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) January 22, 1998 ----------------------------- 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 EXHIBIT. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. PAGE ---- Financial Statements of South Brooklyn Nephrology Center, Inc. F-1 (b) PRO FORMA FINANCIAL INFORMATION. Unaudited Pro Forma Financial Statements F-11 (c) EXHIBITS. 23.1 Consent of Maier Markey & Menashi LLP. 2 - ------------ 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: January 21, 1998 By:/s/ John E. King ----------------------------- John E. King Vice President and Chief Financial Officer 3 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. December 31, 1996 and 1995 F-1 INDEPENDENT AUDITOR'S REPORT To the Stockholders South Brooklyn Nephrology Center, Inc. Brooklyn, New York We have audited the accompanying balance sheets of South Brooklyn Nephrology Center, Inc. (a Subchapter S Corporation) as of December 31, 1996 and 1995 and the related statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Brooklyn Nephrology Center, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Maier Markey & Menashi LLP March 14, 1997 Larchmont, New York F-2 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. BALANCE SHEETS December 31, ------------ September 30, 1996 1995 1997 ----------- ----------- ------------- (unaudited) ASSETS ------ Current assets: Cash $ - $ - $ 76,895 Accounts receivable, less allowance for doubtful accounts of $67,824 in 1996 and $65,692 in 1995 1,095,738 1,065,052 1,443,510 Medical and pharmacy supplies 100,180 95,189 114,239 Prepaid expenses 69,312 108,291 113,150 Deferred income taxes 2,959 1,744 2,959 Other receivables 476,200 416,815 - ---------- ----------- ----------- Total current assets 1,744,389 1,687,091 1,750,753 Property, plant and equipment 469,822 646,952 349,727 Deposits 4,895 4,895 4,895 ----------- ----------- ----------- $ 2,219,106 $ 2,338,938 $ 2,105,375 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Cash overdraft $ 37,944 $ 85,965 $ - Accounts payable 883,652 945,735 876,849 Loans payable to stockholders 100,500 110,500 100,500 Accrued expenses and other current liabilities 293,559 241,449 272,895 ----------- ----------- ----------- Total current liabilities 1,315,655 1,383,649 1,250,244 ----------- ----------- ----------- Deferred income taxes payable - noncurrent - 3,871 - Commitments - - - Stockholders' equity: Common stock, no par value, 200 shares authorized, issued and outstanding 40,216 40,216 40,216 Retained earnings 863,235 911,202 814,915 ----------- ----------- ----------- Total stockholders' equity 903,451 951,418 855,131 ----------- ----------- ----------- $ 2,219,106 $ 2,338,938 $ 2,105,375 =========== =========== =========== The accompanying notes are an integral part of these statements. F-3 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. STATEMENTS OF OPERATIONS Nine Months Ended Year Ended December 31, September 30, -------------------------- -------------------------- 1996 1995 1996 1997 ---------- ---------- ---------- ---------- (unaudited) (unaudited) Revenue: Net patient service revenue $6,932,486 $6,661,552 $4,898,888 $5,699,331 Interest revenue - - - 3,220 ---------- ---------- ---------- ----------- Total revenue 6,932,486 6,661,552 4,898,888 5,702,551 ---------- ---------- ---------- ----------- Operating expenses: Staff salaries and contract labor 2,035,555 1,799,952 1,477,437 1,645,512 Officers' salaries 479,000 674,900 104,000 180,000 Employee benefits and payroll taxes 457,345 347,042 317,434 339,407 Purchased diagnostic services 78,372 41,164 56,172 20,000 Medical and pharmacy supplies 2,686,615 2,423,640 1,973,605 2,194,654 Lab and pharmacy fees 13,096 10,773 9,974 6,446 Equipment repairs and maintenance 128,247 84,480 97,347 88,653 Rent, real estate and commercial rent tax 191,714 223,182 147,868 181,322 Depreciation and amortization 233,621 223,275 175,722 167,400 Interest expense 485 23,035 485 - Bad debt expense 60,000 60,000 45,000 45,000 Health facility assessment fees 40,958 39,538 28,972 31,560 Accounting and legal fees 54,946 43,211 51,599 28,195 Insurance 43,439 39,075 32,312 33,136 Utilities 64,870 51,913 49,980 46,438 Communications 35,811 29,724 25,571 30,883 Advertising 28,228 10,158 25,556 15,213 Office supplies 14,031 11,988 9,868 11,228 Repairs and maintenance 94,102 33,729 66,736 60,033 Rubbish removal 44,861 49,389 34,168 31,170 Travel and entertainment 4,350 4,293 465 - Patient transportation 135,498 26,325 97,161 77,898 Delivery and postage 16,561 29,493 13,283 7,854 Contributions 2,050 2,300 2,050 - Patient insurance 4,759 1,146 - - Miscellaneous expense 23,400 7,481 21,099 22,929 ---------- ---------- ---------- ----------- Total operating expenses 6,971,914 6,291,206 4,863,864 5,264,931 ---------- ---------- ---------- ----------- Net income (loss) before income taxes (39,428) 