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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-4034
TOTAL RENAL CARE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 51-0354549
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503-5517
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (310) 792-2600
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par
value $0.001 per share
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 16, 1998, based on the price at
which the Common Stock was sold as of March 16, 1998, was $2,833,602,632.
The number of shares of the Registrant's Common Stock outstanding as of
March 16, 1998 was 80,463,321 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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On February 27, 1998, the Registrant acquired Renal Treatment Centers, Inc.
("RTC") in a transaction accounted for as a pooling of interests. Accordingly,
the Registrant's consolidated financial statements have been restated to
include the consolidated financial statements of RTC for all periods presented
(see Note 1 to the Consolidated Financial Statements). Such restated financial
statements and a corresponding update of Items 6 and 7 of the originally filed
Form 10-K are included herein. General information in the originally filed
Form 10-K was presented as of March 31, 1997 and has not been updated in this
amended filing.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected consolidated financial data of the
Company for the periods indicated. The consolidated financial data as of May
31, 1993, 1994 and 1995 and as of December 31, 1995, 1996 and 1997 and for
each of the years in the three year period ended May 31, 1995, the seven month
period ended December 31, 1995, and the years ended December 31, 1996 and 1997
have been derived from the Company's audited consolidated financial
statements. The consolidated financial data for the seven months ended
December 31, 1994 and the year ended December 31, 1995 are unaudited and
include all adjustments consisting solely of normal recurring adjustments
necessary to present fairly the Company's results of operations for the period
indicated. The results of operations for the seven month periods ended
December 31, 1994 and 1995 are not necessarily indicative of the results which
may occur for the full fiscal year. The following financial and operating data
should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements filed as part of this Report.
SEVEN MONTHS
ENDED DECEMBER
YEARS ENDED MAY 31,(1) 31, YEARS ENDED DECEMBER 31,
-------------------------- ----------------- --------------------------
1993 1994 1995 1994 1995 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE)
INCOME STATEMENT
DATA:(2)(8)
Net operating revenues. $125,617 $153,513 $214,425 $122,065 $176,463 $299,411 $498,024 $760,997
Total operating
expenses(3)........... 108,243 133,211 182,251 104,053 143,196 247,925 427,520 636,217
-------- -------- -------- -------- -------- -------- -------- --------
Operating income....... 17,374 20,302 32,174 18,012 33,267 51,486 70,504 124,780
Interest expense, net.. 1,442 1,549 7,851 3,838 6,831 11,801 9,559 25,039
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes, minority
interests and
extraordinary item.... 15,932 18,753 24,323 14,174 26,436 39,685 60,945 99,741
Income taxes........... 5,181 6,208 7,827 4,759 9,931 13,841 22,960 40,212
-------- -------- -------- -------- -------- -------- -------- --------
Income before minority
interests and
extraordinary item.... 10,751 12,545 16,496 9,415 16,505 25,844 37,985 59,529
Minority interests in
income of consolidated
subsidiaries.......... 775 1,046 1,593 878 1,784 2,544 3,578 4,502
-------- -------- -------- -------- -------- -------- -------- --------
Income before
extraordinary item.... $ 9,976 $ 11,499 $ 14,903 $ 8,537 $ 14,721 $ 23,300 $ 34,407 $ 55,027
======== ======== ======== ======== ======== ======== ======== ========
Income per share before
extraordinary
item(4)(5)............ $ 0.33 $ 0.20 $ 0.26 $ 0.43 $ 0.46 $ 0.71
======== ======== ======== ======== ======== ========
MAY 31, DECEMBER 31,
------------------------- ----------------------------
1993 1994 1995 1995 1996 1997
(IN THOUSANDS)
BALANCE SHEET
DATA:(2)(9)
Working capital........ $18,569 $ 33,773 $ 42,918 $ 98,071 $184,975 $ 199,754
Total assets........... 73,038 103,628 218,081 338,866 665,221 1,278,235
Long-term debt ........ 11,833 17,531 115,522 96,979 233,126 724,226
Mandatory redeemable
Common Stock(6)....... 9,528 3,990
Stockholders'
equity(7)............. 31,493 65,391 61,749 193,162 359,099 428,830
1
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(1) In 1995, the Company changed its fiscal year end to December 31 from May
31.
(2) The August 1994 Transaction and subsequent acquisitions had a significant
impact on the Company's capitalization and equity securities and on the
Company's results of operations. Consequently, the Balance Sheet Data as
of May 31, 1995 and as of December 31, 1995, 1996 and 1997 and the Income
Statement Data for the fiscal year ended May 31, 1995, for the seven
months ended December 31, 1995, and the years ended December 31, 1996 and
1997 are not directly comparable to corresponding information as of prior
dates and for prior periods, respectively.
(3) General and administrative expenses for the fiscal years ended May 31,
1993 and 1994 include overhead allocations by the Company's former parent
of $235,000 and $1,458,000, respectively. The overhead allocations for the
fiscal year ended May 31, 1993 were made using a different methodology
than that used in the fiscal year ended May 31, 1994 and the substantial
increase in that year reflects this change in methodology rather than a
change in the level of services provided. No overhead allocation was made
for the period from March 1, 1994 through the closing of the August 1994
Transaction, at which time the Company began to record general and
administrative expenses as incurred on a stand-alone basis. General and
administrative expenses for the fiscal year ended May 31, 1994 also
reflect $458,000 in expenses relating to a terminated equity offering.
(4) In December 1995, the Company recorded an extraordinary loss of $2,555,000
or $0.04 per share, net of tax, on the early extinguishment of debt. In
July and September 1996, the Company recorded a combined extraordinary
loss of $7,700,000 or $0.10 per share net of tax, on the early
extinguishment of debt. See Note 8 of Notes to Consolidated Financial
Statements.
(5) See additional income per share information in the Consolidated Statements
of Income. No income per share information is presented for the years
ended May 31, 1993 and 1994 as the Company was a wholly-owned subsidiary
during those periods.
(6) Mandatorily redeemable Common Stock represents shares of Common Stock
issued in certain acquisitions subject to put options that terminated upon
the completion of the Initial Public Offering.
(7) In connection with the August 1994 Transaction, the Company paid a special
dividend to Tenet Healthcare Corporation ("Tenet") of $81.7 million,
including $75.5 million in cash.
(8) The consolidated income statement data combine the Company's results of
operations for the years ended May 31, 1993, 1994 and 1995, the seven
months ended December 31, 1994 and 1995 and the years ended December 31,
1995, 1996 and 1997 with RTC's results of operations for the years ended
December 31, 1992, 1993 and 1994, the six months ended December 31, 1994
and 1995 and the years ended December 31, 1995, 1996 and 1997.
(9) The consolidated balance sheet data combine the Company's balance sheet as
of May 31, 1993, 1994, 1995 and December 31, 1995, 1996 and 1997 with
RTC's balance sheet as of December 31, 1992, 1993, 1994, 1995, 1996 and
1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes thereto contained elsewhere in this
Form 10-K.
BACKGROUND
The Company's wholly owned subsidiary Total Renal Care, Inc., formerly
Medical Ambulatory Care, Inc., was organized in 1979 by Tenet Healthcare
Corporation ("Tenet," formerly National Medical Enterprises, Inc.), to own and
operate Tenet's hospital-based dialysis services as freestanding dialysis
facilities and to acquire and develop additional dialysis facilities in
Tenet's markets. The Company was organized to facilitate the August 1994
Transaction which consisted of the sale by Tenet of approximately 75% of its
ownership interest to DLJ Merchant Banking Partners, L.P. and certain of its
affiliates ("DLJMB"), management of the Company and certain holders of debt
securities of the Company. In connection with the August 1994 Transaction, the
2
Company, NME Properties Corporation (a wholly-owned subsidiary of Tenet),
Tenet and DLJMB entered into a number of agreements relating to, among other
things, corporate governance, the provision of certain services to the Company
by Tenet, and restrictions on stock transfers.
In the August 1994 Transaction, the Company paid a special dividend of $81.7
million, including $75.5 million in cash, to Tenet out of the net proceeds
from (i) the issuance of units consisting of $100 million in principal amount
at maturity of 12% Senior Subordinated Discount Notes due 2004 (the "Discount
Notes"), which were issued at approximately 70% of par, and 1,000,000 shares
of Common Stock and (ii) borrowing under the Company's revolving credit
facility with The Bank of New York (the "TRC Credit Facility"). The Company
raised additional capital to fund the continuation of its growth strategy
through an initial public offering ("IPO") on October 30, 1995 in which the
Company issued and sold 11,500,000 shares of its Common Stock and raised gross
proceeds of $107 million. Concurrent with the IPO, the Company listed its
Common Stock on the New York Stock Exchange under the symbol "TRL." Subsequent
to the IPO, the Company changed its fiscal year end from May 31 to December
31.
The Company raised additional capital to further fund its growth strategy
with two secondary stock offerings in April and October of 1996 which raised
gross proceeds to the Company of approximately $135 million. In October of
1996 the Company increased its credit facility with the Bank of New York from
$130 million to $400 million (the "Credit Facility"). With the proceeds from
the IPO, the April 1996 secondary offering and the Credit Facility, the
Company was able to complete the early retirement of the Discount Notes. On
October 24, 1997, the Company increased the Credit Facility to an aggregate of
$1,050,000,000 in two bank facilities ("the Credit Facilities").
Following the August 1994 Transaction, the Company implemented a focused
strategy to increase net operating revenues per treatment and improve
operating income margins. The Company has significantly increased per-
treatment revenues through the addition of in-house clinical laboratory and
pharmacy services, improved pricing, and increased utilization of ancillary
services. To improve operating income, the Company began a systematic review
of the Company's vendor relations leading to the renegotiation of a number of
supply contracts and insurance arrangements that reduced operating expenses.
In addition the Company has focused on improving facility operating
efficiencies and leveraging corporate and regional management. These
improvements have been offset in part by increased amortization of goodwill
and other intangible assets relating to the Company's acquisitions (all of
which have been accounted for as purchase transactions, except the Merger) and
start-up expenses related to de novo developments.
The Company incurred approximately $70.4 million of indebtedness as a result
of the August 1994 Transaction. The related interest expense had a significant
impact on the Company's results of operations for subsequent periods. The
Company's results of operations for these periods have also been materially
affected by the implementation of the Company's growth strategy subsequent to
the August 1994 Transaction.
On February 27, 1998 the Company acquired Renal Treatment Centers, Inc.
("RTC"), with headquarters in Berwyn, Pennsylvania (the "Merger"). In
connection with the Merger, the Company issued 34,565,729 shares of its common
stock in exchange for all of the outstanding shares of RTC common stock. The
RTC merger transaction has been accounted for as a pooling of interests and as
such, the consolidated financial statements have been restated to include RTC
for all periods presented as described in Note 1 to the Consolidated Financial
Statements.
NET OPERATING REVENUES
Net operating revenues are derived primarily from four sources: (i)
outpatient facility hemodialysis services, (ii) ancillary services, including
EPO administration, clinical laboratory services and intravenous and oral
pharmaceutical products and services, (iii) home dialysis services and related
products and (iv) inpatient hemodialysis services provided to hospitalized
patients pursuant to arrangements with hospitals. Additional revenues are
derived from the provision of dialysis facility management services to certain
subsidiaries and affiliated and unaffiliated dialysis centers. The Company's
dialysis and ancillary services are reimbursed primarily under the Medicare
ESRD program in accordance with rates established by HCFA. Payments are also
provided by other third party payors, generally at rates higher than those
reimbursed by Medicare for up to the
3
first 21 months of treatment as mandated by law. Rates paid for services
provided to hospitalized patients are negotiated with individual hospitals.
For the year ended May 31, 1995, approximately 65% and 7% of the Company's net
operating revenues were derived from reimbursement under Medicare and
Medicaid, respectively. For the seven months ended December 31, 1995,
approximately 55% and 6% of the Company's net operating revenues were derived
from reimbursement under Medicare and Medicaid, respectively. For the years
ended December 31, 1996 and December 31, 1997, approximately 60% and 56%,
respectively, and 5% and 5%, respectively of the Company's net operating
revenues were derived from reimbursement under Medicare and Medicaid,
respectively. See "Item 1. Business--Operations--Sources of Revenue
Reimbursement."
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial and
operating information for each of the last two calendar years:
QUARTERS ENDED
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MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
---------- --------- -------------- ------------- ---------- --------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARES AND PER TREATMENT DATA)
Net operating
revenues........... $ 98,493 $ 117,719 $ 133,707 $ 148,105 $ 157,937 $179,715 $ 197,749 $ 225,596
Facility operating
expenses........... 67,878 80,947 92,289 103,066 107,728 121,373 131,670 150,219
General and
administrative
expenses........... 6,991 7,648 8,747 8,964 9,916 12,120 13,208 14,855
Operating income.... 12,512 17,547 18,437 22,008 24,596 28,694 33,287 38,203
Income before
extraordinary item. 5,655 9,002 8,731 11,019 11,788 13,470 14,632 15,137
Income per share
before
extraordinary item
(1)................ $ 0.08 $ 0.12 $ 0.12 $ 0.14 $ 0.15 $ 0.17 $ 0.19 $ 0.19
Outpatient
facilities......... 204 218 232 240 267 316 337 383
Treatments.......... 452,982 527,539 599,285 657,048 691,406 803,035 894,067 1,003,163
Net operating
revenues per
treatment.......... $ 217.43 $ 223.96 $ 231.76 $ 226.76 $ 228.43 $ 223.79 $ 221.18 $ 224.88
Operating income
margin............. 12.7% 14.9% 13.8% 14.9% 15.6% 16.0% 16.8% 16.9%
- -------
(1) See additional income per share information in Note 16 to the Consolidated
Financial Statements.
Utilization of the Company's services is generally not subject to material
seasonal fluctuations. The quarterly variations shown above reflect the impact
of increasing labor costs and decreasing margins related to the corresponding
costs of providing services and amortization of intangibles from acquired
facilities.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
information expressed as a percentage of net operating revenues for such
periods:
SEVEN MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
MAY 31, -------------- ----------------------------
1995 1994 1995 1995 1996 1997
---------- ------ ------ -------- -------- --------
Net operating revenues.. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Facility operating
expenses............... 68.4 68.3 65.3 66.3 69.1 67.1
General and
administrative
expenses............... 8.3 8.3 6.9 7.0 6.5 6.6
Provision for doubtful
accounts............... 2.6 2.9 2.6 2.5 3.2 2.7
Depreciation and
amortization........... 5.8 5.8 6.1 6.2 6.5 7.2
Merger expenses......... .3 .7 .6
Operating income........ 15.0 14.8 18.9 17.2 14.2 16.4
Interest expense, net of
interest income........ 3.6 3.1 3.9 3.9 1.9 3.3
Income taxes............ 3.7 3.9 5.6 4.6 4.6 5.3
Minority interests...... .7 .7 1.0 .8 .7 .6
Income before
extraordinary item..... 7.0 7.0 8.3 7.8 6.9 7.2
4
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net Operating Revenues. Net operating revenues increased $262,973,000 to
$760,997,000 for the year ended December 31, 1997 ("Year End 1997") from
$498,024,000 for the year ended December 31, 1996 ("Year End 1996")
representing a 52.8% increase. Of this increase $257,113,000 was due to
increased treatments from acquisitions, existing facility growth and from de
novo developments. The remainder was due to an increase in net operating
revenues per treatment which were $224.37 in Year End 1997 compared to $222.64
in Year End 1996. The increase in operating revenues per treatment was due to
increases in ancillary services utilization and in affiliated and unaffiliated
facility management fees.
Facility Operating Expenses. Facility operating expenses consist of costs
and expenses specifically attributable to the operation of dialysis
facilities, including operating and maintenance costs of such facilities,
equipment, direct labor, and supply and service costs relating to patient
care. Facility operating expenses increased $166,810,000 to $510,990,000 in
Year End 1997 from $344,180,000 in Year End 1996 and as a percentage of net
operating revenues, facility operating expenses decreased to 67.1% in Year End
1997 from 69.1% in Year End 1996. This decrease is mostly due to improvements
in labor and pharmaceutical costs as a percentage of revenues partially offset
by an increase in other facility expenses, consisting primarily of rent and
medical director fees. In December 1996, the Company implemented its best
demonstrated practices program which focuses primarily upon deriving
efficiencies in labor and supply costs.
General and Administrative Expenses. General and administrative expenses
include headquarters expense and administrative, legal, quality assurance,
information systems and centralized accounting support functions. General and
administrative expenses increased $17,749,000 to $50,099,000 in Year End 1997
from $32,350,000 in Year End 1996, and as a percentage of net operating
revenues, general and administrative expenses increased to 6.6% for Year End
1997 from 6.5% in Year End 1996. The increase was due to additional corporate
labor resources added to further the Company's growth via acquisitions
proportionately in excess of revenue growth.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $4,788,000 to $20,525,000 in Year End 1997 from $15,737,000 in Year
End 1996. As a percentage of net operating revenues, the provision for
doubtful accounts decreased to 2.7% in Year End 1997 from 3.2% in Year End
1996, due to better management of the collection process for patient secondary
balances remaining after Medicare, as the primary payor, has paid 80% of the
claim.
Depreciation and Amortization. Depreciation and amortization increased
$22,158,000 to $54,603,000 in Year End 1997 from $32,445,000 in Year End 1996,
and as a percentage of net operating revenues, depreciation and amortization
increased to 7.2% in Year End 1997 from 6.5% in Year End 1996. This increase
was attributable to increased amortization due to acquisition activity and
increased depreciation from new center leaseholds and routine capital
expenditures.
Merger Expenses. There were no merger expenses for the year ended December
31, 1997, as compared to $2,808,000 for the same period in 1996. For the year
ended December 31, 1996, merger expenses were incurred as a result of the
mergers by RTC which were completed during 1996 and were accounted for under
the pooling-of-interests method of accounting. Merger expenses include
investment banking, legal, accounting and other fees and expenses.
Operating Income. Operating income increased $54,276,000 to $124,780,000 in
Year End 1997 from $70,504,000 in Year End 1996, and as a percentage of net
operating revenues, operating income increased to 16.4% in Year End 1997 from
14.2% in Year End 1996. This increase in operating income as a percentage of
net operating revenue reflects a decrease in facility operating costs and the
provision for doubtful accounts offset by an increase in general and
administrative expenses, and depreciation and amortization.
Interest Expense. Interest expense, net of interest income, increased
$15,480,000 to $25,039,000 in Year End 1997 from $9,559,000 in Year End 1996,
and as a percentage of net operating revenues, interest expense, net of
interest income, was 3.3% in Year End 1997 and 1.9% in Year End 1996. Cash
interest expense during Year End 1997 was $28,214,000 and non-cash interest
during the same period was $0 versus $9,021,000 and $4,396,000 in Year End
1996, respectively. Non-cash interest expense during Year End 1996 was related
to the Company's Discount Notes which were completely retired through an early
extinguishment during the third
5
quarter of 1996. The increase in cash interest expense was due primarily to an
increase in borrowings made under the Company's credit facilities to fund the
Company's acquisitions.
Provision for Income Taxes. Provision for income taxes increased $17,252,000
to $40,212,000 in Year End 1997 from $22,960,000 in Year End 1996, and the
effective income tax rate after minority interests increased to 42.2% in Year
End 1997 from 40.0% in Year End 1996. The overall increase in the effective
tax rate primarily reflects non-deductible goodwill associated with stock
acquired, and to foreign net operating losses, for which no benefit was
recognized during 1997, from businesses in Argentina.
Minority Interests. Minority interests represent the pretax income earned by
physicians who directly or indirectly own minority interests in the Company's
partnership affiliates and the net income in two of the Company's corporate
subsidiaries. Minority interests increased $924,000 to $4,502,000 in Year End
1997 from $3,578,000 in Year End 1996, and as a percentage of net operating
revenues, minority interest decreased to 0.6% in Year End 1997 from 0.7% in
Year End 1996. This decrease in minority interest as a percentage of net
operating revenues is a result of a relative proportionate decrease in the
formation of partnership affiliates and subsidiaries as a percentage of total
new acquisitions.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net Operating Revenues. Net operating revenues increased $198,613,000 to
$498,024,000 for Year End 1996 from $299,411,000 for the year ended December
31, 1995 ("Year End 1995") representing a 66.3% increase. Of this increase
$191,811,000 was due to increased treatments from acquisitions, existing
facility growth and from de novo developments. The remainder was due to an
increase in net operating revenues per treatment which were $222.64 in Year
End 1996 compared to $219.60 in Year End 1995. The increase in net operating
revenues per treatment was due to the addition of the Company's ESRD
laboratory in 1995 resulting in a full year of revenue in 1996, an overall
increase in average reimbursement rates, increased ancillary services
utilization primarily in the administration of EPO, the opening of the
Company's oral pharmaceutical and IV therapy program, and an increase in
affiliated and unaffiliated facility management fees.
Facility Operating Expenses. Facility operating expenses increased
$145,526,000 to $344,180,000 in Year End 1996 from $198,654,000 in Year End
1995 and as a percentage of net operating revenues, facility operating
expenses increased to 69.1% in Year End 1996 from 66.3% in Year End 1995. In
Year End 1996 the increase in facility operating expenses as a percentage of
revenue primarily was due to increased labor and benefits partially incurred
as a result of utilizing existing employees of the acquired facilities during
transition periods after the acquisitions.
General and Administrative Expenses. General and administrative expenses
increased $11,350,000 to $32,350,000 in Year End 1996 from $21,000,000 in Year
End 1995, and as a percentage of net operating revenues, general and
administrative expenses declined to 6.5% in Year End 1996 from 7.0% in Year
End 1995. This decline as a percentage of net revenue is a result of revenue
growth and economies of scale achieved through the leveraging of corporate
staff across a higher revenue base.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $8,157,000 to $15,737,000 in Year End 1996 from $7,580,000 in Year
End 1995, and as a percentage of net operating revenues, provision for
doubtful accounts increased to 3.2% in Year End 1996 from 2.5% in Year End
1995. The increase is due to the recognition of an increase in uncollectible
accounts, primarily patient secondary amounts remaining after Medicare, as the
primary payor, paid 80% of the bill. The decrease in collectibility was caused
by RTC's conversion to a new system in late 1995.
Depreciation and Amortization. Depreciation and amortization increased
$13,842,000 to $32,445,000 in Year End 1996 from $18,603,000 in Year End 1995,
and as a percentage of net operating revenues, depreciation and amortization
increased to 6.5% in Year End 1996 from 6.2% in Year End 1995. This increase
was attributable to increased amortization due to acquisition activity and
increased depreciation from new center leaseholds and routine capital
expenditures.
6
Merger Expenses. Merger expenses increased 34.5% to $2,808,000 for the Year
End December 31,1996 from $2,088,000 for Year End 1995. The merger expenses
represented expenses incurred in connection with the completed mergers by RTC
which were accounted for under the pooling-of-interest method of accounting.
Merger expenses include investment banking, legal, accounting and other fees
and expenses.
Operating Income. Operating income increased $19,018,000 to $70,504,000 in
Year End 1996 from $51,486,000 in Year End 1995, and as a percentage of net
operating revenues, operating income decreased to 14.2% in Year End 1996 from
17.2% in Year End 1995. This decrease in operating income as a percentage of
revenue is primarily due to an increase in facility operating expenses,
provision for doubtful accounts and depreciation and amortization partially
offset by a decrease in general and administrative expenses as a percentage of
net operating revenues.
