-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I4qp4NRIRqFDKPM26JnADT+spPESg4D6weo+OpTD2HF5woYp1BjZXaLVcPMxx4/d XT7za45Hp8SwoLPucpI+Gw== 0000898430-96-005061.txt : 19961106 0000898430-96-005061.hdr.sgml : 19961106 ACCESSION NUMBER: 0000898430-96-005061 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961104 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOTAL RENAL CARE HOLDINGS INC CENTRAL INDEX KEY: 0000927066 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 510354549 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-04034 FILM NUMBER: 96653410 BUSINESS ADDRESS: STREET 1: 21250 HAWTHORNE BLVD STREET 2: SUTIE 800 CITY: TORRANCE STATE: CA ZIP: 90503 BUSINESS PHONE: 3107922600 MAIL ADDRESS: STREET 2: 21250 HAWTHORNE BLVD SUITE 800 CITY: TORRANCE STATE: CA ZIP: 90503 FORMER COMPANY: FORMER CONFORMED NAME: TOTAL RENAL CARE INC DATE OF NAME CHANGE: 19940719 10-Q/A 1 FORM 10-Q/A FOR PERIOD ENDED SEPTEMBER 30, 1996 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington , D.C. 20549 FORM 10-Q/A AMENDMENT NO. 1 (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, 1996 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, 1996 Delaware 51-0354549 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 21250 Hawthorne Blvd. Suite 800 Torrance, CA 90503-5517 (Address of principal executive offices) (Zip Code) (310) 792-2600 (Registrant's telephone number, including area code) 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 and 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. Class Outstanding at October 31, 1996 Common Stock, Par Value $0.001 25,968,029 shares TOTAL RENAL CARE HOLDINGS, INC. Purpose of Amendment: This Quarterly Report on Form 10-Q/A is being filed to amend entirely and to restate the Registrant's Quarterly Report on Form 10-Q that was filed on November 1, 1996. Such Form 10-Q was filed inadvertently due to filing agent error prior to completion and final revisions. Index Part I. Financial Information
Page No. -------- Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 1 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1996 and September 30, 1995 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and September 30, 1995 4 Notes to Condensed Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Liquidity and Capital Resources 8 Risk Factors 9 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 14 Signature 15 Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not applicable.
TOTAL RENAL CARE HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 1996 and December 31, 1995
September 30, 1996 December 31, 1995 ------------------ ----------------- (unaudited) ASSETS Current Assets: Cash and cash equivalents.............................. $ 5,440,000 $ 30,181,000 Accounts receivable, less allowance for doubtful accounts of $10,734,000 (unaudited) and $5,668,000, respectively......................... 95,314,000 40,014,000 Receivable from Tenet, a related company............... 322,000 432,000 Other current assets................................... 14,855,000 4,867,000 ------------ ------------ Total current assets...................... 115,931,000 75,494,000 Property and equipment, net................................. 49,443,000 25,505,000 Notes receivable from a related party....................... 1,851,000 1,379,000 Investment in affiliate, at equity.......................... 1,018,000 972,000 Other long-term assets...................................... 899,000 885,000 Intangible assets, net of accumulated amortization of $12,152,000 (unaudited) and $7,353,000, respectively...... 151,279,000 59,763,000 ------------ ------------ Total assets.............................. $320,421,000 $163,998,000 ============ ============
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 BALANCE SHEETS September 30, 1996 and December 31, 1995
September 30, 1996 December 31, 1995 ------------------ ----------------- (unaudited) LIABILITIES & STOCKHOLDERS' EQUITY Total current liabilities................................... $ 30,677,000 $ 20,803,000 Deferred income taxes....................................... 1,052,000 510,000 Long term debt and other.................................... 79,007,000 56,538,000 Minority interests.......................................... 5,326,000 3,343,000 Stockholders' equity: Common stock, voting, ($0.001 par value; 55,000,000 shares authorized; 25,967,029 (unaudited) and 22,308,207 issued and outstanding, respectively).... 26,000 22,000 Preferred stock, ($0.001 par value; 5,000,000 shares authorized; none outstanding).......................... ---- ---- Additional paid-in capital............................... 236,433,000 123,710,000 Notes receivable from stockholders....................... (2,783,000) (2,773,000) Retained earnings (deficit).............................. (29,317,000) (38,155,000) ------------ ------------ Total stockholders' equity......................... 204,359,000 82,804,000 ------------ ------------ $320,421,000 $163,998,000 Total liabilities and stockholders' equity ============ ============
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 INCOME Three Months and Nine Months Ended September 30, 1996 and 1995 (unaudited)
Three Months Nine Months ------------------------- ------------------------- 1996 1995 1996 1995 ----------- ----------- ------------ ----------- Net operating revenues $73,333,000 $37,415,000 $188,153,000 $93,508,000 Operating expenses: Facilities......................................... 49,474,000 23,884,000 126,121,000 60,304,000 General and administrative......................... 4,943,000 3,107,000 13,644,000 8,307,000 Provision for doubtful accounts.................... 1,559,000 757,000 3,892,000 2,023,000 Depreciation and amortization...................... 4,231,000 1,891,000 10,263,000 4,564,000 ----------- ----------- ------------ ----------- Total operating expenses......................... 60,207,000 29,639,000 153,920,000 75,198,000 ----------- ----------- ------------ ----------- Operating income..................................... 13,126,000 7,776,000 34,233,000 18,310,000 Interest expense..................................... (1,719,000) (2,813,000) (5,869,000) (7,534,000) Interest income...................................... 394,000 73,000 2,007,000 247,000 ----------- ----------- ------------ ----------- Income before income taxes and minority interests and extraordinary item............................. 11,801,000 5,036,000 30,371,000 11,023,000 Income taxes......................................... 4,386,000 1,774,000 11,537,000 3,852,000 ----------- ----------- ------------ ----------- Income before minority interests and extraordinary item............................. 7,415,000 3,262,000 18,834,000 7,171,000 Minority interests in income of consolidated subsidiaries.......................... 879,000 777,000 2,296,000 1,787,000 ----------- ----------- ------------ ----------- Income before extraordinary item..................... 6,536,000 2,485,000 16,538,000 5,384,000 Extraordinary loss related to early extinguishment of debt, net of tax................................ 7,700,000 0 7,700,000 0 ----------- ----------- ------------ ----------- Net (loss) income.................................... $(1,164,000) $ 2,485,000 $ 8,838,000 $ 5,384,000 =========== =========== ============ =========== Earnings (loss) per common share: Income before extraordinary item..................... $ 0.25 $ 0.16 $ 0.65 $ 0.35 Extraordinary item................................... $ (0.29) ---- $ (0.30) ---- ----------- ----------- ------------ ----------- Net (loss) income.................................... $ (0.04) $ 0.16 $ 0.35 $ 0.35 =========== =========== ============ =========== Weighted average number of common shares and equivalents outstanding........................ 26,661,000 15,690,000 25,409,000 15,427,000
