-----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, TMRr9BDXFJIZeGJe/S5DmhccueJHeOuprNkVSz/alRgz32YCm3q0RMfqBJzWNWB2 QfD8Wj84j4SVVL8iYiuc5w== 0000898430-00-000207.txt : 20000203 0000898430-00-000207.hdr.sgml : 20000203 ACCESSION NUMBER: 0000898430-00-000207 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 20000128 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-K405/A SEC ACT: SEC FILE NUMBER: 001-04034 FILM NUMBER: 515207 BUSINESS ADDRESS: STREET 1: 21250 HAWTHORNE BLVD STREET 2: SIE 800 CITY: TORRANCE STATE: CA ZIP: 90503-5517 BUSINESS PHONE: 3107922600 MAIL ADDRESS: STREET 1: 21250 HAWTHORNE BLVD SUITE 800 STREET 2: 21250 HAWTHORNE BLVD SUITE 800 CITY: TORRANCE STATE: CA ZIP: 90503-5517 FORMER COMPANY: FORMER CONFORMED NAME: TOTAL RENAL CARE INC DATE OF NAME CHANGE: 19940719 10-K405/A 1 AMENDMENT #2 TO FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-K/A (Mark One) (AMENDMENT NO. 2) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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) Delaware 51-0354549 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503-5517 (Address of principal executive offices) Registrant's telephone number, including area code: (310) 792-2600 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.001 per share Name of each exchange on which registered: New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the common stock of the Registrant held by non- affiliates of the Registrant on March 15, 1999, based on the price at which the common stock was sold as of March 15, 1999, was $738,650,481. The number of shares of the Registrant's common stock outstanding as of March 15, 1999 was 81,054,793 shares. Documents Incorporated by Reference None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INTRODUCTORY STATEMENT We are filing this Amendment No. 2 on Form 10-K/A for the year ended December 31, 1998 to restate our financial statements, with the following impact on earnings: Decreases to income before taxes
Year ended December 31, --------------------------------- 1996 1997 1998 ---------- ----------- ---------- To reflect goodwill adjustments associated with acquisition transactions............... $1,351,000 $10,520,000 $ 896,000 To recognize a calculated fair value of stock options granted to medical directors and contract labor.............................. 1,453,000 3,541,000 3,585,000 To reflect accounts payable accruals in the quarters the liabilities were subsequently determined to have been incurred............ 3,800,000 ---------- ----------- ---------- Decrease to income before taxes............ $2,804,000 $14,061,000 $8,281,000 ========== =========== ==========
1996 1997 1998 ------------------------------ ------------------------------ --------------------------------- As As As previously As previously As previously As reported Adjustment restated reported Adjustment restated reported Adjustment restated ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- (in thousands, except per share) Net operating revenues.. $498,024 $(1,373) $496,651 $760,997 $(2,594) $758,403 $1,204,894 $(1,156) $1,203,738 Operating expenses...... 427,520 1,431 428,951 636,217 11,467 647,684 1,063,076 7,125 1,070,201 Income taxes............ 22,960 (929) 22,031 40,212 (4,558) 35,654 41,580 (3,131) 38,449 Net income (loss)....... 26,707 (1,875) 24,832 55,027 (9,503) 45,524 (4,298) (5,150) (9,448) Earnings (loss) per share.................. 0.36 (0.03) 0.33 0.71 (0.12) 0.59 (0.05) (0.07) (0.12) Earnings (loss) per share--assuming dilution............... 0.35 (0.03) 0.32 0.69 (0.12) 0.57 (0.05) (0.07) (0.12)
The restated financial statements (item 8) and a corresponding update of items 6 and 7 of the previously filed Form 10-K/A (Amendment No.1) are included in this filing. We have not amended the other information in the previously filed Form 10-K/A (Amendment No.1) in this filing. 1 Item 6. Selected Financial Data. The following table presents our selected consolidated financial and operating data for the periods indicated. The consolidated financial data as of May 31, 1994 and 1995 and as of December 31, 1995, 1996, 1997 and 1998 and for the years ended May 31, 1994 and 1995, the seven month period ended December 31, 1995, and the years ended December 31, 1996, 1997 and 1998 have been derived from our audited consolidated financial statements. The consolidated financial data for the seven months ended December 31, 1994 and the year ended December 31, 1995 are unaudited and include all adjustments consisting solely of normal recurring adjustments necessary to present fairly our results of operations for the period indicated. The results of operations for the seven month periods ended December 31, 1994 and 1995 are not necessarily indicative of the results which may occur for the full fiscal year. The consolidated financial and operating data as of and for the years ended December 31, 1996, 1997 and 1998 have been restated as further described in the Introductory Statement to this Form 10-K/A (Amendment No. 2). The following financial and operating data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements filed as part of this report.
Seven months Years ended ended May 31,(1) December 31, Year ended December 31, ----------------- ----------------- ----------------------------------------- 1994 1995 1994 1995 1995 1996 1997 1998 (in thousands, except per share) (restated) (restated) (restated) Income statement data:(2)(8) Net operating revenues..... $153,513 $214,425 $122,065 $176,463 $299,411 $496,651 $758,403 $1,203,738 Total operating expenses(3) .......................... 133,211 182,251 104,053 143,196 247,925 428,951 647,684 1,070,201 -------- -------- -------- -------- -------- -------- -------- ---------- Operating income .......... 20,302 32,174 18,012 33,267 51,486 67,700 110,719 133,537 Interest expense, net(3) .. 1,549 7,851 3,838 6,831 11,801 9,559 25,039 77,733 -------- -------- -------- -------- -------- -------- -------- ---------- Income before income taxes, minority interests, extraordinary item and cumulative effect of change in accounting principle................. 18,753 24,323 14,174 26,436 39,685 58,141 85,680 55,804 Income taxes .............. 6,208 7,827 4,759 9,931 13,841 22,031 35,654 38,449 -------- -------- -------- -------- -------- -------- -------- ---------- Income before minority interests, extraordinary item and cumulative effect of change in accounting principle................. 12,545 16,496 9,415 16,505 25,844 36,110 50,026 17,355 Minority interests in income of consolidated subsidiaries.. 1,046 1,593 878 1,784 2,544 3,578 4,502 7,163 -------- -------- -------- -------- -------- -------- -------- ---------- Income before extraordinary item and cumulative effect of change in accounting principle ................ $ 11,499 $ 14,903 $ 8,537 $ 14,721 $ 23,300 $ 32,532 $ 45,524 $ 10,192 ======== ======== ======== ======== ======== ======== ======== ========== Net income (loss)(4)....... $ 11,499 $ 14,903 $ 8,537 $ 12,166 $ 20,745 $ 24,832 $ 45,524 $ (9,448) ======== ======== ======== ======== ======== ======== ======== ========== Earning per common share(5): Net income before extraordinary item and cumulative effect of change in accounting principle............... $ 0.33 $ 0.20 $ 0.26 $ 0.43 $ 0.43 $ 0.59 $ 0.12 ======== ======== ======== ======== ======== ======== ========== Net income (loss)(4)..... $ 0.33 $ 0.20 $ 0.22 $ 0.38 $ 0.33 $ 0.59 $ (0.12) ======== ======== ======== ======== ======== ======== ========== Earning per common share-- assuming dilution(5): Net income before extraordinary item and cumulative effect of change in accounting principle............... $ 0.31 $ 0.19 $ 0.25 $ 0.40 $ 0.42 $ 0.57 $ 0.12 ======== ======== ======== ======== ======== ======== ========== Net income (loss)(4)..... $ 0.31 $ 0.19 $ 0.20 $ 0.36 $ 0.32 $ 0.57 $ (0.12) ======== ======== ======== ======== ======== ======== ========== Seven months Year ended ended May 31, December 31, Year ended December 31, ----------------- ----------------- ----------------------------------------- 1994 1995 1994 1995 1995 1996 1997 1998 Ratio of earnings to fixed charges(10)................ 6.06 2.97 3.17 3.48 3.22 3.82 3.11 1.51
May 31, December 31, ----------------- --------------------------------------- 1994 1995 1995 1996 1997 1998 (in thousands) Balance sheet data:(2)(9) Working capital........ $ 33,773 $ 42,918 $ 98,071 $185,904 $ 205,798 $ 388,064 Total assets........... 103,628 218,081 338,866 664,799 1,279,261 1,911,619 Long-term debt ........ 17,531 115,522 96,979 233,126 731,192 1,225,781 Mandatorily redeemable common stock(6)....... 3,990 Stockholders' equity... 65,391 61,749(7) 193,162 358,677 422,446 473,864
(See notes on following page) 2 - -------- (1) In 1995, we changed our fiscal year end to December 31 from May 31. (2) Our recapitalization in 1994 and subsequent acquisitions have had a significant impact on our capitalization and equity securities and on our results of operations. Consequently, the balance sheet data as of May 31, 1995 and as of December 31, 1995, 1996, 1997 and 1998 and the income statement data for the fiscal year ended May 31, 1995, for the seven months ended December 31, 1995, and the years ended December 31, 1996, 1997 and 1998 are not directly comparable to corresponding information as of prior dates and for prior periods, respectively. (3) General and administrative expenses for the fiscal year ended May 31, 1994 include overhead allocations by our former parent of $1,458,000 for the period June 1993 through February 1994. No overhead allocation was made for the period from March 1994 through our recapitalization in 1994 at which time we began to record general and administrative expenses as incurred on a stand-alone basis. General and administrative expenses for the fiscal year ended May 31, 1994 also reflect $458,000 in expenses relating to a terminated equity offering. During the first quarter of 1998 we recorded an expense of $79,435,000 for merger and related costs associated with the RTC merger and during the second quarter we recorded a charge in interest expense of $9,823,000 to terminate interest rate swap agreements on debt that were refinanced. (4) In December 1995, we recorded an extraordinary loss of $2,555,000, or $0.09 per share, net of tax, on the early extinguishment of debt. In July and September 1996, we recorded a combined extraordinary loss of $7,700,000 or $0.10 per share net of tax, on the early extinguishment of debt. At the time of our merger with RTC we paid off their existing revolving credit agreement and the remaining unamortized deferred financing costs, net of tax, of $2,812,000 or approximately $0.04 per share, was included as an extraordinary loss in 1998. In April 1998 we replaced our existing $1.05 billion credit facilities with a combined total of $1.35 billion in two senior credit facilities. As a result of this refinancing, the remaining net deferred financing costs, net of tax, of $9,932,000 or approximately $0.12 per share, was included as an extraordinary loss in 1998. See Note 8 of our consolidated financial statements. In the first quarter of 1998 we adopted Statement of Position No. 98-5, Reporting on the Costs for Start-up Activities, or SOP 98-5, which requires that pre-opening and organization costs previously treated as deferred costs should be expensed as incurred. As a result all existing remaining unamortized deferred pre-opening and organizational costs was taken as a charge, net of tax, of $6,896,000 or approximately $0.08 per share, as a cumulative effect of a change in accounting principle. See our consolidated financial statements and related notes. (5) See additional income per share information in our consolidated statements of income. (6) Mandatorily redeemable common stock represents shares of common stock issued in certain acquisitions subject to put options that terminated upon the completion of our initial public offering. (7) In connection with our recapitalization in 1994, we paid a special dividend to Tenet Healthcare Corporation, or Tenet, of $81.7 million, including $75.5 million in cash. (8) The consolidated income statement data combine our results of operations for the years ended May 31, 1994 and 1995, the seven months ended December 31, 1994 and 1995 and the years ended December 31, 1995, 1996 and 1997 with RTC's results of operations for the years ended December 31, 1993 and 1994, the six months ended December 31, 1994 and 1995 and the years ended December 31, 1995, 1996 and 1997, respectively. (9) The consolidated balance sheet data combines our balance sheet as of May 31, 1994 and 1995 and December 31, 1995, 1996 and 1997 with RTC's balance sheet as of December 31, 1993, 1994, 1995, 1996 and 1997, respectively. (10) The ratio of earnings to fixed charges is computed by dividing fixed charges into earnings. Earnings is defined as pretax income from continuing operations adjusted by adding fixed charges and excluding interest capitalized during the period. Fixed charges means the total of interest expense and amortization of financing costs and the estimated interest component of rental expense on operating leases. 