Interest Expense. Interest expense, net of interest income, decreased
$2,242,000 to $9,559,000 in Year End 1996 from $11,801,000 in Year End 1995,
and as a percentage of net operating revenues, interest expense, net of
interest income, was 1.9% in Year End 1996 and 3.9% in Year End 1995. Cash
interest expense during Year End 1996 was $9,021,000 and non-cash interest
during the same period was $4,396,000 versus $3,929,000 and $8,901,000 in Year
End 1995, respectively. The decrease in Year End 1996 non-cash interest
expense was due primarily to the early extinguishment of a portion of the
Discount Notes in December of 1995 and the remainder in the third quarter of
the year ended December 31, 1996 (as discussed in "Liquidity and Capital
Resources" below), and short term investment income earned on excess proceeds
from the public stock offerings in April and October, 1996.
Provision for Income Taxes. Provision for income taxes increased $9,119,000
to $22,960,000 in Year End 1996 from $13,841,000 in Year End 1995, and the
effective income tax rate before minority interests increased to 40.0% in Year
End 1996 from 37.3% in Year End 1995. The overall increase in the effective
tax rate reflects an increase in the blended state rates and additional non-
deductible goodwill associated with certain acquisitions of stock.
Minority Interests. Minority interests increased $1,034,000 to $3,578,000 in
Year End 1996 from $2,544,000 in Year End 1995, and as a percentage of net
operating revenues, minority interest decreased to 0.7% in Year End 1996 from
0.8% in Year End 1995. This decrease in minority interest as a percentage of
net operating revenues is a result of a relative proportionate decrease in the
formation of partnership affiliates and subsidiaries as a percentage of total
new acquisitions.
Extraordinary Loss. In December 1995 the Company redeemed 35% of the
accreted value of the Discount Notes for a total redemption price of
$31,912,000. In connection with this redemption, the Company recorded an
extraordinary loss of $2,555,000 (net of income tax effect). In July and
September 1996, the Company retired all remaining outstanding Notes for a
total redemption price of $68,499,000. In connection with these redemptions,
the Company recorded an extraordinary loss of $7,700,000 (net of income tax
effect).
Seven Months Ended December 31, 1995 compared to Seven Months Ended December
31, 1994
Net Operating Revenues. Net operating revenues increased $54,398,000 to
$176,463,000 for the seven months ended December 31, 1995 ("1995 Seven Month
Period") from $122,065,000 for the seven months ended December 31, 1994 ("1994
Seven Month Period") representing a 44.6% increase. The increase was due to
increased treatments from acquisitions, existing facility growth and de novo
developments. The remaining increase was attributable to an increase in
affiliated and unaffiliated facility management fees, the addition of TRC's
ESRD laboratory, an overall increase in reimbursement rates, increased
ancillary services utilization primarily in the administration of EPO and the
opening of the Company's oral pharmaceutical and IV therapy program.
Facility Operating Expenses. Facility operating expenses increased
$31,849,000 to $115,219,000 in the 1995 Seven Month Period from $83,370,000 in
the 1994 Seven Month Period and as a percentage of net
7
operating revenues, facility operating expenses declined to 65.3% in the 1995
Seven Month Period from 68.3% in the 1994 Seven Month Period. In the 1995
Seven Month Period the decrease in facility operating expenses as a percentage
of revenue was due to substantial reductions achieved in the costs of
providing services, including medical and pharmaceutical supplies, and overall
labor resource efficiencies.
General and Administrative Expenses. General and administrative expenses
increased $2,018,000 to $12,117,000 in the 1995 Seven Month Period from
$10,099,000 in the 1994 Seven Month Period, and as a percentage of net
operating revenues, general and administrative expenses declined to 6.9% in
the 1995 Seven Month Period from 8.3% in the 1994 Seven Month Period. This
decline as a percentage of net revenue is a result of revenue growth and
economies of scale achieved through the leveraging of corporate staff across a
higher revenue base.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $1,066,000 to $4,552,000 in the 1995 Seven Month Period from
$3,486,000 in the 1994 Seven Month Period, and as a percentage of net
operating revenues, provision for doubtful accounts decreased to 2.6% in the
1995 Seven Month Period from 2.9% in the 1994 Seven Month Period. The
provision for doubtful accounts is influenced by the amount of net operating
revenues generated from non-governmental payor sources. The decrease for the
1995 Seven Month Period reflects better management of accounts receivable,
including increased collection efforts, billing accuracy and improved
preauthorization procedures with payors.
Depreciation and Amortization. Depreciation and amortization increased
$3,710,000 to $10,808,000 in the 1995 Seven Month Period from $7,098,000 in
the 1994 Seven Month Period, and as a percentage of net operating revenues,
depreciation and amortization increased to 6.1% in the 1995 Seven Month Period
from 5.8% in the 1994 Seven Month Period. This increase was attributable to
increased amortization due to acquisition activity and increased depreciation
from new center leaseholds and routine capital expenditures.
Merger Expenses. Merger expenses in the 1995 Seven Month Period were the
expenses incurred as a result of the RTC merger completed on August 1, 1995
which was accounted for under the pooling-of-interests method of accounting.
These expenses included fees for the investment banker, attorneys,
accountants, and various other expenses incurred as a result of combining the
companies.
Operating Income. Operating income increased $15,255,000 to $33,267,000 in
the 1995 Seven Month Period from $18,012,000 in the 1994 Seven Month Period,
and as a percentage of net operating revenues, operating income increased to
18.9% in the 1995 Seven Month Period from 14.8% in the 1994 Seven Month
Period. This increase in operating income reflects a decrease in facility
operating expenses, general and administrative expenses, and the provision for
doubtful accounts, slightly offset by an increase in depreciation and
amortization, all as a percentage of net operating revenues.
Interest Expense. Interest expense, net of interest income, increased
$2,993,000 to $6,831,000 in the 1995 Seven Month Period from $3,838,000 in the
1994 Seven Month Period, and as a percentage of net operating revenues,
interest expense, net of interest income, was 3.9% in the 1995 Seven Month
Period and 3.1% in the 1994 Seven Month Period. Cash interest expense during
the 1995 Seven Month Period was $2,466,000 and non-cash interest during the
same period was $5,228,000 versus $1,198,000 and $3,274,000 in the 1994 Seven
Month Period, respectively. The increase in the 1995 Seven Month Period cash
interest expense was due primarily to increased borrowing under the TRC Credit
Facility and the increase in non cash interest expense was due to the August
11, 1994 issuance of the Discount Notes, which resulted in four and a half
months of interest expense recognized in the 1994 Seven Month Period as
compared to a full seven months of interest expense recognized in the 1995
Seven Month Period. In addition, interest accrued in the 1995 Seven Month
Period on a higher accreted principal amount through December 7, 1995, on
which date the Company redeemed 35% of the principal amount of the Discount
Notes at maturity.
Provision for Income Taxes. Provision for income taxes increased $5,172,000
to $9,931,000 in the 1995 Seven Month Period from $4,759,000 in the 1994 Seven
Month Period, and the effective income tax rate after minority interests
increased to 40.3% in the 1995 Seven Month Period from 35.8% in the 1994 Seven
Month Period. The increase was primarily due to an increase in the blended
state tax rates.
8
Minority Interests. Minority interests increased $906,000 to $1,784,000 in
the 1995 Seven Month Period from $878,000 in the 1994 Seven Month Period, and
as a percentage of net operating revenues, minority interest increased to 1.0%
in the 1995 Seven Month Period from 0.7% in the 1994 Seven Month Period. This
increase in minority interest as a percentage of revenue is a result of
increased profitability at these partnership affiliates and subsidiaries and
an increase in the number of company facilities owned by such partnership
affiliates.
Extraordinary Loss. On December 7, 1995 the Company redeemed 35% of the
accreted value of the Discount Notes at a redemption premium of 111% for a
total redemption price of $31,912,000. In connection with this redemption, the
Company recorded an extraordinary loss of $2,555,000 (net of income tax
effect) in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash. Net cash provided by operating activities of the
Company was $21,279,000, $30,926,000, $14,393,000 and $19,305,000 for Year End
1997, Year End 1996, 1995 Seven Month Period and the fiscal year ended May 31,
1995, respectively. Net cash provided by operating activities consists of the
Company's net income, increased by an extraordinary item related to the early
extinguishment of debt (for the 1995 Seven Month Period and Year End 1996) and
non-cash expenses such as depreciation, amortization, accreted interest and
the provision for doubtful accounts, and adjusted by changes in components of
working capital, primarily accounts receivable. Net cash used in investing
activities was $526,217,000, $273,069,000, $47,973,000 and $83,156,000 for
Year End 1997, Year End 1996, 1995 Seven Month Period and the fiscal year
ended May 31, 1995, respectively. The Company's principal uses of cash in
investing activities have been related to acquisitions, purchases of new
equipment and leasehold improvements for the Company's outpatient facilities,
as well as the development of new outpatient facilities. Net cash provided by
financing activities was $489,754,000 for Year End 1997 consisting primarily
of proceeds from the Company's Credit Facilities, $225,058,000 for Year End
1996 consisting primarily of net proceeds from two public issuances of common
stock, net proceeds from the Credit Facility and proceeds from issuance of the
RTC Convertible Subordinated Notes, offset by amounts paid in connection with
the remaining Discount Notes; $67,003,000 for the 1995 Seven Month Period
consisting primarily of net proceeds from the IPO, less amounts paid in
connection with the redemption of 35% of the outstanding Discount Notes and
net payments of borrowings under the Credit Facility; and $66,571,000 for the
fiscal year ended May 31, 1995, consisting primarily of debt and equity
offering proceeds, and borrowings under the Credit Facility, net of cash
dividends paid to Tenet.
Expansion. The Company anticipates aggregate capital requirements for
purchases of equipment and leasehold improvements for outpatient facilities
including the development costs of 30 de novo facilities after March 31, 1998
will be approximately $40,000,000.
The Company's strategy is to continue to expand its operations both through
development of de novo centers and through acquisitions. The development of a
typical outpatient facility generally requires $800,000 to $1,200,000 for
initial construction and equipment and $200,000 to $300,000 for working
capital. Based on the Company's experience, a de novo facility typically
achieves operating profitability, before depreciation and amortization, by the
12th to 15th month of operation. However, the period of time for a de novo
facility to break even is dependent on many factors which can vary
significantly from facility to facility, and, therefore, the Company's past
experience may not be indicative of the performance of future de novo
facilities.
From January 1, 1998 through March 31, 1998 the Company has paid
approximately $51 million in consideration for acquisitions of nine facilities
and a pharmacy operation. Additionally, the Company has entered into letters
of intent to acquire additional facilities for approximately $100 million.
Credit Facilities. On October 24, 1997, the Company expanded its existing
$400 million Credit Facility to an aggregate of $1,050,000,000 in two bank
facilities. The Credit Facilities consist of a seven-year $800 million
revolving credit facility and a ten-year $250 million term facility. Under the
revolving credit
9
facility, up to $100,000,000 may be used in connection with letters of credit,
and up to $15,000,000 in short-term funds may be borrowed the same day notice
is given to the banks under a "Swing Line" facility. Up to $75,000,000 of the
available letters of credit or borrowings under the revolving credit facility
may be utilized for foreign financing. In general, borrowings under the Credit
Facilities bear interest at one of two floating rates selected by the Company:
(i) the Alternate Base Rate (defined as the higher of The Bank of New York's
prime rate or the federal funds rate plus 0.5%); or (ii) Adjusted LIBOR
(defined as the 30-, 60-, 90- or 180-day London Interbank Offered Rate,
adjusted for statutory reserves) plus a margin that ranges from 0.45% to 1.75%
depending on the Company's leverage ratio. Swing Line borrowings bear interest
at either a rate negotiated by the Company and the banks at the time of
borrowing or, if no rate is negotiated and agreed upon, the Alternate Base
Rate.
The Credit Facilities contain financial and operating covenants including,
among other things, requirements that the Company maintain certain financial
ratios and satisfy certain financial tests, and imposes limitations on the
Company's ability to make capital expenditures, to incur other indebtedness
and to pay dividends. As of the date hereof, the Company is in compliance with
all such covenants.
On November 25, 1996, the Company entered into a seven year interest rate
swap agreement involving the exchange of fixed and floating interest payment
obligations without the exchange of the underlying principal amounts. At
December 31, 1997 the total notional principal amount of this interest rate
swap agreement was $100,000,000 and the effective interest rate thereon was
7.57%.
On July 24, 1997, the Company entered into a ten-year interest rate swap
agreement. At December 31, 1997 the total notional principal amount of this
interest rate swap agreement was $200,000,000 and the effective interest rate
thereon was 7.77%.
Stock Split. On September 30, 1997 the Company declared a five-for-three
split of its Common Stock in the form of a stock dividend. Stockholders of
record on October 7, 1997 received two additional shares of the Company's
Common Stock for every three shares owned. The dividend shares were delivered
to the record stockholders on October 20, 1997. The Company issued a cash
dividend for all fractional shares of approximately $14,000 which was also
paid on October 20, 1997.
Year 2000 Risks. Certain of the Company's older computer software programs
identify years with two digits instead of four. This is likely to cause
problems because the programs may recognize the year 2000 as the year 1900.
Plans are in the process to eliminate all Year 2000 software problems. The
Company fully expects to complete the necessary conversions by the end of the
second quarter of 1999. The Company believes that the cost of modifying those
systems that were not already scheduled for replacement for business reasons
prior to 2000 is immaterial. Although the Company does not expect Year 2000 to
have a material adverse effect on its internal operations, it is possible that
Year 2000 problems could have a significant adverse effect on (i) the
Company's suppliers and their ability to service the Company and to accurately
process payments received and (ii) the ability of certain third party
insurance payors and governmental payors, such as Medicare and the individual
state Medicaid programs, to accurately process remittance (payments) on
patient accounts receivable due to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)Documents filed as part of this Report:
(1) Index to Financial Statements of Total Renal Care Holdings, Inc.:
PAGE
Report of Independent Accountants of Price Waterhouse LLP F-1
Report of Independent Accountants of Coopers & Lybrand L.L.P. F-2
Report of Independent Accountants of Deloitte & Touche LLP F-3
Report of Independent Accountants of Baird, Kurtz & Dobson F-4
Consolidated Balance Sheets as of December 31, 1996 and December
31, 1997 F-5
Consolidated Statements of Income for year ended May 31, 1995,
the seven months ended December 31, 1994 (unaudited) and
December 31, 1995 and the years ended December 31, 1995
(unaudited), December 31, 1996 and December 31, 1997 F-6
Consolidated Statements of Stockholders' Equity for the year
ended May 31, 1995, the seven months ended December 31, 1995 and
the years ended December 31, 1996 and December 31, 1997 F-7
Consolidated Statements of Cash Flows for year ended May 31,
1995, the seven months ended December 31, 1994 (unaudited) and
December 31, 1995 and the years ended December 31, 1995
(unaudited), December 31, 1996 and December 31, 1997 F-8
Notes to Consolidated Financial Statements F-9
(2) Index to Financial Statements of Renal Treatment Centers, Inc.:
Report of Independent Accountants of Coopers & Lybrand L.L.P. F-34
Consolidated Balance Sheets at December 31, 1996 and 1997 F-35
Consolidated Statements of Income for the years ended December
31, 1995, 1996 and 1997 F-36
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997 F-37
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 F-38
Notes to Consolidated Financial Statements F-39
(3) Index to Financial Statement Schedules:
Report of Independent Accountants on Financial Statement
Schedule of Price Waterhouse LLP S-1
Schedule II--Valuation and Qualifying Accounts of Total Renal
Care Holdings Inc. S-2
(4)(a) Exhibits:
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
3.1 Amended and Restated Certificate of Incorporation of the
Company, dated December 4, 1995.@@
3.2 Certificate of Amendment of Certificate of Incorporation of
the Company, dated February 26, 1998.+++
3.3 Bylaws of the Company, dated October 6, 1995.+
4.1 Shareholders Agreement, dated August 11, 1994 between DLJMB,
DLJIP, DLJOP, DLJMBF, NME Properties, Continental Bank, as
voting trustee, and the Company.##
4.2 Agreement and Amendment, dated as of June 30, 1995, between
DLJMBP, DLJIP, DLJOP, DLJMBF, DLJESC, Tenet, the Company,
Victor M.G. Chaltiel, the Putnam Purchasers, the Crescent
Purchasers and the Harvard Purchasers, relating to the
Shareholders Agreement dated as of August 11, 1994 between
DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties, Continental
Bank, as voting trustee, and the Company.##
11
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
10.1 Subscription Agreement dated May 26, 1994 between DLJMB,
DLJIP, DLJOP, DLJMBF, NME Properties, Tenet and the
Company.#
10.2 Services Agreement dated August 11, 1994 between the Company
and Tenet.##
10.3 Noncompetition Agreement dated August 11, 1994 between the
Company and Tenet.##
10.4 Employment Agreement dated as of August 11, 1994 by and
between the Company and Victor M.G. Chaltiel (with forms of
Promissory Note and Pledge and Stock Subscription Agreement
attached as exhibits thereto) (the "Chaltiel Employment
Agreement").##*
10.5 Amendment to Chaltiel Employment Agreement, dated as of
August 11, 1994.##*
10.6 Employment Agreement dated as of September 1, 1994 by and
between the Company and Barry C. Cosgrove.##*
10.7 Employment Agreement dated as of August 11, 1994 by and
between the Company and Leonard W. Frie (the "Frie
Employment Agreement").##*
10.8 Amendment to Frie Employment Agreement, dated as of October
11, 1994.##*
10.9 Employment Agreement dated as of September 1, 1994 by and
between the Company and John E. King.##*
10.10 First Amended and Restated 1994 Equity Compensation Plan
(the "1994 Plan") of the Company (with form of Promissory
Note and Pledge attached as an exhibit thereto), dated
August 5, 1994.##*
10.11 Form of Stock Subscription Agreement relating to the 1994
Plan.##*
10.12 Form of Purchased Shares Award Agreement relating to the
1994 Plan.##*
10.13 Form of Nonqualified Stock Option relating to the 1994
Plan.##*
10.14 1995 Equity Compensation Plan.+*
10.15 Employee Stock Purchase Plan.+*
10.16 Option Exercise and Bonus Agreement dated as of September
18, 1995 between the Company and Victor M.G. Chaltiel.+*
10.17 1997 Equity Compensation Plan.**
10.18 Subsidiary Guaranty (the "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). Renal Treatment Centers--Mid-
Atlantic, Inc., Renal Treatment Centers--Northeast, Inc.,
Renal Treatment Centers--California, Inc., Renal Treatment
Centers--West, Inc., and Renal Treatment Centers--
Southeast, Inc. subsequently executed an agreement in this
form on February 27, 1998.@@@
10.19 Borrower Pledge Agreement dated as of October 24, 1997 and
entered into by and between the Company, 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).@@@
12
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
10.20 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). RTC subsequently
executed an agreement in this form on February 27,
1998.@@@
10.21 Agreement and Plan of Merger dated as of November 18, 1997
by and among TRCH, Nevada Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of TRCH, and
RTC.###
10.22 Amendment No. 2 and Consent No. 2 to the Revolving Credit
Agreement and First Amendment to the Subsidiary Guaranty
dated February 17, 1998.+++
10.23 Third Amendment to the Term Loan Agreement and First
Amendment to the Subsidiary Guaranty dated February 17,
1998. (The provisions of this agreement amending the
original term loan agreement have been superseded by
exhibit no. 10.31 hereof.)+++
10.24 Special Purpose Option Plan.++
10.25 Indenture, dated June 12, 1996, by RTC to PNC Bank including
form of RTC Note (the "Indenture").***
10.26 First Supplemental Indenture, dated as of February 27, 1998,
among RTC, TRCH and PNC Bank under the Indenture.+++
10.27 Second Supplemental Indenture, dated as of March 31, 1998,
among RTC, TRCH and PNC Bank under the Indenture.+++
10.28 Guaranty, entered into as of March 31, 1998, by the Company
in favor of and for the benefit of PNC Bank.+++
10.29 Amended and Restated Term Loan Agreement, dated April 30,
1998, by and among the Company, the lenders party thereto,
DLJ Capital Funding, Inc., as Syndication Agent, and The
Bank of New York, as Administrative Agent (the "Term Loan
Agreement").X
10.30 Amended and Restated Revolving Credit Agreement, dated April
30, 1998, by and among the Company, 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").X
10.31 Form of First Amendment to Borrower/Subsidiary Pledge
Agreement, dated April 30, 1998, by and among the Company,
RTC, Total Renal Care, Inc., and The Bank of New York, as
Collateral Agent.X
10.32 Form of Acknowledgment and Confirmation, dated April 30,
1998, by the Company, RTC, TRC West, Inc., Total Renal
Care, Inc., Total Renal Care Acquisition Corp., Renal
Treatment Centers--Mid-Atlantic, Inc., Renal Treatment
Centers--Northeast, Inc., Renal Treatment Centers--
California, Inc., Renal Treatment Centers--West, Inc., and
Renal Treatment Centers--Southeast, Inc. for the benefit of
The Bank of New York, as Collateral Agent and the lenders
party to the Term Loan Agreement or the Revolving Credit
Agreement.X
21 List of Subsidiaries of the Company.+++
23.1 Consent of Price Waterhouse LLP.X
23.2 Consent of Coopers & Lybrand L.L.P.X
23.3 Consent of Deloitte & Touche, L.L.P.X
13
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
23.4 Consent of Baird, Kurtz & Dobson.X
24 Powers of Attorney with respect to the Company (included on
Page II-1 hereof).+++
27 Financial Data Schedule.X
- --------
X Included in this filing.
@ Filed on October 18, 1996 as an exhibit to the Company's Current Report on
Form 8-K.
@@ Filed on March 18, 1996 as an exhibit to the Company's Transitional Report
on Form 10-K for the transition period from June 1, 1995 to December 31,
1995.
@@@ Filed on December 19, 1997 as an exhibit to the Company's Current Report
on Form 8-K.
+ Filed on October 24, 1995 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Registration Statement No. 33-97618).
++ Filed on February 25, 1998 as an exhibit to the Company's Registration
Statement on Form S-8 (Registration Statement No. 333-46887).
+++ Filed on March 31, 1998 as an exhibit to the Company's Form 10-K for the
year ended December 31, 1997.
# Filed on June 6, 1994 as an exhibit to the Company's Registration Statement
on Form S-1 (Registration Statement No. 33-79770).
## Filed on August 29, 1995 as an exhibit to the Company's Form 10-K for the
year ended May 31, 1995.
### Filed on December 19, 1997 as Annex A to the Company's Registration
Statement on Form S-4 (Registration No. 333-42653).
* Management contract or executive compensation plan or arrangement.
** Filed on August 29, 1997 as an exhibit to the Company's Registration
Statement on Form S-8 (Registration Statement No. 333-34695).
*** Filed as an exhibit to RTC's Form 10-Q for the quarter ended June 30,
1996.
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated November 21, 1997, reporting under Item
5 the issuance by TRCH of a press release in connection with the Merger.
Current Report on Form 8-K, dated December 19, 1997, reporting under Item
7: (i) the Audited Financial Statements of the Nephrology Services Business
of Caremark International, Inc., (ii) the Audited Financial Statements of
New West Dialysis, Inc., (iii) the 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., (iv) Audited
Financial Statements of Dialysis Care of North Carolina, (v) Audited
Financial Statements of the Renal Dialysis Business of the Rogosin
Institute, Inc. and (vi) certain Unaudited Pro Forma Financial Statements.