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. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1996 and 1995 (Unaudited)
1996 1995 ----------- ----------- Cash flows from operating activities: Net income....................................................... $ 8,838,000 $ 5,384,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................ 10,263,000 4,564,000 Extraordinary item....................................... 12,623,000 -- Noncash interest......................................... 4,396,000 6,729,000 Provision for doubtful accounts.......................... 3,892,000 2,023,000 Other.................................................... (38,039,000) (8,808,000) ----------- ----------- Total adjustments.................................... (6,865,000) 4,508,000 ----------- ----------- Net cash (used) provided by operating activities. 1,973,000 9,892,000 ----------- ----------- Cash flows from investing activities: Purchases of property and equipment......................... (18,118,000) (4,699,000) Cash paid for acquisitions, net of cash acquired............ (120,495,000) (31,440,000) Additions to intangible assets.............................. (2,880,000) (1,347,000) Issuance of long-term note receivable....................... (472,000) (2,726,000) Other....................................................... 746,000 517,000 ----------- ----------- Net cash used by investing activities............ (141,219,000) (39,695,000) ----------- ----------- Cash flows from financing activities: Borrowings from bank credit facility........................ 84,335,000 28,050,000 Payments on bank credit facility............................ (51,000,000) (4,000,000) Net proceeds from sale of common stock...................... 110,079,000 2,900,000 Cash paid to retire bonds................................... (28,499,000) -- Distributions to minority interests......................... (1,488,000) (1,453,000) Other....................................................... 1,078,000 173,000 ----------- ----------- Net cash provided by financing activities........ 114,505,000 25,670,000 ----------- ----------- Net increase (decrease) in cash.................................. (24,741,000) (4,133,000) Cash at beginning of period...................................... 30,181,000 6,932,000 ----------- ----------- Cash at end of period............................................ $ 5,440,000 $ 2,799,000 =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 4 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 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 transitional fiscal year ended December 31, 1995 filed on March 18, 1996 by the Company have been omitted. Certain other 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. During the period of October 1, 1994 to November 2, 1995 the Company issued approximately 2,190,000 shares of its common stock, par value $0.001 (the "Common Stock") and options at prices significantly below the offering price of the Common Stock in the Company's initial public offering. Such shares and common stock equivalents have been included in the number of shares outstanding from June 1, 1994, (including the quarter and nine months ended September 30, 1995) until November 2, 1995 using the Treasury Stock method using the actual offering price of $15.50 per share. 3. On November 3, 1995, the Company completed an equity offering of 6.9 million shares of its Common Stock. In connection with this offering the Company's directors redesignated the Class A Common Stock as "Common Stock," authorized an increase in the number of shares of Common Stock to 55,000,000, par value $0.001, authorized 5,000,000 new shares of preferred stock, par value $0.001, and approved a three-into-two reverse stock split of the Company's Class A and Class B Common Stock. Additionally, as of December 4, 1995, all Class B Common Stock was converted to "Common Stock." All information in these condensed consolidated financial statements pertaining to shares of Common Stock and per share amounts have been adjusted to give retroactive effect to these actions. 4. Effective March 1, 1996, the Company purchased substantially all of the assets and assumed certain specified liabilities of the Nephrology Services Business of Caremark International, Inc. (the "Caremark Acquisition") and two centers located in South Carolina for cash consideration of $49.0 million and $8.2 million, respectively. The transactions were recorded under the purchase method of accounting and the results of operations from March 1, 1996 have been recognized in the accompanying financial statements. Goodwill of $21.5 million and $5.9 million, respectively, was recorded in connection with these transactions and will be amortized over their estimated lives in accordance with the Company's existing accounting policies. During the quarter ended June 30, 1996, the Company purchased substantially all of the assets and assumed certain specified liabilities of two unrelated centers in Maryland for cash consideration of $8.0 million and $2.9 million, respectively. Goodwill of $5.8 million and $2.6 million was recorded in connection with these transactions in accordance with the Company's existing accounting policies. During the period January 1, 1996 through June 30, 1996, the Company also purchased selected net assets of an existing dialysis company for $6.4 million and two existing dialysis companies for $2.6 million and contributed those assets during the formation of three unrelated general partnerships. Aggregate goodwill associated with these transactions was $7.3 million. The Company entered into two management agreements with two additional unaffiliated centers, one in each of the quarters ended June 30, 1996 and March 31, 1996, respectively. During the quarter ended September 30, 1996, the Company purchased substantially all of the assets and assumed certain liabilities of 11 centers for total consideration of $43.9 million consisting of cash of $42.1 million and common stock valued at $1.8 million. Goodwill of $33.7 million was recorded in connection with these transactions in accordance with the Company's existing accounting policies. 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:
1995 1996 -------- -------- Pro forma net operating revenues....................... $180,978 $232,902 ======== ======== Pro forma net income................................... $ 1,965 $ 6,548 ======== ======== Pro forma earnings per share........................... $ 0.13 $ 0.26 ======== ========
