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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-4034
TOTAL RENAL CARE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
DELAWARE 51-0354549
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21250 HAWTHORNE BLVD., SUITE 800
TORRANCE, CALIFORNIA 90503-5517
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 792-2600
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
OUTSTANDING AT
CLASS NOVEMBER 1, 1998
----- -----------------
Common Stock, Par Value $0.001........................... 80,951,491 shares
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TOTAL RENAL CARE HOLDINGS, INC.
Unless otherwise indicated in this Form 10-Q, "we," "us," "our" and similar
terms, as well as references to "the Company," refer to Total Renal Care
Holdings, Inc. and its subsidiaries.
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997...................................................... 1
Condensed Consolidated Statements of Income for the Three Months and the
Nine Months Ended September 30, 1998 and September 30, 1997............ 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and September 30, 1997........................ 3
Notes to Condensed Consolidated Financial Statements.................... 4
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 10
Liquidity and Capital Resources........................................... 13
Risk Factors.............................................................. 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............... 24
Item 6. Exhibits and Reports on Form 8-K.................................. 24
Signatures.............................................................. 25
- ---------------------
Note: Items 1, 2, 3 and 5 of Part II are omitted because they are not
applicable.
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
ASSETS
------
Current assets:
Cash and cash equivalents.................... $ 32,849,000 $ 6,143,000
Patient accounts receivable, less allowance
for doubtful accounts of $47,881,000 and
$30,695,000, respectively................... 382,025,000 248,408,000
Receivable from Tenet, a related company..... 358,000 534,000
Deferred income taxes........................ 22,215,000
Other current assets......................... 50,479,000 47,119,000
-------------- --------------
Total current assets....................... 487,926,000 302,204,000
Property and equipment, net.................... 215,411,000 172,838,000
Notes receivable from related parties.......... 22,193,000 11,344,000
Other long-term assets......................... 12,693,000 17,583,000
Intangible assets, net of accumulated
amortization of $100,261,000 and $77,040,000,
respectively.................................. 1,010,934,000 774,266,000
-------------- --------------
Total assets............................... $1,749,157,000 $1,278,235,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term obligations..... $ 9,611,000 $ 27,810,000
Other current liabilities.................... 117,458,000 74,640,000
-------------- --------------
Total current liabilities.................. 127,069,000 102,450,000
Long term debt and other....................... 1,140,561,000 725,376,000
Deferred income taxes.......................... 8,532,000 2,500,000
Minority interests............................. 21,661,000 19,079,000
Stockholders' equity:
Preferred stock, ($0.001 par value; 5,000,000
shares authorized; none outstanding)........ -- --
Common stock, voting, ($0.001 par value;
195,000,000 shares authorized; 80,947,325
and 77,991,595 shares issued and
outstanding, respectively).................. 81,000 78,000
Additional paid-in capital................... 402,052,000 358,492,000
Notes receivable from stockholders........... (349,000) (3,030,000)
Retained earnings............................ 49,550,000 73,290,000
-------------- --------------
Total stockholders' equity................. 451,334,000 428,830,000
-------------- --------------
Total liabilities and stockholders'
equity.................................... $1,749,157,000 $1,278,235,000
============== ==============
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
THREE MONTHS NINE MONTHS
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net operating revenues.. $318,585,000 $197,749,000 $865,684,000 $535,401,000
Operating expenses:
Facilities............ 200,925,000 131,670,000 549,544,000 360,771,000
General and
administrative....... 17,174,000 13,208,000 50,589,000 35,244,000
Provision for doubtful
accounts............. 8,997,000 5,390,000 23,539,000 14,786,000
Depreciation and
amortization......... 22,435,000 14,194,000 62,474,000 38,023,000
Merger and related
costs................ 92,835,000
------------ ------------ ------------ ------------
Total operating
expenses............ 249,531,000 164,462,000 778,981,000 448,824,000
Operating income...... 69,054,000 33,287,000 86,703,000 86,577,000
Interest expense, net of
capitalized interest... (19,805,000) (7,525,000) (50,866,000) (17,179,000)
Interest rate swap--
early termination
costs.................. (9,823,000)
Interest income......... 963,000 883,000 3,627,000 2,346,000
------------ ------------ ------------ ------------
Income before income
taxes, minority
interests,
extraordinary item
and cumulative effect
of change in
accounting
principle............ 50,212,000 26,645,000 29,641,000 71,744,000
Income taxes............ 19,244,000 11,163,000 28,924,000 28,661,000
------------ ------------ ------------ ------------
Income before minority
interests,
extraordinary item
and cumulative effect
of change in
accounting
principle............ 30,968,000 15,482,000 717,000 43,083,000
Minority interests in
income of consolidated
subsidiaries........... 1,859,000 850,000 4,817,000 3,193,000
------------ ------------ ------------ ------------
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ 29,109,000 14,632,000 (4,100,000) 39,890,000
Extraordinary loss, net
of tax of $7,668,000... 12,744,000
Cumulative effect of
change in accounting
principle, net of tax
of $4,300,000.......... 6,896,000
------------ ------------ ------------ ------------
Net income (loss)....... $ 29,109,000 $ 14,632,000 $(23,740,000) $ 39,890,000
============ ============ ============ ============
Earnings (loss) per
common share:
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ $ 0.36 $ 0.19 $ (0.05) $ 0.52
Extraordinary loss,
net of tax........... (0.16)
Cumulative effect of
change in accounting
principle, net of
tax.................. (0.09)
------------ ------------ ------------ ------------
Net income (loss)..... $ 0.36 $ 0.19 $ (0.30) $ 0.52
============ ============ ============ ============
Weighted average number
of common shares
outstanding............ 80,858,000 77,752,000 79,982,000 77,405,000
============ ============ ============ ============
Earnings (loss) per
common share--assuming
dilution:
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting
principle............ $ 0.35 $ 0.18 $ (0.05) $ 0.50
Extraordinary loss,
net of tax........... (0.16)
Cumulative effect of
change in accounting
principle, net of
tax.................. (0.09)
------------ ------------ ------------ ------------
Net income (loss)..... $ 0.35 $ 0.18 $ (0.30) $ 0.50
============ ============ ============ ============
Weighted average number
of common shares and
equivalents
outstanding--assuming
dilution............... 87,052,000 80,532,000 79,982,000 79,683,000
============ ============ ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
TOTAL RENAL CARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
--------------- -------------
Cash flows from operating activities:
Net (loss) income............................ $ (23,740,000) $ 39,890,000
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization.............. 62,474,000 38,023,000
Extraordinary item, net of tax............. 12,744,000
Provision for doubtful accounts............ 23,539,000 14,786,000
Change in accounting principle, net of
tax....................................... 6,896,000
Compensation expense from stock option
exercise.................................. 16,000,000
Other non-cash merger related expenses..... 10,094,000
Changes in working capital................. (101,155,000) (75,265,000)
--------------- -------------
Total adjustments........................ 30,592,000 (22,456,000)
--------------- -------------
Net cash provided by operating
activities............................ 6,852,000 17,434,000
--------------- -------------
Cash flows from investing activities:
Purchases of property and equipment.......... (64,767,000) (41,071,000)
Cash paid for acquisitions, net of cash
acquired.................................... (276,075,000) (257,180,000)
Sale of investments.......................... 41,202,000
Other........................................ (42,388,000) (15,590,000)
--------------- -------------
Net cash used in investing activities.. (383,230,000) (272,639,000)
--------------- -------------
Cash flows from financing activities:
Borrowings from bank credit facility......... 1,499,825,000 267,000,000
Principal payments on long-term obligations.. (1,122,180,000) (12,373,000)
Net proceeds from sale of common stock....... 20,347,000 2,751,000
Other........................................ 5,092,000 722,000
--------------- -------------
Net cash provided by financing
activities............................ 403,084,000 258,100,000
--------------- -------------
Net increase in cash........................... 26,706,000 2,895,000
Cash at beginning of period.................... 6,143,000 21,327,000
--------------- -------------
Cash at end of period.......................... $ 32,849,000 $ 24,222,000
=============== =============
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments consisting only of normal recurring
adjustments which are necessary to state fairly the consolidated financial
position, results of operations, and cash flows of Total Renal Care Holdings,
Inc., ("TRCH" or the "Company") as of and for the periods indicated. TRCH
presumes that users of the interim financial information herein have read or
have access to the Company's audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the preceding fiscal year and that the adequacy of additional
disclosure needed for a fair presentation, except in regard to material
contingencies or recent significant events, may be determined in that context.
Accordingly, footnote and other disclosures which would substantially duplicate
the disclosures contained in Form 10-K for the year ended December 31, 1997
filed on March 31, 1998 and Form 10K/A for the year ended December 31, 1997
filed on May 18, 1998 by the Company have been omitted. Certain
reclassifications of prior period amounts have been made to conform to current
period classifications. The financial information herein is not necessarily
representative of a full year's operations.