370,346 35,024 437,620 Provision for income taxes 8,539 36,565 8,000 54,800 ---------- ---------- ---------- ---------- Net income (loss) $ (47,967) $ 333,781 $ 27,024 $ 382,820 ========== ========== ========== ========== The accompanying notes are an integral part of these statements. F-4 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Common Stock Retained (No Par) Earnings Total -------- -------- ----- Balance, December 31, 1994 $ 40,216 $ 577,421 $ 617,637 Net income - 333,781 333,781 -------- --------- --------- Balance, December 31, 1995 40,216 911,202 951,418 Net loss - (47,967) (47,967) -------- --------- --------- Balance, December 31, 1996 $ 40,216 $ 863,235 $ 903,451 ======== ========= ========= The accompanying notes are an integral part of these statements. F-5 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. STATEMENTS OF CASH FLOWS Year Ended Nine months ended December 31, September 30, September 30, 1996 1995 1996 1997 ----- ---- ---- ---- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(47,967) $ 333,781 $ 27,024 $ 382,820 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 233,621 223,275 175,722 167,400 Deferred income taxes (5,086) 14,140 - - (Increase) decrease in: Accounts receivable (30,686) (60,307) (11,150) (347,772) Medical and pharmacy supplies (4,991) (5,299) (49,484) (14,059) Prepaid expenses 38,979 (751) 17,802 (43,838) Other receivables (59,385) (76,587) (6,185) 45,060 Increase (decrease) in: Accounts payable (62,083) 117,718 (15,964) (6,803) Accrued expenses and other current liabilities 52,110 (192,475) 69,226 (20,664) -------- --------- -------- -------- Net cash provided by operating activities 114,512 353,495 206,991 162,144 -------- --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (56,491) (101,399) (54,092) (47,305) -------- --------- -------- -------- Net cash used by investing activities (56,491) (101,399) (54,092) (47,305) -------- --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of stockholder loans payable (10,000) - (10,000) - -------- --------- -------- -------- Net cash used by financing activities (10,000) - (10,000) - -------- --------- -------- -------- Net increase in cash 48,021 252,096 142,899 114,839 Cash overdraft at beginning of period (85,965) (338,061) (85,965) (37,944) -------- --------- -------- -------- Cash overdraft at end of period $(37,944) $ (85,965) $ 56,934 $ 76,895 ======== ========= ======== ======== Supplemental cash flow disclosures: Cash paid during the period for: Interest $ 485 $ 23,304 ======== ========= Income taxes $ 21,975 $ 23,190 ======== ========= The accompanying notes are an integral part of these statements. F-6 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of significant accounting policies - --------------------------------------------------- The Company - ----------- South Brooklyn Nephrology Center, Inc. (the "Company") provides end stage renal disease dialysis services. The Company was incorporated in 1981. Subchapter S - ------------ The Company has elected for federal and state purposes to have its taxable net income or loss reported by its stockholders. Therefore, the provision and liability for income taxes is for the New York City general corporation tax and the New York State surcharge tax on Subchapter S corporations. Net patient service revenue - --------------------------- Patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered. Current and prior years' payments under third-party payer agreements are subject to audit and retroactive adjustment based on industry wide and Company specific data. Provisions for estimated third-party payer rate adjustments are provided in the period the related services are rendered. Differences between the estimated amounts accrued and interim and final settlements are reported in operations in the year of settlement. Reclassifications - ----------------- Certain accounts in the prior year-financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements. Cash equivalents - ---------------- For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Medical and pharmacy supplies - ----------------------------- Medical and pharmacy supplies are stated at the lower of cost (generally determined on a first-in, first-out basis) or market. Depreciation - ------------ The cost of property, plant, and equipment is depreciated over the estimated useful lives of the related assets pursuant to declining balance and straight-line methods for financial reporting purposes. F-7 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. NOTES TO FINANCIAL STATEMENTS Note 1 -- Summary of significant accounting policies (continued) - ---------------------------------------------------------------- Depreciation (continued) - ------------------------ Expenditures for maintenance and repairs are charged to expense and renewals and betterments are capitalized. Upon sale or retirement the cost of the asset and the related accumulated depreciation are removed from the accounts, and the remaining gain or loss is included in the results of operations. 