5. On April 3, 1996, the Company completed an equity offering of 8,050,000 shares of Common Stock, 3,500,000 of which were sold for the Company's account and 4,550,000 of which were sold by certain of the Company's stockholders. The net proceeds to the Company of $110.0 million were used to repay borrowings incurred under the Company's senior credit facility in connection with the Caremark Acquisition or were invested in short-term, investment grade instruments to be used for future acquisitions, de novo developments, working capital and other general corporate purposes. 6. In July and September 1996, the Company irrevocably purchased and subsequently retired its remaining outstanding Discount Notes for $68.4 million, including consent payments of $1.1 million. Including the writedown of related bond issuance costs of $1.9 million, and $474,000 in related transaction costs, the Company recognized an extraordinary loss, net of taxes, of approximately $7.7 million in the quarter ending September 30, 1996. 7. Subsequent to September 30, 1996, the Company completed acquisitions of or entered into letters of intent to acquire nine facilities for consideration of approximately $29.7 million, which will primarily be funded by borrowings under the Senior Credit Facility (as defined below). In addition, the Company has agreed to purchase the minority interest in one of its existing centers. 8. Effective October 17, 1996, the Company refinanced its prior bank credit facility with the senior credit facility which permits borrowings of up to $400.0 million (the "Senior Credit Facility"). Under the Senior Credit Facility, up to $50.0 million may be used in connection with letters of credit, and up to $15.0 million in short-term funds may be borrowed the same day notice is given to the banks under a "Swing Line" facility. In general, borrowings under the Senior Credit Facility bear interest at one of two floating rates selected by the Company: (i) the Alternate Base Rate (defined as the higher of The Bank of New York's prime rate or the federal funds rate plus 0.5%); and (ii) Adjusted LIBOR (defined as the 30-, 60-, 90- or 180-day London Interbank Offered Rate, adjusted for statutory reserves) plus a margin that ranges from 0.45% to 1.25% depending on the Company's leverage ratio. Swing Line borrowings bear interest at either a rate negotiated by the Company and the banks at the time of borrowing or, if no rate is negotiated and agreed upon, the Alternate Base Rate. Maximum borrowings under the Senior Credit Facility will be reduced by $50.0 million on September 30, 2000, $75.0 million on September 30, 2001, and another $75.0 million on September 30, 2002, and the Senior Credit Facility terminates on September 30, 2003. The Senior Credit Facility contains financial and operating covenants including, among other things, requirements that the Company maintain certain financial ratios and satisfy certain financial tests, and imposes limitations on the Company's ability to make capital expenditures, to incur other indebtedness and to pay dividends. As of the date hereof, the Company is in compliance with all such covenants. 9. In October 1996, the Company commenced a public equity offering of 2,500,000 shares of Common Stock, 500,000 of which were sold for the Company's account and 2,000,000 of which were sold by certain of the Company's stockholders. The net proceeds to the Company of $18.2 million will be used for acquisitions, de novo developments, working capital and other corporate purposes. Pending such uses, the Company may use such proceeds to reduce the amount under the revolving portion of the Company's Senior Credit Facility. 5 TOTAL RENAL CARE HOLDINGS, INC. 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. 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 the Company's various Securities and Exchange Commission filings. RESULTS OF OPERATIONS Three Months Ended September 30, 1996 Compared to the Three Months Ended September 30, 1995. Net Operating Revenues. Net operating revenues for the three months ended September 30, 1996 (third quarter) increased $35,918,000 to $73,333,000 from $37,415,000 for the three months ended September 30, 1995 representing a 96.0% increase. Of this increase, $34,742,000 was due to increased treatments from acquisitions, existing facility growth and de novo developments. The remainder was due to an increase in net operating revenues per treatment, $232.38 in the third quarter of 1996 compared to $228.65 in the third quarter of 1995, and an increase in affiliated and unaffiliated facility management fees. The increase in operating revenues per treatment was due to increased utilization of the Company's ESRD laboratory, increased ancillary utilization primarily in the administration of EPO, an overall increase in average reimbursement rates, increased utilization of an IV and oral pharmaceutical program and the start of an access management program. Facility Operating Expenses. Facility operating expenses increased $25,590,000 to $49,474,000 in the third quarter of 1996 from $23,884,000 in the third quarter of 1995. As a percentage of net operating revenues, facility operating expenses increased to 67.5% in the third quarter of 1996 from 63.8% in the third quarter of 1995 due to the significant amount of recent acquisitions and de novo development activity with an operating expense structure that is initially higher due to integration costs incurred in the first few months of operations coupled with a lower base of revenue generated until the Company's ancillary programs are added, leading to an overall lower operating margin. General and Administrative Expenses. General and administrative expenses increased $1,836,000 to $4,943,000 in the third quarter of 1996 from $3,107,000 in the third quarter of 1995. As a percentage of net operating revenues, general and administrative expenses declined to 6.7% in the third quarter of 1996 from 8.3% in the third quarter of 1995. This decline as a percentage of net revenue is a result of revenue growth and economies of scale achieved through the leveraging of corporate staff across a higher revenue base. Provision for Doubtful Accounts. The provision for doubtful accounts increased $802,000 to $1,559,000 in the third quarter of 1996 from $757,000 in the third quarter of 1995. As a percentage of net operating revenues, the provision for doubtful accounts increased slightly to 2.1% in the third quarter of 1996 from 2.0% in the third quarter of 1995. 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. As a result of the recent acquisitions, the allowance for doubtful accounts as a percentage of accounts receivable has decreased as the change in ownership process, which can take approximately 30- 180 days to occur, must be completed on newly acquired facilities before any governmental billing can be submitted or paid. Depreciation and Amortization. Depreciation and amortization increased $2,340,000 to $4,231,000 in the third quarter of 1996 from $1,891,000 in the third quarter of 1995. As a percentage of net operating revenues, depreciation and amortization increased to 5.8% in the third quarter of 1996 from 5.1% in the third quarter of 1995. The increase was attributable to goodwill, other intangibles and fixed assets recorded through acquisition activity and increased depreciation from new center leaseholds and routine capital expenditures. Operating Income. Operating income increased $5,350,000 to $13,126,000 in the third quarter of 1996 from $7,776,000 in the third quarter of 1995. As a percentage of net operating revenues, operating income decreased to 17.9% in the third quarter of 1996 from 20.8% in the third quarter of 1995. This decrease in operating income is primarily due to an increase in facility operating costs and depreciation and amortization partially offset by a decrease in general and administrative expenses as a percentage of net operating revenue