2. On 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
stockholders 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 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 and provided for underlying shares at a
conversion price of $25.62. In connection with this transaction, the Board and
the Company's stockholders authorized an additional 140,000,000 shares of
common stock.
The Merger was accounted for as a pooling of interests and as such, the
condensed consolidated financial statements have been restated to include RTC
for all periods presented. There were no transactions between the Company and
RTC prior to the combination and immaterial adjustments were made to conform
RTC's accounting policies. The results of operations for the separate companies
and the combined results presented in the condensed consolidated financial
statements follow:
THREE MONTHS NINE MONTHS
ENDED SEPT. ENDED SEPT.
30, 1997 30 1997
------------ ------------
Net operating revenues
TRCH........................................... $113,668,000 $307,450,000
RTC............................................ 84,081,000 227,951,000
------------ ------------
$197,749,000 $535,401,000
------------ ------------
Income before extraordinary item and cumulative
effect of change in accounting principle
TRCH........................................... $ 9,870,000 $ 26,561,000
RTC............................................ 4,762,000 13,329,000
------------ ------------
$ 14,632,000 $ 39,890,000
------------ ------------
Net income
TRCH........................................... $ 9,870,000 $ 26,561,000
RTC............................................ 4,762,000 13,329,000
------------ ------------
$ 14,632,000 $ 39,890,000
------------ ------------
Additionally, the results of operations for the separate companies and the
combined results presented in the condensed consolidated financial statements
for the nine months ended September 30, 1998 contain two
4
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
months of RTC operations prior to the Merger, including net operating revenues
of $72,482,000, income before extraordinary item and cumulative effect of
change in accounting principle of $4,827,000 and net income of $4,827,000.
In connection with the Merger, fees and expenses incurred to date or
anticipated which related to the Merger and to the integration of the combined
companies have been expensed as required under the pooling of interests
accounting method. Such fees and expenses amounted to $92,835,000 which were
paid or accrued in the first quarter of 1998. The charge includes $21,580,000
for financial advisory, legal, accounting and other direct transaction costs,
$45,260,000 for payments under severance and employment agreements and other
costs associated with certain compensation plans and costs of $25,995,000 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. Certain of the Merger costs estimated at $36,000,000 are not
deductible for tax purposes. During the three months ended September 30, 1998,
the Company incurred approximately $2,389,000 in merger costs and at September
30, 1998, the accrual for remaining Merger costs amounted to approximately
$21,711,000.
As a result of the Merger, the RTC Revolving Credit Agreement ("RTC Credit
Agreement") was terminated and the outstanding balance of approximately
$297,228,000 was paid off through additional borrowings under the Company's
Credit Facilities (as defined in Note 6). The remaining net unamortized
deferred financing costs in the amount of $4,392,000 related to the RTC Credit
Agreement were recognized as an extraordinary loss in the consolidated
statement of income for the nine months ended September 30, 1998.
3. During the quarter ended March 31, 1998, the Company purchased nine
centers and a pharmacy operation. Total cash consideration for these
transactions was $51 million.
During the quarter ended June 30, 1998, the Company purchased 25 centers and
acquired additional ownership interest in certain of the Company's
partnerships. Total cash consideration for these transactions was $116 million.
During the quarter ended September 30, 1998, the Company purchased 30 centers
and purchased all outstanding minority interest in one of the Company's
partnerships. Total cash consideration was approximately $109 million.
These transactions were accounted for under the purchase method. The cost of
these acquisitions will be allocated primarily to intangible assets such as
patient charts, noncompete agreements and goodwill to the extent the purchase
price exceeds the value of the tangible assets, primarily capital equipment.
The results of operations on a pro forma basis as though the above
acquisitions had been combined with the Company at the beginning of each period
presented for the nine months ended September 30, are as follows:
1998 1997
------------ ------------
Pro forma net operating revenues................. $935,861,000 $660,209,000
Pro forma income before extraordinary item and
cumulative effect of change in accounting
principle....................................... 5,687,000 48,001,000
Pro forma net (loss) income...................... $(13,953,000) $ 48,001,000
Pro forma earnings per share before extraordinary
item and cumulative effect of change in
accounting principle:
Basic.......................................... $ 0.07 $ 0.62
Assuming dilution.............................. $ 0.07 $ 0.60
5
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. In April 1998, Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities ("SOP 98-5"), was issued and was adopted by the Company in
the first quarter of 1998 (effective January 1, 1998). SOP 98-5 requires that
pre-opening and organization costs, incurred in conjunction with facility pre-
opening activities, which previously had been treated as deferred costs and
amortized over five years, should be expensed as incurred. As a result of the
adoption of SOP 98-5, all existing unamortized pre-opening, development and
organizational costs have been recognized as the cumulative effect of a change
in accounting principle in the condensed consolidated statement of income for
the nine months ended September 30, 1998.
5. The reconciliation of the numerators and denominators used to calculate
earnings (loss) per common share for all periods presented is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPT.
SEPT. 30 30
------------------------ -------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
Applicable Common Shares
Average outstanding
during the period...... 80,871,000 77,864,000 79,994,000 77,537,000
Reduction in shares in
connection with notes
receivable from
employees................ (13,000) (112,000) (12,000) (132,000)
----------- ----------- ------------ -----------
Weighted average number of
shares outstanding
for use in computing
earnings per share....... 80,858,000 77,752,000 79,982,000 77,405,000
Dilutive effect of
outstanding stock
options.................. 1,315,000 2,780,000 2,059,000
Dilutive effect of
convertible debt and
earnout note............. 4,879,000 219,000
----------- ----------- ------------ -----------
Weighted average number of
shares and equivalents
outstanding for use in
computing earnings per
share--assuming
dilution................. 87,052,000 80,532,000 79,982,000 79,683,000
=========== =========== ============ ===========
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle................ $29,109,000 $14,632,000 $(4,100,000) $39,890,000
Interest, net of tax
resulting from dilutive
effect of convertible
debt and earnout note.... 1,055,000 34,000
----------- ----------- ------------ -----------
Adjusted Income (loss).... 30,164,000 14,632,000 (4,100,000) 39,924,000
Extraordinary loss, net of
tax...................... 12,744,000
Cumulative effect of
change in accounting
principle, net of tax.... 6,896,000
----------- ----------- ------------ -----------
Income (loss)--assuming
dilution................. $30,164,000 $14,632,000 $(23,740,000) $39,924,000
=========== =========== ============ ===========
Earnings (loss) per common
share:
Income (loss) per common
share before
extraordinary item and
cumulative effect
of change in accounting
principle.............. $ 0.36 $ 0.19 $ (0.05) $ 0.52
Extraordinary loss, net of
tax...................... (0.16)
Cumulative effect of
change in accounting
principle, net of tax.... (0.09)
----------- ----------- ------------ -----------
Net income (loss) per
common share............. $ 0.36 $ 0.19 $ (0.30) $ 0.52
=========== =========== ============ ===========
Earnings (loss) per common
share--assuming dilution:
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. $ 0.35 $ 0.18 $ (0.05) $ 0.50
Extraordinary item, net
of tax................. (0.16)
Cumulative effect of
change in accounting
principle, net of tax.. (0.09)
----------- ----------- ------------ -----------
Net income (loss) per
common share--assuming
dilution................. $ 0.35 $ 0.18 $ (0.30) $ 0.50
=========== =========== ============ ===========
6
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in the above calculation is the effect of the RTC Subordinated
Convertible Notes for the three months ended September 30, 1998; however, the
effect is not included for the nine months ended September 30, 1998 and the
three and nine months ended September 30, 1997 because it was anti-dilutive.
6. On April 30, 1998, the Company replaced its existing $1,050,000,000 credit
facilities with an aggregate of $1,350,000,000 in two senior bank facilities
("Senior Credit Facilities"). The Senior Credit Facilities consist of a seven-
year $950,000,000 revolving senior credit facility and a ten-year $400,000,000
senior term facility. The terms and rates are comparable to those in effect
with the previous credit facilities and allow for an expansion of the leverage
ratio as well as a waiver for cash costs associated with the Merger. As a
result of this refinancing, remaining net deferred financing costs in the
amount of approximately $16,019,000, less tax of $6,087,000, were recognized as
an extraordinary loss in the second quarter of 1998.
7. In conjunction with the refinancing of its Senior Credit Facilities the
Company's two existing forward interest rate swap agreements with notional
amounts of $100,000,000 and $200,000,000 were canceled in April 1998. The loss
associated with the early cancellation of those swaps was approximately
$9,823,000. During the quarter ended June 30, 1998, the Company entered into
forward interest rate cancelable swap agreements, with a combined notional
amount of $800,000,000. The lengths of the agreements are between three and ten
years with cancellation clauses at the swap holders' option from one to seven
years. The underlying blended interest rate is fixed at approximately 5.65%
plus an applicable margin based upon the Company's current leverage ratio.