14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Total Renal Care Holdings, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of income, of stockholders' equity, and of cash flows present
fairly, in all material respects, the financial position of Total Renal Care
Holdings, Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for the year ended May 31,
1995, the seven months ended December 31, 1995 and the years ended December
31, 1996 and 1997 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 audits. We did not audit the financial statements of Renal
Treatment Centers, Inc. (RTC) a wholly-owned subsidiary, which statements
reflect total assets of $293,948,000 and $585,494,000 at December 31, 1996 and
1997, respectively, and total revenues of $115,457,000; $86,752,000;
$225,077,000 and $322,792,000 for the year ended December 31, 1994, the six
months ended December 31, 1995, and the years ended December 31, 1996 and
1997, respectively. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for RTC, is based solely on the
report of the other auditors. 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 and the report of other
auditors provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Seattle, Washington
February 16, 1998,
except as to the pooling of interests with
RTC which is as of May 14, 1998
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholders and Board of Directors
Renal Treatment Centers, Inc.
We have audited the accompanying consolidated balance sheets of Renal
Treatment Centers, Inc. and Subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the four years in the period ended December 31, 1997 and for
the six month period ended December 31, 1995 (not presented separately
herein). Our audits also included Financial Statement Schedule II of Renal
Treatment Centers, Inc. and its subsidiaries (not presented separately
herein). 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 did not audit the financial statements of
Wichita Dialysis Group and Healthcare Corporation and Affiliates for the year
ended December 31, 1994. Such Companies were acquired by the Company in
business combinations which have both been accounted for using the pooling of
interest method of accounting, as described in Note 2 to the financial
statements. The financial statements for the Companies reflect 22 percent of
total consolidated net patient revenue for the year ended December 31, 1994.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it related to the amounts
included for Wichita Dialysis Group and Healthcare Corporation and Affiliates,
is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Renal Treatment
Centers, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
four years in the period ended December 31, 1997 and for the six month period
ended December 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information required to included therein.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 14, 1998
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Healthcare Corporation and Affiliates
Nashville, Tennessee
We have audited the combined statements of income, stockholder's equity and
cash flows for the year ended December 31, 1994 of Healthcare Corporation and
Affiliates (the "Company"). These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such combined financial statements (not presented separately
herein) present fairly, in all material respects, the results of the Company's
operations and its cash flows for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Nashville, Tennessee
March 31, 1995
F-3
INDEPENDENT ACCOUNTANTS' REPORT
The Shareholders
Wichita Dialysis Group
Wichita, Kansas
We have audited the accompanying combined balance sheets of WICHITA DIALYSIS
GROUP as of December 31, 1993 and 1994, and the related combined statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1994. 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of WICHITA DIALYSIS
GROUP as of December 31, 1993 and 1994 and the results of its operations and
its cash flows for each of the two years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
/s/ Baird, Kurtz & Dobson
_____________________________________
Baird, Kurtz & Dobson
July 14, 1995, except for Note 9 as to which the date is July 24, 1995
Wichita, Kansas
F-4
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1996 1997
ASSETS
Cash and cash equivalents....................... $ 21,327,000 $ 6,143,000
Investments..................................... 41,202,000 0
Patient accounts receivable, less allowance for
doubtful accounts of $15,765,000 and
$30,695,000, respectively...................... 156,207,000 248,408,000
Receivable from Tenet........................... 347,000 534,000
Inventories..................................... 10,433,000 15,766,000
Deferred income taxes........................... 5,383,000 9,853,000
Prepaid expenses and other current assets....... 17,304,000 21,500,000
------------ --------------
Total current assets........................ 252,203,000 302,204,000
Property and equipment, net..................... 97,844,000 172,838,000
Notes receivable from related parties........... 1,919,000 11,344,000
Deferred taxes, noncurrent...................... 385,000
Other long-term assets.......................... 1,992,000 17,198,000
Intangible assets, net.......................... 311,263,000 774,266,000
------------ --------------
$665,221,000 $1,278,235,000
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................ $ 23,841,000 $ 33,283,000
Employee compensation and benefits.............. 16,349,000 25,430,000
Other accrued liabilities....................... 12,605,000 15,927,000
Current portion of long-term obligations........ 14,433,000 27,810,000
------------ --------------
Total current liabilities................... 67,228,000 102,450,000
------------ --------------
Long-term debt.................................. 233,126,000 723,782,000
------------ --------------
Deferred income taxes........................... 61,000 2,500,000
------------ --------------
Other long-term liabilities..................... 993,000 1,594,000
------------ --------------
Minority interests.............................. 4,714,000 19,079,000
------------ --------------
Commitments and contingencies (Notes 8, 9 and
13)
Stockholders' equity
Preferred stock ($.001 par value; 5,000,000
shares authorized; none outstanding)......... -- --
Common stock ($.001 par value, 195,000,000
shares authorized; 76,686,364 and 77,991,595
shares issued and outstanding)............... 77,000 78,000
Additional paid-in capital.................... 343,586,000 358,492,000
Notes receivable from stockholders............ (2,827,000) (3,030,000)
Retained earnings............................. 18,263,000 73,290,000
------------ --------------
Total stockholders' equity.................. 359,099,000 428,830,000
------------ --------------
$665,221,000 $1,278,235,000
============ ==============
See accompanying notes to consolidated financial statements.
F-5
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
MAY 31, -------------------------- ----------------------------------------
1995 1994 1995 1995 1996 1997
(UNAUDITED) (UNAUDITED)
Net operating revenues.. $214,425,000 $122,065,000 $176,463,000 $299,411,000 $498,024,000 $760,997,000
------------ ------------ ------------ ------------ ------------ ------------
Operating expenses
Facilities............. 146,560,000 83,370,000 115,219,000 198,654,000 344,180,000 510,990,000
General and
administrative........ 17,856,000 10,099,000 12,117,000 21,000,000 32,350,000 50,099,000
Provision for doubtful
accounts.............. 5,492,000 3,486,000 4,552,000 7,580,000 15,737,000 20,525,000
Depreciation and
amortization.......... 12,343,000 7,098,000 10,808,000 18,603,000 32,445,000 54,603,000
Merger costs........... 500,000 2,088,000 2,808,000
------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses.............. 182,251,000 104,053,000 143,196,000 247,925,000 427,520,000 636,217,000
------------ ------------ ------------ ------------ ------------ ------------
Operating income........ 32,174,000 18,012,000 33,267,000 51,486,000 70,504,000 124,780,000
Interest expense, net of
capitalized interest... (8,651,000) (4,472,000) (7,694,000) (12,830,000) (13,417,000) (28,214,000)
Interest income......... 800,000 634,000 863,000 1,029,000 3,858,000 3,175,000
------------ ------------ ------------ ------------ ------------ ------------
Income before income
taxes, minority
interests and
extraordinary item.... 24,323,000 14,174,000 26,436,000 39,685,000 60,945,000 99,741,000
Income taxes............ 7,827,000 4,759,000 9,931,000 13,841,000 22,960,000 40,212,000
------------ ------------ ------------ ------------ ------------ ------------
Income before minority
interests and
extraordinary item.... 16,496,000 9,415,000 16,505,000 25,844,000 37,985,000 59,529,000
Minority interests in
income of consolidated
subsidiaries........... 1,593,000 878,000 1,784,000 2,544,000 3,578,000 4,502,000
------------ ------------ ------------ ------------ ------------ ------------
Income before
extraordinary item.... 14,903,000 8,537,000 14,721,000 23,300,000 34,407,000 55,027,000
Extraordinary loss
related to early
extinguishment of debt,
net of tax............. 2,555,000 2,555,000 7,700,000
------------ ------------ ------------ ------------ ------------ ------------
Net income.............. $ 14,903,000 $ 8,537,000 $ 12,166,000 $ 20,745,000 $ 26,707,000 $ 55,027,000
============ ============ ============ ============ ============ ============
Earnings per common
share:
Net income before
extraordinary item.... $ 0.33 $ 0.20 $ 0.26 $ 0.43 $ 0.46 $ 0.71
Extraordinary loss..... (0.04) (0.05) (0.10)
------------ ------------ ------------ ------------ ------------ ------------
Net income............. $ 0.33 $ 0.20 $ 0.22 $ 0.38 $ 0.36 $ 0.71
============ ============ ============ ============ ============ ============
Weighted average number
of common shares
outstanding............ 45,301,000 42,682,000 57,109,000 53,936,000 74,042,000 77,524,000
============ ============ ============ ============ ============ ============
Earnings per common
share--assuming
dilution:
Net income before
extraordinary item.... $ 0.31 $ 0.19 $ 0.25 $ 0.40 $ 0.45 $ 0.69
Extraordinary loss..... (0.05) (0.04) (0.10)
------------ ------------ ------------ ------------ ------------ ------------
Net income............. $ 0.31 $ 0.19 $ 0.20 $ 0.36 $ 0.35 $ 0.69
============ ============ ============ ============ ============ ============
Weighted average number
of common shares and
equivalents
outstanding--assuming
dilution............... 47,506,000 44,879,000 60,693,000 57,744,000 77,225,000 79,975,000
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
-------------------
NOTES
ADDITIONAL RECEIVABLE RETAINED
PAID-IN FROM EARNINGS
SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT) TOTAL
Balance at May 31, 1994. 21,642,062 $22,000 $ 25,282,000 $ 40,296,000 $ 65,600,000
Shares issued to Tenet.. 4,888,890 4,000 4,000
Shares issued in change
of control:
DLJMB.................. 11,666,667 12,000 10,488,000 10,500,000
Employees.............. 2,077,778 2,000 1,868,000 $(995,000) 875,000
Shares issued in
offerings.............. 7,393,315 7,000 51,994,000 52,001,000
Stock issuance costs.... (2,172,000) (2,172,000)
Dividend paid to Tenet:
Cash................... (75,500,000) (75,500,000)
Intercompany receiv-
able.................. (6,152,000) (6,152,000)
Shares issued in
acquisitions........... 729,687 1,000 2,258,000 2,259,000
Shares issued to
employees and others... 1,275,420 1,000 1,147,000 (513,000) 635,000
Options exercised....... 476,275 1,000 315,000 316,000
Acquisition of treasury
stock.................. (5,797) (47,000) (47,000)
Dividend distribution... (1,473,000) (1,473,000)
Net income.............. 14,903,000 14,903,000
---------- ------- ------------ ----------- ------------ ------------
Balance at May 31, 1995. 50,144,297 50,000 91,133,000 (1,508,000) (27,926,000) 61,749,000
Net proceeds from
initial public
offering............... 11,500,000 12,000 98,282,000 98,294,000
Shares and options
issued in acquisitions. 1,574,616 1,000 8,453,000 8,454,000
Shares issued to
employees and others... 46,117 0 59,000 (13,000) 46,000
Shares issued to repay
debt................... 67,447 0 523,000 523,000
Options exercised....... 2,355,894 3,000 2,519,000 (1,330,000) 1,539,000
Conversion of
mandatorily redeemable
common stock........... 1,136,112 1,000 3,989,000 3,990,000
Payments on notes
receivable, net of
interest accrued....... 78,000 78,000
Income tax benefit
related to stock
options exercised...... 1,792,000 1,792,000
Acquisition of treasury
stock.................. (43,868) (347,000) (347,000)
Dividend distribution... (1,499,000) (1,499,000)
Adjustment to conform
fiscal years of RTC.... 6,377,000 6,377,000
Net income.............. 12,166,000 12,166,000
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31,
1995................... 66,780,615 67,000 206,750,000 (2,773,000) (10,882,000) 193,162,000
Net proceeds from stock
offerings.............. 6,666,667 7,000 128,311,000 128,318,000
Shares issued in
acquisitions........... 161,095 2,810,000 2,810,000
Shares issued in
connection with merger. 2,422,534 2,000 105,000 3,097,000 3,204,000
Shares issued to
employees and others... 1,883 15,000 15,000
Shares issued to repay
debt................... 190,109 1,474,000 1,474,000
Options exercised....... 463,461 1,000 3,183,000 3,184,000
Interest accrued on
notes receivable, net
of payments............ (54,000) (54,000)
Income tax benefit
related to stock
options exercised...... 938,000 938,000
Dividend distribution... (659,000) (659,000)
Net income.............. 26,707,000 26,707,000
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31,
1996................... 76,686,364 77,000 343,586,000 (2,827,000) 18,263,000 359,099,000
Shares issued in
acquisitions........... 17,613 273,000 273,000
Shares issued to
employees and others... 174,775 1,773,000 1,773,000
Options exercised....... 447,456 2,025,000 2,019,000
Shares issued to repay
debt................... 664,580 1,000 5,147,000 5,148,000
Interest accrued on
notes receivable, net
of payments............ (203,000) (203,000)
Income tax benefit
related to stock
options exercised...... 5,453,000 5,453,000
Grant of stock options.. 235,000 235,000
Issuance of treasury
stock to repay debt.... 807 6,000 6,000
Net income.............. 55,027,000 55,027,000
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31,
1997................... 77,991,595 $78,000 $358,492,000 $(3,030,000) $ 73,290,000 $428,830,000
========== ======= ============ =========== ============ ============
See accompanying notes to consolidated financial statements.
F-7
TOTAL RENAL CARE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
MAY 31, -------------------------- ------------------------------------------
1995 1994 1995 1995 1996 1997
(UNAUDITED) (UNAUDITED)
Cash flows from
operating activities
Net income............ $ 14,903,000 $ 8,537,000 $ 12,166,000 $ 20,745,000 $ 26,707,000 $ 55,027,000
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 12,343,000 7,098,000 10,808,000 18,603,000 32,445,000 54,603,000
Extraordinary loss.... 4,258,000 4,258,000 12,623,000
Non-cash interest..... 6,947,000 3,274,000 5,228,000 8,901,000 4,396,000
Deferred income taxes. (1,213,000) (481,000) (2,219,000) (2,233,000) (1,258,000) (5,131,000)
Provision for doubtful
accounts............. 5,492,000 3,486,000 4,552,000 7,580,000 15,737,000 20,525,000
Loss (gain) on
disposition of
property and
equipment............ (37,000) (3,000) (144,000) (146,000) (20,000) 76,000
Equity in (earnings)
losses from
affiliate............ (96,000) (51,000) (267,000) (267,000) 16,000 (40,000)
Minority interests in
income of
consolidated
subsidiaries......... 1,593,000 878,000 1,784,000 2,544,000 3,578,000 4,502,000
Changes in operating
assets and
liabilities, net of
effect of
acquisitions:
Accounts receivable.. (28,612,000) (16,919,000) (26,608,000) (40,247,000) (52,909,000) (109,811,000)
Inventories.......... (383,000) (804,000) (968,000) (267,000) (3,030,000) (1,843,000)
Prepaid expenses and
other current
assets.............. (1,363,000) (398,000) (277,000) (432,000) (8,805,000) (143,000)
Other long-term
assets.............. (300,000) (300,000) (9,166,000)
Accounts payable..... 1,618,000 2,842,000 (560,000) (3,194,000) 2,147,000 (992,000)
Employee compensation
and benefits........ 3,473,000 1,453,000 (354,000) 1,216,000 6,043,000 8,539,000
Other accrued
liabilities......... 5,115,000 1,262,000 3,757,000 6,867,000 (207,000) 2,791,000
Income taxes payable. (475,000) (483,000) 2,323,000 816,000 (6,315,000) 2,329,000
Other long-term
liabilities......... 107,000 1,214,000 916,000 (222,000) 13,000
------------ ------------ ------------ ------------ ------------- -------------
Net cash provided by
operating
activities......... 19,305,000 9,798,000 14,393,000 25,360,000 30,926,000 21,279,000
------------ ------------ ------------ ------------ ------------- -------------
Cash flow from
investing activities
Purchases of property
and equipment........ (8,935,000) (4,912,000) (8,896,000) (14,713,000) (41,740,000) (62,033,000)
Additions to
intangible assets.... (1,573,000) (734,000) (1,520,000) (3,086,000) (10,775,000) (35,224,000)
Cash paid for
acquisitions, net of
cash acquired........ (72,799,000) (29,532,000) (35,450,000) (56,911,000) (179,002,000) (455,090,000)
Purchase of
investments.......... (38,500,000) (26,223,000) (55,311,000)
Sale of investments... 38,589,000 38,589,000 2,662,000 14,109,000 41,202,000
Investment in
affiliate............ (972,000) (972,000) (46,000) (2,935,000)
Issuance of long-term
notes receivable..... (1,379,000) (1,379,000) (540,000) (12,502,000)
Proceeds from
disposition of
property and
equipment............ 62,000 28,000 244,000 495,000 236,000 365,000
------------ ------------ ------------ ------------ ------------- -------------
Net cash used in
investing
activities......... (83,156,000) (22,784,000) (47,973,000) (73,904,000) (273,069,000) (526,217,000)
------------ ------------ ------------ ------------ ------------- -------------
Cash flows from
financing activities
Advances from Tenet... 2,874,000 3,499,000
Proceeds from long-
term borrowings...... 18,539,000 14,987,000 258,000 258,000 107,000 4,511,000
Principal payments on
long-term
obligations.......... (14,414,000) (61,000) (2,094,000) (9,044,000) (8,649,000) (26,269,000)
Proceeds from
Convertible notes.... 121,250,000
Cash dividends paid to
Tenet................ (75,500,000) (75,500,000)
Payment of Dividend
distribution......... (1,473,000) (1,023,000) (417,000) (1,499,000) (659,000)
Net proceeds from debt
offering............. 66,841,000 66,140,000
Cash paid to retire
bonds................ (31,912,000) (31,912,000) (68,499,000)
Proceeds from bank
credit facility...... 13,253,000 31,981,000 50,916,000 239,835,000 505,000,000
Payment of bank credit
facility............. (4,000,000) (31,625,000) (31,625,000) (188,510,000)
Net proceeds from
issuance of common
stock................ 62,159,000 11,122,000 99,947,000 100,267,000 131,517,000 3,792,000
Income tax benefit
related to stock
options exercised.... 1,792,000 1,792,000 938,000 5,453,000
Cash received on notes
receivable from
stockholders......... 175,000 175,000 170,000 35,000
Distributions to
minority interests... (1,708,000) (723,000) (1,102,000) (2,087,000) (2,442,000) (2,768,000)
------------ ------------ ------------ ------------ ------------- -------------
Net cash provided by
financing
activities......... 66,571,000 18,441,000 67,003,000 77,241,000 225,058,000 489,754,000
------------ ------------ ------------ ------------ ------------- -------------
Net increase (decrease)
in cash............... 2,720,000 5,455,000 33,423,000 28,697,000 (17,085,000) (15,184,000)
Cash and cash
equivalents at
beginning of period... 2,109,000 4,260,000 4,989,000 9,715,000 38,412,000 21,327,000
------------ ------------ ------------ ------------ ------------- -------------
Cash and cash
equivalents at end of
period................ $ 4,829,000 $ 9,715,000 $ 38,412,000 $ 38,412,000 $ 21,327,000 $ 6,143,000
============ ============ ============ ============ ============= =============
Supplemental cash flow
information (Note 15)
See accompanying notes to consolidated financial statements.
F-8
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Total Renal Care Holdings, Inc. (the Company) operates kidney dialysis
facilities and provides related medical services in Medicare certified
dialysis facilities in various geographic sectors of the United States and
also in Argentina, Puerto Rico, Europe and Guam.
The Company was a wholly-owned subsidiary of Tenet Healthcare Corporation
("Tenet", formerly National Medical Enterprises, Inc.) until August 1994. In
August 1994, the Company completed a public offering of senior subordinated
notes and common stock, the proceeds of which were used to partially fund a
dividend to Tenet. Immediately after payment of the dividend, Donaldson,
Lufkin, Jenrette Merchant Banking Funding, Inc. and certain of its affiliates
(DLJMB) and certain members of management acquired newly issued common stock
of the Company to effect a change in control of the Company. Although there
was a change in control, the Company's accounts were not adjusted from their
historical bases due to the significant continuing ownership interest of
Tenet.
On February 27, 1998 the Company acquired Renal Treatment Centers, Inc.
("RTC"), with headquarters in Berwyn, Pennsylvania ("Merger"). In connection
with the Merger, the Company issued 34,565,729 shares of its common stock in
exchange for all of the outstanding shares of RTC common stock. RTC
shareholders received 1.335 shares of the Company's common stock for each
share of RTC common stock that they owned. The Company also issued 2,156,424
options in substitution for previously outstanding RTC stock options,
including 1,662,354 of the vested options that were exercised on the merger
date or shortly thereafter. In addition, the Company guaranteed $125,000,000
of RTC's 5 5/8% subordinated convertible notes. In conjunction with this
transaction, the Board and the Company's stockholders authorized an additional
140,000,000 share of common stock. The RTC merger transaction has been
accounted for as a pooling of interests and as such, the consolidated
financial statements have been restated to include RTC for all periods
presented. RTC has always used a December 31 year end while the Company used a
May 31 year end until May 31, 1995 after which it changed to a December 31
fiscal year end. Accordingly, the restated consolidated financial statements
combine the Company's balance sheet as of December 31, 1997 and 1996 and the
results of operations and cash flows for the twelve months ended December 31,
1997 and 1996, the seven month period ended December 31, 1995 and the twelve
months ended May 31, 1995 with RTC's balance sheet as of December 31, 1997 and
1996 and the results of operations and cash flows for the twelve months ended
December 31, 1997 and 1996, the six months ended December 31, 1995 and the
twelve months ended December 31, 1994, respectively. Net revenue and net
income of RTC for the six month period ended June 30, 1995 was $77,816,000 and
$6,377,000, respectively, with the net income reflected as an adjustment to
retained earnings effective July 1, 1995. See Note 17.
There were no transactions between the Company and RTC prior to the
combination and immaterial adjustments were recorded to conform RTC's
accounting policies. Certain reclassifications were made to the RTC financial
statements to conform to the Company's presentations.
Basis of presentation
The consolidated financial statements include the accounts of Total Renal
Care Holdings, Inc. and its wholly-owned and majority-owned corporate
subsidiaries and partnership investments. All significant intercompany
transactions and balances have been eliminated in consolidation.
In February 1996, RTC acquired, through two separate transactions,
Intercontinental Medical Services, Inc. ("IMS") and Midwest Dialysis Unit and
its affiliates (collectively "MDU"). Each of the transactions was separately
accounted for as a pooling-of-interests. The consolidated financial statements
include the results of IMS and MDU as of January 1, 1996. Prior year financial
statements have not been restated to reflect these transactions because the
effect of such transactions is not material.
F-9
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1996, RTC acquired Panama City Artificial Kidney Center, Inc. and
North Florida Artificial Kidney Center, Inc. (collectively "the Group"). In
July 1995, RTC acquired Wichita Dialysis Center, P.A., Southeast Kansas
Dialysis Center, P.A., Garden City Dialysis Center, P.A. and Wichita Dialysis
Center, East, P.A. (the "Wichita Companies"). In March 1995, RTC acquired
Healthcare Corporation and its affiliates (collectively, "HCC"). These
transactions were accounted for as a pooling-of-interests. Accordingly, the
consolidated financial statements have been prepared to give retroactive
effect to the mergers.
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 amounts expected to be
realized from governmental and third-party payors, patients and others for
services provided. Appropriate allowances are established based upon credit
risk of specific third-party payors, historical trends and other factors and
are reflected in the provision for doubtful accounts as a component of
operating expenses in the consolidated statements of income.