as discussed above. Interest Expense. Interest expense, net of interest income, decreased $1,415,000 to $1,325,000 in the third quarter of 1996 from $2,740,000 in the third quarter of 1995. As a percentage of net operating revenues, interest expense, net of interest income, decreased to 1.8% in the third quarter of 1996 from 7.3% in the third quarter of 1995. Cash interest expense during the third quarter of 1996 was $551,000 and non-cash interest during the same period was $1,168,000 versus $504,000 and $2,309,000 in the third quarter of 1995, respectively. The decrease in the third quarter of 1996 non-cash interest expense was due primarily to the redemption of 35.0% of the accreted value of the Company's Discount Notes in December 1995 and the additional repurchase of $27.4 million, at maturity, in July 1996. The increase in cash interest expense was due primarily to borrowings made under the Company's Senior Credit Facility to fund the Company's acquisitions and to repurchase additional Discount Notes during the third quarter of 1996. The increase in interest income was due to investments of excess cash generated from the Company's secondary equity offering placed in short-term high-grade instruments. Provision for Income Taxes. Provision for income taxes increased $2,612,000 to $4,386,000 in the third quarter of 1996 from $1,774,000 in the third quarter of 1995. As a percentage of net operating revenues, provision for income taxes increased to 6.0% in the third quarter of 1996 from 4.7% in the third quarter of 1995 and the effective tax rate decreased to 40.2% from 41.7% over the same period. The increase as a percentage of net operating revenues was primarily due to the increased profitability of the Company in the third quarter of 1996 versus the same period in the prior year. The change in the effective tax rate was primarily influenced by the mix of taxable income by state and was largely due to the relative change in state taxable income and state taxable expense associated with the mix of operations, including the effect of separate filing requirements for certain states. Minority Interest. Minority interest increased $102,000 to $879,000 in the third quarter of 1996 from $777,000 in the third quarter of 1995. As a percentage of net operating revenues, minority interest decreased to 1.2% in the third quarter of 1996 from 2.1% in the third quarter of 1995. This decrease in minority interest as a percentage of net operating revenues is a result of a relative proportionate decrease in the formation of partnership affiliates and subsidiaries as a percentage of total new acquisitions. Extraordinary Loss. In July and September 1996 the Company retired all outstanding Discount Notes for an aggregate payment of $68.4 million (including consent payments of $1.1 million). The debt retirement resulted in an extraordinary loss, net of tax, of $7.7 million during the third quarter of 1996. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 Net Operating Revenues. Net operating revenues for the nine months ended September 30, 1996 increased $94,645,000 to $188,153,000 from $93,508,000 for the nine months ended September 30, 1995 representing a 101.2% increase. Of this increase, $84,665,000 was due to increased treatments from acquisitions, existing facility growth and de novo developments. The remainder was due to an increase in net operating revenues per treatment, $233.07 in the first nine months of 1996 compared to $220.71 in the first nine months of 1995, and an increase in affiliated and unaffiliated facility management fees. The increase in operating revenues per treatment was due to the addition of the Company's ESRD laboratory, increased ancillary utilization primarily in the administration of EPO, an overall increase in average reimbursement rates and the opening of an IV and oral pharmaceutical program and an access management program. Facility Operating Expenses. Facility operating expenses increased $65,817,000 to $126,121,000 in the first nine months of 1996 from $60,304,000 in the first nine months of 1995. As a percentage of net operating revenues, facility operating expenses increased to 67.0% in the first nine months of 1996 from 64.5% in the first nine months of 1995 due to the significant amount of recent acquisitions and de novo development activity with an operating expense structure that is initially higher due to integration costs incurred in the first few months of operations coupled with a lower base of revenue generated until the Company's ancillary programs are added, leading to an overall lower operating margin. General and Administrative Expenses. General and administrative expenses increased $5,337,000 to $13,644,000 in the first nine months of 1996 from $8,307,000 in the first nine months of 1995. As a percentage of net operating revenues, general and administrative expenses declined to 7.3% in the first nine months of 1996 from 8.9% in the first nine months of 1995. This decline as a percentage of net revenue is a result of revenue growth and economies of scale achieved through the leveraging of corporate staff across a higher revenue base. Provision for Doubtful Accounts. The provision for doubtful accounts increased $1,869,000 to $3,892,000 in the first nine months of 1996 from $2,023,000 in the first nine months of 1995. As a percentage of net operating revenues, the provision for doubtful accounts decreased to 2.0% in the first nine months of 1996 from 2.1% in the first nine months of 1995. Due to the significant acquisition activity since the first nine months of 1995, the percentage of accounts receivable, for which the Company provision methodology will be applied, in the more recent aging categories has increased, causing a corresponding decrease in the provision as a percentage of revenues. Depreciation and Amortization. Depreciation and amortization increased $5,699,000 to $10,263,000 in the first nine months of 1996 from $4,564,000 in the first nine months of 1995. As a percentage of net operating revenues, depreciation and amortization increased to 5.5% in the first nine months of 1996 from 4.9% in the first nine months of 1995. The increase was attributable to goodwill, other intangibles and fixed assets recorded through acquisition activity and increased depreciation from new center leaseholds and routine capital expenditures. Operating Income. Operating income increased $15,923,000 to $34,233,000 in the first nine months of 1996 from $18,310,000 in the first nine months of 1995. As a percentage of net operating revenues, operating income decreased to 18.2% in the first nine months of 1996 from 19.6% in the first nine months of 1995. This decrease in operating income is primarily due to an increase in facility operating costs and depreciation and amortization partially offset by a decrease in general and administrative expenses as a percentage of net operating revenue as discussed above. Interest Expense. Interest expense, net of interest income, decreased $3,425,000 to $3,862,000 in the first nine months of 1996 from $7,287,000 in the first nine months of 1995. As a percentage of net operating revenues, interest expense, net of interest income, decreased to 2.1% in the first nine months of 1996 from 7.8% in the first nine months of 1995. Cash interest expense during the first nine months of 1996 was $1,473,000 and non-cash interest during the same period was $4,396,000 versus $805,000 and $6,729,000 in the first nine months of 1995, respectively. The decrease in the first nine months of 1996 non-cash interest expense was due primarily to the redemption of 35.0% of the accreted value of the Company's Discount Notes in December 1995. The increase in cash interest expense was due primarily to borrowings made under the Company's Senior Credit Facility to fund the Company's acquisitions and to repurchase additional Discount Notes during the first nine months of 1996. The increase in interest income was due to investments of excess cash generated from the Company's initial public offering and secondary equity offering placed in short-term high-grade instruments. Provisions for Income Taxes. Provision for income taxes increased $7,685,000 to $11,537,000 in the first nine months of 1996 from $3,852,000 in the first nine months of 1995. As a percentage of net operating revenues, provision for income taxes increased to 6.1% in the first nine months of 1996 from 4.1% in the first nine months of 1995 and the effective tax rate decreased to 41.1% from 41.7% over the same period. The increase as a percentage of net operating revenues was primarily due to the increased profitability of the Company in the first nine months of 1996 versus the same period in the prior year. Minority Interest. Minority interest increased $509,000 to $2,296,000 in the first nine months of 1996 from $1,787,000 in the first nine months of 1995. As a percentage of net operating revenues, minority interest decreased to 1.2% in the first nine months of 1996 from 1.9% in the first nine months of 1995. This decrease in minority interest as a percentage of net operating revenues is a result of a relative proportionate decrease in the formation of partnership affiliates and subsidiaries as a percentage of total new acquisitions. Extraordinary Loss. In July and September 1996 the Company retired all outstanding Discount Notes for an aggregate payment of $68.4 million (including consent payments of $1.1 million). The debt retirement resulted in an extraordinary loss, net of tax, of $7.7 million during the third quarter of 1996. 7 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $1,973,000 for the first nine months of 1996. Net cash provided by operating activities consists of the Company's net income, 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, in the first nine months of 1996. Net cash used in investing activities was $141,219,000 for the first nine months of 1996. The Company's principal uses of cash in investing activities have been related to acquisitions, purchases of new equipment and leasehold improvements for the Company's outpatient facilities, as well as the development of new outpatient facilities. Net cash provided by financing activities was $114,505,000, of which the primary sources of financing were $110,079,000 net proceeds from sale of common stock and $33,335,000 net borrowings on bank credit facility. The remaining cash required for other acquisitions, de novo developments and working capital needs were funded by the Company's available cash. As a result, cash decreased by $24,741,000 in the first nine months of 1996. In July 1996, the Company repurchased $27.4 million of the outstanding Discount Notes for $28.4 million. In September 1996, the Company completed a tender offer for its Discount Notes pursuant to which it purchased all outstanding Discount Notes, with a principal amount of $37.6 million at maturity, for $38.9 million and made aggregate consent payments of $1.1 million. The repurchase and tender offer resulted in an extraordinary loss, net of tax, of $7.7 million during the third quarter of 1996. Effective October 17, 1996, the Company refinanced its prior bank credit facility with the Senior Credit Facility, which permits borrowings of up to $400.0 million. Under the Senior Credit Facility, up to $50.0 million may be used in connection with letters of credit, and up to $15.0 million in short-term funds may be borrowed the same day notice is given to the banks under a "Swing Line" facility. In general, borrowings under the Senior Credit Facility bear interest at one of two floating rates selected by the Company: (i) the Alternate Base Rate (defined as the higher of The Bank of New York's prime rate or the federal funds rate plus 0.5%); and (ii) Adjusted LIBOR (defined as the 30-, 60-, 90- or 180-day London Interbank Offered Rate, adjusted for statutory reserves) plus a margin that ranges from 0.45% to 1.25% depending on the Company's leverage ratio. Swing Line borrowings bear interest at either a rate negotiated by the Company and the banks at the time of borrowing or, if no rate is negotiated and agreed upon, the Alternate Base Rate. Maximum borrowings under the Senior Credit Facility will be reduced by $50.0 million on September 30, 2000, $75.0 million on September 30, 2001, and another $75.0 million on September 30, 2002, and the Senior Credit Facility terminates on September 30, 2003. The Senior Credit Facility contains financial and operating covenants including, among other things, requirements that the Company maintain certain financial ratios and satisfy certain financial tests, and imposes limitations on the Company's ability to make capital expenditures, to incur other indebtedness and to pay dividends. As of the date hereof, the Company is in compliance with all such covenants. As of September 30, 1996, the Company had working capital of $85,254,000, including cash of $5,440,000. In October 1996, the Company commenced a public offering which is anticipated to close in November. Net proceeds to the Company from this offering will be approximately $18.2 million. The Company anticipates that its aggregate capital requirements for purchases of equipment and leasehold improvements for outpatient facilities after September 30, 1996 through December 31, 1996 will be approximately $6.8 million. The Company's strategy is to continue to expand its operations both through development of de novo centers and through acquisitions. The development of a typical outpatient facility generally requires $700,000 for initial construction and equipment and $200,000 for working capital. Based on the Company's experience, a de novo facility typically achieves operating profitability, before depreciation and amortization, by the 12th to 15th month of operation. However, the period of time for a development facility to break even is dependent on many factors which can vary significantly from facility to facility, and, therefore, the Company's past experience may not be indicative of the performance of future developed facilities. The Company is currently developing eight new facilities. During the period January 1, 1996 through September 30, 1996, the Company paid approximately $126.5 million in consideration for acquisitions, including approximately $49.0 million for the Caremark Acquisition. From October 1, 1996 to October 30, 1996, the Company completed acquisitions of three facilities for consideration of $17.2 million of which $4.7 million was paid in cash, the remainder in the issuance of a letter of credit under its Senior Credit Facility to secure a subsequent cash payment to be made in the first half of 1997. The Company has signed letters of intent in which it has agreed to purchase six centers servicing approximately 300 patients for a total consideration of $12.5 million in cash and has agreed to purchase the minority interest