3 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Form 10-K/A (Amendment No. 2). Background Our wholly-owned subsidiary TRC, formerly Medical Ambulatory Care, Inc., was organized in 1979 by Tenet, formerly National Medical Enterprises, Inc., to own and operate Tenet's hospital-based dialysis services as freestanding dialysis facilities and to acquire and develop additional dialysis facilities in Tenet's markets. TRCH was organized to facilitate the 1994 sale by Tenet of approximately 75% of its ownership interest to DLJ Merchant Banking Partners, L.P., or DLJMB, and certain of its affiliates, our management and certain holders of our debt securities. In connection with our recapitalization in 1994, we paid a special dividend to Tenet out of the net proceeds from (a) the issuance of units consisting of $100 million in principal amount at maturity of 12% senior subordinated discount notes due 2004, which were issued at approximately 70% of par, and 1,000,000 shares of common stock and (b) borrowing under TRC's revolving credit facility. We raised additional capital to fund the continuation of our growth strategy through an initial public offering, or IPO, in October 1995 in which we raised gross proceeds of $107 million. Concurrent with the IPO, we listed our common stock on the New York Stock Exchange under the symbol "TRL." Subsequent to the IPO, we changed our fiscal year end from May 31 to December 31. We raised additional capital to further our growth strategy with two secondary stock offerings in April and October of 1996 which raised gross proceeds to us of approximately $135 million. In October of 1996 we increased our credit facility from $130 million to $400 million. With the proceeds from the IPO, the April 1996 secondary offering and the credit facility, we were able to complete the early retirement of the discount notes. In October 1997 and April 1998, we increased our credit facility to an aggregate of $1.05 billion and $1.35 billion respectively in two bank facilities. In November 1998, we sold $345 million of our 7% convertible subordinated notes. Following our recapitalization in 1994, we implemented a focused strategy to increase net operating revenues per treatment and improve operating income margins. We have significantly increased per-treatment revenues through improved pricing, the addition of in-house clinical laboratory services, increased utilization of ancillary services and the addition of in-house pharmacy services and other ancillary programs. To improve operating income, we began a systematic review of our vendor relations leading to the renegotiation of a number of supply contracts and insurance arrangements that reduced operating expenses. In addition, we have focused on improving facility operating efficiencies and leveraging corporate and regional management. These improvements have been offset in part by increased amortization of goodwill and other intangible assets relating to our acquisitions (all of which have been accounted for as purchase transactions, except the merger with RTC) and start- up expenses related to de novo developments. On February 27, 1998, we acquired RTC in a stock for stock transaction valued at approximately $1.3 billion. The transaction was accounted for as a pooling of interests. Accordingly, our consolidated financial statements have been restated to include RTC for all periods presented. Net operating revenues Net operating revenues are derived primarily from five sources: (a) outpatient facility hemodialysis services; (b) ancillary services, including the administration of EPO and other intravenous pharmaceuticals, clinical laboratory services, oral pharmaceutical products and other ancillary services; (c) home dialysis services and related products; (d) inpatient hemodialysis services provided to hospitalized patients pursuant to arrangements with hospitals; and (e) international operations. Additional revenues are derived from the provision of dialysis facility management services to certain subsidiaries and affiliated and unaffiliated dialysis 4 centers. Our dialysis and ancillary services are reimbursed primarily under the Medicare ESRD program in accordance with rates established by HCFA. Payments are also provided by other third party payors, generally at rates higher than those reimbursed by Medicare for up to the first 33 months of treatment as mandated by law. Rates paid for services provided to hospitalized patients are negotiated with individual hospitals. For the years ended December 31, 1996, 1997 and 1998, approximately 60%, 56% and 51%, respectively, and 4%, 5% and 4%, respectively of our net patient revenues were derived from reimbursement under Medicare and Medicaid, respectively. We maintain a usual and customary fee schedule for our dialysis treatment and other patient services. We often do not realize our usual and customary rates, however, because of limitations on the amounts we can bill to or collect from the payors for our services. We generally bill the Medicare and Medicaid programs at net realizable rates determined by applicable fee schedules for these programs, which are established by statute or regulation. We bill most non-governmental payors, including managed care payors with which we have contracted, at our usual and customary rates. Since we bill most non- governmental payors at our usual and customary rates, but often expect to receive payments at the lower contracted rates, we also record a contractual allowance in order to record expected net realizable revenue for services provided. This process involves estimates and we record revisions to these estimates in subsequent periods as they are determined to be necessary. For more information, see the subheading "Sources of revenue reimbursement" under "Item 1. Business." 5 Quarterly results of operations The following table sets forth selected unaudited quarterly financial data and operating information for 1997 and 1998. The unaudited financial data presented below have been restated to reflect adjustments we have made to our accrual for merger and related costs in connection with our merger with RTC and for other restatements. For more information regarding the adjustments we made and their effects, see Notes 1A, 1 and 16 to our consolidated financial statements.
Quarters ended (as restated) ----------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, March 31, June 30, September 30, 1997 1997 1997 1997 1998 1998 1998 --------- -------- ------------- ------------ --------- -------- ------------- (dollars in thousands, except per share and per treatment data) Net operating revenues.. $156,788 $179,408 $197,525 $ 224,682 $ 257,833 $ 288,350 $ 318,585 Facility operating expenses............... 108,366 122,129 132,608 151,269 168,440 184,399 200,773 General and administrative expenses............... 9,779 12,172 13,246 14,737 16,622 18,087 18,292 Operating income (loss)(1).............. 22,764 27,599 26,086 34,270 (33,571) 55,409 66,481 Income before extraordinary item and cumulative effect of change in accounting principle.............. 10,705 12,793 9,362 12,664 (47,959) 16,841 28,058 Income per share before extraordinary item and cumulative effect of change in accounting principle(3)........... $ 0.14 $ 0.16 $ 0.12 $ 0.16 $ (0.61) $ 0.20 $ 0.33 Outpatient facilities... 267 316 337 380 391 423 477 Treatments.............. 691,406 803,035 894,067 1,003,163 1,099,627 1,186,597 1,283,734 Net operating revenues per treatment.......... $ 227 $ 223 $ 221 $ 224 $ 234 $ 243 $ 248 Operating income margin................. 14.5% 15.4% 13.2% 15.3% (13.0)%(2) 19.2% 20.9% December 31, 1998 ------------ Net operating revenues.. $ 338,970 Facility operating expenses............... 226,128 General and administrative expenses............... 22,685 Operating income (loss)(1).............. 45,218 Income before extraordinary item and cumulative effect of change in accounting principle.............. 13,252 Income per share before extraordinary item and cumulative effect of change in accounting principle(3)........... $ 0.16 Outpatient facilities... 508 Treatments.............. 1,342,386 Net operating revenues per treatment.......... $ 253 Operating income margin................. 13.3%(2)
- -------- (1) The reconciliation between the operating income before merger costs and operating income (loss) included in the quarterly results of operations is presented below:
Quarters ended (as restated) ------------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, 1997 1997 1997 1997 1998 1998 1998 1998 --------- -------- ------------- ------------ --------- -------- ------------- ------------ (in thousands) Operating income before merger costs........... $22,764 $27,599 $26,086 $34,270 $45,864 $55,409 $66,481 $43,971 Merger costs............ (79,435) 1,247 Operating income (loss)................. 22,764 27,599 26,086 34,270 (33,571) 55,409 66,481 45,218
(2) The operating income margin calculated prior to the merger and related costs of $79,435,000 for the quarter ended March 31, 1998 is 17.8%. The operating income margin calculated prior to the reduction of merger costs of $1,247,000 for the quarter ended December 31, 1998 is 13.0%. (3) See additional income per share information in Note 16 to our consolidated financial statements. 6 Utilization of our services generally is not subject to material seasonal fluctuations. The quarterly variations shown above reflect the impact of increasing labor costs and decreasing margins related to the corresponding costs of providing services and amortization of intangibles from acquired facilities. Results of operations The following table sets forth for the periods indicated selected information expressed as a percentage of net operating revenues for such periods:
Years ended December 31, ------------------- 1996 1997 1998 Net operating revenues................................ 100.0% 100.0% 100.0% Facility operating expenses........................... 69.6 67.8 64.8 General and administrative expenses................... 6.5 6.6 6.3 Provision for doubtful accounts....................... 3.2 3.8 3.7 Depreciation and amortization......................... 6.5 7.2 7.6 Merger expenses....................................... 0.6 6.5 Operating income...................................... 13.6 14.6 11.1 Interest expense...................................... 2.7 3.7 6.0 Interest rate swap-early termination costs............ 0.8 Interest income....................................... 0.8 0.4 0.4 Income taxes.......................................... 4.4 4.7 3.2 Minority interests.................................... 0.7 0.6 0.6 Income before extraordinary item and cumulative effect of change in accounting principle.................... 6.6 6.0 0.8
Year ended December 31, 1998 compared to year ended December 31, 1997 Net operating revenues. Net operating revenues increased $445,335,000 to $1,203,738,000 for the year ended December 31, 1998 from $758,403,000 for the year ended December 31, 1997, representing a 58.7% increase. Of this increase, $341,197,000 was due to increased treatments, of which $137,056,000 was from acquisitions consummated during 1998, $188,702,000 was from existing facilities as of December 31, 1997 and $15,439,000 was from de novo developments commencing operations in 1998. The remaining increase of $104,138,000 resulted from an increase in net operating revenues per treatment which increased from $223.61 in 1997 to $245.04 in 1998. The increase in net operating revenues per treatment was attributable to increased ancillary services utilization of $46,019,000, primarily in the administration of EPO of $36,147,000, the overall impact of a rate increase of $32,090,000, $21,912,000 resulting from an increase in the number of services reimbursed by private payors, who pay at higher rates, stemming from HCFA's extension of private payor primary reimbursement obligations for an additional twelve-month period, and expanded laboratory services extended to former RTC facilities of $4,117,000. Facility operating expenses. Facility operating expenses consist of costs and expenses specifically attributable to the operation of dialysis facilities, including operating and maintenance costs of such facilities, equipment, direct labor, and supply and service costs relating to patient care. Facility operating expenses increased $265,368,000 to $779,740,000 in 1998 from $514,372,000 in 1997 and as a percentage of net operating revenues, facility operating expenses decreased by 3.0% to 64.8% in 1998 from 67.8% in 1997. This decrease primarily was attributable to a decrease in labor costs which, as a percentage of revenue, declined by 2.7% from 28.2% in 1997 to 25.5% in 1998. This decrease was due to the continued implementation of our Best Demonstrated Practices Program at our facilities existing prior to the RTC merger and the new implementation of this program at the former RTC facilities. Our Best Demonstrated Practices Program includes measures designed to improve staffing efficiencies and, as a result, decrease labor costs. The remaining decrease in facility operating expenses of 0.3% was due to efficiencies achieved in the cost of medical supplies and other facility expenses as a percentage of operating revenues. 7 General and administrative expenses. General and administrative expenses include headquarters expense and administrative, legal, quality assurance, information systems and centralized accounting support functions. General and administrative expenses increased $25,752,000 to $75,686,000 in 1998 from $49,934,000 in 1997, and as a percentage of net operating revenues, general and administrative expenses decreased to 6.3% for 1998 from 6.6% in 1997. The decrease of 0.3% of net operating revenues, or approximately $3,493,000, is a result of the elimination of duplicate corporate staff and efficiencies achieved from the RTC merger of $4,100,000 and revenue growth and economies of scale achieved by the leveraging of corporate staff across a higher revenue base of $2,693,000, offset by bonus payments of $3,300,000 made in connection with our merger with RTC. 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 $15,959,000 to $44,858,000 in 1998 from $28,899,000 in 1997. As a percentage of net operating revenues, the provision for doubtful accounts decreased to 3.7% in 1998 from 3.8% in 1997. The decrease is primarily attributable to the additional provisions taken in 1997 related to accounts receivable associated with acquired businesses that were not as collectible as originally estimated. This decrease was offset by an additional allowance of $11,500,000, taken in the fourth quarter of 1998, as a result of the most recent analysis of the remaining RTC accounts receivable that were on the books as of December 31, 1997. The provision for doubtful accounts, as a percentage of net operating revenues for 1998, before considering this additional allowance was 2.7%. The additional allowance of $11.5 million was the result of a detailed review, completed in the first quarter of 1999, of RTC's account receivable balances. We previously conducted a detailed review of all RTC accounts receivable balances for dates of service prior to 1998. This previous review, completed in the second quarter of 1998, revealed errors in RTC's determination of accounts receivable allowances, and resulted in increases to RTC's provision for doubtful accounts in 1996 and 1997. These increases are reflected in our financial statements for 1996 and 1997. The underlying cause of the errors was RTC accounting procedures that had resulted in the recording of provisions based on budgeted allowances, rather than the best estimate based on all information then available. Our determination of the appropriate allocation of the increases to the provision between 1996 and 1997 was based upon when the errors that resulted in the under-recognition of accounts receivable provisions had occurred. During the first review, we made significant judgments and estimates in determining the appropriate increases to the provision for doubtful accounts, primarily relating to the large number of typically small balance receivables involved in our review, the projection of collection trends based on RTC's historic aging reports and other information we had developed, and our collection experience and expectations from similar receivable populations. We undertook the second review of RTC's patient accounts receivable after we hired a new vice president of finance in August 1998 to manage the former RTC billing office, with responsibility for improving the reimbursement processes and reviewing the accounts receivable. Furthermore, in connection with our first review, we began producing more detailed aging reports than RTC had utilized. RTC had grouped all receivables over 120 days old into one category. During subsequent months, additional collection trends information was captured in the more detailed agings, providing the basis for the second review of accounts receivable reserves during the fourth quarter of 1998. The additional allowance of $11.5 million represents a change in our estimate of our ability to collect these receivables as a result of the additional collection trends information that we have developed. Depreciation and amortization. Depreciation and amortization increased $37,250,000 to $91,729,000 in 1998 from $54,479,000 in 1997, and as a percentage of net operating revenues, depreciation and amortization increased to 7.6% in 1998 from 7.2% in 1997. This increase primarily was attributable to accelerated depreciation associated with certain incompatible and duplicative software as a result of the merger with RTC. 8 Merger and related expenses. Merger and related costs recorded during 1998 include transaction costs associated with certain integration activities, and costs of employee severance and amounts due under employment agreements and other compensation programs. A summary of merger and related costs and accrual activity through December 31, 1998 is as follows:
Direct Transaction Severance and Costs to Integrate Costs Employment Costs Operations Total Initial expense......... $21,580,000 $ 41,960,000 $15,895,000 $ 79,435,000 Amounts utilized--1st quarter 1998........... (7,771,000) (35,304,000) (9,474,000) (52,549,000) ----------- ------------ ----------- ------------ Accrual, March 31, 1998................... 13,809,000 6,656,000 6,421,000 26,886,000 Amounts utilized--2nd quarter 1998........... (5,109,000) (1,096,000) (2,427,000) (8,632,000) ----------- ------------ ----------- ------------ Accrual, June 30, 1998.. 8,700,000 5,560,000 3,994,000 18,254,000 Amounts utilized--3rd quarter 1998........... (837,000) (458,000) (1,048,000) (2,343,000) ----------- ------------ ----------- ------------ Accrual, September 30, 1998................... 7,863,000 5,102,000 2,946,000 15,911,000 Adjustment of estimates.............. 1,305,000 (959,000) (1,593,000) (1,247,000) Amounts utilized--4th quarter 1998........... (9,168,000) (543,000) (188,000) (9,899,000) ----------- ------------ ----------- ------------ Accrual, December 31, 1998................... $ -- $ 3,600,000 $ 1,165,000 $ 4,765,000 =========== ============ =========== ============
Direct transaction costs consist primarily of investment banking fees, legal and accounting costs and other costs, including the costs of consultants, printing and registration, which were incurred by both TRCH and RTC in connection with the merger. During the fourth quarter we concluded negotiations pertaining to the amount of certain of these fees and subsequently we paid these amounts. Severance and employment costs were incurred for the following: . Severance pay. The RTC merger constituted a constructive termination of employment under various preexisting employment contracts with RTC officers. Terminated RTC officers were entitled to severance payments and tax gross-up payments of approximately $6,500,000. In addition, approximately 80 employees of RTC were informed that their positions would be eliminated. Most of these employees were formerly located in RTC's administrative office and a laboratory under development. The terminations were structured over the integration period, which continued through the end of 1998. The accrued severance payments to these employees amounted to approximately $1,600,000. The remaining balance of severance costs of $600,000 was paid in the first quarter of 1999 and tax gross up payments of approximately $3,000,000 are expected to be paid in 1999. . Option exercises. Pre-existing terms of RTC stock option grants permitted the exercise of options by tender of RTC shares. Some of the RTC shares tendered had been held for less than six months by the option holders and, as required by Emerging Issues Task Force Issue 84-18, we recognized a noncash expense of approximately $16,000,000 equal to the difference between the exercise price of the options and the market value of the stock on the date of exercise. We also incurred approximately $600,000 of payroll tax related to the exercise of nonqualified stock options. . Bonuses. RTC and TRCH each awarded special bonuses as a result of the merger, paid in the first quarter in 1998, for which approximately $16,300,000 was included in merger and related costs. In connection with the RTC merger, we developed a plan which included initiatives to integrate the operations of TRCH and RTC, eliminate duplicative overhead, facilities and systems and improve service delivery. These integration activities were commenced during the first quarter of 1998 and are expected to be substantially completed by approximately July 1, 1999. 9 We eliminated the following RTC departments: human resources, managed care, laboratory, and all finance functions, with the exception of patient accounting. The finance functions eliminated included payroll, financial reporting and analysis, budgeting, general ledger, accounts payable, and tax functions. The RTC human resources and managed care departments were discontinued in Berwyn, Pennsylvania and consolidated with our respective departments in our Torrance, California headquarters as of September 30, 1998. All finance functions, with the exception of patient accounting, were consolidated into our Tacoma, Washington business office as of December 31, 1998. RTC's laboratory, located in Las Vegas, Nevada, was closed prior to its commencement of operation. All laboratory functions were consolidated into our laboratories in Minnesota and Florida in February 1998. Costs to integrate operations included the following: . Laboratory restructuring. As part of our merger integration plan, we decided to restructure our laboratories. To optimize post-merger operations, we terminated a long-term management services agreement with a third party that provided full laboratory management on a contract basis. The termination fee of approximately $3,800,000 was negotiated in the first quarter of 1998. We also immediately halted development of RTC's new laboratory, which was not required for post-merger operations. The RTC laboratory, which was being developed in leased space, is now vacant and a new sublessee is being sought. As a result of this decision, previously capitalized leasehold improvements of $2,600,000 were expensed. Additionally, merger and related costs include approximately $1,000,000 of pre-opening start up costs incurred during the first quarter of 1998 relating to the terminated RTC laboratory and $1,500,000 of remaining lease payments. The accrual for lease payments was not offset by any anticipated sublease income. No such income has been received to date and the remaining balance of this accrual at December 31, 1998 was approximately $1,165,000. . Initial merger costs. Approximately $5,400,000 was expensed for integration activities which occurred at the time of the merger. These costs include a special training program held in March 1998 and attended by many TRCH and RTC employees, merger related travel costs, consultant costs and other costs attributed to the merger. The expected savings to be achieved from the elimination of general and administrative expenses will come in the form of reduced compensation in the future as follows:
1998 1999 ---------- ---------- Executive management.................................. $2,305,000 $2,766,000 Finance and accounting................................ 631,000 1,285,000 Human resources, facility operations and other........ 107,000 490,000 Laboratory closing.................................... 1,069,000 1,283,000 ---------- ---------- Total savings......................................... $4,112,000 $5,824,000 ========== ==========
No assurance can be given that we will achieve these savings. There were approximately $64,900,000 of non-recurring cash expenditures, incurred or to be incurred, necessary to conclude the merger transaction.This includes approximately $61,600,000 in merger and related costs, specifically: $22,900,000 of direct transaction costs, $24,400,000 of severance and employment costs and $14,300,000 of costs to integrate operations. The remaining non-recurring cash expenditure of approximately $3,300,000 was for merger bonuses not included in the merger expenses described above. As a result of these costs, we increased our borrowings under our credit facilities, which increased our annualized interest expense by approximately $4,500,000 per year. Operating income. Operating income increased $22,818,000 to $133,537,000 in 1998 from $110,719,000 in 1997. As a percentage of net operating revenues, operating income decreased to 11.1% in 1998 from 14.6% in 1997. This decrease was due to the costs associated with the RTC merger. Operating income before the merger costs increased to 17.6%, as a percentage of net operating revenues, in 1998. This increase primarily was due to increased revenues, and a general decrease in operating costs partially offset by the additional provision for doubtful accounts recorded in the fourth quarter. 10 Interest expense. Interest expense increased $44,590,000 to $72,804,000 in 1998 from $28,214,000 in 1997, and as a percentage of net operating revenues, interest expense was 6.0% in 1998 and 3.7% in 1997. The increase in interest expense primarily was due to an increase in borrowings made under our credit facilities to fund acquisitions. Interest rate swap-early termination costs. In conjunction with the refinancing of our credit facilities, 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. Interest income. Interest income is generated as a result of the short-term investment of surplus cash from operations and excess proceeds from borrowings under our credit facilities. Interest income increased $1,719,000 to $4,894,000 in 1998 from $3,175,000 in 1997. As a percentage of net operating revenues, interest income remained at 0.4% for both years. Provision for income taxes. Provision for income taxes increased $2,795,000 to $38,449,000 in 1998 from $35,654,000 in 1997. The effective income tax rate after minority interests increased to 69.0% in 1998 from 41.6% in 1997. The overall increase in the effective tax rate primarily reflects non-deductible merger and related expenses consisting of certain compensation costs and stock issuance costs of $36,000,000 as well as non-deductible goodwill associated with other acquired businesses. Before the non-deductible merger charges, the effective tax rate after minority interests declined to 30.7% in 1998 from 41.6% in 1997 primarily due to the restructuring of our business in Argentina to increase our consolidated tax deductible income by increasing equity and reducing debt in Argentina. Minority interests. Minority interests represent the pretax income earned by minority partners who directly or indirectly own minority interests in our partnership affiliates and the net income in certain of our corporate subsidiaries. Minority interests increased $2,661,000 to $7,163,000 in 1998 from $4,502,000 in 1997, and as a percentage of net operating revenues, minority interest amounted to 0.6% for both years. Extraordinary item. On February 27, 1998, in conjunction with our merger with RTC, we terminated RTC's revolving credit agreement and recorded all of the remaining unamortized deferred financing costs as an extraordinary loss of $2,812,000, net of income tax effect. 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 income tax effect. Cumulative effect of change in accounting principle. Effective January 1, 1998, we adopted SOP 98-5. SOP 98-5 requires that pre-opening and organizational costs incurred in conjunction with pre-opening activities associated with 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 income tax effect, as a cumulative effect of change in accounting principle. Year ended December 31, 1997 compared to year ended December 31, 1996 Net operating revenues. Net operating revenues increased $261,752,000 to $758,403,000 for the year ended December 31, 1997 from $496,651,000 for the year ended December 31, 1996 representing a 52.7% increase. Of this increase, $257,113,000 was due to increased treatments, of which $159,837,000 was from acquisitions consummated during 1997, $89,606,000 was from existing facilities as of December 31, 1996 and $7,670,000 was from de novo developments commencing operations in 1997. The remainder was due to an increase in net operating revenues per treatment which were $223.61 in 1997 compared to $222.03 in 1996. The increase in net operating revenues per treatment was due to increases in ancillary services utilization and in affiliated and unaffiliated facility management fees. Facility operating expenses. Facility operating expenses increased $168,835,000 to $514,372,000 in 1997 from $345,537,000 in 1996 and as a percentage of net operating revenues, facility operating expenses decreased 11 to 67.8% in 1997 from 69.6% in 1996. This decrease primarily was attributable to decreases in medical supplies expense, which as a percentage of revenues decreased by 2.1% to 24.9% in 1997 from 27.0% in 1996, and in labor costs, which as a percentage of revenues decreased by 1.3% to 28.2% in 1997 from 29.5% in 1996. These decreases were due to the implementation of our Best Demonstrated Practices Program in December 1996, and were partially offset by an increase in facility expenses from the expansion of our operations in Argentina of 1.9% as a percentage of revenues. The remaining decrease in facility operating expenses of 0.3% was due to the overall increase in net revenue per treatment. General and administrative expenses. General and administrative expenses increased $17,488,000 to $49,934,000 in 1997 from $32,446,000 in 1996, and as a percentage of net operating revenues, general and administrative expenses increased to 6.6% for 1997 from 6.5% in 1996. In 1997, we added additional staff to implement our long-term strategy focused on the continued growth of our business and improvement of the quality of care we deliver. These additional resources are intended to support our long-term goals, rather than provide an immediate financial benefit. Accordingly the revenue increase in 1997 was insufficient to offset these increases in general and administrative expenses, resulting in the slight increase in these expenses as a percentage of net operating revenues. Provision for doubtful accounts. The provision for doubtful accounts increased $13,162,000 to $28,899,000 in 1997 from $15,737,000 in 1996. As a percentage of net operating revenues, the provision for doubtful accounts increased to 3.8% in 1997 from 3.2% in 1996, largely as a result of additional provisions taken in 1997 related to accounts receivable associated with acquired businesses that were not as collectible as previously estimated as discussed above. Depreciation and amortization. Depreciation and amortization increased $22,056,000 to $54,479,000 in 1997 from $32,423,000 in 1996, and as a percentage of net operating revenues, depreciation and amortization increased to 7.2% in 1997 from 6.5% in 1996. This increase was attributable to increased amortization due to acquisition activity and increased depreciation from new center leaseholds and routine capital expenditures. Merger expenses. Merger expenses include investment banking, legal, accounting and other fees and expenses associated with acquisitions accounted for as poolings of interests. There were no merger expenses in 1997, as compared to $2,808,000 in 1996. In 1996, merger expenses were incurred as a result of the mergers accounted for under the pooling-of-interests method of accounting that RTC completed during 1996. Operating income. Operating income increased $43,019,000 to $110,719,000 in 1997 from $67,700,000 in 1996, and as a percentage of net operating revenues, operating income increased to 14.6% in 1997 from 13.6% in 1996. This increase in operating income as a percentage of net operating revenues reflected a decrease in facility operating costs offset by increases in general and administrative expenses, the provision for doubtful accounts and depreciation and amortization. Interest expense. Interest expense increased $14,797,000 to $28,214,000 in 1997 from $13,417,000 in 1996, and as a percentage of net operating revenues, interest expense was 3.7% in 1997 and 2.7% in 1996. The increase in interest expense primarily was due to an increase in borrowings made under our credit facilities to fund acquisitions that occurred during 1997 and were accounted for under the purchase method of accounting. Interest income. Interest income decreased $683,000 to $3,175,000 in 1997 from $3,858,000 in 1996. This decrease was due to the timing of cash receipts and additional borrowings and the use of those funds for acquisitions. As a percentage of net operating revenues, interest income decreased to 0.4% from 0.8% in 1996. Provision for income taxes. Provision for income taxes increased $13,623,000 to $35,654,000 in 1997 from $22,031,000 in 1996, and the effective income tax rate after minority interests increased to 41.6% in 1997 from 37.9% in 1996. The overall increase in the effective tax rate primarily reflected non- deductible goodwill associated with stock acquired, and to foreign net operating losses, for which no benefit was recognized during 1997, from businesses in Argentina. 