During the years ended May 31, 1995, the seven months ended December 31,
1995 and the years ended December 31, 1996 and 1997, the Company received
approximately 72%, 61%, 65% and 61%, respectively, of its dialysis revenues
from Medicare and Medicaid programs. Accounts receivable from Medicare and
Medicaid amounted to $119,611,000 and $205,564,000 as of December 31, 1996,
and 1997, respectively. Medicare historically pays approximately 80% of
government established rates for services provided by the Company. The
remaining 20% is typically paid by state Medicaid programs, private insurance
companies or directly by the patients receiving the services.
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-governmental
third-party payors at established private rates. The Company has contracts for
the provision of dialysis services to members of certain managed care
organizations which generally include rate provisions at less than the
established private rates.
In August 1993, the provisions of the Omnibus Budget Reconciliation Act of
1993 ("OBRA 93") became effective. The OBRA 93 provisions were originally
interpreted by the Health Care Financing Administration (HCFA) to modify the
requirements that employer group health sponsored insurance plans (private
payors) be the primary payor for end-stage renal disease (ESRD) patients who
subsequently become dually entitled to Medicare benefits because of ESRD
following initial eligibility under age or disability provisions. In July
1994, HCFA instructed the Medicare fiscal intermediaries to retroactively
apply the provisions of OBRA 93 to August 10, 1993. In April 1995, HCFA issued
instructions of clarification to the fiscal intermediaries that it had
misinterpreted the OBRA regulations and that Medicare would continue as the
primary payor after dual eligibility was achieved under the ESRD provision. In
January 1998, a permanent injunction was issued by a federal court preventing
HCFA from retroactively applying its reinterpretation of the OBRA 93
regulations as unlawful retroactive rule-making. Accordingly, the Company has
recognized as revenue payments from private payors in excess of the revenue
previously recognized at lower rates which are attributable to such patients.
As a Medicare and Medicaid provider, the Company is subject to extensive
regulation by both the federal government and the states in which the Company
conducts its business. Due to heightened awareness of federal and state
budgets, scrutiny is being placed on the health care industry, potentially
subjecting the Company to regulatory investigation and changes in billing
procedures.
The provisions of the Kennedy-Kassebaum legislation issued January 1, 1997
may limit the Company's ability to pay for policy premiums for patients even
with proven financial hardship. However, the Company
F-10
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
believes that the bill did not intend to limit the Company's ability to pay
premiums for insurance coverage to third-party or governmental payors. In the
Fall of 1997, the Office of Inspector General of the HHS issued an advisory
opinion which would allow the Company to make grants to a foundation that may
provide for such premium payments on behalf of ESRD patients. In addition,
legislation is currently pending which would permit the Company to pay
premiums for insurance coverage for patients with proven financial hardship.
Cash and cash equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less.
Investments
Investments were comprised of investments in corporate bonds and government
and government agency securities. Investment income is recognized when earned
and realized gains and losses are recognized on a trade date basis, computed
based on original cost. The investments are stated at cost, which approximates
fair market value. All investments were managed by one financial institution.
Subsequent to December 31, 1996, all investments were liquidated, resulting in
an immaterial realized gain.
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 stated at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation and amortization expense are
computed using the straight-line method over the useful lives of the assets
estimated as follows: buildings, 20 to 40 years; leaseholds and improvements,
over the shorter of their estimated useful life or the lease term; and
equipment, 3 to 15 years.
Capitalized interest
The Company capitalizes interest associated with the costs of significant
facility expansion and construction. Interest is capitalized by using an
interest rate which is equal to the weighted average borrowing rate on the
Company's long-term debt. Approximately $685,000 in interest expense was
capitalized for the year ended December 31, 1997.
Intangible assets
Business acquisition costs allocated to patient lists are amortized
generally over five to eight years using the straight-line method. Business
acquisition costs allocated to covenants not to compete are amortized over the
terms of the agreements, typically three to eleven years, using the straight-
line method. Deferred debt issuance costs are amortized over the term of the
debt using the effective interest method. Pre-opening and development costs,
included in other intangible assets, are amortized over five years.
The excess of aggregate purchase price over the fair value of net assets of
businesses acquired is recorded as goodwill. Goodwill is amortized over 15 to
40 years using the straight-line method.
The carrying value of intangible assets is assessed for any permanent
impairment by evaluating the operating performance and future undiscounted
cash flows from operations of the underlying businesses. Adjustments are made
if the sum of the expected future undiscounted net cash flows is less than
book value. Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of (SFAS 121), requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable.
F-11
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes
The Company accounts for income taxes using an asset and liability approach,
which requires recognition of deferred income taxes for all temporary
differences between the tax and financial reporting bases of the Company's
assets and liabilities based on enacted tax rates applicable to the periods in
which the differences are expected to be recovered or settled.
Following the change in control described above, the Company's results of
operations were no longer included in Tenet's consolidated federal and
applicable unitary state income tax returns. For financial reporting purposes,
the provision for income taxes through August 11 of the first quarter of
fiscal year 1995 was calculated as if the Company filed separate federal and
state income tax returns.
Minority interests
Minority interests represent the proportionate equity interest of other
partners and stockholders in the Company's consolidated entities which are not
wholly owned. As of December 31, 1997, these included 29 active partnerships
and corporations.
Stock-based compensation
During the year ended December 31, 1996, the Company adopted the Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). This pronouncement requires the Company to elect to
account for stock-based compensation on a fair value based model or an
intrinsic value based model. The intrinsic value based model is currently used
by the Company and is the accounting principle prescribed by Accounting
Principles Board No. 25, Accounting for Stock Issued to Employees (APB 25).
Under this model, compensation cost is the excess, if any, of the quoted
market price of the stock at the date of grant or other measurement date over
the amount an employee must pay to acquire the stock. The fair value based
model prescribed by SFAS 123 requires the Company to value stock-based
compensation using an accepted valuation model. Compensation cost is measured
at the grant date based on the value of the award and would be recognized over
the service period which is usually the vesting period. SFAS 123 requires the
Company to either reflect the results of the valuation in the consolidated
financial statements or alternatively continue to apply the provisions of APB
25 and make appropriate disclosure of the impact of such valuation in the
accompanying notes to consolidated financial statements.
The Company has elected to continue to apply the provisions of APB 25 to
their employee stock-based compensation plans and therefore has included the
required disclosure of the pro forma impact on net income and earnings per
share of the difference between compensation expense using the intrinsic value
method and the fair value method (see Note 10).
Earnings per share
In February 1997, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). The Company adopted SFAS 128 in the fourth quarter of 1997, as required
by this pronouncement. SFAS 128 establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated by
dividing net income before extraordinary item, and net income by the weighted
average number of shares of common stock outstanding. Accordingly, earnings
per common share assuming dilution includes the dilutive effects of stock
options and warrants using the treasury stock method, in determining the
weighted average number of shares of common stock outstanding. Not currently
used in the calculation is the effect of the Company's convertible debt of
$125,000,000. For the years ended December 31, 1996 and 1997, the effect of
the convertible debt is antidilutive and as such, is not to be included in the
diluted EPS calculation. Earnings per share for all periods presented have
been restated following the provisions of SFAS 128.
F-12
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest rate swap agreements
The Company has entered into two interest rate swap agreements (Note 8) as a
means of managing its interest rate exposure. The Company has not entered
these agreements for trading or speculative purposes. These agreements have
the effect of converting the Company's line of credit obligation from a
variable rate to a fixed rate. Net amounts paid or received are reflected as
adjustments to interest expense. The counterparty to these agreements is a
large international financial institution. These interest rate swap agreements
subject the Company to financial risk that will vary during the life of the
agreements in relation to the prevailing market interest rates. The Company is
also exposed to credit loss in the event of non-performance by this
counterparty. However, the Company does not anticipate non-performance by the
other party, and no material loss would be expected from non-performance by
the counterparty.
Financial instruments
The Company's financial instruments consist primarily of cash, investments,
accounts receivable, notes receivable from related parties, accounts payable,
employee compensation and benefits, and other accrued liabilities. These
balances, as presented in the financial statements at December 31, 1996 and
1997, approximate their fair value. Borrowings under the Company's three
credit facilities, of which $590,000,000 was outstanding as of December 31,
1997, reflect fair value as they are subject to fees and rates competitively
determined in the marketplace. The fair value of the interest rate swap
agreement is based on the present value of expected future cash flows from the
agreement and was in a net payable position of $49,000 at December 31, 1997.
The fair value of convertible subordinated notes was approximately
$149,700,000 at December 31, 1997.
Foreign currency translation
The Company's principal operations outside of the United States are in
Argentina. The currency in Argentina floats with the U.S. dollar, therefore,
there are no significant foreign currency translation adjustments. The
Company's operations in Europe were nominal through December 31, 1997.
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
In December 1995, the Company changed its year-end to December 31 from May
31. The information presented for the seven months ended December 31, 1994 and
the year ended December 31, 1995 has not been audited. In the opinion of
management, the unaudited consolidated statements of income and of cash flows
include all adjustments consisting solely of normal recurring adjustments
necessary to present fairly the Company's consolidated results of operations
and cash flows for the seven months ended December 31, 1994 and the year ended
December 31, 1995.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-13
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment comprise the following:
DECEMBER 31,
--------------------------
1996 1997
Land.................... $ 473,000 $ 1,410,000
Buildings............... 5,428,000 6,463,000
Leaseholds and
improvements........... 40,162,000 78,956,000
Equipment............... 93,194,000 147,824,000
Construction in
progress............... 4,638,000 7,352,000
------------ ------------
143,895,000 242,005,000
Less accumulated
depreciation and
amortization........... (46,051,000) (69,167,000)
------------ ------------
Property and equipment,
net.................... $ 97,844,000 $172,838,000
============ ============
Depreciation and amortization expense on property and equipment was
$5,315,000, $4,855,000, $13,903,000 and $22,160,000 for the year ended May 31,
1995, the seven months ended December 31, 1995, and the years ended December
31, 1996 and 1997, respectively.
3. INTANGIBLE ASSETS
A summary of intangible assets is as follows:
DECEMBER 31,
--------------------------
1996 1997
Goodwill......................................... $244,539,000 $624,740,000
Patient lists.................................... 58,119,000 122,463,000
Noncompetition agreements........................ 38,984,000 61,797,000
Deferred debt issuance costs..................... 9,122,000 23,415,000
Other............................................ 6,277,000 18,891,000
------------ ------------
357,041,000 851,306,000
Less accumulated amortization.................... (45,778,000) (77,040,000)
------------ ------------
$311,263,000 $774,266,000
============ ============
Amortization expense applicable to intangible assets was $7,028,000,
$5,953,000, $18,542,000 and $32,443,000 for the year ended May 31, 1995, the
seven months ended December 31, 1995, and the years ended December 31, 1996
and 1997, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets comprise the following:
DECEMBER 31,
-----------------------
1996 1997
Supplier rebates and other non-trade receivables.... $ 6,594,000 $10,886,000
Prepaid income taxes................................ 6,491,000 5,501,000
Prepaid expenses.................................... 4,084,000 4,910,000
Deposits............................................ 135,000 203,000
----------- -----------
$17,304,000 $21,500,000
=========== ===========
F-14
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES RECEIVABLE FROM RELATED PARTIES
During the year ended December 31, 1997 the Company entered into various
agreements to provide funding for expansion to certain companies that provide
renal dialysis or renal related services. These notes receivables are secured
by the assets and operations of these companies. Approximately $9,205,000 was
outstanding and included in notes receivable from related parties at December
31, 1997. Additionally, a note receivable from the Company's President was
approximately $1,678,000 and $1,820,000 at December 31, 1996 and 1997,
respectively.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities comprise the following:
DECEMBER 31,
-----------------------
1996 1997
Customer refunds........................................ $ 6,068,000 $ 5,278,000
Accrued interest........................................ 4,185,000 5,395,000
Other................................................... 2,352,000 5,254,000
----------- -----------
$12,605,000 $15,927,000
=========== ===========
7. INCOME TAXES
The provision for income taxes consists of the following:
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED DECEMBER 31,
MAY 31, DECEMBER 31, --------------------------
1995 1995 1996 1997
Current
Federal............. $ 7,602,000 $9,546,000 $ 20,655,000 $ 35,128,000
State............... 1,438,000 1,462,000 3,562,000 6,430,000
Foreign............. 1,070,000
Deferred
Federal............. (1,002,000) (943,000) (1,151,000) (1,963,000)
State............... (211,000) (134,000) (106,000) (453,000)
----------- ---------- ------------ ------------
$ 7,827,000 $9,931,000 $ 22,960,000 $ 40,212,000
=========== ========== ============ ============
F-15
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
DECEMBER 31,
----------------------
1996 1997
Receivables, primarily allowance for doubtful
accounts.......................................... $4,860,000 $8,635,000
Intangibles, primarily patient lists............... 5,241,000 6,055,000
Property and equipment............................. 33,000
Accrued vacation................................... 831,000 2,114,000
Deferred compensation.............................. 107,000 67,000
Foreign NOL carryforward........................... 944,000
Foreign tax credit carryforward.................... 200,000
Other.............................................. 14,000 417,000
---------- ----------
Gross deferred tax assets.......................... 11,053,000 18,065,000
Depreciation and amortization...................... (1,976,000) (2,454,000)
Intangible assets.................................. (3,442,000) (6,712,000)
Change in tax accounting method.................... (313,000) (17,000)
---------- ----------
Gross deferred tax liabilities................... (5,731,000) (9,183,000)
Valuation allowance.............................. (1,144,000)
---------- ----------
Net deferred tax assets.......................... $5,322,000 $7,738,000
========== ==========
The valuation allowance relates to deferred tax assets established under
SFAS No. 109 for foreign net operating loss carryforwards of $2.86 million and
foreign tax credit carryforwards of $200,000. These unutilized loss and credit
carryforwards which expire in 2002, will be carried forward to future years
for possible utilization. No benefit of these carryforwards has been
recognized on the financial statements.
The reconciliation between the Company's effective tax rate and the U.S.
federal income tax rate on income is as follows:
SEVEN MONTHS YEARS ENDED
YEAR ENDED ENDED DECEMBER 31,
MAY 31, DECEMBER 31, --------------
1995 1995 1996 1997
Federal income tax rate............. 34.0% 35.0% 35.0% 35.0%
State taxes, net of federal benefit. 4.0 3.8 4.1 4.1
Foreign income taxes................ 0.4
Nondeductible amortization of
intangible assets.................. 0.9 1.5 1.1 0.8
Federal and state income tax benefit
from S corporation status of HCC... (4.0) (1.1) (0.3)
Valuation allowance................. 1.2
Other............................... (0.5) 1.1 0.1 0.7
---- ---- ------ ------
Effective tax rate.................. 34.4 40.3 40.0 42.2
Minority interests in partnerships.. (2.2) (2.7) (2.3) (1.9)
---- ---- ------ ------
Effective tax rate before minority
interests.......................... 32.2% 37.6% 37.7% 40.3%
==== ==== ====== ======
F-16
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT
Long-term debt comprises:
DECEMBER 31,
--------------------------
1996 1997
Credit Facilities............................... $ 85,000,000 $590,000,000
Convertible Subordinated Notes, 5 5/8%, due
2006........................................... 125,000,000 125,000,000
Acquisition obligations......................... 29,091,000 26,651,000
Capital lease obligations (Note 9).............. 6,716,000 5,180,000
Other........................................... 1,752,000 4,761,000
------------ ------------
247,559,000 751,592,000
Less current portion............................ (14,433,000) (27,810,000)
------------ ------------
$233,126,000 $723,782,000
============ ============
Maturities of long-term debt for the years ending December 31 are as
follows:
1998....................................................... $ 27,810,000
1999....................................................... 3,180,000
2000....................................................... 45,775,000
2001....................................................... 60,507,000
2002....................................................... 60,305,000
Thereafter................................................. 554,015,000
12% Senior Subordinated Discount Notes
In August 1994, the Company completed a public offering consisting of units
of 12% Senior Subordinated Discount Notes (the "Notes") and common stock.
Aggregate proceeds from the offering were $71,294,000, of which $900,000 was
allocated to the common stock, based upon the estimated value of the stock and
the remaining $70,394,000 to the Notes. The Notes had a stated maturity of
August 15, 2004 with the first semi-annual cash interest payment commencing on
February 15, 1998, at a rate of 12% per annum. Prior to February 15, 1998,
interest was paid in kind through amortization of the discount. The discount
was amortized using the effective interest rate of 12.39%.
On December 7, 1995, the Company redeemed 35% of the accreted value of the
Notes equaling $28,749,000 at a redemption premium of 111% for a total
redemption price of $31,912,000. An extraordinary loss on the early
extinguishment of debt of $4,258,000, net of income tax effect of $1,703,000,
was recorded during the seven months ended December 31, 1995. In July and
September 1996, the Company retired the remaining 65% of the outstanding Notes
for $68,499,000, including consent payments of $1,100,000. An extraordinary
loss on the early extinguishment of debt of $12,623,000, net of income tax
effect of $4,923,000, was recorded in the year ended December 31, 1996.
Credit Facilities
At December 31, 1997 and 1996, the Company had outstanding borrowings under
its revolving credit facilities of $353,000,000 and $85,000,000, respectively.
On October 24, 1997, the Company expanded its existing $400 million
revolving credit facility to an aggregate of $1,050,000,000 consisting of a
seven-year $800 million revolving credit facility and a ten-year $250 million
term facility. Under the $800 million revolving credit facility, up to
$100,000,000 may be used in
F-17
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
connection with letters of credit, and up to $15,000,000 in short-term funds
may be borrowed the same day notice is given to the banks under a "Swing Line"
facility. Up to $75,000,000 of the available letters of credit or borrowings
under the revolving credit facility may be utilized for foreign financing. In
general, borrowings under the credit facilities bear interest at one of two
floating rates selected by the Company: (i) the Alternate Base Rate (defined
as the higher of The Bank of New York's prime rate or the federal funds rate
plus 0.5%); or (ii) Adjusted LIBOR (defined as the 30-, 60-, 90- or 180-day
London Interbank Offered Rate, adjusted for statutory reserves) plus a margin
that ranges from 0.45% to 1.75% depending on the Company's leverage ratio.
Swing Line borrowings bear interest at either a rate negotiated by the Company
and the banks at the time of borrowing or, if no rate is negotiated and agreed
upon, the Alternate Base Rate.
Maximum borrowings under the $800 million revolving credit facility will be
reduced by $75,000,000 on September 30, 2001, $125,000,000 on September 30,
2002, and another $200,000,000 on September 30, 2003, and the revolving credit
facility terminates on September 30, 2004. Under the $250 million term
facility, payments of $2,500,000 shall be made each consecutive year beginning
on September 30, 1998 and continuing through September 30, 2006. The remaining
balance of $227,500,000 is due on September 30, 2007 when the term facility
terminates. The credit facilities contain financial and operating covenants
including, among other things, requirements that the Company maintain certain
financial ratios and satisfy certain financial tests, and imposes limitations
on the Company's ability to make capital expenditures, to incur other
indebtedness and to pay dividends. The Company is in compliance with all such
covenants.
The Company and certain of its subsidiaries, including Total Renal Care,
Inc. ("TRC"), TRC West, Inc., Total Renal Care Acquisition Corp., RTC, Renal
Treatment Centers-Mid Atlantic, Inc., Renal Treatment Centers-Northeast, Inc.,
Renal Treatment Centers-California, Inc., Renal Treatment Centers-West, Inc.
and Renal Treatment Centers-Southeast, Inc., have guaranteed the Company's
obligations under the credit facilities on a senior basis.
RTC also had a Credit Agreement which provided for a $350,000,000 revolving
credit/term facility available to fund acquisitions and general working
capital requirements, of which $237,000,000 and no amounts were outstanding as
of December 31, 1997 and December 31, 1996, respectively. Borrowings under the
RTC Credit Agreement bear interest at either (i) the agent bank's base rate
payable on a quarterly basis or (ii) a one-, two-, three-, or six-month period
Libor rate plus .50% to 1.50%, depending on RTC's ratio of consolidated debt
to annualized cash flow, payable at maturity, or, in the case of a six-month
period rate, at three months and maturity. The weighted average interst rate
of all loans outstanding at December 31, 1997 was 6.9%. The loans are
collateralized by all stock of RTC's subsidiaries and the assignment of all
intercompany notes. The RTC Credit Agreement was terminated and repaid with
borrowings under the TRCH Credit Facilities on February 27, 1998.
Convertible Subordinated Notes
In June 1996, RTC issued $125,000,000 of 5 5/8% Convertible Subordinated
Notes due 2006 (the "Notes"). The Notes are convertible, at the option of the
holder, at any time after August 12, 1996 through maturity, unless previously
redeemed or repurchased, into Common Stock at a conversion price of $25.62
principal amount per share, subject to certain adjustments. At any time on or
after July 17, 1999, all or any part of the Notes will be redeemable at the
Company's option on at least 15 and not more than 60 days notice as a whole
or, from time to time, in part at redemption prices ranging from 103.94% to
100% of the principal amount thereof, depending on the year of redemption,
together with accrued interest to, but excluding, the date fixed for
redemption.
The 5 5/8% subordinated convertible notes are issued by the Company's
wholly-owned subsidiary, Renal Treatment Centers, Inc. (RTC) and is guaranteed
by the Company. The following is summarized financial information of RTC:
F-18
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31
-------------------------
1996 1997
Cash and cash equivalents......................... $ 1,446,000 $ 743,000
Accounts receivable, net.......................... 65,198,000 95,927,000
Other current assets.............................. 54,273,000 19,484,000
------------ ------------
Total current assets............................ 120,917,000 116,154,000
Property and equipment, net....................... 39,578,000 72,777,000
Intangible assets, net............................ 130,646,000 384,529,000
Other assets...................................... 2,807,000 12,034,000
------------ ------------
Total assets.................................... $293,948,000 $585,494,000
============ ============
Current liabilities............................... $ 35,240,000 $ 62,673,000
Long-term debt.................................... 130,574,000 367,219,000
Other long-term liabilities....................... -- 444,000
Stockholder's equity.............................. 128,134,000 155,158,000
------------ ------------
$293,948,000 $585,494,000
============ ============
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
Net operating revenues............... $164,568,000 $225,077,000 $322,792,000
Total operating expenses............. 139,748,000 203,402,000 277,869,000
------------ ------------ ------------
Operating income..................... 24,820,000 21,675,000 44,923,000
Interest expense, net................ 2,557,000 4,384,000 11,802,000
------------ ------------ ------------
Income before income taxes........... 22,263,000 17,291,000 33,121,000
Income taxes......................... 7,632,000 6,609,000 15,071,000
------------ ------------ ------------
Net income........................... $ 14,631,000 $ 10,682,000 $ 18,050,000
============ ============ ============
Acquisition Obligations
In 1994, pursuant to a business acquisition, RTC entered into an agreement
to pay $7,364,100 in annual installments commencing June 1995 through June
1998. Interest on the unpaid principal amount of the note accrued at an annual
rate of 6.50%, payable in arrears each June 1 from 1995 from 1998. The note
allowed the seller to convert the principal amount of the note into that
number of shares of common stock of RTC based upon the average daily closing
sale price of RTC stock during December 1994. During 1997, the note payable
was paid in full through the issuance of common stock.