at one of its existing centers for $1.0 million in cash. The Company believes that the net proceeds from its October 1996 equity offering, borrowings under the Senior Credit Facility, cash generated from operations and other current sources of financing will be sufficient to meet the Company's need for capital for the foreseeable future, including working capital, purchases of additional property and equipment for the operation of its existing facilities and interest on the Senior Credit Facility. To continue its growth strategy, however, the Company may need to issue additional debt or equity securities. There can be no assurance that additional financing and capital, if and when required, will be available on terms acceptable to the Company or at all. 8 RISK FACTORS In evaluating the Company, its business and its financial position the following risk factors should be carefully considered in addition to the other information contained herein. The following factors could affect the Company's actual future results and could cause them to differ from any forward-looking statements made by or on behalf of the Company. DEPENDENCE ON MEDICARE, MEDICAID AND OTHER SOURCES OF REIMBURSEMENT The Company is reimbursed for dialysis services primarily at fixed rates established in advance under the Medicare End Stage Renal Disease program. Under this program, once a patient becomes eligible for Medicare reimbursement, Medicare is responsible for payment of 80% of the composite rates determined by the Health Care Financing Administration ("HCFA") for dialysis treatments. Since 1972, qualified patients suffering from chronic kidney failure, also known as end stage renal disease ("ESRD") have been entitled to Medicare benefits regardless of age or financial circumstances. The Company estimates that approximately 62% of its net patient revenues during its fiscal year ended May 31, 1995, approximately 60% during the seven months ended December 31, 1995 and 60% during the nine months ended September 30, 1996 were funded by Medicare. Since 1983, numerous Congressional actions have resulted in changes in 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. The Company is not able to predict whether future rate changes will be made. Reductions in composite rates could have a material adverse effect on the Company's revenues and net earnings. 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 the Company's earnings in the future. The Company is also unable to predict whether certain services, as to which the Company is currently separately reimbursed, may in the future be included in the Medicare composite rate. Since June 1, 1989, the Medicare ESRD program has provided reimbursement for the administration to dialysis patients of erythropoietin ("EPO"). EPO is beneficial in the treatment of anemia, a medical complication frequently experienced by dialysis patients. Many of the Company's dialysis patients receive EPO. Revenues from EPO (the substantial majority of which are reimbursed through Medicare and Medicaid programs) were approximately $18.2 million, or 18% of net operating revenues, in its fiscal year ended May 31, 1995 and were $18.0 million, or 20% of net operating revenues, during the seven months ended December 31, 1995 and $37.3 million, or 20% of net operating revenues during the nine months ended September 30, 1996. EPO reimbursement significantly affects the Company's net income. Medicare reimbursement for EPO was reduced from $11 to $10 per 1,000 units for services rendered after December 31, 1993. EPO is produced by a single manufacturer, and any interruption of supply or product cost increases could adversely affect the Company's operations. The Company provides certain of its patients with intradialytic parenteral nutrition ("IDPN"), a nutritional supplement administered during dialysis to patients suffering from nutritional deficiencies. The Company has historically been reimbursed by the Medicare program for the administration of IDPN therapy. Beginning in 1993, HCFA designated four durable medical equipment regional carriers ("DMERCs") to process reimbursement claims for IDPN therapy. The DMERCs established new, more stringent medical policies for reimbursement of IDPN therapy which were adopted by HCFA in April 1996, and many dialysis providers' claims have been denied or delayed. Where appropriate, the Company has appealed and continues to appeal such denials. The final outcome of some appeals and the anticipated review is uncertain. The Company's allowance for doubtful accounts reflects a reserve that the Company believes is adequate against the possibility of an adverse outcome. The Company has continued to provide IDPN therapy only to a select number of its patients whom the Company believes meet the most stringent guidelines. Although the Company fully expects to be paid on outstanding claims, there can be no certainty to that effect. 9 All of the states in which the Company currently operates dialysis facilities provide Medicaid (or comparable) benefits to qualified recipients to supplement their Medicare entitlement. The Company estimates that approximately 8% of its net patient revenues during the fiscal year ended May 31, 1995, 7% of its net operating revenues during the seven months ended December 31, 1995 and 6% of its net operating revenues during the nine month period ended September 30, 1996 were funded by Medicaid or comparable state programs. The Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, all of which may have the effect of decreasing program payments, increasing costs or modifying the way the Company operates its dialysis business. Approximately 30% of the Company's net patient revenues during the fiscal year ended May 31, 1995, 33% during the seven month period ended December 31, 1995 and 34% during the nine month period ended September 30, 1996 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 with which the Company has contracts for the provision of acute dialysis treatments. Any restriction or reduction of the Company's ability to charge for such services at rates in excess of those paid by Medicare would adversely affect the Company's net operating revenues and net income. The Company is unable to quantify or predict the degree, if any, of the risk of reductions in payments under these various payment plans. The Company is a party to non-exclusive agreements with certain third-party payors and termination of such third-party agreements could have an adverse effect on the Company. OPERATIONS SUBJECT TO GOVERNMENT REGULATION The Company is subject to extensive regulation by both the federal government and the states in which the Company conducts its business. The Company is subject to the illegal remuneration provisions of the Social Security Act and similar state laws, which impose civil and criminal sanctions on persons who solicit, offer, receive or pay any remuneration, directly or indirectly, for referring a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar state programs. In July 1991 and November 1992, the federal government published regulations that provide exceptions or "safe harbors" for certain business transactions. Transactions that are structured within the safe harbors are deemed not to violate the illegal remuneration provisions. Transactions that do not satisfy all elements of a relevant safe harbor do not necessarily violate the illegal remuneration statute, but may be subject