Currently, the effective interest rate for borrowings under the swap agreement
is 7.15%.
8. The outstanding $125,000,000 of 5 5/8% subordinated convertible notes
issued by RTC are guaranteed by the Company. The following summarizes financial
information of RTC:
SEPTEMBER DECEMBER 31,
30, 1998 1997
------------ ------------
Cash and cash equivalents........................ $ 2,325,000 $ 743,000
Accounts receivable, net......................... 141,983,000 95,927,000
Other current assets............................. 20,263,000 19,484,000
------------ ------------
Total current assets............................. 164,571,000 116,154,000
Property and equipment, net...................... 77,505,000 72,777,000
Intangible assets, net........................... 404,850,000 384,529,000
Other assets..................................... 3,315,000 12,034,000
------------ ------------
Total assets..................................... $650,241,000 $585,494,000
------------ ------------
Current liabilities (including $307,268,000
payable to TRCH at September 30, 1998).......... $347,640,000 $ 62,673,000
Long-term debt................................... 125,429,000 367,219,000
Other long-term liabilities...................... 6,924,000 444,000
Stockholder's equity............................. 170,248,000 155,158,000
------------ ------------
$650,241,000 $585,494,000
============ ============
7
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
Net operating revenues.. $120,178,000 $84,081,000 $358,829,000 $227,951,000
Total operating
expenses............... 97,274,000 71,791,000 339,355,000 197,121,000
------------ ----------- ------------ ------------
Operating income........ 22,904,000 12,290,000 19,474,000 30,830,000
Interest expense, net... 2,074,000 3,116,000 6,862,000 7,095,000
------------ ----------- ------------ ------------
Income before income
taxes.................. 20,830,000 9,174,000 12,612,000 23,735,000
Income taxes............ 226,000 4,412,000 5,020,000 10,406,000
------------ ----------- ------------ ------------
Net income.............. $ 20,604,000 $ 4,762,000 $ 7,592,000 $ 13,329,000
============ =========== ============ ============
9. The financial information of RTC as originally presented in Form 10-Q for
the three and nine months ended September 30, 1997 has been restated to correct
net revenues and the provision for doubtful accounts receivable with the
following effect (in thousands, except per share amounts):
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 1997 SEPTEMBER 30, 1997
------------------- -------------------
AS AS
ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
Net revenues....................... $86,559 $84,081 $234,940 $227,951
Operating expense.................. 71,090 71,791 195,144 197,121
Operating profit................... 15,469 12,290 39,796 30,830
Net income......................... 7,659 4,762 20,424 13,329
Earnings per common share.......... .31 .19 .82 .54
Earnings per common share--assuming
dilution.......................... .29 .18 .78 .51
10. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
11. The Company's licensed clinical laboratories are subject to extensive
federal and state regulation of performance standards, including the provisions
of the Clinical Laboratory Improvement Act of 1967 and the Clinical Laboratory
Improvements Amendment of 1988 Act as well as federal and state regulations.
The Company's Florida-based laboratory subsidiary is the subject of a third-
party carrier review relating to certain claims submitted by us for Medicare
reimbursement. It is the Company's understanding that similar reviews have been
undertaken with respect to other providers' laboratory activities. The carrier
has alleged that 99.3% of the tests performed by the Company's laboratory for
the review period it initially identified (from January 1995 to April 1996)
were not properly supported by the prescribing physicians' medical
justification. The carrier has issued a formal overpayment determination in the
amount of $5.6 million and has suspended all payments of our laboratory-related
claims. In addition, the carrier has informed the local offices of the
Departments of Justice ("DOJ") and HHS of this matter. The Company has
consulted with outside counsel,
8
TOTAL RENAL CARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reviewed the Company's records, is disputing the overpayment determination
vigorously and has provided extensive supporting documentation of the Company's
claims. The Company continues to cooperate with the carrier to resolve this
matter and have initiated the process of a formal review of the carrier's
determination. However, the Company is unable to determine at this time (1)
when this matter will be resolved or when the laboratory's payment suspension
will be lifted; (2) what, if any, of the laboratory claims will be disallowed;
(3) what action DOJ or HHS may take with respect to this matter; (4) the
outcome of the carrier's review of the periods from May 1996 through March
1998, including the initiation of another payment suspension; (5) whether
additional periods may be reviewed by the carrier; or (6) any other outcome of
this investigation. Determinations adverse to the Company could have an adverse
impact on the Company's business, results of operations or financial condition.
12. Subsequent to September 30, 1998, the Company completed acquisitions or
signed definitive agreements or entered into agreements in principle to acquire
29 dialysis facilities for consideration of approximately $88 million, which
has been or will primarily be funded by additional borrowings under the
Company's Senior Credit Facilities.
13. The Company is in the process of issuing 7% Convertible Subordinated
Notes Due 2009 in the aggregate principal amount of $300 million (plus an over-
allotment option of up to $45 million) (the "Convertible Notes"). The
Convertible Notes will be convertible at any time, in whole or in part, into
shares of the Company's Common Stock at a conversion price of $32.81 and will
be redeemable after November 15, 2001. The Convertible Notes will be sold only
to qualified institutional buyers pursuant to Rule 144A and the Company intends
to use the net proceeds from any sale of the Convertible Notes to pay down debt
under the Revolving Facility (which may be reborrowed). This transaction is
expected to close November 17, 1998.
The Notes have not been registered under the Securities Act of 1933 or states
securities laws and may not be offered or sold in the United States without
registration or qualification or an applicable exemption from registration or
qualification requirements.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act").
Such statements relating to future events and financial performance are
forward-looking statements involving risks and uncertainties that are detailed
from time to time in our various Securities and Exchange Commission filings.
MERGER
As described in Note 2 to the condensed consolidated financial statements, we
merged (the "Merger") with Renal Treatment Centers, Inc. ("RTC") on February
27, 1998 in a transaction accounted for as a pooling of interests. Accordingly,
the condensed consolidated financial statements have been restated to include
RTC for all periods presented.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997.
Net Operating Revenues. Net operating revenues for the three months ended
September 30, 1998 ("Third Quarter of 1998") increased $120,836,000 to
$318,585,000 from $197,749,000 for the three months ended September 30, 1997
("Third Quarter of 1997") representing a 61.1% increase. Of this increase,
$86,186,000 was due to increased treatments from acquisitions, existing
facility growth and de novo developments. The remaining increase in net
operating revenues per treatment, which was $248.17 in the Third Quarter of
1998 compared to $221.18 in the Third Quarter of 1997, was attributable to
increased ancillary usage primarily in EPO administration, an increase in non-
governmental (private) payor services stemming from the Medicare Secondary
payor extension causing private payors to be in a primary position for an
additional twelve-month period combined with an overall increase in ancillary
rates, and the addition from the partial roll-out of the TRCH laboratory
services to the RTC patient base.
Facility Operating Expenses. Facility operating expenses consist of cost and
expenses specifically attributable to the operation of dialysis facilities,
including operating and maintenance cost of such facilities, equipment, direct
labor, and supply and service costs relating to patient care. Facility
operating expense increased $69,255,000 to $200,925,000 in the Third Quarter of
1998 from $131,670,000 in the Third Quarter of 1997 and as a percentage of net
operating revenues, facility operating expenses decreased to 63.1% in the Third
Quarter of 1998 from 66.6% in the Third Quarter of 1997. This decrease was
primarily a result of revenue growth stemming from the Medicare Secondary payor
extensions and the effects from our Best Demonstrated Practices Program,
including efficiencies in medical supplies and labor.
General and Administrative Expenses. General and administrative expenses
include headquarters expenses and administrative, legal, quality assurance,
information systems and centralized accounting support functions. General and
administrative expenses increased $3,966,000 to $17,174,000 in the Third
Quarter of 1998 from $13,208,000 in the Third Quarter of 1997. As a percentage
of net operating revenues, general and administrative expenses decreased to
5.4% in the Third Quarter of 1998 from 6.7% in the Third Quarter of 1997. This
decline as a percentage of net revenue is a result of revenue growth and
economies of scale achieved by leveraging of corporate staff across a higher
revenue base and the elimination of duplicate corporate staff and efficiencies
achieved from the RTC Merger.