12 Minority interests. Minority interests increased $924,000 to $4,502,000 in 1997 from $3,578,000 in 1996, and as a percentage of net operating revenues, minority interest decreased to 0.6% in 1997 from 0.7% in 1996. This decrease in minority interest as a percentage of net operating revenues was a result of a relative proportionate decrease in the formation of partnership affiliates and subsidiaries as a percentage of total new acquisitions. Liquidity and capital resources Sources and uses of cash 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 $956,000 for the year ended December 31, 1998 and $31.9 million for the year ended December 31, 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, the provision for doubtful accounts, cumulative change in accounting principle, and extraordinary loss, and adjusted by changes in components of working capital, primarily accounts receivable, and accrued merger and related expenses in 1998. Accounts receivable, before allowance for doubtful accounts, increased during 1998 by $200.3 million, of which approximately $140.6 million was due to the increase in our revenues, $23.7 million was due to a build up of accounts receivable with governmental payors which occurs while these payors process a change of ownership for facilities newly acquired by us, a process that typically can take from three to twelve months, approximately $11.0 million was due to a payment suspension imposed on our Florida-based laboratory by its Medicare carrier, and approximately $9.2 million was due to the change in patient mix toward commercial insurance from Medicare because of the changes in Medicare secondary payor extension, resulting in a longer period for receiving reimbursement because commercial insurance carriers generally process claims less quickly than Medicare. The remaining $15.8 million was due to unresolved collections on accounts primarily attributable to third party private payors. Additionally, the allowance for doubtful accounts increased by $31.2 million, including $11.5 million related to RTC receivables deemed uncollectible at year end. We have recorded no allowances as a result of the payment suspension imposed on our Florida-based laboratory because we believe that we will ultimately collect these amounts. Until it is resolved, the payment suspension will negatively impact our cash flows from operations and may require us to borrow additional amounts to fund our working capital needs, depending on our other cash flows. Net cash used in investing activities was $469.4 million in 1998 and $530.8 million in 1997. Our principal uses of cash in investing activities have been related to acquisitions, purchases of new equipment and leasehold improvements for our facilities, as well as the development of new facilities. Net cash provided by financing activities was $503.2 million for 1998 and $484.3 million in 1997 primarily consisting of borrowings from our credit facilities and the proceeds from our 7% convertible subordinated notes offering. As of December 31, 1998, we had working capital of $388.1 million, including cash of $41.5 million. We believe that we will have sufficient liquidity to fund our debt service obligations and our growth strategy over the next 12 months. Expansion Our strategy is to continue to expand our operations both through the development of de novo facilities and through acquisitions. The development of a typical facility generally requires $1.0 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 9th to 18th month of operation. However, the period of time for a de novo facility to break even depends 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 1998, we developed 27 new facilities, three of which we manage, and we expect to develop approximately 40 additional new facilities in 1999. We anticipate that our aggregate capital requirements for purchases of equipment and leasehold improvements for facilities, including de novo facilities, will be approximately $75.0 to $100.0 million for 1999. 13 During 1998, we paid cash of approximately $338.2 million for a pharmacy, minority interests in certain of our partnerships and 76 facilities. The operations of six of these facilities were not included in our consolidated financial statements until January 1, 1999. Since December 31, 1998, we have acquired 17 additional facilities for approximately $44.6 million. 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 $950.0 million revolving senior credit facility maturing on March 31, 2005 and a ten-year $400.0 million senior term facility maturing on March 31, 2008. As of December 31, 1998 the outstanding principal amount under the revolving facility was $353.6 million and under the term facility was $396.0 million. The term facility requires annual principal payments of $4.0 million, with the $360.0 million balance due on maturity. Therefore, we had $596.4 million available for borrowing under the revolving facility. 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 impose limitations on our ability to make capital expenditures, to incur other indebtedness and to pay dividends. As of December 31, 1998, we were in compliance with all such covenants. Interest rate swaps 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 holder's 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 6.90%. Subordinated notes The $125.0 million outstanding 5 5/8% convertible subordinated notes due 2006 issued by RTC bear interest at the rate of 5 5/8%, payable semi-annually and require no principal payments until 2006. The 5 5/8% 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. In November we issued 7% convertible subordinated notes due 2009 in the aggregate principal amount of $345.0 million. The 7% notes are 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 16, 2001. We used the net proceeds from the sale of the 7% notes to pay down debt under the revolving facility, which may be reborrowed. 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, or 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 complete conversion to this Y2K compliant version by the end of the third quarter of 1999. Operating systems. We are also reviewing our operating systems to assess possible Y2K exposure. We use several different network operating systems, or 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, or 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 Y2K 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 have contacted or 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 warranties, 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 effect which these difficulties would have on our operations. 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 15 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 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 currently are not 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 Item 8. Financial Statements and Supplementary Data. See the Index included at "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K." 17 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)Documents filed as part of this Report: (1) Index to Financial Statements:
Page Report of Independent Accountants F-1 Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998 F-2 Consolidated Statements of Income for the years ended December 31, 1996, December 31, 1997 and December 31, 1998 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, December 31, 1997 and December 31, 1998 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31, 1997 and December 31, 1998 F-5 Notes to Consolidated Financial Statements F-6 (2) Index to Financial Statement Schedules: Report of Independent Accountants on Financial Statement Schedule S-1 Schedule II--Valuation and Qualifying Accounts S-2
(3)(a) Exhibits: 3.1 Amended and Restated Certificate of Incorporation of TRCH, dated December 4, 1995.(1) 3.2 Certificate of Amendment of Certificate of Incorporation of TRCH, dated February 26, 1998.(2) 3.3 Bylaws of TRCH, dated October 6, 1995.(3) 4.1 Shareholders Agreement, dated August 11, 1994, between DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties, Continental Bank, as voting trustee, and TRCH.(4) 4.2 Agreement and Amendment, dated as of June 30, 1995, between DLJMBP, DLJIP, DLJOP, DLJMBF, DLJESC, Tenet, TRCH, Victor M.G. Chaltiel, the Putnam Purchasers, the Crescent Purchasers and the Harvard Purchasers, relating to the Shareholders Agreement dated as of August 11, 1994 between DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties, Continental Bank, as voting trustee, and TRCH.(4) 4.3 Indenture, dated June 12, 1996 by RTC to PNC Bank including form of RTC Note.(12) 4.4 First Supplemental Indenture, dated as of February 27, 1998, among RTC, TRCH and PNC Bank under the 1996 indenture.(2) 4.5 Second Supplemental Indenture, dated as of March 31, 1998, among RTC, TRCH and PNC Bank under the 1996 indenture.(2) 4.6 Indenture, dated as of November 18, 1998, between TRCH and United States Trust Company of New York, as trustee, and Form of Note.(5) 4.7 Registration Rights Agreement, dated as of November 18, 1998, between TRCH and DLJ, BNY Capital Markets, Inc., Credit Suisse First Boston Corporation and Warburg Dillon Read LLC, as the initial purchasers.(5) 4.8 Purchase Agreement, dated as of November 12, 1998, between TRCH and the initial purchasers.(5) Noncompetition Agreement, dated August 11, 1994, between TRCH and 10.1 Tenet.(4) 10.2 Employment Agreement, dated as of August 11, 1994, by and between TRCH and Victor M.G. Chaltiel (with forms of Promissory Note and Pledge and Stock Subscription Agreement attached as exhibits thereto).(4)*
18 10.3 Amendment to Mr. Chaltiel's employment agreement, dated as of August 11, 1994.(4)* 10.4 Second Amendment to Mr. Chaltiel's employment agreement, dated as of March 2, 1998.*(13) 10.5 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Barry C. Cosgrove.(6)* 10.6 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Leonard W. Frie.(6)* 10.7 Employment Agreement, dated as of March 2, 1998, by and between TRCH and John E. King.(6)* 10.8 Employment Agreement dated as of March 2, 1998, by and between TRCH and Stan M. Lindenfeld.(6)* 10.9 Amendment to Dr. Lindenfeld's employment agreement, dated September 1, 1998.*(13) 10.10 First Amended and Restated 1994 Equity Compensation Plan of TRCH (with form of Promissory Note and Pledge attached as an exhibit thereto), dated August 5, 1994.(4)* 10.11 Form of Stock Subscription Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.12 Form of Purchased Shares Award Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.13 Form of Nonqualified Stock Option relating to the 1994 Equity Compensation Plan.(4)* 10.14 1995 Equity Compensation Plan.(3)* 10.15 Employee Stock Purchase Plan.(3)* 10.16 Option Exercise and Bonus Agreement, dated as of September 18, 1995 between TRCH and Victor M.G. Chaltiel.(3)* 10.17 1997 Equity Compensation Plan.(7) 10.18 Amended and Restated Revolving Credit Agreement, dated as of April 30, 1998, by and among TRCH, the lenders party thereto, DLJ Capital Funding, Inc., as Syndication Agent, First Union National Bank, as Documentation Agent, and The Bank of New York, as Administrative Agent.(8) 10.19 Amendment No. 1 and Consent No. 1, dated as of August 5, 1998, to the Revolving Credit Agreement.(13) 10.20 Amendment No. 2, dated as of November 12, 1998, to the Revolving Credit Agreement.(13) 10.21 Amended and Restated Term Loan Agreement, dated as of April 30, 1998, by and among TRCH, the lenders party thereto, DLJ Capital Funding, Inc., as Syndication Agent, First Union National Bank, as Documentation Agent, and The Bank of New York, as Administrative Agent.(8) 10.22 Subsidiary Guaranty dated as of October 24, 1997 by Total Renal Care, Inc., TRC West, Inc. and Total Renal Care Acquisition Corp. in favor of and for the benefit of The Bank of New York, as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as defined therein) and the Acknowledging Currency Exchangers (as defined therein).(9) 10.23 Borrower Pledge Agreement dated as of October 24, 1997 and entered into by and between the Company, and The Bank of New York, as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as defined therein) and the Acknowledging Currency Exchangers (as defined therein).(9) 10.24 Amendment to Borrower Pledge Agreement, dated February 27, 1998, executed by TRCH in favor of The Bank of New York, as Collateral Agent.(13) 10.25 Form of Subsidiary Pledge Agreement dated as of October 24, 1997 by Total Renal Care, Inc., TRC West, Inc. and Total Renal Care Acquisition Corp., and The Bank of New York, as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as defined therein) and the Acknowledging Currency Exchangers (as defined therein).(9) 10.26 Subsidiary Pledge Agreement, dated as of February 27, 1998, by RTC and The Bank of New York, as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as defined therein) and the Acknowledging Currency Exchangers (as defined therein).(13)