to greater scrutiny by enforcement agencies. Neither the arrangements between the Company and the physician directors of its facilities ("Medical Directors") nor the minority ownership interests of referring physicians in certain of the Company's dialysis facilities fall within the protection afforded by these safe harbors. Although the Company has never been challenged under these statutes and believes it complies in all material respects with these and all other applicable laws and regulations, there can be no assurance that the Company will not be required to change its practices or relationships with its Medical Directors or with referring physicians holding minority ownership interests or that the Company will not experience material adverse effects as a result of any such challenge. The Omnibus Budget Reconciliation Act of 1989 includes certain provisions ("Stark I") that restrict physician referrals for clinical laboratory services to entities with which a physician or an immediate family member has a "financial relationship." In August 1995, HCFA published regulations interpreting Stark I. The regulations specifically provide that services furnished in an ESRD facility that are included in the composite billing rate are excluded from the coverage of Stark I. The Company believes that the language and legislative history of Stark I indicate that Congress did not intend to include laboratory services provided incidental to dialysis services within the Stark I prohibition; however, laboratory services not included in the Medicare composite rate could be included within the coverage of Stark I. Violations of Stark I are punishable by civil penalties which may include exclusion or suspension of a provider from future participation in Medicare and Medicaid programs and substantial fines. Due to the breadth of the statutory provisions, it is possible that the Company's practices might be challenged under this law. A broad interpretation of Stark I would apply to the Company's competitors as well. 10 The Omnibus Budget Reconciliation Act of 1993 includes certain provisions ("Stark II") that restrict physician referrals for certain "designated health services" to entities with which a physician or an immediate family member has a "financial relationship." The Company believes that the language and legislative history of Stark II indicate that Congress did not intend to include dialysis services and the services and items provided incident to dialysis services within the Stark II prohibitions; however, certain services, including the provision of, or arrangement and assumption of financial responsibility for, outpatient prescription drugs, including EPO, and clinical laboratory services, could be construed as designated health services within the meaning of Stark II. Violations of 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. Due to the breadth of the statutory provisions and the absence of regulations or court decisions addressing the specific arrangements by which the Company conducts its business, it is possible that the Company's practices might be challenged under these laws. A broad interpretation of Stark II to include dialysis services and items provided incident to dialysis services would apply to the Company's competitors as well. A California statute that became effective January 1, 1995 makes it unlawful for a physician who has, or a member of whose immediate family has, a financial interest with or in an entity to refer a person to that entity for, among other services, laboratory services. The Company currently operates centers in California, which accounted for a significant percentage of net operating revenues for the fiscal year ended May 31, 1995 and the seven months ended December 31, 1995. Although the Company does not believe that the statute is intended to apply to laboratory services that are provided incident to dialysis services, it is possible that the statute could be interpreted to apply to such laboratory services. If the California statute were so interpreted, the Company would be required to restructure some or all of its relationships with referring physicians who serve as Medical Directors of the Company's facilities and with the physicians who hold minority interests in certain of the Company's facilities. At present, ESRD patients eligible for California's Medicaid program, MediCal, are reimbursed for their transportation costs relating to ESRD treatments. From time to time, the Company pays Medicare supplemental insurance premiums for patients with a financial need. If this practice is deemed to violate applicable federal or state law, the Company may be forced to halt this practice and the Company cannot predict the effect the foregoing would have on the desire of such patients to use the Company's services. A number of proposals for health care reform have been made in recent years, some of which have included radical changes in the health care system. Health care reform could result in material changes in the financing and regulation of the health care business, and the Company is unable to predict the effect of such changes on its future operations. It is uncertain what legislation on health care reform, if any, will ultimately be implemented or whether other changes in the administration or interpretation of governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the results of operations of the Company. RISKS INHERENT IN GROWTH STRATEGY Following the August 1994 Transaction, the Company began an aggressive growth strategy. This growth strategy is dependent on the continued availability of suitable acquisition candidates and subjects the Company to the risks inherent in assessing the value, strengths and weaknesses of acquisition candidates, the operations of acquired companies and identifying suitable locations for additional facilities. The Company's growth is expected to place significant demands on the Company's financial and management resources. In recent years, acquisition prices and competition for facilities has increased. To the extent the Company is unable to acquire or develop facilities in a cost- effective manner, its ability to expand its business and enhance results of operations would be adversely affected. In addition, although the Company believes it has a demonstrable track record of integrating the operations of acquired companies with its historic operations, the process for integrating acquired 11 operations, particularly for newly acquired regional clusters, presents a significant challenge to the Company's management and may lead to unanticipated costs or a diversion of management's attention from day-to-day operations. There can be no assurance that the Company will be able to continue its growth strategy or that this strategy will ultimately prove successful. A failure to successfully continue its growth strategy could have an adverse effect on the Company's results of operations. COMPETITION The dialysis industry is fragmented and highly competitive, particularly in terms of acquisitions of existing dialysis facilities and developing relationships with referring physicians. Certain of the Company's competitors have substantially greater financial resources than the Company and may compete with the Company for acquisitions of facilities in markets targeted by the Company. Competition for acquisitions has increased the cost of acquiring existing dialysis