In 1996, pursuant to a business acquisition, RTC entered into an agreement
to pay a total of $8,050,000 in one installment in January 1997. During 1997,
pursuant to several business acquisitions, RTC entered into several other
agreements to pay the various Sellers a total of $24,468,000 in one
installment in January 1998.
In conjunction with certain facility acquisitions, the Company issued three
letters of credit. Two of these were released on April 1, 1997. The remaining
letter of credit of $3,000,000 is being released to the seller in three annual
principal installments of $1,000,000 commencing January 1997. The Company has
also agreed to pay the seller interest at 6.5% on the outstanding principal.
As of December 31, 1996 and December 31, 1997 the aggregate amount
outstanding, including accrued interest, was $15,886,000 and $2,183,000
respectively.
F-19
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate Swap Agreements
On November 25, 1996, the Company entered into a seven-year interest rate
swap agreement involving the exchange of fixed and floating interest payment
obligations without the exchange of the underlying principal amounts. At
December 31, 1997 the total notional principal amount of this interest rate
swap agreement was $100,000,000 and the effective interest rate thereon was
7.57%.
On July 24, 1997, the Company entered into a ten-year interest rate swap
agreement. At December 31, 1997 the total notional principal amount of this
interest rate swap agreement was $200,000,000 and the effective interest rate
thereon was 7.77%.
9. LEASES
The Company leases the majority of its facilities under noncancelable
operating leases expiring in various years through 2021. Most lease agreements
cover periods from five to ten years and contain renewal options of five to
ten years at the fair rental value at the time of renewal or at rates subject
to consumer price index increases since the inception of the lease. In the
normal course of business, operating leases are generally renewed or replaced
by other similar leases.
Future minimum lease payments under noncancelable operating leases for the
years ending December 31 are as follows:
1998...................................................... $ 28,282,000
1999...................................................... 25,461,000
2000...................................................... 23,350,000
2001...................................................... 20,740,000
2002...................................................... 19,588,000
Thereafter................................................ 74,233,000
------------
Total minimum lease payments.............................. $191,654,000
============
Rental expense under all operating leases for the year ended May 31, 1995,
the seven months ended December 31, 1995 and the years ended December 31, 1996
and 1997 amounted to $7,425,000, $5,851,000, $15,901,000 and $24,589,000,
respectively.
The Company also leases certain equipment under capital lease agreements.
Future minimum lease payments under capital leases for the years ending
December 31 are as follows:
1998........................................................ $2,473,000
1999........................................................ 2,091,000
2000........................................................ 801,000
2001........................................................ 245,000
2002........................................................ 28,000
Thereafter.................................................. 176,000
----------
5,814,000
Less--Portion representing interest......................... 634,000
----------
Total capital lease obligation, including current portion of
$782,000................................................... $5,180,000
==========
F-20
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net book value of fixed assets under capital lease was $5,932,000 and
$5,649,000 at December 31, 1996 and 1997, respectively. Capital lease
obligations are included in long-term debt (Note 8).
10. STOCKHOLDERS' EQUITY
Public offerings of common stock
On March 1, 1994, RTC completed a public offering whereby it issued
6,393,315 shares of common stock. The stock offering resulted in net proceeds
to RTC in the amount of $51,101,000 after the deduction of certain expenses.
On November 3, 1995, the Company completed an initial public offering of its
common stock at an offering price of $9.30 per share. The Company received net
proceeds of $98,294,000 after the deduction of underwriting discounts and
commissions and other expenses. The Company used net proceeds of $62,912,000
to redeem outstanding notes and to repay outstanding borrowings. The remainder
of the net proceeds was used for general corporate purposes, acquisitions, de
novo facility developments and other capital expenditures.
On April 3, 1996, and October 31, 1996 the Company completed equity offerings
of its 13,416,667 and 4,166,667 shares of common stock, respectively; 5,833,333
and 833,334, respectively, of which were sold for the Company's account and
7,583,333 and 3,333,333 respectively, of which were sold by certain of the
Company's stockholders. The net proceeds received by the Company of $109,968,000
and $18,350,000, respectively, were used to repay borrowings incurred under the
Company's Credit Facilities in connection with acquisitions, to repurchase and
subsequently retire its 12% senior subordinated debt, to finance other
acquisitions and de novo developments and for working capital and other
corporate purposes.
Change in shares, stock splits and dividends
In July 1994, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock from 1,000 shares to
35,000,000 shares and to reduce the par value of such stock from $1.00 per
share to $.001 per share. Concurrent with this change, the Board of Directors
approved a 1,000-for-1 stock split. Shares held by Tenet were the only shares
affected by this action. Following the split, Tenet purchased an additional
4,888,890 shares of common stock for $4,400.
Immediately following the public debt offering of 12% senior subordinated
debt in August 1994, the Company paid Tenet a dividend totaling $81,652,000.
The dividend comprised $75,500,000 in cash and $6,152,000 in the forgiveness
of Tenet's intercompany balance due the Company. Subsequently, the Company has
not made, nor is it intending to make, dividends to its stockholders.
During October 1995 the Company's directors authorized an increase in the
authorized number of shares of common stock to 55,000,000, authorized
5,000,000 new shares of $.001 par value preferred stock, and approved a three-
into-two reverse stock split of the Company's common stock. All information in
these consolidated financial statements pertaining to shares of common stock
and per share amounts have been restated to retroactively reflect the stock
splits.
Dividend distributions paid during 1995 and 1996 were to the former
shareholders of entities acquired by RTC in transactions accounted for as
poolings of interests as described in Note 1.
F-21
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On September 30, 1997 the Company announced a common stock dividend to all
shareholders of record as of October 7, 1997, to be paid on October 20, 1997.
Each shareholder received two additional shares of common stock for each three
shares held. Fractional shares calculated as a result of the stock dividend
were paid out in cash in the amount of approximately $14,000. As such, all
share and per share amounts presented in the financial statements and related
notes thereto have been retroactively restated to reflect this dividend which
was accounted for as a stock split.
Earnings per share
The reconciliation of the numerators and denominators used to calculate
earnings per share for all periods presented is as follows:
SEVEN MONTHS ENDED YEAR ENDED
------------------------- ----------------------------------------
YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
MAY 31, 1995 1994 1995 1995 1996 1997
(UNAUDITED) (UNAUDITED)
Net Income:
As reported............ $14,903,000 $8,537,000 $12,166,000 $20,745,000 $26,707,000 $55,027,000
=========== ========== =========== =========== =========== ===========
Net Income--assuming di-
lution:
As reported............ $14,903,000 $8,537,000 $12,166,000 $20,745,000 $26,707,000 $55,027,000
Add back interest on
RTC earnout note, tax
effected.............. 136,000 283,000 233,000 34,000
----------- ---------- ----------- ----------- ----------- -----------
$14,903,000 $8,537,000 $12,302,000 $21,028,000 $26,940,000 $55,061,000
=========== ========== =========== =========== =========== ===========
Applicable common
shares:
Average outstanding
during the period..... 45,376,000 42,812,000 57,237,000 54,058,000 74,172,000 77,649,000
Average mandatorily
redeemable common
shares outstanding
during the period..... 110,000
Reduction in shares in
connection with notes
receivable from
employees............. (185,000) (130,000) (128,000) (122,000) (130,000) (125,000)
----------- ---------- ----------- ----------- ----------- -----------
Weighted average number
of shares outstanding
for use in computing
earnings per share..... 45,301,000 42,682,000 57,109,000 53,936,000 74,042,000 77,524,000
Outstanding stock
options (based on the
treasury stock
method)............... 2,205,000 2,197,000 2,728,000 2,897,000 2,411,000 2,288,000
Dilutive effect of RTC
earnout note.......... 0 0 856,000 911,000 772,000 163,000
----------- ---------- ----------- ----------- ----------- -----------
Adjusted weighted
average number of
common and common
share equivalent
shares outstanding.... 47,506,000 44,879,000 60,693,000 57,744,000 77,225,000 79,975,000
=========== ========== =========== =========== =========== ===========
Earnings per common
share.................. $ 0.33 $ 0.20 $ 0.22 $ 0.38 $ 0.36 $ 0.71
Earnings per common
share--assuming
dilution............... $ 0.31 $ 0.19 $ 0.20 $ 0.36 $ 0.35 $ 0.69
Stock-Based Compensation Plans
At December 31, 1997, the Company has four stock-based compensation plans,
which are described below.
1994 Stock Plan. In August 1994, the Company established the Total Renal
Care Holdings, Inc. 1994 Equity Compensation Plan (1994 Stock Plan) which
provides for awards of nonqualified stock options to purchase common stock and
other rights to purchase shares of common stock to certain employees,
directors, consultants and facility medical directors of the Company.
Under terms of the 1994 Stock Plan, the Company may grant awards for up to
8,474,078 shares of common stock. Original options granted generally vest on
the ninth anniversary of the date of grant, subject to accelerated
F-22
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
vesting in the event the Company meets certain performance criteria. In April
1996, the Company changed the vesting schedule for new options granted so that
options vest over four years from the date of grant. The exercise price of
each option equals the market price of the Company's stock on the date of
grant, and an option's maximum term is ten years.
Purchase rights to acquire 1,314,450 common shares for $.90-$3.60 per share
have been awarded to certain employees under the 1994 Stock Plan, the majority
of which were granted in connection with the change in control. All such
rights were exercised and the Company received notes for the uncollected
portion of the purchase proceeds. The notes bear interest at the lesser of The
Bank of New York's prime rate or 8%, are full recourse to the employees, and
are secured by the employees' stock. The notes are repayable four years from
the date of issuance, subject to certain prepayment requirements. At December
31, 1995, 1996 and 1997 the outstanding notes plus accrued interest totaled
$378,000, $227,000, and $212,000 respectively.
During the year ended May 31, 1995, 1,477,778 of the options issued to
purchase common stock were issued to the Company's President. These options
originally vested 50% over four years and 50% in the same manner as other
options granted under the 1994 Stock Plan. In September 1995, the Board of
Directors and stockholders agreed to accelerate the President's vesting period
and all of the options became 100% vested. Pursuant to this action, the
President exercised all of the stock options through issuance of a full
recourse note of $1,330,000 bearing interest at the lesser of prime or 8%.
Additionally, the President executed a full recourse note for $1,349,000
bearing interest at the lesser of prime or 8% per annum to meet his tax
liability in connection with the stock option exercise. In April 1996, this
note was increased by an additional $173,000. These notes are secured by other
shares of company stock and mature in September 1999 or upon disposition of
the common stock by the President.
1995 Stock Plan. In November 1995, the Company established the Total Renal
Care Holdings, Inc. 1995 Equity Incentive Plan (1995 Stock Plan) which
provides awards of stock options and the issuance of common shares subject to
certain restrictions to certain employees, directors and other individuals
providing services to the Company. There are 1,666,667 common shares reserved
for issuance under the 1995 Stock Plan. Options granted generally vest over
four years from the date of grant and an option's maximum term is ten years,
subject to certain restrictions. The Company generally issues awards with the
exercise prices equal to the market price of the Company's stock on the date
of grant.
1997 Stock Plan. In July 1997, the Company established the Total Renal Care
Holdings, Inc. 1997 Equity Compensation Plan (1997 Stock Plan) which provides
awards of stock options and the issuance of common shares subject to certain
restrictions to certain employees, directors and other individuals providing
services to the Company. There are 4,166,667 common shares reserved for
issuance under the 1997 Stock Plan. Options granted generally vest over four
years from the date of grant and an option's maximum term is ten years. The
Company generally issues awards with the exercise prices equal to the market
price of the Company's stock on the date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants for the seven months ended December 31, 1995, year ended December 31,
1996, and year ended December 31, 1997, respectively: dividend yield of 0
percent for all periods; weighted average expected volatility of 40.5%, 36.35%
and 35.12%; risk-free interest rates of 5.92%, 6.56% and 6.40% and expected
lives of six years for all periods.
F-23
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A combined summary of the status of the 1994 Stock Plan, 1995 Stock Plan,
and 1997 Stock Plan as of and for the seven months ended December 31, 1995 and
years ended December 31, 1996 and 1997, is presented below:
SEVEN MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
Outstanding at beginning
of period.............. 2,863,890 $ .90 1,441,685 $ 1.91 3,118,394 $13.82
Granted................. 322,238 5.41 1,818,913 22.28 3,931,080 19.74
Exercised............... (1,744,443) .90 (111,647) .92 (275,620) 3.96
Forfeited............... (30,557) 2.43 (1,734,016) 22.46
---------- ----- --------- ------ ---------- ------
Outstanding at end of
year................... 1,441,685 $1.91 3,118,394 $13.82 5,039,838 $16.01
========== ===== ========= ====== ========== ======
Options exercisable at
year end............... 351,855 663,007 797,474
Weighted-average fair
value of options
granted during the
year................... $3.17 $10.52 $ 9.15
Forfeitures and grants include the effects of modifications to the terms of
awards as if the original award was repurchased and exchanged for a new award
of greater value. On April 24, 1997, 1,649,735 shares were cancelled and
reawarded at the market price as of that date. The new awards vest annually
over 3 years on the anniversary date of the new award.
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EERCISE PRICESX OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
$ 0.01-$ 5.00 950,917 6.8 years $ 1.15 666,411 $ 1.08
$ 5.01-$10.00 19,735 7.0 years 5.44 10,531 5.47
$10.01-$15.00 13,890 7.8 years 11.82 7,230 11.82
$15.01-$20.00 3,561,952 8.8 years 18.64 99,969 17.49
$20.01-$25.00 100,002 9.3 years 22.07 2,083 20.73
$25.01-$30.00 300,283 9.6 years 26.20 11,250 28.43
$30.01-$35.00 93,059 9.8 years 30.79 0 0
--------- --------- ------ ------- ------
5,039,838 8.5 years $16.01 797,474 $ 3.73
========= ========= ====== ======= ======
RTC Stock Plan. In September 1990, RTC established a stock plan, which
provided for awards of incentive and nonqualified stock options to certain
directors, officers, employees and other individuals. In 1995 and 1996, the
stock plan was amended to increase the number of RTC common shares available
for grant to 3,253,395 and 4,321,395 respectively. In addition, in 1996, RTC
established an option plan for outside directors pursuant to which
nonqualified stock options to purchase up to 80,100 shares of RTC common stock
were reserved for issuance.
Options granted generally vest from three to five years and an option's
maximum term is ten years, subject to certain restrictions. Incentive stock
options were granted at an exercise price not less than the fair market value
of RTC's common stock on the date of grant. Nonqualified stock options were
permitted to be granted as low as 50% of market value, subject to certain
floor restrictions. Accordingly, compensation expense for the difference
between the fair market value and the exercise price for nonqualified stock
options is recorded over the vesting period of such options.
F-24
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1995, RTC granted 559,557 incentive stock options to certain
directors, officers and employees of RTC. These options were granted at an
exercise price equal to the fair market value of RTC's common stock on the
date of the grant. These options vest over three years. Certain options
totaling 407,175 vest upon the earlier of attainment of predetermined earnings
per share targets or nine years.
In March 1996, RTC granted 821,495 incentive stock options to certain
directors, officers and employees of RTC. These options were granted at an
exercise price equal to the fair market value of RTC's common stock on the
date of the grant and vest over four years. Certain options aggregating
231,398 vest upon the earlier of attainment of predetermined earnings per
share targets or nine years.
In December 1996, RTC granted 133,500 incentive stock options to an officer
of the Company. These options were granted at an exercise price equal to the
fair market value of RTC's common stock on the date of the grant and were
fully vested on the grant date.
Also in December 1996, RTC granted 40,050 non-qualified stock options in
connection with the release of RTC from certain obligations. The options were
granted at an exercise price equal to the fair market value of RTC's common
stock on the date of grant and were fully vested as of December 31, 1997.
During 1997, RTC granted 1,182,543 incentive stock options to certain
directors, officers and employees. These options were granted at an exercise
price equal to the fair market value of RTC's common stock on the dates of the
grants and vest in two to five years.
In 1997 RTC granted 26,700 options to acquisition consultants for covenants
not to compete. These options were granted at a price equal to the fair market
values of RTC's common stock on the date of the grant and were valued at
$235,000.
Upon consummation of the Merger, all outstanding options were converted to
The Total Renal Care Holdings Inc. Special Purpose Plan (Special Purpose Plan)
options. The Special Purpose Plan provides for awards of incentive and
nonqualified stock options in exchange for outstanding RTC stock plan options.
The Special Purpose Plan options have the same provisions and terms as the RTC
stock plan, including acceleration provisions upon certain sale of assets,
mergers and consolidations. On the Merger date, there was a conversion of
2,156,426 of the Company's options. Further, options for 1,305,738 shares
became fully vested due to change in control accelerated vesting provisions
which were contained in the original grants. Options for 1,662,356 shares were
exercised subsequent to the Merger date. The Stock Plan Committee has the
option of accelerating the remaining options upon certain sale of assets,
mergers and consolidations.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
the six months ended December 31, 1995, the year ended December 31, 1996 and
the year ended December 31, 1997, respectively: dividend yield of 0 percent
for all periods; weighted average expected volatility of 29.3%, 29.3% and 43%;
risk free interest rates of 6.39%, 6.18% and 6.55%; and expected lives of
6.00, 5.63, 4.29 years.
F-25
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the RTC Stock Plan as of and for the six months
ended December 31, 1995, and the years ended December 31, 1996 and 1997, is
presented below:
SIX MONTHS YEAR ENDED YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------------------- ------------------------- -------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
Outstanding at beginning
of period.............. 1,985,756 $ 6.62 1,658,601 $ 7.33 2,293,483 $11.09
Granted................. 4,197 12.55 997,376 16.50 1,182,543 16.84
Exercised............... (326,012) 3.08 (351,814) 8.73 (171,830) 7.60
Forfeited............... (5,340) 8.43 (10,680) 9.09 (19,004) 13.09
--------- ------ --------- ------ --------- ------
Outstanding at end of
year................... 1,658,601 $ 7.33 2,293,483 $11.09 3,285,192 $13.33
========= ====== ========= ====== ========= ======
Options exercisable at
year end............... 995,018 966,903 1,785,169
========= ========= =========
Weighted-average fair
value of options
granted during the
year................... $ 4.90 $ 7.35 $ 9.70
========= ========= =========
The following table summarizes information about RTC fixed stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED AVG.
RANGE OF REMAINING WEIGHTED AVG. WEIGHTED AVG.
EERCISE PRICESX OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
3.75- 7.49. 703,307 4.87 $ 6.49 614,100 $ 6.58
7.50-11.24. 516,430 7.61 8.58 274,262 8.58
11.25-14.99. 4,197 7.89 12.55 4,197 12.55
15.00-18.74. 1,995,843 9.09 16.59 868,580 16.70
18.75-22.50. 65,415 9.33 20.13 24,030 20.37
--------- ---- ------ --------- ------
3,285,192 7.96 $13.33 1,785,169 $12.01
========= ==== ====== ========= ======
Stock Purchase Plan. In November 1995, the Company established the Total
Renal Care Holdings, Inc. Employees Stock Purchase Plan (the Stock Purchase
Plan) which entitles qualifying employees to purchase up to $25,000 of common
stock during each calendar year. The amounts used to purchase stock are
typically accumulated through payroll withholdings and through an optional
lump sum payment made in advance of the first day of the Plan. The Stock
Purchase Plan allows employees to purchase stock for the lesser of 100% of the
fair market value on the first day of the purchase right period or 85% of the
fair market value on the last day of the purchase right period. Except for the
initial purchase right period, which began on November 3, 1995 (the date of
completion of the initial public offering, and ended on December 31, 1996),
each purchase right period begins on January 1 or July 1, as selected by the
employee and ends on December 31. Payroll withholdings related to the Stock
Purchase Plan, included in accrued employee compensation and benefits, were
$411,000, $1,790,000 and $1,120,307 at December 31, 1995, 1996, and 1997
respectively. Subsequent to December 31, 1996, and December 31, 1997, 174,775
and 49,060 shares, respectively were issued to satisfy the Company's
obligations under the Plan.
For the November 1995 and July 1996 purchase right periods the fair value of
the employees' purchase rights were estimated on the beginning date of the
purchase right period using the Black-Scholes model with the
F-26
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
following assumptions for grants on November 3, 1995 and July 1, 1996,
respectively: dividend yield of 0 percent for both periods; expected
volatility of 36.6 percent for both periods; risk-free interest rate of 5.5
and 6.6 percent and expected lives of 1.2 and 0.5 years. Using these
assumptions, the weighted-average fair value of purchase rights granted on
November 3, 1995 and July 1, 1996 is $2.86 and $7.37, respectively.
The fair value of the January 1, 1997 and July 1, 1997 purchase right period
were not estimated at December 31, 1997 because of the employee's ability to
withdraw from participation through December 31.
Pro forma net income and earnings per share. The Company applied APB Opinion
No. 25 and related interpretations in accounting for all of its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
option plans and its stock purchase plan. Had compensation cost for the
Company's stock-based compensation plans been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
SEVEN MONTHS YEAR ENDED YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31,
DEC. 31, 1995 1996 1997
Income before extraordinary item.... $14,038,000 $28,830,000 $43,282,000
Extraordinary loss related to early
extinguishment of debt, net of tax. 2,555,000 7,700,000 0
----------- ----------- -----------
Net income........................ $11,483,000 $21,130,000 $43,282,000
=========== =========== ===========
Earnings per common share
Income before extraordinary item.. $ 0.25 $ 0.39 $ 0.56
Extraordinary loss................ (0.05) (0.10) 0
----------- ----------- -----------
Net income........................ $ 0.20 $ 0.29 $ 0.56
=========== =========== ===========
Weighted average number of common
shares and equivalents outstanding. 56,465,000 74,042,000 77,524,000
=========== =========== ===========
Earnings per common share--assuming
dilution:
Income before extraordinary item.. $ 0.20 $ 0.25 $ 0.55
Extraordinary loss................ (0.05) ( 0.09)
----------- ----------- -----------
Net income........................ $ 0.15 $ 0.16 $ 0.55
=========== =========== ===========
Weighted average number of common
shares and equivalents
outstanding--assuming dilution..... 58,220,000 83,477,000 78,982,000
=========== =========== ===========
Stock issued to employees outside of plans
In connection with the change in control in August 1994, the Company awarded
its Chief Executive Officer and Chief Operating Officer rights to purchase
1,855,555 and 222,222 common shares, respectively, at a purchase price of $.90
per share. These rights were awarded outside of the 1994 Stock Plan in
connection with the respective employment agreements. All such purchase rights
were made and the Company received notes totaling $935,000 for the uncollected
portion of the purchase proceeds. The notes bear terms similar to those issued
in connection with the 1994 Stock Plan.
11. TRANSACTIONS WITH RELATED PARTIES
The Company provides dialysis services to Tenet hospital patients under
agreements with terms of one to three years. The contract terms are comparable
to contracts with unrelated third parties. Included in the receivable from
Tenet are amounts related to these services of $347,000 and $534,000 at
December 31, 1996 and 1997,
F-27
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively. Net operating revenues received from Tenet for these services
were $2,130,000, $1,332,000, $2,260,000 and $2,640,000 for the year ended May
31, 1995, the seven months ended December 31, 1995, and the years ended
December 31, 1996 and 1997, respectively.
Prior to October 1994, company employees were eligible to participate in the
Tenet Retirement Savings Plan, a defined contribution retirement plan,
covering substantially all full-time employees, whereby employees'
contributions to the plan were matched by the Company up to certain limits.