19 10.27 Form of First Amendment to Borrower/Subsidiary Pledge Agreement, dated April 30, 1998, by and among TRCH, RTC, TRC and The Bank of New York, as Collateral Agent.(8) 10.28 Form of Acknowledgement and Confirmation, dated April 30, 1998, by TRCH, RTC, TRC West, Inc., Total Renal Care, Inc., Total Renal Care Acquisition Corp., Renal Treatment Centers--Mid-Atlantic, Inc., Renal Treatment Centers--Northeast, Inc., Renal Treatment Centers-- California, Inc., Renal Treatment Centers--West, Inc., and Renal Treatment Centers--Southeast, Inc. for the benefit of The Bank of New York, as Collateral Agent and the lenders party to the Term Loan Agreement or the Revolving Credit Agreement.(8) 10.29 Agreement and Plan of Merger dated as of November 18, 1997 by and among TRCH, Nevada Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of TRCH, and RTC.(10) 10.30 First Amendment to the Subsidiary Guaranty dated February 17, 1998.(2) 10.31 Special Purpose Option Plan.(11) 10.32 Guaranty, entered into as of March 31, 1998, by TRCH in favor of and for the benefit of PNC Bank.(2) 10.33 First Amendment, dated as of August 5, 1998, to the Term Loan Agreement.(14) 12.1 Statement re Computation of Ratios of Earnings to Fixed Charges.X 21.1 List of our subsidiaries.(13) 23.1 Consent of PricewaterhouseCoopers LLP.X 24.1 Powers of Attorney with respect to TRCH (included on page II-1).X 27.1 Financial Data Schedule--year ended December 31, 1998, the year ended December 31, 1997 and the year ended December 31, 1996.X 27.2 Financial Data Schedule--three months ended March 31, 1997, the three months ended June 30, 1997, the three months ended September 30, 1997, the six months ended June 30, 1997 and the nine months ended September 30, 1997.X
- -------- X Included in this filing. * Management contract or executive compensation plan or arrangement. (1) Filed on March 18, 1996 as an exhibit to our Transitional Report on Form 10-K for the transition period from June 1, 1995 to December 31, 1995. (2) Filed on March 31, 1998 as an exhibit to our Form 10-K for the year ended December 31, 1997. (3) Filed on October 24, 1995 as an exhibit to Amendment No. 2 to our Registration Statement on Form S-1 (Registration Statement No. 33-97618). (4) Filed on August 29, 1995 as an exhibit to our Form 10-K for the year ended May 31, 1995. (5) Filed on December 18, 1998 as an exhibit to our Registration Statement on Form S-3 (Registration Statement No. 333-69227). (6) Filed as an exhibit to our Form 10-Q for the quarter ended September 30, 1998. (7) Filed on August 29, 1997 as an exhibit to our Registration Statement on Form S-8 (Registration Statement No. 333-34695). (8) Filed on May 18, 1998 as an exhibit to Amendment No. 1 to our annual report for the year ended December 31, 1997 on Form 10-K/A. (9) Filed on December 19, 1997 as an exhibit to our Current Report on Form 8- K. (10) Filed on December 19, 1997 as Annex A to our Registration Statement on Form S-4 (Registration Statement No. 333-42653). (11) Filed on February 25, 1998 as an exhibit to our Registration Statement on Form S-8 (Registration Statement No. 333-46887). (12) Filed as an exhibit to RTC's Form 10-Q for the quarter ended June 30, 1996. (13) Filed on March 31, 1999 as an exhibit to our Form 10-K for the year ended December 31, 1998. (14) Filed on October 8, 1999 as an exhibit to our Form 10-K/A (Amendment No. 1) for the year ended December 31, 1998. 20 (b) Reports on Form 8-K: Current Report on Form 8-K, dated November 3, 1998, reporting under Item 5 the issuance of our press releases in connection with the release of our third quarter earnings and the offering of $345 million of our 7% convertible subordinated notes pursuant to Rule 144A. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Total Renal Care Holdings, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Total Renal Care Holdings, Inc. and its subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1A, the accompanying consolidated financial statements as of and for the three years ended December 31, 1998 have been restated. During the first quarter of 2000 the Company determined it would not be in compliance with financial covenants in its primary credit facilities when measured as of December 31, 1999 and the potential effects are discussed in Note 1A to the consolidated financial statements. PricewaterhouseCoopers LLP Seattle, Washington March 29, 1999, except for Note 1A which is as of January 18, 2000 F-1 TOTAL RENAL CARE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS--AS RESTATED
December 31, December 31, 1997 1998 Assets Cash and cash equivalents...................... $ 6,700,000 $ 41,487,000 Patient accounts receivable, less allowance for doubtful accounts of $30,695,000 and $61,848,000, respectively..................... 248,408,000 416,472,000 Receivable from Tenet.......................... 534,000 350,000 Inventories.................................... 15,766,000 23,470,000 Deferred income taxes.......................... 15,340,000 39,014,000 Prepaid expenses and other current assets...... 21,500,000 45,721,000 -------------- -------------- Total current assets....................... 308,248,000 566,514,000 Property and equipment, net.................... 172,838,000 233,337,000 Notes receivable............................... 14,104,000 29,257,000 Deferred taxes, noncurrent..................... 385,000 Other long-term assets......................... 14,417,000 9,011,000 Intangible assets, net......................... 769,269,000 1,073,500,000 -------------- -------------- $1,279,261,000 $1,911,619,000 ============== ============== Liabilities and Stockholders' Equity Accounts payable............................... $ 33,283,000 $ 45,710,000 Employee compensation and benefits............. 25,430,000 34,778,000 Other accrued liabilities...................... 15,927,000 69,432,000 Current portion of long-term obligations....... 27,810,000 21,847,000 Income taxes payable........................... 6,683,000 -------------- -------------- Total current liabilities.................. 102,450,000 178,450,000 -------------- -------------- Long-term debt................................. 731,192,000 1,225,781,000 -------------- -------------- Deferred income taxes.......................... 2,500,000 8,212,000 -------------- -------------- Other long-term liabilities.................... 1,594,000 1,890,000 -------------- -------------- Minority interests............................. 19,079,000 23,422,000 -------------- -------------- Commitments and contingencies (Notes 8, 9 and 13) Stockholders' equity Preferred stock ($0.001 par value; 5,000,000 shares authorized; none outstanding)........ Common stock ($0.001 par value, 195,000,000 shares authorized; 77,991,595 and 81,029,560 shares issued and outstanding).............. 78,000 81,000 Additional paid-in capital................... 363,486,000 421,675,000 Notes receivable from stockholders........... (3,030,000) (356,000) Retained earnings............................ 61,912,000 52,464,000 -------------- -------------- Total stockholders' equity................. 422,446,000 473,864,000 -------------- -------------- $1,279,261,000 $1,911,619,000 ============== ==============
See accompanying notes to consolidated financial statements. F-2 TOTAL RENAL CARE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME--AS RESTATED
Year ended December 31, ------------------------------------------ 1996 1997 1998 Net operating revenues............. $496,651,000 $758,403,000 $1,203,738,000 Operating expenses Facilities........................ 345,537,000 514,372,000 779,740,000 General and administrative........ 32,446,000 49,934,000 75,686,000 Provision for doubtful accounts... 15,737,000 28,899,000 44,858,000 Depreciation and amortization..... 32,423,000 54,479,000 91,729,000 Merger and related costs.......... 2,808,000 78,188,000 ------------ ------------ -------------- Total operating expenses........ 428,951,000 647,684,000 1,070,201,000 ------------ ------------ -------------- Operating income................... 67,700,000 110,719,000 133,537,000 Interest expense, net of capitalized interest.............. (13,417,000) (28,214,000) (72,804,000) Interest rate swap-early termination costs................. (9,823,000) Interest income.................... 3,858,000 3,175,000 4,894,000 ------------ ------------ -------------- Income before income taxes, minority interests, extraordinary item and cumulative effect of change in accounting principle............. 58,141,000 85,680,000 55,804,000 Income taxes....................... 22,031,000 35,654,000 38,449,000 ------------ ------------ -------------- Income before minority interests, extraordinary item and cumulative effect of change in accounting principle............. 36,110,000 50,026,000 17,355,000 Minority interests in income of consolidated subsidiaries......... 3,578,000 4,502,000 7,163,000 ------------ ------------ -------------- Income before extraordinary item and cumulative effect of change in accounting principle.......... 32,532,000 45,524,000 10,192,000 Extraordinary loss related to early extinguishment of debt, net of tax of $4,923,000 and $7,668,000, respectively...................... 7,700,000 12,744,000 Cumulative effect of change in accounting principle, net of tax of $4,300,000..................... 6,896,000 ------------ ------------ -------------- Net income (loss)................. $ 24,832,000 $ 45,524,000 $ (9,448,000) ============ ============ ============== Earnings (loss) per common share: Income before extraordinary item and cumulative effect of change in accounting principle.......... $ 0.43 $ 0.59 $ 0.12 Extraordinary loss, net of tax.... (0.10) (0.16) Cumulative effect of change in accounting principle, net of tax.............................. (0.08) ------------ ------------ -------------- Net income (loss)................. $ 0.33 $ 0.59 $ (0.12) ============ ============ ============== Weighted average number of common shares outstanding................ 74,042,000 77,524,000 80,143,000 ============ ============ ============== Earnings (loss) per common share-- assuming dilution: Income before extraordinary item and cumulative effect of change in accounting principle.......... $ 0.42 $ 0.57 $ 0.12 Extraordinary loss, net of tax.... (0.10) (0.16) Cumulative effect of change in accounting principle, net of tax.............................. (0.08) ------------ ------------ -------------- Net income (loss)................. $ 0.32 $ 0.57 $ (0.12) ============ ============ ============== Weighted average number of common shares and equivalents outstanding--assuming dilution.... 77,225,000 79,975,000 81,701,000 ============ ============ ==============
See accompanying notes to consolidated financial statements. F-3 TOTAL RENAL CARE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--AS RESTATED
Notes Common Stock Additional Receivable Retained ------------------ Paid-In from Earnings Shares Amount Capital Stockholders (Deficit) Total Balance at December 31, 1995................... 66,780,615 $67,000 $206,750,000 $(2,773,000) $(10,882,000) $193,162,000 Net proceeds from stock offerings.............. 6,666,667 7,000 128,311,000 128,318,000 Shares issued in acquisitions........... 161,095 2,810,000 2,810,000 Shares issued in connection with mergers................ 2,422,534 2,000 105,000 3,097,000 3,204,000 Shares issued to employees and others... 1,883 15,000 15,000 Shares issued to repay debt................... 190,109 1,474,000 1,474,000 Options exercised....... 463,461 1,000 3,183,000 3,184,000 Interest accrued on notes receivable, net of payments............ (54,000) (54,000) Income tax benefit related to stock options exercised...... 938,000 938,000 Dividend distribution... (659,000) (659,000) Stock option expense.... 1,453,000 1,453,000 Net income.............. 24,832,000 24,832,000 ---------- ------- ------------ ----------- ------------ ------------ Balance at December 31, 1996................... 76,686,364 77,000 345,039,000 (2,827,000) 16,388,000 358,677,000 Shares issued in acquisitions........... 17,613 273,000 273,000 Shares issued to employees and others... 174,775 1,773,000 1,773,000 Options exercised....... 447,456 2,019,000 2,019,000 Shares issued to repay debt................... 664,580 1,000 5,147,000 5,148,000 Interest accrued on notes receivable, net of payments............ (203,000) (203,000) Income tax benefit related to stock options exercised...... 5,453,000 5,453,000 Grant of stock options.. 235,000 235,000 Issuance of treasury stock to repay debt.... 807 6,000 6,000 Stock option expense.... 3,541,000 3,541,000 Net income.............. 45,524,000 45,524,000 ---------- ------- ------------ ----------- ------------ ------------ Balance at December 31, 1997................... 77,991,595 78,000 363,486,000 (3,030,000) 61,912,000 422,446,000 Shares issued in acquisitions........... 98,549 2,796,000 2,796,000 Shares issued to employees and others... 49,060 1,085,000 1,085,000 Options exercised....... 2,890,356 3,000 36,396,000 36,399,000 Repayment of notes receivable, net of interest accrued....... 2,674,000 2,674,000 Income tax benefit related to stock options exercised...... 14,199,000 14,199,000 Grant of stock options.. 128,000 128,000 Stock option expense.... 3,585,000 3,585,000 Net loss................ (9,448,000) (9,448,000) ---------- ------- ------------ ----------- ------------ ------------ Balance at December 31, 1998................... 81,029,560 $81,000 $421,675,000 $ (356,000) $ 52,464,000 $473,864,000 ========== ======= ============ =========== ============ ============
See accompanying notes to consolidated financial statements. F-4 TOTAL RENAL CARE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--AS RESTATED