facilities. The Company has from time to time experienced competition from referring physicians who have opened their own dialysis facilities. A portion of the Company's 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, the Company could be adversely affected. DEPENDENCE ON KEY PERSONNEL The Company is dependent upon the services and management experience of the Company's executive officers, and accordingly has entered into employment agreements with, and provided a variety of equity incentives to, each of these executives. The Company's continued growth depends upon its ability to attract and retain skilled employees, in particular highly skilled nurses, for whom competition is intense. The Company believes that its future success will also be significantly dependent on its ability to attract and retain qualified physicians to serve as Medical Directors of its dialysis facilities. The Company does not carry key-man life insurance on any of its officers. DEPENDENCE ON PHYSICIAN REFERRALS The Company's facilities are dependent upon referrals of ESRD patients for treatment by physicians specializing in nephrology and practicing in the communities served by the Company's dialysis facilities. As is generally true in the dialysis industry, at each facility one or a few physicians account for all or a significant portion of the patient referral base. 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 the Company's overall operations. Referring physicians own minority interests in 21 of the Company's dialysis facilities. If such interests are deemed to violate applicable federal or state law, such physicians may be forced to dispose of their ownership interests. The Company cannot predict the effect such dispositions would have on its business. See "Risk Factors--Operations Subject to Government Regulation." 12 PART II. OTHER INFORMATION ITEMS 1,2,3,4 AND 5 ARE NOT APPLICABLE. 13 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10. Credit Agreement by and among Total Renal Care Holdings, Inc., the lenders party thereto, BNY Capital Markets, Inc. and Donaldson Lufkin & Jenrette Securities Corporation as Arrangers, DLJ Capital Funding, Inc. as Documentation Agent and The Bank of New York as Administrative Agent, dated as of October 11, 1996 (the "Credit Agreement"). The Credit Agreement was filed as an Exhibit to the Company's Current Report on Form 8-K dated October 18, 1996 and is incorporated herein by reference. 11. Computation of per share earnings for the three months and nine months ended September 30, 1996 and September 30, 1995. 27. Financial Data Schedule. (b) Reports on Form 8-K (i) August 29, 1996 Item 5. Other Events. Covers second quarter earnings press release and announcement of tender offer for outstanding Discount Notes. (ii) October 18, 1996 Item 5. Other Events. Covers the Credit Agreement and the financial statments listed in Item 7 below. Item 7. Financial Statements and Exhibits. BURBANK DIALYSIS GROUP, INC. Report of Independent Accountants of Price Waterhouse LLP Balance Sheet Statement of Operations and Retained Earnings (Deficit) Statement of Cash Flows Notes to Financial Statements PASADENA DIALYSIS CENTER, INC. Report of Independent Accountants of Price Waterhouse LLP Balance Sheet Statement of Operations and Retained Earnings Statement of Cash Flows Notes to Financial Statements PIEDMONT DIALYSIS, INC.; PERALTA RENAL CENTER Report of Independent Accountants of Price Waterhouse LLP Combined Balance Sheet Combined Statement of Income and Retained Earnings Combined Statement of Cash Flows Notes to Combined Financial Statements HOUSTON KIDNEY CENTER; NORTHWEST KIDNEY CENTER, LLP; NORTH HOUSTON KIDNEY CENTER, LLP; HOUSTON KIDNEY CENTER-- SOUTHEAST, LLP Report of Independent Accountants of Price Waterhouse LLP Combined Balance Sheet Combined Statement of Income and Partners' Equity Combined Statement of Cash Flows Notes to Combined Financial Statements BERTHA SIRK DIALYSIS CENTER, INC.; GREENSPRING DIALYSIS CENTER, INC. Report of Independent Accountants of Price Waterhouse LLP Combined Balance Sheet Combined Statement of Income and Retained Earnings Combined Statement of Cash Flows Notes to Combined Financial Statements UNAUDITED PRO FORMA FINANCIAL INFORMATION Unaudited Pro Forma Combined Balance Sheet Notes to Unaudited Pro Forma Combined Balance Sheet Unaudited Pro Forma Combined Statements of Income Notes to Unaudited Pro Forma Combined Statements of Income (iii) October 25, 1996 Item 5. Other Events. Covers third quarter earnings press release. Item 7. Financial Statements and Exhibits. (iv) October 30, 1996 Item 5. Other Events. Covers unaudited pro forma financial statements listed in Item 7 below. Item 7. Financial Statements and Exhibits. Unaudited Pro Forma Combined Balance Sheet Notes to Unaudited Pro Forma Combined Balance Sheet Unaudited Pro Forma Combined Statements of Income Notes to Unaudited Pro Forma Combined Statements of Income 14 SIGNATURE 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 ------------------------------ John E. King Vice President, Finance and Chief Financial Officer Date: November 4, 1996 John E. King is signing in the dual capacities as i) Chief Financial Officer, and ii) a duly authorized officer of the Company. 15 EX-11 2 COMPUTATION OF PER SHARE EARNINGS TOTAL RENAL CARE HOLDINGS, INC. EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS During the period from October 1, 1994 to November 2, 1995 the Company issued approximately 2,190,000 shares of Common Stock and options at prices significantly below the offering price of the Company's initial public offering. Such shares and common stock equivalents have been included in the number of shares outstanding from June 1, 1994 (including the quarter and nine months ended September 30, 1995) until November 2, 1995 using the Treasury Stock method using the actual offering price of $15.50 per share.
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 -------------------------- ------------------------- 1996 1995 1996 1995 ------------ ----------- ----------- ----------- Applicable Common Shares Average outstanding during the period 25,948,000 14,396,000 24,700,000 14,041,000 Outstanding stock options 787,000 1,479,000 788,000 1,511,000 Reduction in shares in connection with notes receivable from employees (74,000) (185,000) (79,000) (125,000) ----------- ----------- ----------- ---------- Weighted average number of shares outstanding 26,661,000 15,690,000 25,409,000 15,427,000 =========== =========== =========== =========== Income before extraordinary item $ 6,536,000 $ 2,485,000 $16,538,000 $ 5,384,000 Extraordinary loss (7,700,000) (7,700,000) ----------- ----------- ----------- ----------- Net (loss) income $(1,164,000) $ 2,485,000 $ 8,838,000 $ 5,384,000 =========== =========== =========== =========== Earnings (loss) per common share: Income before extraordinary item $ 0.25 $ 0.16 $ 0.65 $ 0.35 Extraordinary item (0.29) (0.30) ----------- ----------- ----------- ----------- Net (loss) income $ (0.04) $ 0.16 $ 0.35 $ 0.35 =========== =========== =========== ===========
EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 5,440,000 0 95,314,000 0 4,579,000 115,931,000 49,443,000 0 320,421,000 30,677,000 78,225,000 0 0 26,000 204,333,000 320,421,000 0 73,333,000 0 60,207,000 0 1,559,000 1,719,000 10,992,000 4,386,000 6,536,000 0 (7,700,000) 0 (1,164,000) .25 (.04)
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