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 financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimated. 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 year. Note 2 - Concentrations of credit risk - -------------------------------------- The Company has significant concentrations of receivables for patient care from government related programs and Empire Blue Cross/Blue Shield. Note 3 - Property, plant & equipment - ------------------------------------ Following is a summary of property, plant, and equipment - at cost, less accumulated depreciation and amortization: 1996 1995 ---- ---- Leasehold improvements $ 268,542 $ 261,584 Equipment 1,292,829 1,245,945 Furniture and fixtures 105,945 103,296 ---------- ---------- 1,667,316 1,610,825 Less: accumulated depreciation and amortization (1,197,494) (963,873) ---------- ---------- $ 469,822 $ 646,952 ========== ========== The property, plant, and equipment has been pledged as collateral to guarantee a loan to the Company's stockholders (see Note 4). F-8 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. NOTES TO FINANCIAL STATEMENTS Note 4 - Loans payable to stockholders - -------------------------------------- The Company pledged its property, plant and equipment as collateral for guarantees on a revolving operating loan made by IBJ Schroder Bank & Trust Company to the stockholders of the Company. The proceeds of the operating loan were advanced by the stockholders to the Company for its capital investment and working capital needs. The operating loan was repaid in 1996. Following is a summary of the loans payable to stockholders: 1996 1995 ---- ---- Revolving operating loan payable to stockholders on demand with interest payable monthly at the rate of prime plus 1.5% secured by property, plant & equipment (see Note 3) $ - $ 10,000 Short-term loan payable to stockholders 100,500 100,500 --------- --------- $ 100,500 $ 110,500 ========= ========= Note 5 - Income taxes - --------------------- Deferred taxes are computed based on the tax liability or benefit in future years of the reversal of temporary differences in the recognition of income or deduction of expenses between financial and tax reporting purposes. The principal causes of the differences result from using the allowance method of accounting for doubtful accounts for financial statement purposes and the direct write-off method for income tax purposes and from the use of different depreciation methods for financial reporting and for income tax purposes. The components of income tax expense are: 1996 1995 ---- ---- Current $ 13,625 $ 22,425 Deferred (5,086) 14,140 --------- --------- $ 8,539 $ 36,565 ========= ========= F-9 SOUTH BROOKLYN NEPHROLOGY CENTER, INC. NOTES TO FINANCIAL STATEMENTS Note 6-Commitments: - ------------------- The Company rents its operating facility under the terms of a lease expiring June 30, 2001. Minimum future payments under the remaining lease terms as of December 31, 1996 are: 1997 $ 221,246 1998 233,520 1999 242,861 2000 252,575 2001 132,186 ----------- $ 1,082,388 =========== In addition, the lease requires the Company to pay as additional rent a portion of real estate tax escalation over the base year amount, which was approximately $37,000 in 1996 and $39,000 in 1995. The amount charged to operations for rent expense was $154,700 in 1996 and $179,000 in 1995. Note 7 - Subsequent events - -------------------------- In 1997 the Company obtained a two year $250,000 revolving line of credit from First Union National Bank. The revolving line of credit bears interest at a variable rate equal to the bank's prime rate, is secured by a blanket lien on all assets of the Company, and is personally guaranteed by the Company's stockholders. F-10 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"); South Brooklyn Nephrology Center, Inc., which is expected to be acquired during the first quarter of 1998 (the "South Brooklyn Facilities"); and certain other individually insignificant acquisitions consummated during the period from October 1, 1997 through January 22, 1998, and individually insignificant acquisitions which were probable as of January 22, 1998. 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; the South Brooklyn Facilities; and other individually insignificant acquisitions consummated during the period January 1, 1997 through January 22, 1998, and individually insignificant acquisitions which were probable as of January 22, 1998. 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; the South Brooklyn Facilities; and other individually insignificant acquisitions consummated during the period January 1, 1997 through January 22, 1998, and individually insignificant acquisitions which were probable as of January 22, 1998. 