Year ended December 31, --------------------------------------------- 1996 1997 1998 Cash flows from operating activities Net income (loss).............. $ 24,832,000 $ 45,524,000 $ (9,448,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................. 32,423,000 54,479,000 91,729,000 Extraordinary loss............ 12,623,000 20,412,000 Cumulative change in accounting principle......... 11,196,000 Non-cash interest............. 4,396,000 Deferred income taxes......... (2,187,000) (9,689,000) (17,577,000) Compensation expense from stock option exercise........ 16,000,000 Income tax benefit related to stock options exercised...... 938,000 5,453,000 14,199,000 Provision for doubtful accounts..................... 15,737,000 28,899,000 44,858,000 Loss (gain) on disposition of property and equipment....... (20,000) 76,000 192,000 Equity in losses (earnings) from affiliate............... 16,000 (40,000) (157,000) Minority interests in income of consolidated subsidiaries................. 3,578,000 4,502,000 7,163,000 Stock option expense.......... 1,453,000 3,541,000 3,713,000 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable........... (52,909,000) (109,811,000) (200,251,000) Inventories................... (3,030,000) (1,843,000) (7,152,000) Prepaid expenses and other current assets............... (8,784,000) (143,000) (30,104,000) Other long-term assets........ (9,166,000) 7,652,000 Accounts payable.............. 2,147,000 (992,000) (261,000) Employee compensation and benefits..................... 6,043,000 8,539,000 8,933,000 Other accrued liabilities..... (207,000) 2,791,000 36,580,000 Income taxes payable.......... (6,315,000) 2,329,000 11,004,000 Other long-term liabilities... (222,000) 7,423,000 (7,725,000) ------------- ------------- --------------- Net cash provided by operating activities........ 30,512,000 31,872,000 956,000 ------------- ------------- --------------- Cash flows from investing activities Purchases of property and equipment................. (41,740,000) (62,033,000) (83,012,000) Additions to intangible assets........................ (9,423,000) (39,807,000) (32,186,000) Cash paid for acquisitions, net of cash acquired.............. (179,002,000) (455,090,000) (338,164,000) Purchase of investments........ (55,311,000) Sale of investments............ 14,109,000 41,202,000 Investment in affiliate, net... (46,000) (2,935,000) (1,187,000) Issuance of long-term notes receivable.................... (540,000) (12,502,000) (14,836,000) Proceeds from disposition of property and equipment........ 236,000 365,000 ------------- ------------- --------------- Net cash used in investing activities.................. (271,717,000) (530,800,000) (469,385,000) ------------- ------------- --------------- Cash flows from financing activities Proceeds from long-term borrowings.................... 107,000 4,511,000 3,395,000 Principal payments on long-term obligations................... (8,649,000) (26,269,000) (35,675,000) Proceeds from convertible notes......................... 121,250,000 345,000,000 Dividend distribution.......... (659,000) Cash paid to retire bonds...... (68,499,000) Proceeds from bank credit facility...................... 239,835,000 505,000,000 1,567,225,000 Payment of bank credit facility...................... (188,510,000) (1,407,650,000) Net proceeds from issuance of common stock.................. 131,517,000 3,792,000 21,483,000 Bank overdrafts................ 10,392,000 Cash received on notes receivable from stockholders.. 170,000 35,000 2,674,000 Distributions to minority interests..................... (2,442,000) (2,768,000) (3,628,000) ------------- ------------- --------------- Net cash provided by financing activities........ 224,120,000 484,301,000 503,216,000 ------------- ------------- --------------- Net (decrease) increase in cash........................... (17,085,000) (14,627,000) 34,787,000 Cash and cash equivalents at beginning of year.............. 38,412,000 21,327,000 6,700,000 ------------- ------------- --------------- Cash and cash equivalents at end of year........................ $ 21,327,000 $ 6,700,000 $ 41,487,000 ============= ============= ===============
Supplemental cash flow information (Note 15) See accompanying notes to consolidated financial statements F-5 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1A. Restatement of previously reported financial statements and subsequent event. Restatement Our financial statements have been restated for the three years ended December 31, 1996, 1997 and 1998 as summarized below. The restated financial statements supersede our financial statements included in Form 10-K/A (Amendment No. 1) previously reported. Decreases to income before taxes
Year ended December 31, --------------------------------- 1996 1997 1998 ---------- ----------- ---------- To reflect goodwill adjustments associated with acquisition transactions............... $1,351,000 $10,520,000 $ 896,000 To recognize a calculated fair value of stock options granted to medical directors and contract labor.............................. 1,453,000 3,541,000 3,585,000 To reflect accounts payable accruals in the quarters the liabilities were subsequently determined to have been incurred............ 3,800,000 ---------- ----------- ---------- Decrease to income before taxes............ $2,804,000 $14,061,000 $8,281,000 ========== =========== ==========
A reconciliation of the amounts previously reported for the three years ended December 31, 1996, 1997 and 1998 to the amounts presented in the restated consolidated financial statements is as follows:
1996 1997 1998 --------------------------------- ---------------------------------- ----------------------------------- As previously As As previously As As previously As reported Adjustment restated reported Adjustment restated reported Adjustment restated ------------- ---------- -------- ------------- ---------- --------- ------------- ---------- ---------- (in thousands, except per share) Net operating revenues.......... $498,024 $(1,373) $496,651 $760,997 $(2,594) $758,403 $1,204,894 $(1,156) $1,203,738 Operating expenses Facilities........ 344,180 1,357 345,537 510,990 3,382 514,372 772,666 7,074 779,740 General and administrative... 32,350 96 32,446 50,099 (165) 49,934 75,829 (143) 75,686 Provision for doubtful accounts......... 15,737 15,737 20,525 8,374 28,899 44,365 493 44,858 Depreciation and amortization..... 32,445 (22) 32,423 54,603 (124) 54,479 92,028 (299) 91,729 Merger and related costs.... 2,808 2,808 78,188 78,188 Total operating expenses....... 427,520 1,431 428,951 636,217 11,467 647,684 1,063,076 7,125 1,070,201 Operating income... 70,504 (2,804) 67,700 124,780 (14,061) 110,719 141,818 (8,281) 133,537 Income before extraordinary item and cumulative effect of change in accounting principle......... 34,407 (1,875) 32,532 55,027 (9,503) 45,524 15,342 (5,150) 10,192 Net income (loss).. . 26,707 (1,875) 24,832 55,027 (9,503) 45,524 (4,298) (5,150) (9,448) Income (loss) per common share: Income before extraordinary item and cumulative effect of change in accounting principle........ 0.46 (0.03) 0.43 0.71 (0.12) 0.59 0.19 (0.07) 0.12 Extraordinary loss........... . (0.10) (0.10) (0.16) (0.16) Cumulative effect of change in accounting principle........ (0.08) (0.08) Net income (loss) per share........ 0.36 (0.03) 0.33 0.71 (0.12) 0.59 (0.05) (0.07) (0.12) Income (loss) per common share-- assuming dilution: Income before extraordinary item and cumulative effect of change in accounting principle........ 0.45 (0.03) 0.42 0.69 (0.12) 0.57 0.19 (0.07) 0.12 Extraordinary loss........... . (0.10) (0.10) (0.16) (0.16) Cumulative effect of change in accounting principle........ (0.08) (0.08) Net income (loss) per share........ 0.35 (0.03) 0.32 0.69 (0.12) 0.57 (0.05) (0.07) (0.12)
F-6 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 1998 ------------------------------------ ------------------------------------ As previously As previously reported Adjustment As restated reported Adjustment As restated ------------- ---------- ----------- ------------- ---------- ----------- (in thousands) Current assets.......... $ 302,204 $ 6,044 $ 308,248 $ 559,542 $ 6,972 $ 566,514 Long term assets........ 976,031 (5,018) 971,013 1,356,039 (10,934) 1,345,105 Total assets............ 1,278,235 1,026 1,279,261 1,915,581 (3,962) 1,911,619 Current liabilities..... 102,450 102,450 174,464 3,986 178,450 Long term liabilities, other.................. 746,955 7,410 754,365 1,259,305 1,259,305 Stockholders' equity.... 428,830 (6,384) 422,446 481,812 (7,948) 473,864 Liabilities and stockholders' equity... 1,278,235 1,026 1,279,261 1,915,581 (3,962) 1,911,619
Subsequent event Our credit facilities contain numerous financial and operating covenants. Throughout 1999 we either complied with these covenants or obtained waivers and continued to utilize these credit facilities. Based on our expectations developed as of the date of this filing regarding our fourth quarter 1999 financial results, we anticipate not being in compliance with the covenants in our credit facilities when measured as of December 31, 1999. Our anticipated inability to maintain compliance results from an expected loss for the fourth quarter of 1999, primarily due to asset impairments and valuation losses. These fourth quarter asset impairments and valuation losses include: an impairment loss for non-continental United States operations held for sale as of December 31, 1999, provision for uncollectible accounts receivable based on current collection experience, and other asset impairments and valuation losses associated with facility closures and other facility related assessments. If our lenders do not waive this failure to comply, a majority of the lenders could declare an event of default, which would allow the lenders to accelerate payment of all amounts due under our credit facilities. Additionally, this noncompliance will result in higher interest costs, and the lenders may require additional concessions from us before giving us a waiver. In the event of default under the credit facilities, the holders of our convertible subordinated notes could also declare us to be in default. We are highly leveraged, and we would be unable to pay the accelerated amounts that would become immediately payable if a default is declared. 1. Organization and summary of significant accounting policies Organization We operate kidney dialysis facilities and provide related medical services in Medicare certified dialysis facilities in various geographic sectors of the United States and also in Argentina, Puerto Rico, Europe and Guam. On February 27, 1998 we acquired Renal Treatment Centers, Inc., or RTC, with headquarters in Berwyn, Pennsylvania in a merger. In connection with the merger, we issued 34,565,729 shares of our common stock in exchange for all of the outstanding shares of RTC common stock. RTC stockholders received 1.335 shares of our common stock for each share of RTC common stock that they owned. We also issued 2,156,424 options in substitution for previously outstanding RTC stock options, including 1,662,354 of the vested options that were exercised on the merger date or shortly thereafter. In addition, we guaranteed $125,000,000 of RTC's 5 5/8% subordinated convertible notes. In conjunction with this transaction, our board of directors and our stockholders authorized an additional 140,000,000 shares of common stock. The RTC merger transaction was accounted for as a pooling of interests and as such, these consolidated financial statements have been restated to include RTC for all periods presented. There were no transactions between RTC and us prior to the combination and no adjustments were necessary to conform RTC's accounting policies to ours. Certain reclassifications also were made to the RTC financial statements to conform to our presentations. F-7 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The results of operations for Total Renal Care Holdings, Inc., or TRCH, and the combined amounts presented in the consolidated financial statements as restated are as follow:
Years ended December 31, ------------------------- 1996 1997 Net operating revenues TRCH.......................................... $271,574,000 $435,611,000 RTC........................................... 225,077,000 322,792,000 ------------ ------------ $496,651,000 $758,403,000 ============ ============ Net income before extraordinary item TRCH.......................................... $ 21,850,000 $ 28,517,000 RTC........................................... 10,682,000 17,007,000 ------------ ------------ $ 32,532,000 $ 45,524,000 ============ ============ Net income after extraordinary item TRCH.......................................... $ 14,150,000 $ 28,517,000 RTC........................................... 10,682,000 17,007,000 ------------ ------------ $ 24,832,000 $ 45,524,000 ============ ============
As a result of the merger, RTC's revolving credit agreement was terminated and the outstanding balance of approximately $297,228,000 was paid off through additional borrowings under our credit facilities. The remaining net unamortized deferred financing costs in the amount of $4,392,000, less tax of $1,580,000, related to RTC's revolving credit agreement were recognized as an extraordinary loss during 1998. In connection with the merger, we developed a plan which included initiatives to integrate our operations with those of RTC, eliminate duplicative overhead, facilities and systems and improve service delivery. These integration activities were commenced during the first quarter of 1998 and are expected to be substantially completed by approximately July 1, 1999. Merger and related costs recorded during the first quarter of 1998 include costs associated with certain of the integration activities, transaction costs and costs of employee severance and amounts due under employment agreements and other compensation programs. These amounts are more fully described below and are based on our estimates of those costs. A summary of merger and related costs and accrual activity through December 31, 1998 is as follows:
Severance Direct and Costs to Transaction Employment Integrate Costs Costs Operations Total Initial expense......... $21,580,000 $ 41,960,000 $15,895,000 $ 79,435,000 Amounts utilized--1st quarter 1998........... (7,771,000) (35,304,000) (9,474,000) (52,549,000) ----------- ------------ ----------- ------------ Accrual, March 31, 1998 (unaudited)............ 13,809,000 6,656,000 6,421,000 26,886,000 Amounts utilized--2nd quarter 1998........... (5,109,000) (1,096,000) (2,427,000) (8,632,000) ----------- ------------ ----------- ------------ Accrual, June 30, 1998 (unaudited)............ 8,700,000 5,560,000 3,994,000 18,254,000 Amounts utilized--3rd quarter 1998........... (837,000) (458,000) (1,048,000) (2,343,000) ----------- ------------ ----------- ------------ Accrual, September 30, 1998 (unaudited)....... 7,863,000 5,102,000 2,946,000 15,911,000 Adjustment of estimates.............. 1,305,000 (959,000) (1,593,000) (1,247,000) Amounts utilized--4th quarter 1998........... (9,168,000) (543,000) (188,000) (9,899,000) ----------- ------------ ----------- ------------ Accrual, December 31, 1998................... $ -- $ 3,600,000 $ 1,165,000 $ 4,765,000 =========== ============ =========== ============