Provision for Doubtful Accounts. The provision for doubtful accounts is
influenced by the amount of net operating revenues generated from non-
governmental payor sources in addition to the relative percentage of accounts
receivable by aging category. The provision for doubtful accounts increased
$3,607,000 to $8,997,000 in the Third Quarter of 1998 from $5,390,000 in the
Third Quarter of 1997. As a percentage of net operating
10
revenues, the provision for doubtful accounts increased to 2.8% in the Third
Quarter of 1998 from 2.7% in the Third Quarter of 1997. This increase is due to
an increase in the non-governmental payor mix caused by the Medicare Secondary
payor extension.
Depreciation and Amortization. Depreciation and amortization increased
$8,241,000 to $22,435,000 in the Third Quarter of 1998 from $14,194,000 in the
Third Quarter of 1997. As a percentage of net operating revenues, depreciation
and amortization decreased to 7.0% in the Third Quarter of 1998 from 7.2% in
the Third Quarter of 1997. The decrease was primarily attributable to
acquisitions with assets with longer lives than those in the prior year base.
Operating Income. Operating income increased $35,767,000 to $69,054,000 in
the Third Quarter of 1998 from $33,287,000 in the Third Quarter of 1997. As a
percentage of net operating revenues, operating income increased to 21.7% in
the Third Quarter of 1998 from 16.8% in the Third Quarter of 1997. The increase
was primarily due to increased revenues, a decrease in facility operating cost,
general and administrative cost and depreciation and amortization expense.
Interest Expense. Interest expense, net of interest income, increased
$12,200,000 to $18,842,000 in the Third Quarter of 1998 from $6,642,000 in the
Third Quarter of 1997. As a percentage of net operating revenues, interest
expense, net of interest income, increased to 5.9% in the Third Quarter of 1998
from 3.4% in the Third Quarter of 1997. The increase in interest expense, net
of interest income was due primarily to an increase in borrowings made under
the credit facilities to fund our acquisitions.
Provision for Income Taxes. Provision for income taxes increased $8,081,000
to $19,244,000 in the Third Quarter of 1998 from $11,163,000 in the Third
Quarter of 1997 and the effective tax rate after minority interest decreased to
39.8% in the Third Quarter of 1998 compared to 43.2% in the Third Quarter of
1997. The reduction in the effective tax rate was due to a decrease in the
blended state tax rate and less amortization of non-deductible goodwill as a
percentage of taxable income.
Minority Interest. Minority interests represent the pretax income earned by
physicians who directly or indirectly own minority interests in our partnership
affiliates and the net income in two of our corporate subsidiaries. Minority
interest increased $1,009,000 to $1,859,000 in the Third Quarter of 1998 from
$850,000 in the Third Quarter of 1997, and as a percentage of net operating
revenues, minority interest increased to 0.6% in the Third Quarter of 1998 from
0.4% in the Third Quarter of 1997. The increase in minority interest expense is
a result of an increase in the number of facilities owned by partnership
affiliates and an increase in profitability at existing partnership affiliates
and subsidiaries.
Nine Months Ended September 30, 1998 Compare to the Nine Months Ended
September 30, 1997.
Net Operating Revenues. Net operating revenues for the nine months ended
September 30, 1998 increased $330,283,000 to $865,684,000 from $535,401,000 for
the nine months ended September 30, 1997 representing a 61.7% increase. Of this
increase, $264,830,000 was due to increased treatments from acquisitions,
existing facility growth and de novo developments. The remaining increase in
net operating revenues per treatment which was $242.49 for the nine months
ended September 30, 1998 compared to $224.16 for the nine months ended
September 30, 1997 was attributable to increased ancillary usage primarily in
EPO administration, an increase in non-governmental (private) payor services
stemming from the Medicare Secondary payor extension causing private payors to
be in a primary position for an additional twelve-month period, an overall
increase in rates, and the addition from the partial roll-out of our laboratory
services to the RTC patient base.
Facility Operating Expenses. Facility operating expense increased
$188,773,000 to $549,544,000 in the first nine months of 1998 from $360,771,000
in the first nine months of 1997 and as a percentage of net operating revenues,
facility operating expenses decreased to 63.5% in the first nine months of 1998
from 67.4% in the first nine months of 1997. This decrease was primarily a
result of revenue growth stemming from the Medicare Secondary payor extensions
and the effects from our Best Demonstrated Practices Program, including
efficiencies in medical supplies and labor.
General and Administrative Expenses. General and administrative expenses
increased $15,345,000 to $50,589,000 in the first nine months of 1998 from
$35,244,000 in the first nine months of 1997. As a
11
percentage of net operating revenues, general and administrative expenses
decreased to 5.8% in the first nine months of 1998 from 6.6% in the first nine
months of 1997. This decline as a percentage of net revenue is a result of
revenue growth and economies of scale achieved by leveraging of corporate staff
across a higher revenue base.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $8,753,000 to $23,539,000 in the first nine months of 1998 from
$14,786,000 in the first nine months of 1997. As a percentage of net operating
revenues, the provision for doubtful accounts decreased to 2.7% in the first
nine months of 1998 from 2.8% in the first nine months of 1997, which reflects
improvements made to the billing and collection processes to curtail write-offs
for untimely follow-up on claims previously billed.
Depreciation and Amortization. Depreciation and amortization increased
$24,451,000 to $62,474,000 in the first nine months of 1998 from $38,023,000 in
the first nine months of 1997. As a percentage of net operating revenues,
depreciation and amortization increased to 7.2% in the first nine months of
1998 from 7.1% in the first nine months of 1997. The increase was primarily
attributable to increased amortization due to acquisition activity and
increased depreciation from new center leaseholds and routine capital
expenditures.
Merger and Related Expenses. In connection with the Merger, fees and expenses
incurred to date or anticipated which related to the Merger and to the
integration of the combined companies have been expensed as required under the
pooling of interests accounting method. Such fees and expenses amounted to
$92,835,000 which were paid or accrued in the first nine months of 1998. The
charge includes $21,580,000 for financial advisory, legal, accounting and other
direct transaction costs, $45,260,000 for payments under severance and
employment agreements and other costs associated with certain compensation
plans and costs of $25,995,000 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. Certain of the Merger costs
estimated at $36,000,000 are not deductible for tax purposes. During the nine
months ended September 30, 1998, the Company incurred approximately $71,124,000
in Merger costs and at September 30, 1998 the accrual for remaining Merger
costs amounted to approximately $21,711,000.
Operating Income. Operating income increased $126,000 to $86,703,000 in the
first nine months of 1998 from $86,577,000 in the first nine months of 1997.
Operating income before merger and related costs increased $91,961,000 to
$179,538,000 in the first nine months of 1998 from $86,577,000 in the first
nine months of 1997. As a percentage of net operating revenues, operating
income before merger and related costs increased to 20.7% in the first nine
months of 1998 from 16.2% in the first nine months of 1997 primarily due to
increased revenues, a decrease in facility operating costs and the provision
for doubtful accounts partially offset by an increase in depreciation and
amortization expense.
Interest Expense. Interest expense, net of interest income, increased
$32,406,000 to $47,239,000 in the first nine months of 1998 from $14,833,000 in
the first nine months of 1997. As a percentage of net operating revenues,
interest expense, net of interest income, increased to 5.5% in the first nine
months of 1998 from 2.8% in the first nine months of 1997. The increase in
interest expense, net of interest income was due primarily to an increase in
borrowings made under the credit facilities to fund our acquisitions.
Interest rate swap--early termination costs. In conjunction with the
refinancing of the Senior Credit Facilities our two existing forward interest
rate swap agreements were canceled in April 1998. The early termination costs
associated with the cancellation of those swaps was $9,823,000.
Provision for Income Taxes. Provision for income taxes increased $263,000 to
$28,924,000 in the first nine months of 1998 from $28,661,000 in the first nine
months of 1997. The effective tax rate after minority interest but before
merger and related expenses was 39.8% in the first nine months of 1998 compared
to 41.8% in the first nine months of 1997. The decrease in the effective tax
rate was due to a reduction in the blended state tax rate and less amortization
of non-deductible goodwill as a percentage of taxable income. Non
12
deductible merger and related expenses consisting of costs associated with
limitations on deductibility of former RTC officer compensation and costs
associated with the issuance of stock amounted to approximately $36,000,000.
Additional tax expenses of approximately $2,600,000 were recognized in the
first nine months of 1998 to conform the RTC tax accrual with our ongoing
policies.
Minority Interest. Minority interest increased $1,624,000 to $4,817,000 in
the first nine months of 1998 from $3,193,000 in the first nine months of 1997,
and as a percentage of net operating revenues, minority interest remained the
same at .6% in the first nine months of 1998 and in the first nine months of
1997.
Extraordinary Loss. On February 27, 1998, in conjunction with the Merger we
terminated the RTC Revolving Credit Agreement ("RTC Credit Agreement") and
recorded all of the remaining related unamortized deferred financing costs as
an extraordinary loss of $2,812,000, net of tax. In April 1998, in conjunction
with replacing our Senior Credit Facilities, we also recorded all of the
remaining related unamortized deferred financing costs as an extraordinary loss
of $9,932,000, net of tax.