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; the South Brooklyn Facilities; and other individually insignificant acquisitions consummated during the period January 1, 1997 through January 22, 1998, and individually insignificant acquisitions which were probable as of January 22, 1998. 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-11 TOTAL RENAL CARE HOLDINGS, INC. Unaudited Pro Forma Combined Balance Sheet September 30, 1997 (in thousands) The North South Other Company Carolina Rogosin Brooklyn Insignificant (Historical) Facilities Facilities Facilities Acquisitions Cash and cash equivalents $ 15,455 $ 72 $ 4 $ 77 $ 222 Accounts receivable, net 131,744 2,636 5,519 1,444 1,784 Other current assets 24,778 488 219 230 4 -------- ------- ------- ------- ------- Total current assets 171,977 3,196 5,742 1,751 2,010 Property & equipment, net 84,846 4,876 2,911 349 3,731 Intangible assets, net 286,210 - - - - Other assets 11,784 626 - 5 - -------- ------- ------- ------- ------- $554,817 $ 8,698 $ 8,653 $ 2,105 $ 5,741 ======== ======= ======= ======= ======= Current liabilities $ 28,784 $ 3,970 $ 2,190 1,250 915 Long-term debt 253,880 304 - - 2,598 - Other long-term liabilities 2,856 1,483 814 - 100 Minority interest 7,640 - - - - Common stock 44 - - 40 120 Additional paid-in capital 260,157 - - - 1,510 Notes receivable from stockholders (2,975) - - - - Retained earnings 4,431 2,941 5,649 815 498 -------- ------- ------- ------- ------- $554,817 $ 8,698 $ 8,653 $ 2,105 $ 5,741 ======== ======= ======= ======= ======= Pro Forma Adjustments Combined Cash and cash equivalents $ (375) (b) $ 15,455 Accounts receivable, net (9,752) (b) 133,375 Other current assets (941) (b) 24,778 -------- -------- Total current assets (11,068) 173,608 Property & equipment, net (1,680) (b) 95,033 Intangible assets, net 108,327 (a) 394,537 Other assets (631) (b) 11,784 -------- -------- $ 94,948 $674,962 ======== ======== Current liabilities (8,110) (b) $ 28,999 Long-term debt (2,902) (b) 371,164 117,284 (a) Other long-term liabilities (2,397) (b) 2,856 Minority interest 2,646 (c) 10,286 Common stock (160) (d) 44 Additional paid-in capital (1,510) (d) 260,157 Notes receivable from stockholders - (2,975) Retained earnings (9,903) (d) 4,431 -------- -------- $ 94,948 $674,962 ======== ======== F-12 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, the South Brooklyn 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, the South Brooklyn Facilities and the other Insignificant Acquisitions as follows (in thousands): NORTH SOUTH OTHER CAROLINA ROGOSIN BROOKLYN INSIGNIFICANT FACILITIES FACILITIES FACILITIES ACQUISITIONS TOTAL Purchase Price $49,300 $18,290 $10,500 $39,194 $117,284 Net book value of assets acquired 3,000 1,912 949 3,096 8,957 ------- ------- ------- ------- -------- Purchase price allocated to intangible assets $46,300 $16,378 $ 9,551 $36,098 $108,327 ======= ======= ======= ======= ======== The purchase prices of the North Carolina Facilities, the Rogosin Facilities, the South Brooklyn 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 January 22, 1998.) 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-13 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 South Brooklyn Facilities Nine months ended Nine months ended September 30, 1997 September 30, 1997 (Historical) (Historical) Net operating revenues $13,254 $5,703 Operating expenses 13,351 5,265 ------ ------ Operating income (97) 438 Interest expense, net - - ------ ------ Income before income taxes, minority interests and extraordinary item (97) 438 Income taxes - 55 ------ ------ Income before minority interest and extraordinary item (97) 383 Minority interest in income of consolidated subsidiaries - - ------ ------ Income before extraordinary item $ (97) $ 383 ====== ====== Income per share before extraordinary item Weighted average number of common shares and equivalents outstanding Other Insignificant Acquisitions Pro Forma (Historical) Adjustments Combined Net operating revenues $28,653 $ (1,534) (b) $380,801 Operating expenses 25,445 4,657 (c) 325,730 ------ -------- -------- Operating income 3,208 (6,191) 55,071 Interest expense, net 10 (593) (d) 18,098 10,699 (e) ------ -------- -------- Income before income taxes, minority interests and extraordinary item 3,198 (16,297) 36,973 Income taxes 512 (5,092) (f) 13,755 ------ -------- -------- Income before minority interest and extraordinary item 2,686 (11,205) 23,218 Minority interest in income of consolidated subsidiaries - (17) (g) 3,176 ------ -------- -------- Income before extraordinary item $2,686 $(11,188) $ 20,042 ====== ======== ======== Income per share before extraordinary item $ 0.44 ======== Weighted average number of common shares and equivalents outstanding 45,146 ======== F-14 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 Nine months ended Two