Defined contributions made by the Company for the year ended May 31, 1995
amounted to $152,000.
Prior to December 1994, the Company was insured for employee health coverage
and a substantial portion of workers' compensation through self-insurance
programs administered by Tenet. Additionally, all professional and general
liability risks were insured by a wholly owned subsidiary of Tenet. The
Company has no liability for employee health coverage claims incurred prior to
December 31, 1994 or workers' compensation claims prior to August 11, 1994.
Insurance expense under these programs amounted to $1,409,000 for year ended
May 31, 1995.
DLJMB
An affiliate of DLJMB was the underwriter for public debt offering of units,
comprising Senior Subordinated Discount Notes and common stock, and DLJMB
participated in the change in control transaction in which DLJMB and certain
employees acquired 74% of the Company. Fees for these transactions were
$2,496,000 and $1,160,000, respectively. During the seven months ended
December 31, 1995 and the year ended December 31, 1996 an affiliate of DLJMB
also was one of several underwriters for the initial public offering of common
stock as well as the two additional public stock offerings in which the
Company issued 11,500,000, 11,666,667 and 833,334 shares, respectively. Fees
for these transactions to DLJMB or its affiliates were $7,245,000, $5,075,000,
and $780,000, respectively. Effective with the August 1997 public offering of
common stock, DLJMB and it's affiliates are no longer considered a related
party.
12. EMPLOYEE BENEFIT PLAN
The Company has a savings plan (the Plan) for substantially all employees,
which has been established pursuant to the provisions of Section 401(k) of the
Internal Revenue Code (IRC). The Plan provides for employees to contribute
from 1% to 15% of their base annual salaries on a tax-deferred basis not to
exceed IRC limitations. The Company, in its sole discretion, may make a
contribution under the Plan each fiscal year as determined by the Board of
Directors. This contribution was allocated for the year ended May 31, 1995 to
each participant not eligible for participation in the 1994 Stock Plan (Note
9) in proportion to the compensation paid during the year and the length of
employment for each of the participants. For the year ended May 31, 1995, the
Company accrued contributions under the Plan in the amount of $200,000. The
Company did not make any contributions subsequent to May 31, 1995.
RTC has a defined contribution savings plan covering substantially all of
their employees. RTC's contributions under the plan were approximately
$231,002, $462,004, $548,471, and $1,069,283 for the six months ended December
31, 1995 and for the years ended December 31, 1995, 1996 and 1997,
respectively. Effective July 1, 1998, the plan will be terminated and merged
into the Company's plan.
13. CONTINGENCIES
The Company's laboratory subsidiary is presently the subject of a Medicare
carrier review. The carrier has requested certain medical and billing records
for certain patients and the Company has provided the requested records. The
carrier has not informed the Company of the reason for or the exact nature or
scope of this review.
F-28
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
14. MERGERS AND ACQUISITIONS
Mergers:
During the fiscal years 1996 and 1995, RTC completed the following five
mergers. There were no mergers in 1994 and 1997.
Merger with Group:
On July 23, 1996, RTC acquired the Group. The two dialysis facilities
acquired are located in Florida and serviced a total of approximately 185
patients as of the acquisition date. The transaction was accounted for under
the pooling-of-interest method of accounting. In the transaction, RTC issued
482,377 shares of its common stock in exchange for all of the outstanding
stock of the Group.
Merger with MDU:
On February 29, 1996, RTC acquired MDU. The 11 dialysis facilities acquired
are located in Oklahoma and serviced approximately 317 patients as of the
acquisition date. The transaction was accounted for under the pooling-of-
interests method of accounting. In the transaction, RTC issued 767,168 shares
of its common stock in exchange for all of the outstanding stock of MDU.
Merger with IMS:
On February 20, 1996, RTC acquired IMS. The four dialysis facilities
acquired are located in Hawaii and served a total of approximately 444
patients as of the acquisition date. The transaction was accounted for under
the pooling-of-interests method of accounting. In the transaction, RTC issued
1,047,464 shares of its common stock in exchange for all of the outstanding
stock of IMS.
Merger with The Wichita Companies:
On August 1, 1995, RTC acquired Wichita Dialysis Center, P.A, Southeast
Kansas Dialysis Center, P.A., Garden City Dialysis Center, P.A. and Wichita
Dialysis Center, East, P.A. (the "Wichita Companies"). All of the facilities
acquired are located in Kansas and serviced approximately 355 patients as of
the acquisition date. The transaction was accounted for under the pooling-of-
interest method of accounting. In the transaction, RTC issued 1,558,920 shares
of its common stock in exchange for all of the outstanding stock of the
Wichita Companies.
Merger with HCC:
On March 6, 1995, RTC completed its acquisition of Healthcare Corporation
and its affiliates (collectively, "HCC"). The 13 facilities acquired from HCC
are located in Missouri, Illinois, North Carolina, Florida and Washington,
D.C. and serviced approximately 720 patients as of the acquisition date. The
transaction was accounted for under the pooling-of-interests method of
accounting. In the transaction, RTC issued 2,292,222 shares of its common
stock in exchange for all of the outstanding stock of HCC.
F-29
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The consolidated financial statements give retroactive effect to the mergers
with the Group, the Wichita Companies and HCC and include the Group, the
Wichita Companies, and HCC for all periods presented. The consolidated
financial statements include the operations of IMS and MDU as of January 1,
1996. The following is a summary of the separate and combined results of
operations for periods prior to the mergers (dollars in thousands):
POOLING RTC
RTC COMPANIES* COMBINED
FOR THE YEAR ENDED DECEMBER 31:
1996:
Net patient revenue.......................... $217,529 $ 7,548 $225,077
Income from operations....................... 20,495 1,180 21,675
Net income................................... 9,985 697 10,682
1995:
Net patient revenue.......................... $150,467 $14,101 $164,568
Income from operations....................... 23,319 1,501 24,820
Net income................................... 13,239 1,392 14,631
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995:
Net patient revenue.......................... $ 83,685 $ 3,067 $ 86,752
Income from operations....................... 14,289 512 14,801
Net income................................... 7,709 545 8,254
- --------
* Includes pooling transactions only for period prior to acquisition. Activity
subsequent to acquisition dates is included in RTC.
Acquisitions
Beginning in August 1994, the Company implemented an acquisition strategy
which through the year ended December 31, 1997 has resulted in the acquisition
of 231 facilities providing services to ESRD patients, more than 180 programs
providing acute hospital in-patient dialysis services, two laboratories, a
vascular access management company and a clinical research company
specializing in renal and renal related services. In addition, during this
period the Company developed forty-six de novo facilities, entered into a
management contract covering an additional two unaffiliated facilities, and
purchased the minority interest at one of its existing facilities. The
following is a summary for all acquisitions that were accounted for as
purchases.
SEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
MAY 31, DECEMBER 31, -------------------------
1995 1995 1996 1997
Number of facilities
acquired................... 24 16 67 119
Number of common shares
issued..................... 729,687 1,574,616 102,645 17,613
Numbers of mandatorily
redeemable shares issued... 1,136,112
Number of common stock
options issued............. 66,667
Estimated fair value of
common shares issued....... $ 2,259,000 $ 8,403,000 $ 1,830,000 $ 273,000
Estimated fair value of
mandatorily redeemable
shares issued.............. 3,990,000
Estimated fair value of
common stock options
issued..................... 51,000
Payable to former owners of
acquired facility.......... 1,243,000
Acquisition obligations
(Note 8)................... 15,886,000
Cash paid................... 73,330,000 35,450,000 179,002,000 455,090,000
----------- ----------- ------------ ------------
Aggregate purchase price.... $79,579,000 $45,147,000 $196,718,000 $455,363,000
=========== =========== ============ ============
F-30
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The assets and liabilities of the acquired entities in the preceding table
were recorded at their estimated fair market values at the dates of
acquisition. The initial allocations of fair market value are preliminary and
subject to adjustment during the first year following the acquisition. The
results of operations of the facilities and laboratories have been included in
the Company's financial statements from their respective acquisition dates.
These initial allocations were as follows:
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED DECEMBER 31,
MAY 31, DECEMBER 31, --------------------------
1995 1995 1996 1997
Identified intangibles.. $16,277,000 $10,321,000 $ 34,682,000 $ 87,498,000
Goodwill................ 57,520,000 32,144,000 135,456,000 366,121,000
Tangible assets......... 9,973,000 7,414,000 44,265,000 47,053,000
Liabilities assumed..... (4,191,000) (4,732,000) (17,685,000) (45,309,000)
----------- ----------- ------------ ------------
Total purchase price.. $79,579,000 $45,147,000 $196,718,000 $455,363,000
=========== =========== ============ ============
The following summary, prepared on a pro forma basis, combines the results
of operations as if the acquisitions had been consummated as of the beginning
of each of the periods presented, after including the impact of certain
adjustments such as amortization of intangibles, interest expense on
acquisition financing and income tax effects.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
(UNAUDITED) (UNAUDITED)
Net revenues..................................... $794,235,000 $930,960,000
Net income before extraordinary items............ $ 50,253,000 $ 70,539,000
Pro forma net income per share before
extraordinary items............................. $ 0.68 $ 0.91
Pro forma net income per share before
extraordinary items--assuming dilution.......... $ 0.65 $ 0.88
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been completed prior to
the beginning of the periods presented. In addition, they are not intended to
be a projection of future results and do not reflect any of the synergies,
additional revenue-generating services or direct facility operating expense
reduction that might be achieved from combined operations.
F-31
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SUPPLEMENTAL CASH FLOW INFORMATION
The table below provides supplemental cash flow information:
SEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
MAY 31, DECEMBER 31 DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
Cash paid for:
Income taxes............ $8,970,000 $3,599,000 $30,069,000 $37,402,000
Interest................ 1,346,000 1,919,000 5,730,000 25,039,000
Noncash investing and
financing activities:
Notes receivable for
issuance of common
stock.................. 1,508,000 1,330,000
Dividend of Tenet
intercompany
receivable............. 6,152,000
Estimated value of stock
and options issued in
acquisitions........... 6,249,000 5,335,000 2,810,000 273,000
Fixed assets acquired
under capital lease
obligations............ 542,000 2,021,000 3,670,000 829,000
Contribution to
partnerships........... 1,111,000 943,000 2,318,000
Issuance of common stock
in connection with earn
out note............... 7,364,000 523,000 1,474,000 5,148,000
Issuance of common stock
in connection with IMS
and MDU mergers........ 3,204,000
Grant of stock options
in connection with
covenant not to
compete................ 235,000
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary unaudited quarterly financial data for the years ended December 31,
1996 and 1997 is as follows (in thousands, except per share amounts).
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
Net operating revenues.. $98,493 $117,719 $133,707 $148,105 $157,937 $179,715 $197,749 $225,596
Operating income........ 12,512 17,547 18,437 22,008 24,596 28,694 33,287 38,203
Income before
extraordinary item..... 5,655 9,002 8,731 11,019 11,788 13,470 14,632 15,137
Net income (loss)....... 5,655 9,002 1,031 11,019 11,788 13,470 14,632 15,137
Earning (loss) per
common share:
Income before
extraordinary item per
share.................. 0.08 0.12 0.12 0.14 0.15 0.17 0.19 0.19
Extraordinary loss...... 0.00 0.00 0.11 0.00 0.00 0.00 0.00 0.00
Net income (loss) per
share.................. 0.08 0.12 0.01 0.14 0.15 0.17 0.19 0.19
Earnings (loss) per
common share--assuming
dilution:
Income before
extraordinary item per
share.................. 0.08 0.11 0.11 0.14 0.15 0.17 0.18 0.19
Extraordinary loss...... 0.00 0.00 0.10 0.00 0.00 0.00 0.00 0.00
Net income (loss) per
share.................. 0.08 0.11 0.01 0.14 0.15 0.17 0.18 0.19
F-32
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENTS
As described in Note 1, on February 27, 1998 the Company acquired Renal
Treatment Centers, Inc. ("RTC") in a transaction accounted for as a pooling of
interests. The results of operations for TRCH and the combined amounts
presented in the consolidated financial statements follow:
SEVEN MONTHS
YEAR ENDED ENDED DEC. 31, YEARS ENDED DECEMBER 31,
MAY 31, -------------- -------------------------
1995 1995 1996 1997
Net operating revenues
TRCH.................. $ 98,968,000 $ 89,711,000 $272,947,000 $438,205,000
RTC................... 115,457,000 86,752,000 225,077,000 322,792,000
------------ ------------ ------------ ------------
$214,425,000 $176,463,000 $498,024,000 $760,997,000
============ ============ ============ ============
Net income before
extraordinary item
TRCH.................. $ 4,852,000 $ 6,467,000 $ 23,725,000 $ 36,977,000
RTC................... 10,051,000 8,254,000 10,682,000 18,050,000
------------ ------------ ------------ ------------
$ 14,903,000 $ 14,721,000 $ 34,407,000 $ 55,027,000
============ ============ ============ ============
Net income after
extraordinary item
TRCH.................. $ 4,852,000 $ 3,912,000 $ 16,025,000 $ 36,977,000
RTC................... 10,051,000 8,254,000 10,682,000 18,050,000
------------ ------------ ------------ ------------
$ 14,903,000 $ 12,166,000 $ 26,707,000 $ 55,027,000
============ ============ ============ ============
In connection with the RTC merger, fees and expenses incurred or anticipated
which are relative to the merger and to the integration of the combined
companies will be expensed as required under the pooling of interests
accounting method. Such fees and expenses amounted to $92,835,000 in the first
fiscal quarter of 1998. The charge includes financial advisory, legal,
accounting and other direct transaction costs, payments under severance and
employment agreements and other costs associated with certain compensation
plans and costs to combine the two operations. Costs to combine operations
include the impairment of certain systems and equipment, elimination of
duplicate departments and facilities, and other costs associated with planning
and executing the merger of operations. Included in other long term assets at
December 31, 1997 are $8,247,000 of deferred merger expenses.
F-33
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholders and Board of Directors
Renal Treatment Centers, Inc.
We have audited the accompanying consolidated balance sheets of Renal
Treatment Centers, Inc. and Subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Renal Treatment Centers, Inc. and Subsidiaries as of December 31, 1996 and
1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 14, 1998
F-34
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
1996 1997
ASSETS
Current assets:
Cash............................................. $ 1,445,798 $ 742,959
Investments...................................... 41,202,123 --
Accounts receivable, net of allowance for
doubtful accounts of $7,853,350 in 1996 and
$18,802,377 in 1997............................. 65,198,524 95,926,837
Inventories...................................... 4,388,290 7,023,557
Income tax receivable............................ 3,782,890 3,708,195
Deferred taxes................................... 2,149,718 3,561,178
Prepaid expenses and other current assets........ 2,749,497 4,610,104
Deferred merger expenses......................... -- 27,376,000
------------ ------------
Total current assets........................... 120,916,840 142,948,830
------------ ------------
Property and equipment (net of accumulated
deprecation of $19,691,015 in 1996 and $30,247,762
in 1997).......................................... 39,578,245 72,776,980
Intangibles (net of accumulated amortization of
$51,014,614 in 1997 and $32,934,871 in 1996)...... 130,645,378 385,331,951
Deferred taxes, non-current........................ 2,807,064 3,566,279
------------ ------------
Total assets................................... $293,947,527 $604,624,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 12,369,365 $ 25,788,509
Accounts payable................................. 11,341,983 12,441,487
Accrued compensation............................. 3,838,502 8,766,781
Accrued expenses................................. 4,051,614 10,981,771
Accrued merger expenses.......................... -- 19,129,972
Accrued interest................................. 3,638,874 4,694,136
------------ ------------
Total current liabilities...................... 35,240,338 81,802,656
------------ ------------
Long-term debt, net................................ 130,573,685 367,663,194
Stockholders equity:
Preferred stock, $.01 par value, 5,000,000
shares, authorized; none issued................. -- --
Common stock, $.01 par value, 45,000,0000 shares
authorized; issued and outstanding, 24,430,256
and 24,056,785 shares in 1996 and 1997,
respectively.................................... 244,303 250,568
Additional paid-in capital....................... 87,890,138 96,852,405
Retained earnings................................ 40,393,139 58,442,895
------------ ------------
128,527,580 155,545,868
Less treasury stock; 37,202 shares in 1996 and
36,598 in 1997, at cost........................... (394,076) (387,678)
------------ ------------
Total stockholders' equity..................... 128,133,504 155,158,190
------------ ------------
Total liabilities and stockholders' equity..... $293,947,527 $604,624,040
============ ============
See accompanying notes to consolidated financial statements.
F-35
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997
Net patient revenue.................. $164,568,392 $225,076,500 $322,792,052
Facilities costs..................... 111,677,282 160,192,504 218,375,586
------------ ------------ ------------
Operating profit................. 52,891,110 64,883,996 104,416,466
General and administrative expenses.. 9,156,107 13,082,689 20,385,996
Provision for doubtful accounts...... 4,760,678 10,240,920 11,629,308
Depreciation and amortization
expense............................. 12,066,461 17,076,827 27,478,658
Merger expenses...................... 2,087,542 2,808,247 --
------------ ------------ ------------
Income from operations............... 24,820,322 21,675,313 44,922,504
Interest income...................... (156,150) (1,980,513) (735,019)
Interest expense..................... 2,713,599 6,364,556 12,536,604
------------ ------------ ------------
Income before income taxes........... 22,262,873 17,291,270 33,120,919
Provision for income taxes........... 7,632,069 6,608,871 15,071,163
------------ ------------ ------------
Net income........................... $ 14,630,804 $ 10,682,399 $ 18,049,756
============ ============ ============
Basic earnings per share data:
Earnings per share................. $ 0.67 $ 0.44 $ 0.73
Weighted average common stock...... 21,868,067 24,230,156 24,884,268
Diluted earnings per share data:
Diluted earning per share.......... $ 0.65 $ 0.43 $ 0.70
Weighted average common stock and
dilutive securities............... 23,095,135 25,646,300 25,972,541
See accompanying notes to consolidated financial statements.
F-36
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------- PAID-IN RETAINED ------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
Balance, December 31,
1994................... 21,449,029 $214,491 $78,319,626 $14,141,396 (4,342) $ (47,219) $ 92,628,294
Exercise of common stock
options................ 458,016 4,580 1,297,693 1,302,273
Issuance of common stock
to repay debt.......... 50,522 505 522,524 523,029
Acquisition of treasury
stock.................. (32,860) (346,857) (346,857)
Dividend distribution... (1,499,330) (1,499,330)
Issuance of common stock
in connection with
purchase of businesses. 252,122 2,521 3,117,226 3,119,747
Net income.............. 14,630,804 14,630,804
---------- -------- ----------- ----------- ------- --------- ------------
Balance, December 31,
1995................... 22,209,689 222,097 83,257,069 27,272,870 (37,202) (394,076) 110,357,960
Exercise of common
stock options......... 263,531 2,636 3,071,112 3,073,748
Issuance of common
stock in connection
with mergers.......... 1,814,632 18,146 89,137 3,096,370 3,203,653
Issuance of common
stock to repay debt... 142,404 1,424 1,472,820 1,474,244
Dividend distribution.. (658,500) (658,500)
Net income............. 10,682,399 10,682,399
---------- -------- ----------- ----------- ------- --------- ------------
Balance, December 31,
1996................... 24,430,256 244,303 87,890,138 40,393,139 (37,202) (394,076) 128,133,504
Exercise of common
stock options......... 128,716 1,287 1,305,039 1,306,326
Issuance of common
stock to repay debt... 497,813 4,978 5,143,495 5,148,473
Issuance of treasury
stock to repay debt... 604 6,398 6,398
Grant of stock options
for covenant not to
compete............... 235,000 235,000
Income tax benefit from
stock compensation.... 2,278,733 2,278,733
Net income............. 18,049,756 18,049,756
---------- -------- ----------- ----------- ------- --------- ------------
Balance, December 31,
1997................... 25,056,785 $250,568 $96,852,405 $58,442,895 (36,598) $(387,678) $155,158,190
========== ======== =========== =========== ======= ========= ============
See accompanying notes to consolidated financial statements.
F-37
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997
Cash flows from operating
activities:
Net income....................... $ 14,630,804 $ 10,682,399 $ 18,049,756
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization.. 12,131,465 17,120,149 27,853,778
Deferred income taxes.......... (1,506,643) (1,924,546) (2,170,675)
Provision for doubtful
accounts...................... 4,760,678 10,240,920 11,629,308
(Gain)/loss on sale of
equipment..................... -- -- 66,159
Equity in (earnings) losses
from affiliate................ (266,592) 15,910 (40,163)
Deferred start up costs........ -- -- (6,295,995)
Deferred merger costs.......... -- -- (9,165,945)
Changes in operating assets and
liabilities, net of effect of
companies acquired:
Accounts receivable.......... (19,444,635) (19,969,828) (35,095,883)
Inventories.................. (117,157) (1,054,213) (514,604)
Prepaid expenses and other
current assets.............. 99,673 (1,167,162) (1,551,300)
Accounts payable and accrued
expenses.................... 585,345 4,579,714 6,755,358
Income tax
payable/receivable.......... 1,747,000 (6,001,582) 2,329,297
------------ ------------- -------------
Net cash provided by
operating
activities................ 12,619,938 12,521,761 11,849,091
------------ ------------- -------------
Cash flows from investing
activities:
Capital expenditures............. (7,899,143) (16,319,461) (25,530,381)
Purchase of businesses, net of
cash required................... (11,646,992) (40,791,079) (254,465,618)
Purchase of investments.......... -- (55,311,044) --
Sale of investments.............. 2,661,944 14,108,921 41,202,123
Other............................ (1,904,962) (3,254,313) (5,304,647)
------------ ------------- -------------
Net cash used in investing
activities................ (18,789,153) (101,566,976) (244,098,523)
------------ ------------- -------------
Cash flows from financing
activities:
Proceeds from long-term debt
borrowings...................... 19,621,000 30,500,000 240,959,286
Proceeds from issuance of 5 5/8%
Convertibles Subordinated Notes
due 2006........................ -- 121,250,000 --
Repayments of debt............... (7,355,102) (70,760,938) (9,498,577)
Proceeds from issuance of common
stock........................... 1,302,272 3,073,748 1,306,326
Payment of dividend distribution. (1,499,330) (658,500) --
Payment on capital lease
obligations..................... (450,985) (1,144,718) (1,220,442)
------------ ------------- -------------
Net cash provided by
financing activities...... 11,617,855 82,259,592 231,546,593
------------ ------------- -------------
Net increase (decrease) in cash and
cash equivalents.................. 5,448,640 (6,785,623) (702,839)
Cash and cash equivalents at
beginning of year................. 2,782,781 8,231,421 1,445,798
------------ ------------- -------------
$ 8,231,421 $ 1,445,798 $ 742,959
============ ============= =============
See accompanying notes to consolidated financial statements.
F-38
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Renal Treatment Centers, Inc. (the "Company") was incorporated in Delaware
on August 11, 1988 for the purpose of providing dialysis services for End
Stage Renal Disease ("ESRD") patients in an outpatient environment or in the
patient's home. Additionally, the Company has acquired or entered into
inpatient dialysis service agreements with hospitals to provide dialysis
treatments on an inpatient basis.