Cumulative Effect of Change in Accounting Principle. Effective January 1,
1998, we adopted Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities ("SOP 98-5"). SOP 98-5 requires that pre-opening and
organizational costs, incurred in conjunction with pre-opening activities of
our de novo facilities, which previously had been treated as deferred costs and
amortized over five years, should be expensed as incurred. In connection with
this adoption, we recorded a charge of $6,896,000, net of tax, as a cumulative
effect of a change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements have been the funding of our growth through
acquisitions and de novo developments and equipment purchases. Net cash
provided by operating activities was $6.9 million for the first nine months of
1998 and $17.4 million in the first nine months of 1997. Net cash provided by
operating activities consists of our net income (loss), increased by non-cash
expenses such as depreciation, amortization, non-cash interest and the
provision for doubtful accounts, and adjusted by changes in components of
working capital, primarily accounts receivable, and accrued merger and related
expenses in 1998. Net cash used in investing activities was $383.2 million for
the first nine months of 1998 and $272.6 million in the first nine months of
1997. Our principal uses of cash in investing activities have been related to
acquisitions, purchases of new equipment and leasehold improvements for our
outpatient facilities, as well as the development of new outpatient facilities.
Net cash provided by financing activities was $403.1 million for the first nine
months of 1998 and $258.1 million in the first nine months of 1997 primarily
consisting of borrowings from our two credit facilities. As of September 30,
1998, we had working capital of $360.9 million, including cash of
$32.8 million.
Our strategy is to continue to expand our operations both through development
of de novo facilities and through acquisitions. The development of a typical
outpatient facility generally requires $0.8 million to $1.2 million for initial
construction and equipment and $0.2 million to $0.3 million for working
capital. Based on our 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, our past experience may not be indicative
of the performance of future developed facilities. In the first nine months of
fiscal 1998, we have developed 21 new facilities, with six additional new
facilities in development expected to be completed by December 31, 1998 and in
fiscal 1999 we plan to open approximately 40 new facilities. We anticipate that
our aggregate capital requirements for purchases of equipment and leasehold
improvements for outpatient facilities, including de novo facilities for the
period from September 30, 1998 through December 31, 1998 will be approximately
$12.0 million and will be approximately $75.0 million for fiscal 1999.
13
During the period January 1, 1998 through September 30, 1998, we paid cash of
approximately $276. million for the acquisition of 64 facilities and a pharmacy
operation, and the purchase of minority interests in certain of our
partnerships. Since September 30, 1998 we have also completed acquisitions or
signed definitive agreements or agreements in principle to acquire 29
facilities, servicing approximately 1,950 patients, for consideration of
approximately $88 million. We have also signed a letter of intent to manage
three facilities servicing more than 400 patients. These acquisitions have been
or will primarily be funded by additional borrowings under our Credit
Facilities.
In April 1998, we replaced our $1.05 billion bank credit facilities with an
aggregate of $1.35 billion in two senior bank facilities. The Credit Facilities
consist of a seven-year $950 million revolving senior credit facility maturing
on March 31, 2005 and a ten-year $400 million senior term facility maturing on
March 31, 2008. As of September 30, 1998 the outstanding principal amount
outstanding under the Revolving Facility was $602 million and under the Term
Facility was $400 million. Therefore, we had $348 million available for
borrowing under the Revolving Facility. The Term Facility requires annual
principal payments of $4 million, with the $365 million balance due on
maturity.
The Credit Facilities contain financial and operating covenants including,
among other things, requirements that we maintain certain financial ratios and
satisfy certain financial tests, and imposes limitations on our ability to make
capital expenditures, to incur other indebtedness and to pay dividends. As of
the date hereof, we are in compliance with all such covenants.
During the quarter ended June 30, 1998, we entered into forward interest rate
cancelable swap agreements, with a combined notional amount of $800.0 million.
The lengths of the agreements are between three and ten years with cancellation
clauses at the swap holders' option from one to seven years. The underlying
blended interest rate is fixed at approximately 5.65% plus an applicable margin
based upon our current leverage ratio. Currently, the effective interest rate
for these swaps is 7.15%.
The $125.0 million outstanding 5 5/8% Convertible Subordinated Notes due 2006
(the "RTC Notes") bear interest at the rate of 5 5/8%, payable semi-annually
and require no principal payments until 2006. The RTC Notes are convertible
into shares of our Common Stock at an effective conversion price of $25.62 per
share and are redeemable by us beginning in July, 1999.
We are in the process of issuing 7% Convertible Subordinated Notes Due 2009
in the aggregate principal amount of $300 million (plus an over-allotment
option of up to $45 million) (the "Convertible Notes"). The Convertible Notes
will be convertible at any time, in whole or in part, into shares of our Common
Stock at a conversion price of $32.81 and will be redeemable after November 15,
2001. The Convertible Notes will be sold only to qualified institutional buyers
pursuant to Rule 144A and we intend to use the net proceeds from any sale of
the Convertible Notes to pay down debt under the Revolving Facility (which may
be reborrowed). This transaction is expected to close November 17, 1998.
Following the Offering, we believe that we will continue to have sufficient
liquidity to fund our debt service obligations and implement our growth
strategy over the next several years.
YEAR 2000 CONSIDERATIONS
Since the summer of 1998, all of our departments have been meeting with our
Information Systems department to determine the extent of our Y2K exposure.
Project teams have been assembled to work on correcting Y2K problems and to
perform contingency planning to reduce our total exposure. Our goal is to have
all corrective action and contingency plans in place by the third quarter of
1999.
Software Applications and Hardware. Each component of our Software
Application Portfolio ("SAP") must be examined with respect to its ability to
properly handle dates in the next millennium. As part of our software
assessment plan, key users will test each and every component of our SAP. These
tests will be constructed to make sure each component operates properly with
the system date advanced to the next millennium.
14
The major phases of our software assessment plan are as follows:
. Complete SAP inventory;
. Implement Y2K compliant software as necessary;
. Analyze which computers have Y2K problems and the cost to repair;
. Test all vendors' representations; and
. Fix any computer-specific problems.
Our billing and accounts receivable software is known to have a significant
Y2K problem. We have already addressed this issue by obtaining a new, Y2K
compliant version of this software. We expect to bring this software on-line in
the first quarter of 1999.
Operating Systems. We are also reviewing our operating systems to assess
possible Y2K exposure. We use several different Network Operating Systems
("NOS") for multi-user access to the software that resides on the respective
servers. Each NOS must be examined with respect to its ability to properly
handle dates in the next millennium. Key users will test each component of our
SAP with a compliant version of the NOS. One level beneath the NOS is a special
piece of software that comes into play when the computer is "booted" that
potentially has a Y2K problem and that is the Basic Input Output System
software ("BIOS"). The BIOS takes the date from the system clock and uses it in
passing the date to the NOS which in turn passes the date to the Desktop
Operating System. The system clock poses another problem in that some system
clocks were only capable of storing a two-digit year while other computer
clocks stored a four-digit year. This issue affects each and every computer we
have purchased. To remedy these problems, we plan to inventory all computer
hardware using a Year 2000 utility program to determine whether we have a BIOS
or a system clock problem. We then intend to perform a BIOS upgrade or perform
a processor upgrade to a Y2K compliant processor.
Our financial exposure from all sources of SAP and operating system Y2K
issues known to date is approximately $300,000, none of which has been
expended.
Dialysis Centers, Equipment and Suppliers. The operations of our dialysis
centers can be affected by the Y2K problem so a contingency plan must be in
place to prevent the shutdown of these centers. Each center will be responsible
for completing a survey of the possible consequences of a failure of the
information systems of our vendors and formulating a contingency plan by the
third quarter of 1999. Divisional Vice Presidents will then review these plans
to assure compliance.
All of our biomedical devices (including dialysis machines) that have a
computer chip in them will be checked thoroughly for Y2K compliance. We will
contact each of the vendors of the equipment we use and ask them to provide us
with documentation regarding Y2K compliance. Where it is technically and
financially feasible without jeopardizing any warrantees, we will test our
equipment by advancing the clock to a date in the next millennium.
In general, we expect to have all of our biomedical devices Y2K compliant by
the third quarter of 1999. We have not yet been able to estimate the costs of
upgrading or replacing certain of our biomedical devices as we do not yet know
which of these machines, if any, are not currently Y2K compliant.