months ended Two months ended Nine 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 South Brooklyn Facilities Facilities Facilities Facilities Nine months ended Nine months ended Nine months endedended Nine months ended September 30, 1996 September 30, 1996 September 30, 1996, 1996 September 30, 1996 (Historical) (Historical) (Historical) ) (Historical) Net operating revenues $10,298 $15,020 $12,493 $4,899 Operating expenses 9,108 13,090 11,277 4,864 ------- ------- ------- -------- Operating income 1,190 1,930 1,216 35 Interest expense, net 18 216 -- -- ------- ------- ------- -------- Income before income taxes, minority interests and extraordinary item 1,172 1,714 1,216 35 Income taxes 35 -- -- 8 ------- ------- ------- -------- Income before minority interest and extraordinary item 1,137 1,714 1,216 27 Minority interest in income of consolidated subsidiaries -- -- -- -- ------- ------- ------- -------- Income before extraordinary item $ 1,137 $ 1,714 $ 1,216 $ 27 ======= ======= ======= ======== Income per share before extraordinary item Weighted average number of common shares and equivalents outstanding Other Insignificant Acquisitions Pro Forma (Historical) Adjustments Combined Net operating revenues $39,527 $ (67) (b) $296,423 Operating expenses 36,587 6,912 (c) 260,564 ------- -------- -------- Operating income 2,940 (6,979) 35,859 Interest expense, net 62 (606) (d) 17,284 -- 14,373 (e) -- ------- -------- -------- Income before income taxes, minority interests and extraordinary item 2,878 (20,746) 18,575 Income taxes 370 (5,052) (f) 6,692 ------- -------- -------- Income before minority interest and extraordinary item 2,508 (15,694) 11,883 Minority interest in income of consolidated subsidiaries -- (2) (g) 2,294 ------- -------- -------- Income before extraordinary item $ 2,508 $(15,692) $ 9,589 ======= ======== ======== Income per share before extraordinary item $ 0.22 ======== Weighted average number of common shares and equivalents outstanding 800 (h) 43,148 ======== ======== F-15 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 South Brooklyn Other Facilities Facilities Insignificant December 31, 1996 December 31, 1997 Acquisitions (Historical) (Historical) (Historical) Net operating revenues $16,816 $ 6,932 $ 52,702 Operating expenses 15,476 6,972 48,782 ------- -------- -------- Operating income 1,340 (40) 3,920 Interest expense, net - - 82 ------- -------- -------- Income before income taxes, minority interests and extraordinary item 1,340 (40) 3,838 Income taxes - 8 493 ------- -------- -------- Income before minority interest and extraordinary item 1,340 (48) 3,345 Minority interest in income of consolidated subsidiaries - - - ------- -------- -------- Income before extraordinary item $ 1,340 $ (48) $ 3,345 ====== ======== ======== Pro Forma Adjustments Combined Net operating revenues $ (66) (b) $412,183 Operating expenses 9,047 (c) 362,691 -------- -------- Operating income (9,113) 49,492 Interest expense, net (764) (d) 23,266 19,164 (e) -------- -------- Income before income taxes, minority interests and extraordinary item (27,513) 26,226 Income taxes (7,458) (f) 9,243 -------- -------- Income before minority interest and extraordinary item (20,055) 16,983 Minority interest in income of consolidated subsidiaries (9) (g) 3,569 -------- -------- Income before extraordinary item $(20,046) $ 13,414 ======== ======== Income per share before extraordinary item $ 0.31 ======== Weighted average number of common shares and equivalents outstanding 800 (h) 43,788 ======== ======== F-16 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, the South Brooklyn Facilities and other individually insignificant acquisitions consummated during the period January 1, 1997 through January 22, 1998, and individually insignificant acquisitions which were probable as of January 22, 1998, 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, the South Brooklyn Facilities and other individually insignificant acquisitions consummated during the period January 1, 1997 through January 22, 1998, and individually insignificant acquisitions which were probable as of January 22, 1998, 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, the South Brooklyn Facilities and other individually insignificant acquisitions consummated during the period January 1, 1997 through January 22, 1998, and individually insignificant acquisitions which were probable as of January 22, 1998, 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-17 (f) To record income tax effects related to the pro forma adjustments. (g) To record the minority interest in 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, were used to purchase facilities and were 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-18 TOTAL RENAL CARE HOLDINGS, INC. INDEX TO EXHIBIT Number Description of Exhibit Page Number 23.1 Consent of Maier Markey & Menashi LLP.