For the years ended December 31, 1995, 1996, 1997, approximately 68%, 62%
and 68%, respectively, of the Company's net patient revenue was received from
Medicare and Medicaid and other state administered programs. Accordingly, the
Company's operations and cash flows are dependent upon the rate and manner of
payment for patient services from third party payors, and, in particular,
federal and state administered programs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
In February 1996, the Company acquired, through two separate transactions,
Intercontinental Medical Services, Inc. ("IMS") and Midwest Dialysis Unit and
its affiliates (collectively "MDU"). Each of the transaction s was separately
accounted for as a pooling-of-interest. The consolidated financial statements
of the Company include the results of IMS and MDU as of January 1, 1996. Prior
year financial statements have not been restated to reflect these transactions
because the impact on the Company's financial statements of such transactions
is not material.
In July 1996, the Company acquired Panama City Artificial Kidney Center,
Inc. and North Florida Artificial Kidney Center, Inc. (collectively "the
Group"). The transaction was accounted for as a pooling-of-interests.
Accordingly, the consolidated financial statements of the Company have been
prepared to give retroactive effect to the merger with the Group, since this
transactions, when combined with the MDU and IMS pooling transaction, was
deemed to be a material transaction.
Certain amounts included in the accompanying consolidated financial
statements and related footnotes reflect the use of estimates based on
assumptions made by management. Actual amounts could differ from these
estimates.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
Principles of Consolidation:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Patient Revenue and Allowances:
Patient revenue is recorded at established rates on the accrual basis in the
period during which the service is provided. Appropriate allowances to give
recognition to third-party arrangements are also recorded on the accrual
basis. Payments to the Company under Medicare and Medicaid and other state
administered programs are based upon a predetermined specific fee per
treatment.
The Company does not believe there are any significant credit risks
associated with receivables from Medicare and Medicaid and other state
administered programs. The allowance for doubtful accounts consists of
management's estimate of amounts that may prove uncollectible from secondary
insurers or patients.
F-39
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Facilities Costs:
Facilities costs include medical supplies, including Erythropoietin ("EPO")
supplies, salaries and benefits associated directly with the facility and all
other costs incurred by the facilities.
General and Administrative Costs:
General and administrative costs include all costs generated by the
Company's corporate offices (Berwyn and Argentina) and the regional office.
These costs include, but are not limited to, corporate and regional salaries,
rent for these office, accounting for legal fees and depreciation of major
information systems items such as the Company's accounting package and billing
systems.
Inventories:
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market and consist of dialysis supplies and prescription
drugs, such as EPO.
Property, Equipment, Depreciation and Amortization:
Property and equipment are stated at cost or respective fair market value at
the time of acquisition. Equipment under capital lease is stated at the lower
of the fair market value or net present value of the minimum lease payments at
inception of the lease. Depreciation and amortization are provided by the
straight-line method over the estimated useful lives of the related assets or
lease terms for leasehold improvements and equipment under capital lease. The
estimated useful life is five to seven years for furniture, fixtures and
equipment, 39 years for buildings, and five to ten years for leasehold
improvements. Costs of maintenance and repairs are charged to expense as
incurred. Sales and retirements of depreciable assets are recorded by removing
the related cost and accumulated depreciation from the accounts. Gains and
losses on sales and retirements of assets are reflected in the results of
operations.
Goodwill:
Goodwill, the excess of aggregate purchase price over the fair value of the
net assets of businesses acquired, is amortized on a straight-line basis,
principally over 25 to 40 years.
Patient Lists:
Patient lists, arising from the purchase of renal dialysis centers, are
stated at cost and amortized over eight years using the straight-line method.
Non-Compete Agreements
Non-compete agreements, arising from acquisitions, are stated at cost and
amortized over the terms of the agreements, on a straight-line basis, over
periods from three to eleven years.
Other Intangibles:
Other intangibles consist of debt issuance costs, inpatient dialysis service
agreements, deferred financing costs, start-up costs and organization costs
and are stated at cost and amortized over one to eleven years using the
straight-line method. Start up costs consist principally of rent and utility
expenses incurred prior to the commencement of dialysis treatments , as well
as costs relating to the development of the renal diagnostic lab. These costs
are amortized over one year commencing with the start of operations.
F-40
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management evaluates intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. This evaluation is based on certain financial
indicators, such as historical and future ability to generate income from
operations.
Income Taxes:
The Company and its subsidiaries file a consolidated federal tax return and
separate company state tax returns. Income taxes are provided for under the
liability method in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under the liability method, deferred income taxes are recognized for the tax
consequences of differences between amounts reported for financial reporting
and income tax purposes by applying enacted statutory tax rates applicable to
future years to such differences. Deferred taxes results primarily from
temporary differences arising from a difference between the book life and the
tax life of certain assets. Under SFAS No. 109, the effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Federal (and state, where applicable) income taxes for HCC and the Wichita
Companies (which are later defined) and IMS, MDU and the Group prior to their
acquisition by the Company were payable personally by the stockholders of IMS,
MDU and the Group pursuant to S Corporation elections under the Internal
Revenue Code.
Prepaid Expenses:
Prepaid expenses and other current assets consist primarily of prepaid
insurance, rent, various taxes and other current assets.
Merger Expenses:
The Company's policy is to defer expenses incurred in connection with a
pooling-of-interests transaction until the transaction is effective or
terminated. The Company has deferred merger expenses consisting of severances
and bonus payments, accounting and legal fees in connection with the merger
with Total Renal Care Holdings, Inc.
Accrued Expenses:
Accrued expenses consist principally of uninvoiced inventory, accrued
insurance and other miscellaneous accruals.
Estimated Medical Professional Liability Claims:
The Company is insured for medical professional liability claims through a
commercial insurance policy. It is the Company's policy that a provision for
estimated premium adjustments to medical professional liability costs be made
for asserted and unasserted claims and based upon the Company's experience.
Provision for such professional liability claims includes estimates of the
ultimate costs of such claims. To date, the Company's loss experience with
such claims has not been significant. Accordingly, no such provision has been
made.
Cash Equivalents:
For the purpose of reporting cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. The cash of the Company is principally held by one financial
institution.
F-41
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments:
Investments were comprised of investments in corporate bonds and government
and government agency securities. Investment income is recognized when earned
and realized gains and losses are recognized on a trade date basis, computed
based on original cost. At December 31, 1996, the investments were stated at
cost, which approximated fair market value. All investments were managed by
one financial institution. Subsequent to December 31, 1996, all investments
were liquidated, resulting in an immaterial realized gain.
Earnings per Share:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share" ("SFAS No. 128"). This statement
establishes standards for computing and presenting earnings per share. Basic
earnings per share is calculated using the average shares of common stock
outstanding, while diluted earnings per share reflects the potential dilution
that could occur if stock options and the earn out note were exercised. The
Company adopted SFAS No. 128 in the fourth quarter of 1997. Prior period
earnings per share amounts have been restated in accordance with SFAS No. 128.
For the years ended December 31, 1996 and 1997, the Notes are not used in the
calculation as the affect is antidilutive and, as such, is not to be included
in the diluted earnings per share calculation.
3. BUSINESS ACQUISITIONS:
During the fiscal years 1996 and 1995, the Company completed the following
five mergers. There were no mergers in 1997.
Merger with Group:
On July 23, 1996, the Company acquired the Group. The two dialysis
facilities acquired are located in Florida and serviced a total of
approximately 185 patients as of the acquisition date. The transaction was
accounted for under the pooling-of-interest method of accounting. In the
transaction, the Company issued 482,377 shares of its common stock in exchange
for all of the outstanding stock of the Group. The acquisition was structured
as a merger of the Group into a subsidiary of the Company.
Merger with MDU:
On February 29, 1996, the Company acquired MDU. The 11 dialysis facilities
acquired are located in Oklahoma and serviced approximately 317 patients as of
the acquisition date. The transaction was accounted for under the pooling-of-
interests method of accounting. In the transaction, the Company issued 767,168
shares of its common stock in exchange for all of the outstanding stock of
MDU. The acquisition was structured as a merger of MDU into a subsidiary of
the Company.
Merger with IMS:
On February 20, 1996, the Company acquired IMS. The four dialysis facilities
acquired are located in Hawaii and served a total of approximately 444
patients as of the acquisition date. The transaction was accounted for under
the pooling-of-interests method of accounting. In the transaction, the Company
issued 1,047,464 shares of its common stock in exchange for all of the
outstanding stock of IMS. The acquisition was structured as a merger of IMS
into a subsidiary of the Company.
Merger with The Wichita Companies:
On July 25, 1995, with an effective date of August 1, 1995, the Company
acquired Wichita Dialysis Center, P.A, Southeast Kansas Dialysis Center, P.A.,
Garden City Dialysis Center, P.A. and Wichita Dialysis Center,
F-42
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
East, P.A. (the "Wichita Companies"). All of the facilities acquired are
located in Kansas and serviced approximately 355 patients as of the
acquisition date. The transaction was accounted for under the pooling-of-
interest method of accounting. In the transaction, the Company issued
1,558,920 shares of its common stock in exchange for all of the outstanding
stock of the Wichita Companies. The acquisition was structured as a merger of
the Wichita Companies into a subsidiary of the Company.
Merger with HCC:
On March 6, 1995, the Company completed its acquisition of Healthcare
Corporation and its affiliates (collectively, "HCC"). The 13 facilities
acquired from HCC are located in Missouri, Illinois, North Carolina, Florida
and Washington, D.C. and serviced approximately 720 patients as of the
acquisition date. The transaction was accounted for under the pooling-of-
interests method of accounting. In the transaction, the Company issued
2,292,222 shares of its common stock in exchange for all of the outstanding
stock of HCC. The acquisition was structured as a merger of HCC into several
subsidiaries of the Company.
The consolidated financial statements give retroactive effect to the mergers
with the Group, the Wichita Companies and HCC and include combined operations
of the Company, the Group, the Wichita Companies, and HCC for all periods
presented. The consolidated financial statements include the operations of IMS
and MDU as of January 1, 1996. The following is a summary of the separate and
combined results of operations for periods prior to the mergers (dollars in
thousands):
RENAL TREATMENT
CENTERS, INC. POOLING
FOR THE YEAR ENDED DECEMBER 31, (PRIOR TO POOLINGS) COMPANIES* COMBINED
1996:
Net patient revenue............... $217,529 $ 7,548 $225,077
Income from operations............ 20,495 1,180 21,675
Net income........................ 9,985 697 10,682
1995:
Net patient revenue............... $150,467 $14,101 $164,568
Income from operations............ 23,319 1,501 24,820
Net income........................ 13,239 1,392 14,631
*Includes pooling transactions only for period prior to acquisition.
Activity subsequent to acquisition dates is included in Renal Treatment
Centers, Inc. (Prior to Poolings).
The acquisitions described below have been accounted for under the purchase
method. The results of these acquisitions have been included in the results of
operations from the applicable acquisition dates. The purchase price of the
acquisitions has been principally allocated to fixed assets, patient lists,
non-compete agreements and goodwill. Goodwill, which is the excess of the
purchase price over the fair value of net assets, acquired in connection with
the 1997 acquisitions was approximately $195,753,000 and is being amortized on
a straight-line basis over 25 to 40 years.
1997 Acquisitions:
During 1997, the Company acquired 68 dialysis centers, including several
acute care contracts, in eight states and in the Republic of Argentina for
approximately $254.5 million in cash and the incurrence and assumption of
approximately $30.3 million of liabilities. The acquisitions included
substantially all of the non-current assets and certain current assets and the
assumptions of certain liabilities and capital leases of the centers.
F-43
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996 Acquisitions:
During 1996, the Company acquired 10 dialysis centers, including several
acute care contracts, in five states and the Republic of Argentina for
approximately $40.8 million in cash and the incurrence and assumption of
approximately $9.2 million of liabilities. The acquisitions included
substantially all of the non-current assets, certain current assets, and the
assumption of certain liabilities and capital leases of the centers.
1995 Acquisitions:
During 1995, the Company acquired nine dialysis centers, including several
acute care contracts, in five states for approximately $11.6 million in cash,
302,644 shares of unregistered common stock, valued at approximately $3.6
million at the respective dates of acquisition, and the assumption of
approximately $118,000 of liabilities. The acquisitions included substantially
all of the non-current assets and certain current assets and the assumption of
certain liabilities and capital leases of the centers.
The following unaudited pro forma information combines the consolidated
results of operations of the Company and the companies acquired in the
acquisitions that were accounted for under the purchase method during 1996 and
1997 as if they had occurred on January 1, 1996:
1996 1997
(UNAUDITED)
Net patient revenue............................... $392,693,934 $410,867,897
Income from operations............................ 66,008,136 69,340,597
Net income........................................ 33,253,134 30,729,309
Basic earnings per share.......................... 1.37 1.23
The pro forma results do not necessarily represent results that would have
occurred if these acquisitions had taken place at the beginning of each
period, nor are they indicative of the results of future combined operations.
4. PROPERTY AND EQUIPMENT:
A summary of property and equipment and related accumulated depreciation as
of December 31, 1996 and 1997 is as follows:
1996 1997
Furniture, fixtures and equipment................... $37,340,616 $64,470,386
Leasehold improvements.............................. 14,699,276 29,866,581
Capital leases...................................... 5,679,063 5,537,470
Building............................................ 1,450,239 2,188,239
Land................................................ 100,066 962,066
----------- -----------
59,269,260 103,024,742
Less accumulated depreciation....................... 19,691,015 30,247,762
----------- -----------
$39,578,245 $72,776,980
=========== ===========
Capital leases primarily consist of dialysis equipment. Depreciation expense
was $3,846,294, $6,601,223 and $9,732,842 for the years ended December 31,
1995, 1996 and 1997, respectively.
F-44
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INTANGIBLE ASSETS:
Intangible assets consist of goodwill and other identifiable intangibles. A
summary of intangible assets and related accumulated amortization as of
December 31, 1996 and 1997 is as follows:
1996 1997
Goodwill.......................................... $ 92,416,850 $290,758,339
Patient lists..................................... 45,354,310 100,042,510
Non-compete agreements............................ 16,005,803 22,919,553
Other intangibles, principally debt issuance
costs............................................ 9,803,286 16,330,168
Start-up costs.................................... -- 6,295,995
------------ ------------
163,580,249 436,346,565
Less accumulated amortization..................... 32,934,871 51,014,614
------------ ------------
$130,645,378 $385,331,951
============ ============
Intangible assets principally arose from acquisitions. Amortization expense
was $8,220,167, $10,475,604 and $17,745,816 for the years ended December 31,
1995, 1996, and 1997, respectively.
6. DEBT:
Debt as of December 31, 1996 and 1997 consists of:
1996 1997
Revolving credit/term facility payable in 16
equal quarterly installments................... -- $237,000,000
Note, payable to The Dialysis Centers Limited
Liability Company in four annual installments
of variable amounts commencing on June 1, 1995. $ 5,154,870 --
Various sellers' notes due January 1997......... 8,050,000 --
Various sellers' notes due January 1998......... -- 24,467,922
Convertible Subordinated Notes, 5 5/8%, due
2006........................................... 125,000,000 125,000,000
Other........................................... 1,144,297 4,312,363
Capital lease obligations....................... 3,593,883 2,671,418
------------ ------------
142,943,050 393,451,703
Less current portion............................ (12,369,365) (25,788,509)
------------ ------------
$130,573,685 $367,663,194
============ ============
The Company's Credit Agreement provides for a $350,000,000 revolving
credit/term facility available to fund acquisitions and general working
capital requirements, of which $237,000,000 and no amounts were outstanding as
of December 31, 1997 and December 31, 1996, respectively. On May 2, 1997, the
Company increased its revolving credit/term facility from $100,000,000 to
$200,000,000. Subsequently, on September 26, 1997, the Credit Agreement was
amended and restated and increased the credit/term facility to $350,000,000.
The revolving credit/term facility converts into a term loan March 31, 2004.
Borrowings under the Credit Agreement bear interest, at the Company's option,
at either (i) the agent bank's base rate payable on a quarterly basis or (ii)
a one-, two-, three-, or six-month period LIBOR rate plus .50% to 1.50%,
depending on the Company's ratio of consolidated debt to annualized cash flow,
payable at maturity, or, in the case of a six-month period rate, at three
months and maturity. The weighted average interest rate of all loans
outstanding at December 31, 1997 was 6.9%.
F-45
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Credit Agreement also provides for the issuance of letters of credit up
to $10,000,000 provided that the aggregate of all outstanding letters of
credit plus the outstanding aggregate principal amount of all revolving
credit/term loans does not exceed the lesser of the total revolving
credit/term commitment or the patient borrowing base, as defined in the Credit
Agreement, at such time. As of December 31, 1996 and 1997, there were no
letters of credit outstanding.
The loans are collateralized by all stock of the Company's subsidiaries and
the assignment of all intercompany notes. The Credit Agreement limits
additional indebtedness, acquisitions, investments and dividends and requires
the Company to comply with certain other covenants and maintain certain
financial ratios. The dividend distributions presented in the Consolidated
Statement of Stockholders' Equity in 1995 and 1996 were paid to the former
stockholders of HCC, the Wichita Companies and the Group and were not subject
to the Credit Agreement limitation on dividend payments.
In June 1996, the Company issued $125,000,000 of 5 5/8% Convertible
Subordinated Notes due 2006 (the "Notes"). The Notes are convertible, at the
option of the holder, at any time after August 12, 1996 through maturity,
unless previously redeemed or repurchased, into Common Stock at a conversion
price of $34.20 principal amount per share, subject to certain adjustments.
The fair value of the Notes was approximately $149,687,500 at December 31,
1997. At any time on or after July 17, 1999, all or any part of the Notes will
be redeemable at the Company's option on at least 15 and not more than 60 days
notice as a whole or, from time to time, in part at redemption prices ranging
from 103.94% to 100.00% of the principal amount thereof, depending on the year
of redemption, together with accrued interest to, but excluding, the date
fixed for redemption.
In June 1994, pursuant to a business acquisition, the Company entered into
an agreement to pay the Seller, the Dialysis Centers Limited Liability
Company, $7,364,100, payable in annual installments commencing June 1995
through June 1998. Interest on the unpaid principal mount of the note accrued
at an annual rate of 6.50%, payable in arrears each June 1 from 1995 through
1998. The note allowed the Seller to convert the principal amount of the note
into that number of shares of common stock of the Company which shall be equal
to the quotient of the outstanding unpaid principal amount of the note
dividend by the average daily closing sale price of the stock during December,
1994. During the first and second quarter of 1997, the note payable to The
Dialysis Centers Limited Liability Company was paid in full through the
issuance of the Company's Common Stock.
In September 1996, pursuant to a business acquisition, the Company entered
into an agreement to pay Sellers. Columbus Regional Dialysis Center, Inc. and
Phoenix City Nephrology Referral Center, Inc., a total of $8,050,000 in one
installment in January 1997.
During the fourth quarter of 1997, pursuant to several business
acquisitions, the Company entered into several agreements to pay the various
Sellers a total of $24,467,922 in one installment in January 1998.
Unless otherwise noted above, the carrying amount of long-term debt
approximates fair value.
Maturities of debt outstanding, excluding capital leases as of December 31,
1997 for each of the next five years is as follows:
1998............................................................ $ 24,744,941
1999............................................................ --
2000............................................................ 45,162,804
2001............................................................ 60,217,072
2002 and thereafter............................................. 260,655,468
F-46
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 consists of the following:
1995 1996 1997
Current:
Federal............................. $ 8,330,951 $ 7,852,091 $14,046,163
State and local..................... 807,761 681,326 2,125,607
Foreign............................. -- -- 1,070,068
----------- ----------- -----------
9,138,712 8,533,417 17,241,838
----------- ----------- -----------
Deferred:
Federal............................. (1,372,961) (1,694,959) (1,831,991)
State and local..................... (133,682) (229,587) (338,684)
----------- ----------- -----------
(1,506,643) (1,924,546) (2,170,675)
----------- ----------- -----------
$ 7,632,069 $ 6,608,871 $15,071,163
=========== =========== ===========
The tax effects of temporary differences which comprise the net deferred tax
asset are as follows for the years ended December 31, 1996 and 1997:
1996 1997
Deferred tax debits:
Allowance for doubtful accounts.................. $ 2,136,098 $ 4,188,883
Intangibles, principally patient lists........... 5,241,100 6,055,084
Vacation reserve................................. -- 397,478
Property and equipment........................... -- 33,199
Foreign NOL carryforward......................... -- 944,000
Foreign tax credit carryforward.................. -- 200,000
Other............................................ 13,620 451,797
----------- -----------
Total deferred tax assets........................ 7,390,818 12,270,441
----------- -----------
Valuation allowance.............................. -- (1,144,000)
----------- -----------
7,390,818 11,126,441
=========== ===========
Deferred tax credits:
Property and equipment........................... (164,806) --
Goodwill......................................... (2,269,230) (3,998,984)
----------- -----------
(2,434,036) (3,998,984)
=========== ===========
Net deferred tax asset............................. $ 4,956,782 $ 7,127,457
=========== ===========
The valuation allowance relates to deferred tax assets established under
SFAS No. 109 for foreign net operating loss carryforwards of $2.86 million and
foreign tax credit carryforwards of $200,000. These unutilized loss and credit
carryforwards which expire in 2002, will be carried forward to future years
for possible utilization. No benefit of these carryforwards has been
recognized on the financial statements.
F-47
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a reconciliation of the statutory federal income tax rates
to the effective rates as a percentage of income before provision for income
taxes as reported in the financial statements for the years ended December 31,
1995, 1996, and 1997:
1995 1996 1997
U.S. federal income tax rate............................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit... 2.4% 2.5% 3.3%
Foreign taxes........................................... -- -- 1.0%
Non-tax effected items, principally intangibles......... 1.8% 1.7% 2.3%
Federal and state income tax benefit from S Corporation
status of HCC, the Wichita Companies and the Group..... (3.5%) (0.9%) --
Valuation allowance..................................... -- -- 3.5%
Other................................................... (1.4%) (0.1%) 0.4%
---- ---- ----
Effective income tax rate............................... 34.3% 38.2% 45.5%
==== ==== ====
8. BENEFIT AND COMPENSATION PLANS:
The Company has a defined contribution savings plan covering substantially
all employees. The Company's contributions under the plan were approximately
$462,004, $548,471, and $1,069,283 for the years ended December 31, 1995,
1996, and 1997, respectively.
In September 1990, the Company established a stock plan, pursuant to which
incentive stock options and non-qualified stock options may be issued to
employees and others through the year 2000. The Company applies APB Opinion
No. 25 and related interpretations in accounting for its stock plan. The FASB
issued SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123")
in 1995 and, if fully adopted by the Company, changes the method for
recognition of cost on stock plans. Although the Company has elected not to
adopt the cost recognition requirements under SFAS No. 123, pro-forma
disclosures as of the Company had adopted the requirements beginning in 1995
are presented below:
1995 1996 1997
Net earnings--as reported............... $14,630,804 $10,682,399 $18,049,756
Net earnings--pro-forma................. 14,165,049 8,350,485 11,072,010
Earnings per share--as reported......... 0.67 0.44 0.73
Earnings per share--pro-forma........... 0.65 0.34 0.44
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for options granted for the years ended December 31, 1995, 1996
and 1997, respectively, weighted average expect volatility of 29.3%, 29.3%,
39.75%, no dividend payments are made for the expected terms; average expected
term of 5.5 years for options that vest over time and 3 years for options
which vest immediately; risk free interest rate on the date of grant with the
maturity equal to the expected term; exercise price equal to the fair market
value on grant date. Options which have vesting provisions that accelerate
upon a change in control either in the option grant or through employment
agreements have been accelerated to 1997 due to the expected changes in
control on February 27, 1998.
