------- -------- --------
Operating income 1,190 1,930 1,216 5,589 (7,476) 37,976
Interest expense, net 18 216 -- (3) (605) (d) 18,558
15,711 (e)
------- ------- ------- ------- -------- --------
Income before income taxes,
minority interests and
extraordinary item 1,172 1,714 1,216 5,592 (22,582) 19,418
Income taxes 35 -- -- 370 (4,697) (f) 7,039
------- ------- ------- ------- -------- --------
Income before minority interest
and extraordinary item 1,137 1,714 1,216 5,222 (17,885) 12,379
Minority interest in income of
consolidated subsidiaries -- -- -- -- (2) (g) 2,294
------- ------- ------- ------- -------- --------
Income before extraordinary item $ 1,137 $ 1,714 $ 1,216 $ 5,222 $(17,883) $ 10,085
======= ======= ======= ======= ======== ========
Income per share before
extraordinary item $ 0.23
========
Weighted average number of common
shares and equivalents outstanding 800 43,148
======== ========
F-57
TOTAL RENAL CARE HOLDINGS, INC.
Unaudited Pro Forma Combined Statement of Income
Year ended December 31, 1996
(in thousands)
Caremark South Carolina
Facilities Facilities
The Company Two months ended Two months ended
December 31, 1996 Debt February 28, 1996 February 28, 1996
(Historical) Retirement(a) (Historical) (Historical)
Net operating revenues $272,947 $ - $7,805 $1,133
Operating expenses 224,118 - 8,250 1,055
-------- ----- ------ ------
Operating income 48,829 - (445) 78
Interest expense, net 5,175 (804) 127 (1)
-------- ----- ------ ------
Income before income taxes,
minority interests and extraordinary item 43,654 804 (572) 79
Income taxes 16,351 - (232) -
-------- ----- ------ ------
Income before minority interest and
extraordinary item 27,303 804 (340) 79
Minority interest in income of
consolidated subsidiaries 3,578 - - -
-------- ----- ------ ------
Income before extraordinary item $ 23,725 $ 804 $ (340) $ 79
======== ===== ====== ======
Income per share before extraordinary item $ .55
========
Weighted average number of common shares and
equivalents outstanding 42,988
========
New West Michigan North Carolina
Facilities Facilities Facilities
December 31, 1996 December 31, 1996 December 31, 1996
(Historical) (Historical) (Historical)
Net operating revenues $22,883 $13,730 $17,301
Operating expenses 20,668 12,144 16,179
------- ------- -------
Operating income 2,215 1,586 1,122
Interest expense, net 48 24 215
------- ------- -------
Income before income taxes,
minority interests and extraordinary item 2,167 1,562 907
Income taxes 34 47 -
------- ------- -------
Income before minority interest and
extraordinary item 2,133 1,515 907
Minority interest in income of
consolidated subsidiaries - - -
------- ------- -------
Income before extraordinary item $ 2,133 $ 1,515 $ 907
======= ======= =======
Income per share before extraordinary item
Weighted average number of common shares and
equivalents outstanding
Rogosin Other
Facilities Insignificant
December 31, 1996 Acquisitions Pro Forma
(Historical) (Historical) Adjustments Combined
Net operating revenues $16,816 $66,485 $ (66)(b) $419,034
Operating expenses 15,476 59,033 9,710 (c) 366,633
------- ------- -------- --------
Operating income 1,340 7,452 (9,776) 52,401
Interest expense, net - (4) (765)(d) 24,964
20,949 (e)
------- ------- -------- --------
Income before income taxes,
minority interests and extraordinary item 1,340 7,456 (29,960) 27,437
Income taxes - 493 (6,955)(f) 9,738
------- ------- -------- --------
Income before minority interest and
extraordinary item 1,340 6,963 (23,005) 17,699
Minority interest in income of
consolidated subsidiaries - - (8)(g) 3,570
------- ------- -------- --------
Income before extraordinary item $ 1,340 $ 6,963 $(22,997) $ 14,129
====== ======= ======== ========
Income per share before extraordinary item $ 0.32
========
Weighted average number of common shares and
equivalents outstanding 800 43,788
======= ========
F-58
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
1. BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Statement of Income for the nine months ended
September 30, 1997 gives effect to the acquisition by the Company of the New
West Facilities, the Michigan Facilities, the North Carolina Facilities, the
Rogosin Facilities and other individually insignificant acquisitions
consummated during the period January 1, 1997 through December 19, 1997, and
individually insignificant acquisitions which were probable as of December 19,
1997, in each case as if such acquisitions were consummated on January 1,
1997.
The Unaudited Pro Forma Combined Statement of Income for the nine months ended
September 30, 1996 gives effect to the acquisition by the Company of the
Caremark Facilities; the South Carolina Facilities; the New West Facilities;
the Michigan Facilities; the North Carolina Facilities; the Rogosin
Facilities; and other individually insignificant acquisitions consummated
during the period January 1, 1997 through December 19, 1997, and individually
insignificant acquisitions which were probable as of December 19, 1997, in
each case as if such acquisitions were consummated on January 1, 1996. The
Unaudited Pro Forma Combined Statement of Income for the nine months ended
September 30, 1996 also gives effect to the Debt Retirement as if such
transaction occurred on January 1, 1996.