In addition to factors noted above which are directly within our control,
factors beyond our direct control may disrupt our operations. If our suppliers
are not Y2K complaint, we may experience inventory shortages and run short of
critical supplies. If the utilities companies, transportation carriers and
telecommunications companies which service us experience Y2K difficulties, our
operations will also be adversely affected and some of our facilities may need
to be closed. We are in the process of taking steps to reduce the impact on our
operations in such instances and implementing contingency plans to address any
possible unavoidable affect which these difficulties would have on our
operations.
15
To address the possibility of a physical plant failure, we are contacting the
landlords of each of our facilities to insure that they will provide access to
our staff and any other key service providers. We are also providing written
notification to our utilities companies of the locations, schedules and
emergency services required of each of our dialysis facilities. In case a
physical plant failure should result in an emergency closure of any of our
facilities, we are currently:
. Confirming that backup hospital affiliation agreements are up-to-date and
complete;
. Reviewing appropriate elements of our disaster preparedness plan with our
staff and patients;
. Adopting/modifying emergency treatment orders (diet, etc.) and rationing
plans with our medical directors to provide patient safety; and
. Conducting patient meetings with social workers and dieticians.
To minimize the affect of any Y2K non-compliance on the part of suppliers, we
are currently taking steps to:
. Identify our critical suppliers and survey each of them to assess their
Y2K compliance status;
. Identify alternative supply sources where necessary;
. Identify Y2K compliant transportation/shipping companies and establish
agreements with them to cover situations where our current supplier's
delivery systems go down;
. Include language in contracts with new suppliers addressing Y2K
performance obligations, requirements and failures;
. Stock our dialysis facilities with one week of additional inventory; the
orders will be placed two weeks before January 2000, to ensure receipt;
. Require critical distributors to carry additional inventory earmarked for
us; and
. Prepare a critical supplier contact/pager list for Y2K emergency supply
problems and ensure that contact persons will be on call 24 hours a day.
General. The extent and magnitude of the Y2K problem as it will affect us,
both before, and for some period after, January 1, 2000, are difficult to
predict or quantify for a number of reasons. Among the most important are our
lack of control over systems that are used by the third parties who are
critical to our operations, such as telecommunications and utilities companies,
the complexity of testing interconnected networks and applications that depend
on third-party networks and the uncertainty surrounding how others will deal
with liability issues raised by Y2K-related failures. Moreover, the estimated
costs of implementing our plans for fixing Y2K problems do not take into
account the costs, if any, that might be incurred as a result of Y2K-related
failures that occur despite our implementation of these plans.
With respect to third-party non-governmental payors, we are in the process of
determining where our exposure is and developing contingency plans to prevent
the interruption of cash flow. With respect to Medicare payments, neither HCFA
nor its financial intermediaries have any contingency plan in place. However,
HCFA has mandated that its financial intermediaries submit a draft of their
contingency plans to it by March 1999 and that they be prepared to ensure that
no interruption of Medicare payments results from Y2K-related failures of their
systems. With respect to MediCal, the largest of our third-party state payors,
we are already submitting our claims with a four-digit numerical year in
accordance with the current system. We are currently working with our other
state payors individually to determine the extent of their Y2K compliance.
Although we are not currently aware of any material operational issues
associated with preparing our internal computer systems, facilities and
equipment for Y2K, we cannot assure you, due to the overall complexity of the
Y2K issues and the uncertainty surrounding third party responses to Y2K issues,
that we will not experience material unanticipated negative consequences and/or
material costs caused by undetected errors or defects in our or third party
systems or by our failure to adequately prepare for the results of such errors
or defects, including costs or related litigation, if any. The impact of such
consequences could have a material adverse effect on our business, financial
condition or results of operations.
16
RISK FACTORS
In evaluating the Company and its business, investors should carefully
consider the following risk factors in addition to the other information
contained herein. This quarterly report contains statements that constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements relate to future
events or the future financial performance of the Company and involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things,
those discussed below, and such factors could cause actual results to differ
materially from those indicated by such forward-looking statements. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this quarterly report or the materials
incorporated herein by reference will in fact transpire.
DEPENDENCE ON MEDICARE, MEDICAID AND OTHER SOURCES OF REIMBURSEMENT
We are reimbursed for dialysis services primarily at fixed rates established
in advance under the ESRD program. Under this program, once a patient becomes
eligible for Medicare reimbursement, Medicare pays for 80% of the composite
rate determined by the Health Care Financing Administration ("HCFA") for
dialysis treatments and a secondary payor (usually the patient, supplemental
insurance or a state Medicaid program) pays for 20% of the composite rate.
Since 1972 qualified patients suffering from ESRD have been entitled to
Medicare benefits regardless of age or financial circumstances. Approximately
52% of our net operating revenues during the nine month period ended September
30, 1998 was funded by Medicare. Since 1983, Congress has changed the Medicare
composite reimbursement rate from a national average of $138 per treatment in
1983 to a low of $125 per treatment on average in 1986 and to approximately
$126 per treatment on average at present. We cannot predict whether future rate
changes will be made. Reductions in composite rates could have a material
adverse effect on our business, results of operations or financial condition.
Furthermore, increases in operating costs that are subject to inflation, such
as labor and supply costs, without a compensating increase in prescribed rates,
may adversely affect our business, results of operations or financial
condition. We cannot predict whether certain services, for which we are
currently separately reimbursed, may in the future be included in the Medicare
composite rate.
Since June 1, 1989, the Medicare ESRD program has paid for the administration
of Erythropoietin ("EPO") to dialysis patients. Most of our dialysis patients
receive EPO; consequently, EPO reimbursement, which is typically received
through Medicare and Medicaid programs, significantly affects our net income.
Revenues from EPO were approximately $194 million, or approximately 22%, of net
operating revenues, during the nine month period ended September 30, 1998. The
Office of the Inspector General ("OIG") of the department of Health and Human
Services ("HHS") recently recommended that Medicare reimbursement for EPO be
reduced from the current amount of $10 to $9 per 1,000 units, and HHS has
concurred with this recommendation. From time to time, EPO reimbursement
programs have been, and in the future may be, subject to various legislative or
administrative proposals. We cannot predict whether future rate or
reimbursement method changes will be made. If such changes are made, they could
have an adverse effect on our business, results of operations or financial
condition. Furthermore, EPO is produced by a single manufacturer, Amgen
Corporation, and any interruption of supply or product cost increases could
adversely affect our business, results of operations or financial condition.
All of the states in which we currently operate dialysis facilities provide
benefits to qualified patients to supplement their Medicare entitlement.
Approximately 4% of our net operating revenues during the nine month period
ended September 30, 1998 were funded by Medicaid or comparable state programs.
The Medicaid programs are subject to statutory and regulatory changes which may
have the effect of decreasing program payments, increasing costs or modifying
the way we operate our dialysis business.
17
Approximately 44% of our net operating revenues during the nine month period
ended September 30, 1998 were from sources other than Medicare and Medicaid.
These sources include payments from third-party, non-government payors, at
rates that generally exceed the Medicare and Medicaid rates, and payments from
hospitals which we contract with to provide inpatient dialysis treatments. Any
restriction on our ability to charge for these services at rates in excess of
those paid by Medicare would adversely affect our business, results of
operations or financial condition. We are also a party to nonexclusive
agreements with certain third-party payors, and the termination of these
agreements could have an adverse effect on our business, results of operations
or financial condition.
OPERATIONS SUBJECT TO GOVERNMENT REGULATION
Our dialysis operations are subject to extensive federal, state, local and
foreign governmental regulations. These regulations require us to meet various
standards relating to, among other things, (1) premises; (2) management of
facilities; (3) personnel; (4) maintenance of proper records; (5) equipment;
and (6) quality assurance programs/patient care. Our dialysis facilities are
subject to periodic inspection by state agencies and other governmental
authorities to determine if applicable standards are satisfied. All of our
dialysis facilities are certified by HCFA, as is required for receipt of
Medicare reimbursement payments.
Our business would be adversely impacted by (1) any loss of (a) federal
certifications; (b) authorization to participate in the Medicare or Medicaid
programs; or (c) licenses under the laws of any state or governmental authority
in which we generate substantial revenues; or (2) healthcare reform reducing
dialysis reimbursement or reducing or eliminating coverage for dialysis
services. Our industry will continue to be subject to intense governmental
regulation at the state and federal levels, the scope and effect of which are
difficult to predict. This regulation could adversely impact us in a material
way. In addition, we periodically may be reviewed or challenged by various
governmental authorities which could have an adverse effect on our financial
position.
FRAUD AND ABUSE
The illegal remuneration provisions of the Social Security Act (or
"antikickback statute") and similar state laws impose civil and criminal
sanctions on persons who receive or make payments for referring a patient for
treatment that is paid for in whole or in part by Medicare, Medicaid or similar
state programs. Transactions structured within published safe harbors are
deemed not to violate these provisions. Transactions that do not fall within a
relevant safe harbor may be subject to greater scrutiny by enforcement
agencies. Neither our arrangements with the Medical Directors of our facilities
nor the minority ownership interests of referring physicians in certain of our
dialysis facilities meet all of the requirements of these safe harbors.