Incentive stock options may be granted at an exercise price not less than
the fair market value of the Company's common stock on the date of grant. Non-
qualified stock options may be granted at an exercise price not less than the
lower of the book value of the Company's common stock or 50% of the fair
market value per share of common stock on the date of grant. Accordingly,
compensation expense for the difference between the fair market value and the
exercise price for non-qualified stock options issued is recorded over the
vesting period of such options.
F-48
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1995 and 1996, the stock plan was amended to increase the number of
shares available for grant to 2,437,000 and 3,237,000 shares, respectively. In
addition, the Company established an option plan for outside directors
pursuant to which non-qualified stock options to purchase up to 60,000 shares
may be issued to non-employee directors of the Company. These options may be
granted at an exercise price not less than the fair market value of the
Company's common stock on the date of the grant.
In May 1995, the Company granted 419,144 incentive stock options to certain
directors, officers and employees of the Company. These options were granted
at an exercise price equal to the fair market value of the Company's common
stock on the date of the grant. These options vest over the next three years.
Certain options totaling 305,000 vest upon the earlier of attainment of
predetermined earnings per share targets or nine years.
In March 1996, the Company granted 615,352 incentive stock options to
certain directors, officers and employees of the Company. These options were
granted at an exercise price equal to the fair market value of the Company's
common stock on the date of the grant. These options vest over the next four
years. Certain options aggregating 173,332 vest upon the earlier of attainment
of predetermined earnings per share targets or ten years.
In December 1996, the Company granted 100,000 incentive stock options to an
officer of the Company. These option were granted at an exercise price equal
to the fair market value of the Company's common stock on the date of the
grant. The options are fully vested.
Also in December 1996, the Company granted 30,000 non-qualified stock
options in connection with the release of the Company from certain
obligations. The options were granted at an exercise price equal to the fair
market value of the Company's common stock on the date of grant. The options
are fully vested as of December 31, 1997.
During 1997, the Company granted 885,800 incentive stock options to certain
directors, officers and employees of the Company. These options were granted
at an exercise price equal to the fair market value of the Company's common
stock on the dates of the grants. These options were vest over the next two
years to five years.
In 1997, the Company granted 20,000 options to acquisition consultants for
covenants not to compete. These options were granted at price equal to the
fair market values of the Company's common stock on the date of the grant. The
Company value the options at $235,000.
Approximately, $50,000 was recorded as compensation expense in 1995, in
connection with incentive and non-qualified options to officers of the
Company, which have been amortized over the remaining vesting period. Certain
options outstanding at December 31, 1997, which were issued to certain
officers and employees of the Company, become fully vested upon certain sales
of assets, mergers and consolidations involving the Company, as set forth in
the respective employee and stock option agreements. The remaining options
outstanding at December 31, 1997, which are issued to certain officers and
employees of the Company, become fully vested upon certain sales of assets,
mergers and consolidations involving the Company, at the option of the Stock
Plan Committee.
F-49
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of option transactions and exercise prices:
WEIGHTED WEIGHTED WEIGHTED
YEAR ENDED AVERAGE YEAR ENDED AVERAGE YEAR ENDED AVERAGE
DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE
1995 PRICE 1996 PRICE 1997 PRICE
Outstanding at beginning
of period.............. 1,281,930 $ 6.66 1,242,398 $ 9.78 1,717,965 $14.80
--------- ------ --------- ------ --------- ------
Granted................. 413,144 11.54 747,098 22.03 885,800 22.48
Exercised............... 448,676 2.47 263,531 11.66 128,714 10.15
Forfeited............... 4,000 11.25 8,000 12.14 14,233 17.47
--------- ------ --------- ------ --------- ------
Outstanding at end of
period................. 1,242,398 $ 9.78 1,717,965 $14.80 2,460,818 $17.80
========= ====== ========= ====== ========= ======
The following table summarizes information about fixed stock options at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
$5.00-$10.00............ 526,822 4.87 $ 8.67 460,000 $ 8.78
$10.01- $15.00.......... 386,839 7.61 11.45 205,439 11.45
$15.01-$20.00........... 3,144 7.89 16.75 3,144 16.75
$20.01-$25.00........... 1,495,013 9.09 22.35 650,622 22.29
$25.01-$30.00........... 49,000 9.33 26.88 18,000 27.19
--------- -------- ---------- ----------- --------
2,460,818 7.96 $ 17.80 1,337,205 $ 16.03
========= ======== ========== =========== ========
9. CAPITAL STOCK:
On January 30, 1996, the Board of Directors of the Company declared a
dividend on the Company's common stock of one share of common stock for each
share outstanding, thereby effecting a 2-for-1 stock split. The dividend
shares were issued on March 14, 1996 to stockholders of record as of February
29, 1996. Additionally, on February 29, 1996, the Company amended its capital
structure to increase the Company's authorized capital to 45,000,000 shares of
$0.01 par value common stock and 5,000,000 shares of $.01 par value Series
Preferred Stock. All references in the financial statements to outstanding and
authorized common shares, average number of shares outstanding and related
prices, per share amounts and stock plan data have been restated to reflect
the split effected by the stock dividend.
10. LEASING ARRANGEMENTS:
The Company leases certain of its operating facilities, corporate office and
furniture and equipment under noncancelable leases for terms ranging from four
to ten years with certain renewal options. Certain of these facilities are
leased by the Company from medical directors.
F-50
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments as of December 31, 1997 are as follows:
OPERATING
THIRD-PARTY LEASES
CAPITAL OPERATING WITH MEDICAL
LEASES LEASES DIRECTORS
1998....................................... $1,494,563 $11,150,274 $ 2,323,603
1999....................................... 1,185,433 10,635,183 1,826,351
2000....................................... 237,522 9,702,719 1,757,139
2001....................................... -- 9,398,941 1,715,303
2002 and thereafter........................ -- 34,513,142 10,564,748
---------- ----------- -----------
Total minimum lease payments............... 2,917,518 $75,400,259 $18,187,144
=========== ===========
Less amounts representing interest......... 246,100
----------
Present value of net minimum payments under
capital leases............................ 2,671,418
Less current portion....................... 1,320,584
----------
$1,350,834
==========
Rent expense paid to third parties under operating leases was $4,921,026,
$5,497,285 and $7,757,194 for the years ended December 31, 1995, 1996 and
1997, respectively. Rent expense paid to medical directors under facility
operating leases was $1,030,208, $1,350,253 and $2,232,904 for the years ended
December 31, 1995, 1996 and 1997, respectively
11. COMMITMENTS AND CONTINGENCIES:
The Company has entered into long-term compensation agreements with the
medical directors of each dialysis facility. The agreements range from one to
ten years with certain agreements containing one to ten year options to renew.
The agreements provide for total annual compensation as follows:
PHYSICIAN
DIRECTOR
COMPENSATION
------------
1998............................................................ $13,930,431
1999............................................................ 13,899,732
2000............................................................ 14,439,947
2001............................................................ 14,438,983
2002 and thereafter............................................. 37,514,213
-----------
Total minimum payments.......................................... $94,223,306
===========
The Company has employment agreements with seven officers, with terms
ranging from two to three years and six month. These agreements provide for
total annual compensation of $1,275,000 and provide that in the event any
payment or benefit received by any of them in connection with a change of
control is deemed an "excess parachute payment" under the Internal Revenue
Code, the Company shall pay the officer a cash bonus equal to any additional
tax liability imposed upon him as a result.
The Company is a party to certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and/or
insurance coverage for these actions and that the ultimate outcome of these
actions will not have a material adverse impact on the Company's results of
operations, financial condition or liquidity.
F-51
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in one principal industry segment, the treatment of
patients with kidney disease. The Company's sales are generated primarily from
the Medicare system. Prior to 1997, the Company's only significant operations
were in the United States. Geographic financial information as of and for the
year ended December 31, 1997 is as follows:
U.S. ARGENTINA ELIMINATIONS CONSOLIDATED
------------ ----------- ------------ ------------
Net sales to unaffiliated
customers.................. $301,397,539 $21,394,513 -- $322,792,052
Transfers between geographic
areas...................... -- -- -- --
------------ ----------- --------- ------------
Total net revenue........... $301,397,539 $21,394,513 -- $322,792,052
============ =========== ========= ============
Operating profit before
corporate expenses......... $ 56,768,606 $ 7,792,432 $ 64,561,038
General corporate expenses.. 19,638,534
Interest expense, net....... 11,801,585
------------
Income from continuing
operations before income
taxes...................... $ 33,120,919
============
Identifiable assets at
December 31, 1997.......... $492,813,377 $65,970,786 $(276,610) $558,507,553
============ =========== =========
Corporate assets............ 46,116,487
------------
Total assets at December 31,
1997....................... $604,624,040
============
Net sales to unaffiliated customers is based on the location of the
customer. There are no transfers between geographic areas. Operating profit is
total revenue less operating expenses. In computing operating profit, neither
net interest expense, corporate expenses, nor income taxes were added or
deducted. Identifiable assets are those assets of the Company that are
identified with the operations in each geographic area. Corporate assets are
principally fixed assets.
F-52
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EARNINGS PER SHARE:
Earnings per share have been restated in accordance with SFAS No. 128. This
restatement resulted in no material change from amounts previously reported.
Earnings per share are computed as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
Basic earnings per share:
Net income available for common stock.... $14,630,804 $10,682,399 $18,049,756
=========== =========== ===========
Average common stock outstanding......... 21,868,067 24,230,156 24,884,268
=========== =========== ===========
Basic earnings per share................. $ 0.67 $ 0.44 $ 0.73
=========== =========== ===========
Diluted earnings per share:
Net income............................... $14,630,804 $10,682,399 $18,049,756
Add back interest on earnout note, tax
effected................................ 283,136 232,573 34,122
----------- ----------- -----------
Net income available for Common Stock and
dilutive securities....................... $14,913,940 $10,914,972 $18,083,878
=========== =========== ===========
Average Common Stock outstanding........... 21,868,067 24,230,156 24,884,268
Additional common shares resulting from
dilutive securities:
Stock options............................ 544,666 837,744 965,831
Earnout note............................. 682,402 578,400 122,442
----------- ----------- -----------
Average Common Stock and dilutive
securities outstanding.................... 23,095,135 25,646,300 25,972,541
=========== =========== ===========
Diluted earnings per share................. $ 0.65 $ 0.43 $ 0.70
=========== =========== ===========
F-53
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information for the years ended
December 31, 1995, 1996, and 1997 is as follows:
1995 1996 1997
Cash paid for:
Interest.................................. $2,177,255 $ 3,609,972 $10,842,106
========== =========== ===========
Income taxes.............................. $5,680,430 $17,198,434 $17,037,849
========== =========== ===========
Non-cash investing and financing activities:
Capital lease obligations entered into.... $2,081,699 $ 2,553,368 $ 298,914
========== =========== ===========
Issuance of common stock in connection
with purchase of business................ $3,119,747 -- --
========== =========== ===========
Issuance of common stock in connection
with an earn out note.................... $ 523,029 $ 1,474,244 $ 5,154,871
========== =========== ===========
Issuance of short-term notes in connection
with purchase of businesses.............. -- $ 9,194,297 $24,467,922
========== =========== ===========
Liabilities assumed in connection with
purchases of businesses.................. $ 118,000 -- $ 5,857,090
========== =========== ===========
Issuance of common stock in connection
with the IMS and MDU mergers............. -- $ 3,203,653 --
========== =========== ===========
Financing fees incurred in the Notes
offering................................. -- $ 3,750,000 --
========== =========== ===========
Acquisition of treasury stock in
connection with payroll taxes resulting
from exercise of stock options........... $ 346,857 -- --
========== =========== ===========
Grant of stock options in connection with
covenant not to compete.................. -- -- $ 235,000
========== =========== ===========
Income tax benefit from stock
compensation............................. -- -- $ 2,278,733
========== =========== ===========
15. NEW ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") established standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. This
statement is effective for fiscal years beginning after December 15, 1997. It
would require the Company to reclassify financial statements for earlier
periods provided for comparative purposes.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of and Enterprise and Related Information" ("SFAS No. 131")
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operation
segments in interim financial reports issued to shareholders. This Statement
is effective for financial statements for the period beginning after December
15, 1997. In the initial year of application, comparative information for
earlier years is to be restated.
The Company does not expect SFAS No. 130 and SFAS No. 131 to have a material
impact on the financial statements.
F-54
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In accordance with Statement of Position ("SOP") "Reporting on the Costs of
Start-up Activities", start up costs must be expensed as incurred. The SOP is
effective for years beginning after December 15, 1998. The Company expects to
adopt this SOP in the first quarter of 1998. The Company expects to write-off
approximately $6 million of start-up costs previously recorded.
16. SUBSEQUENT EVENT:
On February 26, 1998, the Company's stockholders approved the merger with
Total Renal Care Holdings, Inc. ("TRCH") which became effective on February
27, 1998 (the "Merger"). The Merger is expected to be accounted for as a
pooling-of-interests. In connection with the Merger, each of the Company's
stockholders will receive 1.335 shares of TRCH common stock.
The Merger constituted a "change in control" and resulted in certain
executives terminating their employment for good reason. In connection with
the Merger, these certain executives received severance payments and their
1997 bonuses totaling approximately $2,000,000; Merger bonuses of
approximately $4,600,000 and $8,850,000 for covenants not to compete. In
addition, 978,081 of previously issued stock options to employees, which had
an automatic change in control provision in the option grant, became fully
vested on February 27, 1998.
F-55
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Total Renal Care Holdings, Inc.
Our audit of the consolidated financial statements referred to in our report
dated February 16, 1998, except as to the pooling of interests with Renal
Treatment Centers, Inc. which is as of May 14, 1998, appearing on page F-1 of
this Annual Report on Form 10-K/A also included audits of the information
included in the Financial Statement Schedule listed in Item 14(a)(2) of this
Form 10-K/A for the year ended May 31, 1995, the seven months ended December
31, 1995 and the years ended December 31, 1996 and 1997. In our opinion, based
upon our audit and the report of other auditors, the Financial Statement
Schedule presents fairly, in all material respects, the information for the
year ended May 31, 1995, the seven months ended December 31, 1995 and the
years ended December 31, 1996 and 1997 set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
Seattle, Washington
February 16, 1998, except as to the
pooling of interests with Renal Treatment
Centers, Inc. which is as of May 14, 1998
S-1
TOTAL RENAL CARE HOLDINGS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS DEDUCTIONS
---------------------- ----------
BALANCE AT AMOUNTS BALANCES OF AMOUNTS BALANCE AT
BEGINNING OF CHARGED TO COMPANIES WRITTEN END
DESCRIPTION YEAR INCOME ACQUIRED OFF OF YEAR
Allowance for doubtful
accounts:
Year ended May 31, 1995. $ 3,051,000 5,492,000 1,203,000 3,005,000 $ 6,741,000
Seven months ended
December 31, 1995...... $ 6,741,000 4,552,000 541,000 2,662,000 $ 9,172,000
Year ended December 31,
1996................... $ 9,172,000 15,737,000 1,896,000 11,040,000 $15,765,000
Year ended December 31,
1997................... $15,765,000 20,525,000 2,962,000 8,557,000 $30,695,000
S-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TOTAL RENAL CARE HOLDINGS, INC.
/s/ John E. King
By: _________________________________
John E. King
Vice President, Finance and
Chief Financial Officer
Date: May 18, 1998
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
3.1 Amended and Restated Certificate of Incorporation of
the Company, dated December 4, 1995.@@
3.2 Certificate of Amendment of Certificate of
Incorporation of the Company, dated February 26,
1998.+++
3.3 Bylaws of the Company, dated October 6, 1995.+
4.1 Shareholders Agreement, dated August 11, 1994 between
DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties,
Continental Bank, as voting trustee, and the
Company.##
4.2 Agreement and Amendment, dated as of June 30, 1995,
between DLJMBP, DLJIP, DLJOP, DLJMBF, DLJESC, Tenet,
the Company, Victor M.G. Chaltiel, the Putnam
Purchasers, the Crescent Purchasers and the Harvard
Purchasers, relating to the Shareholders Agreement
dated as of August 11, 1994 between DLJMB, DLJIP,
DLJOP, DLJMBF, NME Properties, Continental Bank, as
voting trustee, and the Company.##
10.1 Subscription Agreement dated May 26, 1994 between
DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties, Tenet and
the Company.#
10.2 Services Agreement dated August 11, 1994 between the
Company and Tenet.##
10.3 Noncompetition Agreement dated August 11, 1994 between
the Company and Tenet.##
10.4 Employment Agreement dated as of August 11, 1994 by and
between the Company and Victor M.G. Chaltiel (with
forms of Promissory Note and Pledge and Stock
Subscription Agreement attached as exhibits thereto)
(the "Chaltiel Employment Agreement").##*
10.5 Amendment to Chaltiel Employment Agreement, dated as of
August 11, 1994.##*
10.6 Employment Agreement dated as of September 1, 1994 by
and between the Company and Barry C. Cosgrove.##*
10.7 Employment Agreement dated as of August 11, 1994 by and
between the Company and Leonard W. Frie (the "Frie
Employment Agreement").##*
10.8 Amendment to Frie Employment Agreement, dated as of
October 11, 1994.##*
10.9 Employment Agreement dated as of September 1, 1994 by
and between the Company and John E. King.##*
10.10 First Amended and Restated 1994 Equity Compensation
Plan (the "1994 Plan") of the Company (with form of
Promissory Note and Pledge attached as an exhibit
thereto), dated August 5, 1994.##*
10.11 Form of Stock Subscription Agreement relating to the
1994 Plan.##*
10.12 Form of Purchased Shares Award Agreement relating to
the 1994 Plan.##*
10.13 Form of Nonqualified Stock Option relating to the 1994
Plan.##*
10.14 1995 Equity Compensation Plan.+*
10.15 Employee Stock Purchase Plan.+*
10.16 Option Exercise and Bonus Agreement dated as of
September 18, 1995 between the Company and Victor M.G.
Chaltiel.+*
10.17 1997 Equity Compensation Plan.**
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
10.18 Subsidiary Guaranty (the "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). Renal Treatment Centers--Mid-
Atlantic, Inc., Renal Treatment Centers--Northeast,
Inc., Renal Treatment Centers--California, Inc., Renal
Treatment Centers--West, Inc., and Renal Treatment
Centers--Southeast, Inc. subsequently executed an
agreement in this form on February 27, 1998.@@@
10.19 Borrower Pledge Agreement dated as of October 24, 1997
and entered into by and between the Company, 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).@@@
10.20 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). RTC subsequently executed an
agreement in this form on February 27, 1998.@@@
10.21 Agreement and Plan of Merger dated as of November 18,
1997 by and among TRCH, Nevada Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of
TRCH, and RTC.###
10.22 Amendment No. 2 and Consent No. 2 to the Revolving
Credit Agreement and First Amendment to the Subsidiary
Guaranty dated February 17, 1998.+++
10.23 Third Amendment to the Term Loan Agreement and First
Amendment to the Subsidiary Guaranty dated February
17, 1998. (The provisions of this agreement amending
the original term loan agreement have been superseded
by exhibit no. 10.31 hereof.)+++
10.24 Special Purpose Option Plan.++
10.25 Indenture, dated June 12, 1996, by RTC to PNC Bank
including form of RTC Note (the "Indenture").***
10.26 First Supplemental Indenture, dated as of February 27,
1998, among RTC, TRCH and PNC Bank under the
Indenture.+++
10.27 Second Supplemental Indenture, dated as of March 31,
1998, among RTC, TRCH and PNC Bank under the
Indenture.+++
10.28 Guaranty, entered into as of March 31, 1998, by the
Company in favor of and for the benefit of PNC
Bank.+++
10.29 Amended and Restated Term Loan Agreement, dated April
30, 1998, by and among the Company, the lenders party
thereto, DLJ Capital Funding, Inc., as Syndication
Agent, and The Bank of New York, as Administrative
Agent (the "Term Loan Agreement").X
10.30 Amended and Restated Revolving Credit Agreement, dated
April 30, 1998, by and among the Company, 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").X
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
10.31 Form of First Amendment to Borrower/Subsidiary Pledge
Agreement, dated April 30, 1998, by and among the Company,
RTC, Total Renal Care, Inc., and The Bank of New York, as
Collateral Agent.X
10.32 Form of Acknowledgment and Confirmation, dated April 30, 1998,
by the Company, RTC, TRC West, Inc., Total Renal Care, Inc.,
Total Renal Care Acquisition Corp., Renal Treatment Centers--
Mid-Atlantic, Inc., Renal Treatment Centers--Northeast, Inc.,
Renal Treatment Centers--California, Inc., Renal Treatment
Centers--West, Inc., and Renal Treatment Centers--Southeast,
Inc. for the benefit of The Bank of New York, as Collateral
Agent and the lenders party to the Term Loan Agreement or the
Revolving Credit Agreement.X
21 List of Subsidiaries of the Company.+++
23.1 Consent of Price Waterhouse LLP.X
23.2 Consent of Coopers & Lybrand L.L.P.X
23.3 Consent of Deloitte & Touche, L.L.P.X
23.4 Consent of Baird, Kurtz & Dobson.X
24 Powers of Attorney with respect to the Company (included on
Page II-1 hereof).+++
27 Financial Data Schedule.X
- --------
X Included in this filing.
@ Filed on October 18, 1996 as an exhibit to the Company's Current Report on
Form 8-K.
@@ Filed on March 18, 1996 as an exhibit to the Company's Transitional Report
on Form 10-K for the transition period from June 1, 1995 to December 31,
1995.
@@@ Filed on December 19, 1997 as an exhibit to the Company's Current Report
on Form 8-K.
+ Filed on October 24, 1995 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Registration Statement No. 33-97618).
++ Filed on February 25, 1998 as an exhibit to the Company's Registration
Statement on Form S-8 (Registration Statement No. 333-46887).
+++ Filed on March 31, 1998 as an exhibit to the Company's Form 10-K for the
year ended December 31, 1997.
# Filed on June 6, 1994 as an exhibit to the Company's Registration Statement
on Form S-1 (Registration Statement No. 33-79770).
## Filed on August 29, 1995 as an exhibit to the Company's Form 10-K for the
year ended May 31, 1995.
### Filed on December 19, 1997 as Annex A to the Company's Registration
Statement on Form S-4 (Registration No. 333-42653).
* Management contract or executive compensation plan or arrangement.
** Filed on August 29, 1997 as an exhibit to the Company's Registration
Statement on Form S-8 (Registration Statement No. 333-34695).
*** Filed as an exhibit to RTC's Form 10-Q for the quarter ended June 30,
1996.
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated November 21, 1997, reporting under Item
5 the issuance by TRCH of a press release in connection with the Merger.
Current Report on Form 8-K, dated December 19, 1997, reporting under Item
7: (i) the Audited Financial Statements of the Nephrology Services Business
of Caremark International, Inc., (ii) the Audited Financial Statements of
New West Dialysis, Inc., (iii) the 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., (iv) Audited
Financial Statements of Dialysis Care of North Carolina, (v) Audited
Financial Statements of the Renal Dialysis Business of the Rogosin
Institute, Inc. and (vi) certain Unaudited Pro Forma Financial Statements.