The Unaudited Pro Forma Combined Statement of Income for the year ended
December 31, 1996 gives effect to the acquisition by the Company of the
Caremark Facilities, the South Carolina Facilities, the New West Facilities,
the Michigan Facilities, the North Carolina Facilities, the Rogosin
Facilities and other individually insignificant acquisitions consummated
during the period January 1, 1997 through December 31, 1997, and individually
insignificant acquisitions which were probable as of December 19, 1997, in
each case as if such acquisitions were consummated on January 1, 1996. The
Unaudited Pro Forma Combined Statement of Income for the year ended December
31, 1996 also gives effect to the Debt Retirement as if such transaction
occurred on January 1, 1996.
The pro forma adjustments are based on consideration exchanged, including the
estimated fair value of assets acquired and liabilities assumed. The actual
adjustments, which will be based on valuations of fair value as of the date of
acquisition, may differ from those made herein. The Company does not believe
the effect of any adjustments would be material.
Net income per common share data and weighted average number of common shares
and equivalents outstanding for the nine month periods ended September 30,
1997 and 1996 and for the year ended December 31, 1996 have been retroactively
restated to reflect the five-for-three stock split which occurred in October
1997.
2. PRO FORMA ADJUSTMENTS
(a) To reflect the Debt Retirement as if it occurred on January 1, 1996 by
recording the pro forma effect of the reduction in interest expense. The
Company retired the remaining 12% senior subordinated discount notes for
$68,499,000 including consent payments of $1,100,000. These repurchases
resulted in an extraordinary loss of $7.7 million.
(b) To eliminate management fees earned by the combined entities.
(c) To amortize goodwill, non-compete agreements and patient charts resulting
from the acquisitions on a straight-line basis over 25 to 40, 10 and 7
years, respectively.
(d) To eliminate interest expense on borrowings not assumed by the Company.
(e) To record interest expense resulting from acquisitions funded by borrowings
from the senior credit facility with an assumed interest rate of 8% and
assuming that all acquisitions during the period were funded by borrowings
as discussed in Note a) in the Notes to Unaudited Proforma Combined Balance
Sheet.
F-59
(f) To record income tax effects related to the pro forma adjustments.
(g) To record the minority interest income from two partnerships acquired (see
note (c) to the Unaudited Pro Forma Combined Balance Sheet).
(h) Income per share and weighted average number of common shares and
equivalents outstanding assume that shares issued in the April 3, 1996
Secondary Offering (the "Secondary Offering") to the extent that cash
generated from such shares was used to purchase facilities and was
outstanding from January 1, 1996 to the date of the Secondary Offering as
follows:
Caremark Facilities 1,560,000
South Carolina Facilities 359,000
Share amounts were derived by taking the total purchase price of each
significant acquisition divided by the proceeds per share from the
Secondary Offering of $31.42 per share. As these acquisitions took place in
March 1996, these shares were factored into the weighted average number of
common shares and equivalents outstanding for an additional three months.
F-60
TOTAL RENAL CARE HOLDINGS, INC.
INDEX TO EXHIBITS
Number Description of Exhibit Page
Number
10.1 Revolving Credit Agreement, dated as of October 24, 1997,
by and among Total Renal Care Holdings, Inc., the lenders
thereto, DLJ Capital Funding, Inc., as Syndication Agent,
First Union National Bank, as Documentation Agent, and
the Bank of New York, as Administrative Agent (the
"Revolving Credit Agreement").*
10.2 Amendment No. 1 and Consent No. 1, dated as of December
1, 1997, to the Revolving Credit Agreement.
10.3 Term Loan Agreement, dated as of October 24, 1997, by and
among Total Renal Care Holdings, Inc., the lenders
thereto, DLJ Capital Funding, Inc., as Syndication Agent,
First Union National Bank, as Documentation Agent, and
the Bank of New York, as Administrative Agent (the "Term
Loan Agreement").*
10.4 First Amendment, Dated December 1, 1997, to the Term Loan
Agreement.
10.5 Subsidiary Guaranty dated as of October 24, 1997 by Total
Renal Care, Inc., TRC West, Inc. and Total Renal Care
Acquisition Corp. in favor of and for the benefit of the
Bank of New York, as Collateral Agent, the lenders to the
Revolving Credit Agreement, the lenders to the Term Loan
Agreement, the Term Agent (as defined therein), the
Acknowledging Interest Rate Exchangers (as defined
therein) and the Acknowledging Currency Exchangers (as
defined therein).
10.6 Borrower Pledge Agreement dated as of October 24, 1997
and entered into by and between Total Renal Care
Holdings, Inc., and the Bank of New York, as Collateral
Agent, the lenders to the Revolving Credit Agreement, the
lenders to the Term Loan Agreement, the Term Agent (as
defined therein), the Acknowledging Interest Rate
Exchangers (as defined therein) and the Acknowledging
Currency Exchangers (as defined therein).
10.7 Subsidiary Pledge Agreement dated as of October 24, 1997
by Total Renal Care, Inc., TRC West, Inc. and Total Renal
Care Acquisition Corp., and the Bank of New York, as
Collateral Agent, the lenders to the Revolving Credit
Agreement, the lenders to the Term Loan Agreement, the
Term Agent (as defined therein), the Acknowledging Interest
Rate Exchangers (as defined therein) and the Acknowledging
Currency Exchangers (as defined therein).
23.1 Consent of Price Waterhouse LLP.
- -------------
* The registrant agrees to furnish supplementally a copy of any schedule thereto
to the Commission upon its request.