Although we have never been challenged under these statutes and we believe that
we comply with these and all other applicable laws and regulations, we could in
the future be required to change our practices or relationships with our
Medical Directors or with referring physicians holding minority ownership
interests or could otherwise be materially affected by any challenge under
these statutes.
California law prohibits a physician from making referrals for laboratory
services to entities with which they (or their immediate family members) have a
financial interest. We currently operate facilities in California which account
for a significant percentage of our business. It is possible that the statute
could apply to laboratory services incidental to dialysis services; if so, we
would be required to restructure some relationships with referring physicians
who serve as Medical Directors of our facilities and with the physicians who
hold minority interests in some of our facilities. We also provide laboratory
services incidental to dialysis services in many other states which have "fraud
and abuse" statutes regulating our relationships with physicians.
STARK I AND STARK II
The Omnibus Budget Reconciliation Act of 1989 includes certain provisions,
known as "Stark I," that restrict physicians from making referrals for clinical
laboratory services to entities with which they (or their immediate family
members) have a "financial relationship." It is unclear whether laboratory
services that we provide, which are incidental to dialysis services, fall
within the Stark I prohibition.
18
The Omnibus Budget Reconciliation Act of 1993 includes certain provisions,
known as "Stark II," that restrict physicians from making referrals for certain
"designated health services" to entities with which they (or their immediate
family members) have a "financial relationship." It is unclear whether some of
the services which we provide fall within the Stark II prohibitions.
Violations of Stark I and Stark II are punishable by civil penalties, which
may include exclusion or suspension of the provider from future participation
in Medicare and Medicaid programs and substantial fines. It is possible that
our practices might be challenged under these laws.
MEDICAL
At present, ESRD patients eligible for California's Medicaid program,
MediCal, are reimbursed for their transportation costs relating to ESRD
treatments. If this practice is deemed to violate applicable federal or state
law, we may be forced to halt the practice, and we cannot predict the effect
this would have on the desire of patients to use our services.
INTERNATIONAL REGULATION
Our operations are subject to extensive government regulation by virtually
every nation in which we operate. Although such regulations differ from country
to country, in general, non-U.S. regulations are designed to accomplish the
same objectives as U.S. regulations regarding the operation of dialysis
centers: the provision of quality healthcare for patients, the maintenance of
occupational, health, safety and environmental standards and the provision of
accurate reporting and billing for government payments and/or reimbursement. In
addition, each country has its own payment and reimbursement rules and
procedures, and some countries prohibit ownership of healthcare providers by
foreign interests or establish other regulatory barriers to direct ownership by
foreign companies. In those countries, we work within the framework of local
laws to establish alternative contractual arrangements for the management of
facilities.
INVESTIGATIONS
We are engaged in an industry that is extensively regulated. In the ordinary
course of business, our operations are continuously subject to regulatory
scrutiny, supervision and control. This regulatory scrutiny often includes
inquiries, investigations, examinations, audits, site visits and surveys, some
of which may be non-routine. If a provider is ever found to have engaged in
improper practices, it could be subject to civil, administrative, or criminal
fines, penalties or restitutionary relief, and reimbursement authorities could
also seek the suspension or exclusion of the provider or individuals from
participation in their program.
Our Florida-based laboratory subsidiary is the subject of a third-party
carrier review relating to certain claims submitted by us for Medicare
reimbursement. We understand that similar reviews have been undertaken with
respect to other providers' laboratory activities. The carrier has alleged that
99.3% of the tests performed by our laboratory for the review period it
initially identified (from January 1995 to April 1996) were not properly
supported by the prescribing physicians' medical justification. The carrier has
issued a formal overpayment determination in the amount of $5.6 million and has
suspended all payments of our laboratory-related claims. In addition, the
carrier has informed the local offices of the Departments of Justice ("DOJ")
and HHS of this matter. We have consulted with outside counsel, reviewed our
records, are disputing the overpayment determination vigorously and have
provided extensive supporting documentation of our claims. We continue to
cooperate with the carrier to resolve this matter and have initiated the
process of a formal review of the carrier's determination. However, we are
unable to determine at this time (1) when this matter will be resolved or when
the laboratory's payment suspension will be lifted; (2) what, if any, of the
laboratory claims will be disallowed; (3) what action DOJ or HHS may take with
respect to this matter; (4) the outcome of the carrier's review of the periods
from May 1996 through March 1998, including the initiation of another payment
suspension; (5) whether additional periods may be reviewed by the carrier; or
(6) any other outcome of this investigation. Determinations adverse to us could
have an adverse impact on our business, results of operations or financial
condition.
19
RISKS INHERENT IN GROWTH STRATEGY
Our business strategy significantly depends on our ability to acquire or
develop additional dialysis facilities. We regularly investigate opportunities
for acquisitions. However, suitable acquisition candidates may not be
available, we may not be able to consummate future acquisitions on acceptable
terms and we may not be able to integrate future acquisitions successfully.
Also, risks are inherent in assessing the value, strengths and weaknesses of
acquisition candidates, assessing the nature of the operations of acquired
companies and identifying suitable locations to develop additional facilities.
Our growth is expected to place significant demands on our financial and
management resources and will require us to develop further the management
skills of our managers and supervisors, and to continue to retrain, train,
motivate and effectively manage our employees. We might not be able to manage
effectively the expansion of our operations. Additional financing may not be
available to finance future acquisitions. For more details, see the heading
"Substantial Leverage, Debt Service Obligations and Restrictive Debt Covenants"
below and the section "Business" under the heading "Business Strategy."
In recent years, as a result of consolidation in our industry, acquisition
prices and the competition for facilities have increased. To the extent that we
are unable to acquire or develop facilities in a cost-effective manner, our
ability to expand our business and enhance our results of operations and
financial condition could be adversely affected. In addition, integrating
acquired operations, particularly newly acquired regional networks and large
scale acquisitions, such as our acquisition of RTC in February 1998, present a
significant
challenge and may lead to unanticipated costs or a diversion of management's
attention from day-to-day operations. We might not be able to continue our
growth strategy in the future. A failure to continue our growth strategy and to
implement it successfully could have an adverse effect on our business, results
of operations or financial condition. Additionally, businesses that we may
acquire in the future might not achieve revenues and profit ability that
justify our investment in them.
Despite the pooling of TRCH's and RTC's historical operating results, we have
conducted operations as a combined entity only since February 1998. This
pooling of the business, results of operations and financial condition of TRCH
and RTC on a stand-alone basis may differ from our actual combined results in
the future.
Our operations and future acquisitions may require additional personnel,
assets and cash expenditures. We might not be able to integrate acquired
facilities successfully. In addition, we might not be able to anticipate and
respond to all of the changing demands that our expanding operations, including
our acquisition of RTC in February 1998, will and could continue to have on our
management, information, financial and operating systems. See the section
"Business" under the caption "RTC Merger." Acquisitions could result in delays,
disruptions and unanticipated expenses. Our failure to meet the challenges of
expansion and to manage our prior and future growth could have an adverse
effect on our business, results of operations or financial condition.
Our future growth will require us to manage our expanding operations while
evaluating, completing and integrating new businesses. Our acquisition strategy
will continue to place significant demands on us to improve our operational,
financial and management information systems. If we fail to manage our prior
and future growth, our business, results of operations or financial condition
might be adversely affected.
COMPETITION
A significant portion of the dialysis services industry consists of many
small, independent facilities. The dialysis industry is highly competitive,
particularly in terms of acquiring existing dialysis facilities and developing
relationships with referring physicians. Competition for qualified physicians
to act as Medical Directors is also vigorous. Competition for acquisitions has
increased the cost of acquiring existing dialysis facilities. We have also,
from time to time, experienced competition from referring physicians who have
opened their own dialysis facilities. A portion of our business consists of
monitoring and providing supplies for ESRD treatments in patients' homes.
Certain physicians also provide similar services, and if the number of such
physicians were to increase, which is possible under the proposed Stark II
regulations, our business, results of operations or financial condition could
be adversely affected.
20
DEPENDENCE ON KEY PERSONNEL
We are dependent upon the services and management experience of our executive
officers, and accordingly, we have entered into employment agreements with, and
have provided a variety of equity incentives to, these executives. The loss of
the services of any of these executive officers could have an adverse effect on
our business, results of operations or financial condition. Our future success
depends on our ability to identify, hire, train and retain highly qualified
management personnel, including our present and future management team.
Competition for such personnel is intense, and we may not be able to attract or
retain highly qualified management personnel in the future. Our continued
growth also depends upon our ability to attract and retain non-executive
skilled employees, in particular highly skilled nurses, for whom competition is
intense. We believe that our future success also depends on our ability to
attract and retain qualified physicians to serve as Medical Directors at our
dialysis facilities. Our failure to attract and retain executives, non-
executive skilled employees and qualified physicians could adversely affect our
business, results of operations or financial condition. We do not carry key man
life insurance on any of our officers.
DEPENDENCE ON PHYSICIAN REFERRALS
We depend upon referrals of ESRD patients by physicians specializing in
nephrology and practicing in the communities we serve. As is generally true in
the dialysis industry, one or a few physicians refer all or a significant
portion of the patients at each facility. The loss of one or more key referring
physicians at a particular facility could have a material adverse effect on the
operations of that facility and could adversely affect our business, results of
operations or financial condition. Referring physicians own minority interests
in certain of our dialysis facilities. If these interests are deemed to violate
applicable federal or state law, these physicians may be forced to dispose of
their ownership interests. We cannot predict the effect these dispositions
would have on our business. For more details, see the heading "Operations
Subject to Government Regulation" above.
OPERATIONS OUTSIDE THE UNITED STATES
We service approximately 7.6% of our patients through operations outside the
United States. Our non-United States operations are subject to certain
political and economic uncertainties not encountered in United States
operations, including risks of civil disturbances (or other risks that may
limit or disrupt markets), seizures of our assets and general hazards
associated with the assertions of national sovereignty over certain areas in
which operations are conducted. Our operations outside the United States may
face the additional risk of fluctuating currency values, hard currency
shortages, controls of currency exchange, difficulty in returning income or
capital to the United States and slower payment cycles. We cannot predict what
foreign operator entering a market for the first time, there can be no
assurance that we will be able to replicate our successful history of
integrating domestic acquisitions. Any failure to integrate efficiently foreign
acquisitions or to realize expected synergies and cost savings could have a
material adverse effect on our business, results of operations and financial
condition.
SUBSTANTIAL LEVERAGE, DEBT SERVICE OBLIGATIONS AND RESTRICTIVE DEBT COVENANTS
We are highly leveraged (which means that the amount of our outstanding debt
is large compared to the net book value of our assets), have substantial
repayment obligations under our outstanding debt and will have increased
interest expense as a result of the issuance of the Convertible Notes.
The Credit Facilities currently contain numerous financial and operating
covenants that limit our ability (and the ability of most of our subsidiaries)
to undertake certain transactions. These covenants require that we meet certain
interest coverage, net worth and leverage tests. The Indenture and the Credit
Facilities permit us and our subsidiaries to incur or guarantee additional
debt, subject to certain limitations in the case of the Credit Facilities.
21
Our level of debt and the limitations imposed on us by our debt agreements
could have other important consequences to you, including the following:
. We will have to use a portion of our cash flow from operations for debt
service, rather than for our operations;
. We may not be able to obtain additional debt financing for future working
capital, capital expenditures, acquisitions or other corporate purposes;
. The debt under the Credit Facilities is at a variable interest rate,
making us vulnerable to increases in interest rates; and
. We could be less able to take advantage of significant business
opportunities, such as acquisitions, and react to changes in market or
industry conditions.
YEAR 2000 ISSUES
The "Year 2000" issue ("Y2K") concerns the potential exposures related to the
automated generation of misinformation resulting from the use of computer
programs which have been written using two digits, rather than four, to define
the applicable year of business transactions. In evaluating our state of
readiness we are considering the following key areas: (1) our principal
operating and financial systems; (2) software used in our internal computer
network; (3) micro-processors used in our biomedical equipment; (4) third-party
payors and vendors; and (5) telecommunications and other support systems. We
are currently addressing each of these areas.
The extent and magnitude of the Y2K problem as it will affect us, both
before, and for some period after, January 1, 2000, are difficult to predict or
quantify for a number of reasons. Among the most important are our lack of
control over systems that are used by the third parties who are critical to our
operations, such as telecommunications and utilities companies and governmental
and non-governmental payors, the complexity of testing interconnected networks
and applications that depend on third-party networks and the uncertainty
surrounding how others will deal with liability issues raised by Y2K-related
failures. Moreover, the estimated costs of implementing our plans for fixing
Y2K problems do not take into account the costs, if any, that might be incurred
as a result of Y2K-related failures that occur despite our implementation of
these plans.
Although we are not currently aware of any material operational issues
associated with preparing our internal computer systems, facilities and
equipment for Y2K, we cannot assure you, due to the overall complexity of the
Y2K issues and the uncertainty surrounding third party responses to Y2K issues
that we will not experience material unanticipated negative consequences and/or
material costs caused by undetected errors or defects in our or third party
systems or by our failure to adequately prepare for the results of such errors
or defects, including costs or related litigation, if any. The impact of such
consequences could have a material adverse effect on our business, financial
condition or results of operations. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the heading "Liquidity and
Capital Resources."
22
FORWARD-LOOKING STATEMENTS
We caution the readers that, in addition to the historical financial
information included herein, this report on Form 10-Q includes and incorporates
by reference certain "forward-looking statements" within the meaning of the
Litigation Reform Act that are based on management's beliefs, as well as on
assumptions made by and information currently available to management. All
statements other than statements of historical fact included in this report on
Form 10-Q, regarding our financial position and business strategy, may
constitute forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "intend," "estimate," "anticipate," "believe," "plan,"
"seek," or "continue" or the negative thereof or variations thereon or similar
terminology. Such forward-looking statements involve known and unknown risks,
including, but not limited to, economic and market conditions, the regulatory
environment in which we operate, competitive activities or other business
conditions. Although we believe that our expectations with respect to the
forward-looking statements are based upon reasonable assumptions within the
bounds of our knowledge of our business and operations as of the date hereof,
there can be no assurance that our actual results, performance or achievements
will not differ materially from any future results, performance or achievements
expressed or implied from such forward-looking statements. Important factors
that could cause actual results to differ materially from our expectations
("Cautionary Statements") are disclosed in this report on Form 10-Q, including
without limitation in conjunction with the forward-looking statements included
and incorporated by reference in this report on Form 10-Q and under "Risk
Factors." All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these Cautionary Statements.
23
PART II
OTHER INFORMATION
ITEMS 1, 2, 3 AND 5 ARE NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on July 7, 1998.
Proposal I submitted to a vote of security holders at the meeting was the
election of Directors. The following Directors, being all the Directors of the
Corporation, were elected at the meeting, with the number of votes cast for
each Director or withheld from each Director being set forth after the
Director's respective name.
VOTES WITH WITHOUT
NAME AUTHORITY AUTHORITY
---- ---------- ---------
Maris Andersons..................................... 72,366,123 570,028
Victor M.G. Chaltiel................................ 73,367,090 569,061
Peter T. Grauer..................................... 73,365,514 570,637
Regina E. Herzlinger................................ 73,355,931 580,220
Shaul G. Massry..................................... 73,340,103 596,048
Proposal II submitted to a vote of security holders at the meeting was the
ratification of the appointment of PricewaterhouseCoopers LLP as Independent
Accountants. The votes were cast as follows:
FOR AGAINST ABSTAIN
--- ------- -------
73,915,856 12,409 7,886
---------- ------ -----
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated as of March 2, 1998 by and between the
Company and Leonard W. Frie.
10.2 Employment Agreement dated as of March 2, 1998 by and between the
Company and Barry C. Cosgrove.
10.3 Employment Agreement dated as of March 2, 1998 by and between the
Company and John E. King.
10.4 Employment Agreement dated as of March 2, 1998 by and between the
Company and Stan M. Lindenfeld.
10.5 Employment Agreement dated as of March 2, 1998 by and between the
Company and Barbara A. Bednar.
27.1 Financial Data Schedules--3 months ended
27.2 Financial Data Schedules--9 months ended
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOTAL RENAL CARE HOLDINGS, INC.
(Registrant)
/s/ John E. King
By: _________________________________
John E. King
Senior Vice President, Finance and
Chief Financial Officer
Date: November 16, 1998
John E. King is signing in the dual capacities as (i) Chief Financial Officer
and (ii) a duly authorized officer of the Company.
25
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Employment Agreement dated as of March 2, 1998 by and between the
Company and Leonard W. Frie.
10.2 Employment Agreement dated as of March 2, 1998 by and between the
Company and Barry C. Cosgrove.
10.3 Employment Agreement dated as of March 2, 1998 by and between the
Company and John E. King.
10.4 Employment Agreement dated as of March 2, 1998 by and between the
Company and Stan M. Lindenfeld.
10.5 Employment Agreement dated as of March 2, 1998 by and between the
Company and Barbara A. Bednar.
27.1 Financial Data Schedules--3 months ended
27.2 Financial Data Schedules--9 months ended