F-8 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Direct transaction costs consist primarily of investment banking fees, legal and accounting costs and other direct transaction costs, including the costs of consultants, printing and registration, which were incurred by both TRCH and RTC in connection with the merger. We concluded negotiations as to certain amounts due in the fourth quarter of 1998 and subsequently we paid these amounts. Severance and employment costs were incurred for the following: . Severance pay--The merger constituted a constructive termination of employment under various preexisting employment contracts with RTC officers. Terminated RTC officers were entitled to severance payments and tax gross-up payments of approximately $6,500,000. In addition, approximately 80 employees of RTC were informed that their positions would be eliminated. Most of these employees were formerly located in RTC's administrative office and a laboratory under development. The terminations were structured over the integration period, which continued through the end of 1998. The accrued severance payments to these employees amounted to approximately $1,600,000. The remaining balance of such severance costs of $600,000 was paid in the first quarter of 1999 and tax gross up payments of approximately $3,000,000 are expected to be paid in 1999. . Option exercises--Pre-existing terms of RTC stock option grants permitted the exercise of options by tender of RTC shares. Some of the RTC shares tendered had been held less than six months by the option holders and, as required by Emerging Issues Task Force Issue 84-18, we recognized a noncash expense of approximately $16,000,000 equal to the difference between the exercise price of the options and the market value of the stock on the date of exercise. We also incurred approximately $600,000 of payroll tax related to the exercise of nonqualified stock options. . Bonuses--RTC and TRCH each awarded special bonuses as a result of the merger, paid in the first quarter of 1998, for which approximately $16,300,000 was included in merger and related costs. In connection with the RTC merger, we developed a plan which included initiatives to integrate the operations of TRCH and RTC, eliminate duplicative overhead, facilities and systems and improve service delivery. These integration activities were commenced during the first quarter of 1998 and are expected to be substantially completed by approximately July 1, 1999. We eliminated the following RTC departments: human resources, managed care, laboratory, and all finance functions, with the exception of patient accounting. The finance functions eliminated included payroll, financial reporting and analysis, budgeting, general ledger, accounts payable, and tax functions. The RTC human resources and managed care departments were discontinued in Berwyn, Pennsylvania and consolidated with our respective departments in our Torrance, California headquarters as of September 30, 1998. All finance functions, with the exception of patient accounting, were consolidated into our Tacoma, Washington business office as of December 31, 1998. RTC's laboratory, located in Las Vegas, Nevada, was closed prior to its commencement of operation. All laboratory functions were consolidated into our laboratories in Minnesota and Florida in February 1998. Costs to integrate operations include the following: . Laboratory restructuring--As part of our merger integration plan, we decided to restructure our laboratories. To optimize post-merger operations, we terminated a long-term management services agreement with a third party that provided full laboratory management on a contract basis. The termination fee of approximately $3,800,000 was negotiated in the first quarter of 1998. We also immediately halted development of RTC's new laboratory, which was not required for post-merger operations. The RTC laboratory, which was being developed in leased space, is now vacant and a new sublessee is being sought. As a result of this decision, previously capitalized leasehold improvements of $2,600,000 were expensed. Additionally, merger and related costs include approximately $1,000,000 of F-9 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) pre-opening start up costs incurred during the first quarter of 1998 relating to the terminated RTC laboratory and $1,500,000 of remaining lease payments. The accrual for lease payments was not offset by any anticipated sublease income. No such income has been received to date and the remaining balance of this accrual at December 31, 1998 was approximately $1,165,000. . Initial merger costs--Approximately $5,400,000 was expensed for integration activities which occurred at the time of the merger. Such costs include a special training program held in March 1998 and attended by many of our employees, including former RTC employees, merger related travel costs, consultant costs and other costs attributed to the merger. During the fourth quarter of 1998 we reduced the remaining balance of the accrual by $1,247,000 representing differences between initial estimates and actual amounts of expenses incurred. The accrued merger and related costs initially reported by us in the first quarter of 1998 amounted to $92,835,000. We have previously revised our financial reporting relating to certain costs initially included in our merger and related costs and accrual as set forth in the following table. The selected quarterly financial data in Note 16 has also been restated to include the following revisions:
Three months ended --------------------------------------------------- Year ended March 31, June 30, September 30, December 31, December 31, 1998 1998 1998 1998 1998 Operating expenses Facilities............ $ 1,700,000 $ 1,700,000 General and administrative....... $1,100,000 $1,100,000 $ 1,100,000 3,300,000 Depreciation and amortization......... 590,000 1,770,000 1,770,000 1,770,000 5,900,000 Merger and related costs................ (13,400,000) (1,247,000) (14,647,000) ------------ ---------- ---------- ----------- ------------ (Decrease) Increase to operating expenses..... $(11,110,000) $2,870,000 $2,870,000 $ 1,623,000 $ (3,747,000) ============ ========== ========== =========== ============
A summary of the primary revisions related to our merger and related costs is as follows: .Reclassification of merger charges into operating expenses: Reclassify inventory writeoff as facility expense............. $1,700,000 Amortize merger bonuses with deferred payout schedule in 1998......................................................... 3,300,000 Amortize remaining book value of incompatible and duplicative software in 1998............................................. 5,900,000 .Reversal of accrued expenses within the merger charges: Reverse accrual of estimated potential tax liability.......... $2,500,000 Reversal of differences between original estimates and actual amounts of the merger expenses incurred...................... 1,247,000 ---------- Total reduction in operating costs.......................... $3,747,000 ==========
Basis of presentation Our consolidated financial statements include our accounts and those of our wholly owned and majority-owned subsidiaries and partnerships. Minority-owned investments are recorded under the equity method of accounting because TRCH owns at least a 20% interest in, and has significant influence over, the investments. For all periods presented the results of operations of our foreign-based entities are included through November 30 to allow time for the accumulation of their financial information for inclusion with the results of operations of our domestic operations. F-10 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In February 1996, RTC acquired, through two separate transactions, Intercontinental Medical Services, Inc., or IMS, and Midwest Dialysis Unit and its affiliates, or MDU. In July 1996, RTC acquired Panama City Artificial Kidney Center, Inc. and North Florida Artificial Kidney Center, Inc., or the Kidney Center Group. Accordingly, the consolidated financial statements have been prepared to give retroactive effect to these mergers. Each of the transactions was separately accounted for as a pooling-of-interests. The consolidated financial statements include the results of IMS, MDU and the Kidney Center Group as of January 1, 1996. Net operating revenues Revenues are recognized when services and related products are provided to patients in need of ongoing life sustaining kidney dialysis treatments. Operating revenues consist primarily of dialysis and ancillary fees from patient treatments. We maintain a usual and customary fee schedule for our dialysis treatment and other patient services. We often do not realize our usual and customary rates, however, because of limitations on the amounts we can bill to or collect from the payors for our services. We generally bill the Medicare and Medicaid programs at net realizable rates determined by applicable fee schedules for these programs, which are established by statute or regulation. We bill most non-governmental payors, including managed care payors with which we have contracted, at our usual and customary rates. Since we bill most non-governmental payors at our usual and customary rates, but often expect to receive payments at the lower contracted rates, we also record a contractual allowance in order to record expected net realizable revenue for services provided. Appropriate allowances are established based upon credit risk of specific third-party payors, historical trends and other factors and are reflected in the provision for doubtful accounts as a component of operating expenses in the consolidated statements of income. This process involves estimates and we record revisions to these estimates in subsequent periods as they are determined to be necessary. During 1996, 1997 and 1998, we received approximately 64%, 61% and 56% respectively, of our dialysis revenues from Medicare and Medicaid programs. Accounts receivable from Medicare and Medicaid amounted to $127,788,000 and $204,770,000 as of December 31, 1997 and 1998, respectively. Medicare historically pays approximately 80% of government established rates for services provided by us. The remaining 20% typically is paid by state Medicaid programs, private insurance companies or directly by the patients receiving the services. Medicare and Medicaid programs funded by the U.S. government generally reimburse us according to fee schedules at predetermined rates per treatment, which vary from region to region and are generally below our established private rates. Revenue under these programs is recognized at these predetermined rates which are subject to periodic adjustments by federal and state agencies. We bill non-governmental third-party payors at our established private rates. We have also contracted for the provision of dialysis services to members of managed care organizations at rates that are significantly less than our established private rates. In August 1993, the Omnibus Budget Reconciliation Act of 1993, or OBRA 93, became effective. The Healthcare Financing Administration, or HCFA, originally interpreted certain provisions of OBRA 93 to require employer group health sponsored insurance plans, or private payors, to be the primary payor for patients who became dually entitled to Medicare benefits because they developed ESRD after they had earlier been entitled to Medicare due to age or disability. In July 1994, HCFA instructed the Medicare fiscal intermediaries to apply the provisions of OBRA 93 retroactively to August 10, 1993. Accordingly, we billed the responsible private payors as the primary payors and recognized these revenues, at the generally higher private rates, as services were rendered for periods after August 10, 1993. In April 1995, HCFA issued instructions of clarification to the fiscal intermediaries which stated that it had misinterpreted the OBRA 93 provisions, and that Medicare would continue as the primary payor despite a patient obtaining dual eligibility status under the Medicare ESRD provisions. Accordingly, we began F-11 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) recognizing revenues at Medicare rates for all such patients going forward from April 1995. We also adjusted our financial statements to reflect revenues earned at Medicare rates for such patients during the period from August 1993 through April 1995. This resulted in a reduction in revenues for the period August 1993 through April 1995 of approximately $3.1 million as these revenues had been previously recognized at the generally higher private rates. In June 1995, a federal court issued a preliminary injunction against HCFA prohibiting HCFA from retroactively applying its reinterpretation of the OBRA 93 provisions to periods prior to its April 1995 instructions of clarification. After the issuance of this preliminary injunction, we determined that a permanent injunction would likely be issued, and we adjusted our financial statements to reflect revenues earned during the period from August 1993 through April 1995 at the generally higher private rates. We made no adjustment to revenues recognized going forward from April 1995 because the injunction did not prohibit the prospective effect of HCFA's reinterpretation. In January 1998, a federal court issued a permanent injunction preventing HCFA from applying its reinterpretation of the OBRA 93 provisions because that application would be unlawful retroactive rulemaking. We did not adjust our revenues in January 1998 in response to the permanent injunction because revenues had already been recognized at the generally higher private rates after the issuance of the preliminary injunction in June 1995. As a Medicare and Medicaid provider, we are subject to extensive regulation by both the federal government and the states in which we conduct our business. Due to heightened awareness of federal and state budgets, scrutiny is being placed on the health care industry, potentially subjecting us to regulatory investigation and changes in billing procedures (see Note 13). The provisions of the Kennedy-Kassebaum legislation issued January 1, 1997 may limit our ability to pay for policy premiums for patients even with proven financial hardship. However, we believe that the bill did not intend to limit our ability to pay premiums for insurance coverage to third-party or governmental payors. In the fall of 1997, the Office of Inspector General of the Department of Health and Human Services, of HHS, issued an advisory opinion which would allow us to make grants to a foundation that may provide for these premium payments on behalf of eligible ESRD patients. Furthermore, a recent Congressional action will allow dialysis providers to pay their patients' insurance premiums for secondary insurance. These premiums are generally less than the 20% co-payment that a private insurer would pay. Dialysis providers would be allowed to capture as incremental profit the difference between the premiums paid to these secondary insurers and the reimbursement amounts received from them. We plan to pay for a patient's secondary insurance premium only if the patient does not qualify for Medicaid and the patient demonstrates an inability to pay for this insurance. Dialysis providers will be able to pay directly their patients' premiums for secondary insurance beginning upon the enactment of regulations implementing the Congressional action, which is expected in the third quarter of 1999. We provide management services to dialysis facilities that we do not own. Our fees typically are determined as a percentage of the facilities' patient revenues. The net fee due us is included in our net operating revenues as earned. Any costs incurred in performing these management services are recognized in facility operating and general and administrative expenses. Cash and cash equivalents Cash equivalents are highly liquid investments with original maturities of three months or less. As part of our cash management strategy, we utilize a zero-balance disbursement account that resulted in a cash overdraft of $10,392,000 as of December 31, 1998. This overdraft has been reclassified and included in accounts payable in these financial statements. F-12 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist principally of drugs and dialysis related supplies. Supplier rebates associated with medical supplies inventory are based on a percentage of purchases during the contract period and generally are paid to us on a quarterly or semi-annual basis. The percentage rate of rebate recognized by us is based upon expected purchase thresholds to be achieved during the contract period. We recognize supplier rebates in the same period that the related inventory expense is recognized and they are included in facility operating expenses in the consolidated statement of income. A corresponding rebate receivable is included in other current assets in the consolidated balance sheet. Property and equipment Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense are computed using the straight-line method over the useful lives of the assets estimated as follows: buildings, 20 to 40 years; leaseholds and improvements, over the shorter of their estimated useful life or the lease term; and equipment, 3 to 15 years. Capitalized interest We capitalize interest associated with the costs of significant facility expansion and construction. Interest is capitalized by using an interest rate which is equal to the weighted average borrowing rate on our long-term debt. Approximately $685,000 and $804,000 in interest expense was capitalized during 1997 and 1998, respectively. Intangible assets Business acquisition costs allocated to patient lists are amortized generally over five to eight years using the straight-line method. Business acquisition costs allocated to covenants not to compete are amortized over the terms of the agreements, typically three to eleven years, using the straight-line method. Deferred debt issuance costs are amortized over the term of the debt using the effective interest method. Pre-opening and development costs are expensed as incurred during 1998. The excess of aggregate purchase price over the fair value of net assets of businesses acquired is recorded as goodwill. Goodwill is amortized over 15 to 40 years using the straight-line method. Currently, the blended average life of our goodwill is 34 years. Impairment of Property and Equipment and Intangible Assets The carrying value of property and equipment and intangible assets are assessed for any permanent impairment by evaluating the operating performance and future undiscounted cash flows from operations of the underlying businesses. Adjustments are made if the sum of the expected future undiscounted net cash flows is less than book value. Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, or SFAS 121, requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. F-13 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income taxes We account for income taxes using an asset and liability approach, which requires recognition of deferred income taxes for all temporary differences between the tax and financial reporting bases of our assets and liabilities based on enacted tax rates applicable to the periods in which the differences are expected to be recovered or settled. Minority interests Minority interests represent the proportionate equity interest of other partners and stockholders in our consolidated entities which are not wholly owned. As of December 31, 1998, these included 24 active partnerships and corporations. Stock-based compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock- Based Compensation, or SFAS 123, requires us to elect to account for stock- based compensation for employees on a fair value based model or an intrinsic value based model. We currently use the intrinsic value based model which is the accounting principle prescribed by Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, or APB 25. Under this model, compensation cost is the excess of the quoted market price of the stock at the date of grant or other measurement date over the amount an employee must pay to acquire the stock. The fair value based model prescribed by SFAS 123 requires us to value stock-based compensation using an accepted valuation model. Compensation cost is measured at the grant date based on the value of the award and would be recognized over the service period which is usually the vesting period. SFAS 123 requires us to either reflect the results of the valuation in the consolidated financial statements or alternatively continue to apply the provisions of APB 25 and make appropriate disclosure of the impact of such valuation in the accompanying notes to consolidated financial statements. We have elected to continue to apply the provisions of APB 25 to our employee stock-based compensation plans and have included the required disclosure of the pro forma impact on net income and earnings per share of the difference between compensation expense using the intrinsic value method and the fair value method (see Note 10). The expense recognized for stock options issued to medical directors, contract labor and external consultants was based on a fair value measurement at each period-end using the Black-Scholes model and attributed to the underlying vesting periods using the FIN 28 expense attribution method, except that for options granted prior to the second quarter of 1997 (effective date of EITF 96-18) such expense was a fixed amortization of the grant date fair value. Each period's expense amount represented the change in the cumulative expense amortization remeasured throughout the vesting periods based on the then current calculated option value. Earnings per share In February 1997, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 128, Earnings Per Share, or SFAS 128. SFAS 128 establishes standards for computing and presenting earnings per share. Basic earnings per share is calculated by dividing net income before extraordinary item and net income by the weighted average number of shares of common stock outstanding. Earnings per common share assuming dilution includes the dilutive effects of stock options and warrants, using the treasury stock method, in determining the weighted average number of shares of common stock outstanding. Not currently used in the calculation is the effect of our convertible debt. For 1997 and 1998, the effect of our convertible debt is antidilutive and as such, is not to be included in the diluted EPS calculation. Earnings per share for all periods presented have been restated following the provisions of SFAS 128. F-14 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Interest rate swap agreements We have entered into interest rate swap agreements (see Note 8) as a means of managing our interest rate exposure. We have not entered these agreements for trading or speculative purposes. These agreements have the effect of converting our line of credit obligation from a variable rate to a fixed rate. Net amounts paid or received are reflected as adjustments to interest expense. The counterparties to these agreements are large international financial institutions. These interest rate swap agreements subject us to financial risk that will vary during the life of the agreements in relation to the prevailing market interest rates. We are also exposed to credit loss in the event of non- performance by these counterparties. However, we do not anticipate non- performance by the other parties, and no material loss would be expected from non-performance by the counterparties. Financial instruments Our financial instruments consist primarily of cash, accounts receivable, notes receivable, accounts payable, employee compensation and benefits, and other accrued liabilities. These balances, as presented in the financial statements at December 31, 1997 and 1998, approximate their fair value. Borrowings under our credit facilities, of which $749,575,000 was outstanding as of December 31, 1998, reflect fair value as they are subject to fees and rates competitively determined in the marketplace. The fair value of the interest rate swap agreements is based on the present value of expected future cash flows from the agreement and was in a net payable position of $31,300,000 at December 31, 1998. The fair value of our 7% convertible subordinated notes was equal to the carrying book value because of the proximity in the time between the issue date of these notes and December 31, 1998; the fair value of the RTC 5 5/8% convertible subordinated notes was approximately $124,000,000 at December 31, 1998. Foreign currency translation Our principal operations outside of the United States are in Argentina and are relatively self-contained and integrated within Argentina. The currency in Argentina, which is considered the functional currency, floats with the U.S. dollar, therefore, there are no significant foreign currency translation adjustments. Our operations in Europe were nominal through December 31, 1998. Comprehensive income In June 1997, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, or SFAS 130, which was adopted by us in the first quarter of 1998. SFAS 130 establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general- purpose financial statements or as additional line items within the current set of financial statements. Comprehensive income as defined includes certain changes in stockholders' equity during a period from non-income sources. Such items may include foreign currency translation adjustments, unrealized gains/losses from investing and hedging activities, and other transactions. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. As we have no components of other comprehensive income through December 1998, there were no disclosure requirements involved in our adoption of SFAS 130. In the future, we are likely to have other comprehensive income that SFAS 130 will require us to disclose. Segment information In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, which requires that we report financial and descriptive F-15 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) information about our reportable operating segments. We have determined that we do not have any separately reportable segments. Derivative instruments and hedging activities In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. Accordingly, for us, SFAS 133 will become effective January 1, 2000. SFAS 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. For fair-value hedge transactions in which we are hedging changes in an asset's, liability's, or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash-flow hedge transactions, in which we are hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. We have not yet determined the impact that the adoption of SFAS 133 will have on our earnings or statement of financial position. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year balances have been reclassified to conform to the current year presentation. 2. Property and equipment Property and equipment comprise the following:
December 31, --------------------------- 1997 1998 Land.......................................... $ 1,410,000 $ 1,410,000 Buildings..................................... 6,463,000 10,622,000 Leaseholds and improvements................... 78,956,000 113,409,000 Equipment..................................... 147,824,000 204,156,000 Construction in progress...................... 7,352,000 11,849,000 ------------ ------------- 242,005,000 341,446,000 Less accumulated depreciation and amortization................................. (69,167,000) (108,109,000) ------------ ------------- Property and equipment, net................... $172,838,000 $ 233,337,000 ============ =============
F-16 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Depreciation and amortization expense on property and equipment was $13,903,000, $22,160,000 and $40,032,000 for 1996, 1997, and 1998, respectively. 3. Intangible assets A summary of intangible assets is as follows:
December 31, ---------------------------- 1997 1998 Goodwill....................................... $619,597,000 $ 939,989,000 Patient lists.................................. 122,463,000 132,048,000 Noncompetition agreements...................... 61,797,000 96,670,000 Deferred debt issuance costs................... 23,415,000 19,329,000 Other.......................................... 18,891,000 ------------ -------------- 846,163,000 1,188,036,000 Less accumulated amortization.................. (76,894,000) (114,536,000) ------------ -------------- $769,269,000 $1,073,500,000 ============ ==============
Amortization expense applicable to intangible assets was $18,520,000, $32,319,000 and $51,697,000 for 1996, 1997 and 1998 respectively. In April 1998, Statement of Position No. 98-5, Reporting on the Costs of Start-up Activities, or SOP 98-5, was issued. We adopted SOP 98-5 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 remaining unamortized pre-opening, development and organizational costs existing prior to January 1, 1998 of $11,196,000 were recognized, net of tax of $4,300,000, as the cumulative effect of a change in accounting principle in 1998. 4. Prepaid expenses and other current assets Prepaid expenses and other current assets comprise the following:
December 31, ----------------------- 1997 1998 Supplier rebates and other current non-trade receivables...................................... $10,886,000 $37,917,000 Prepaid income taxes.............................. 5,501,000 Prepaid expenses.................................. 4,910,000 7,165,000 Deposits.......................................... 203,000 639,000 ----------- ----------- $21,500,000 $45,721,000 =========== ===========
F-17 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Notes receivable During 1997, we entered into various agreements to provide funding for expansion to certain companies that provide renal dialysis or renal related services. These notes receivables are secured by the assets and operations of these companies. A summary of notes receivable is as follows:
December 31, ----------------------- 1997 1998 Convertible note due June 2001 with interest at prime plus 1.5%.................................... $ 7,701,000 $15,919,000 Convertible notes, due in quarterly installments commencing in 2001, with interest at prime plus 1.5%............................................... 1,506,000 7,449,000 Note receivable due November 30, 2002 with interest of 8.5%............................................ 3,077,000 3,689,000 Note from Victor M.G. Chaltiel, chief executive officer, repaid in 1998............................ 1,820,000 Convertible note, from a related party, due May 2000 with interest at prime plus 1.5%................... 2,200,000 ----------- ----------- $14,104,000 $29,257,000 =========== ===========
6. Other accrued liabilities Other accrued liabilities comprise the following:
December 31, ----------------------- 1997 1998 Customer refunds.................................... $ 5,278,000 $22,483,000 Purchase price payable (see Note 8)................. 15,223,000 Accrued interest.................................... 5,395,000 10,986,000 Merger accrual...................................... 4,765,000 Other............................................... 5,254,000 15,975,000 ----------- ----------- $15,927,000 $69,432,000 =========== ===========
7. Income taxes Our provision for income taxes consists of the following:
Years ended December 31, -------------------------------------- 1996 1997 1998 Current Federal............................ $20,655,000 $35,128,000 $ 46,061,000 State.............................. 3,562,000 6,430,000 8,913,000 Foreign............................ 1,070,000 1,052,000 Deferred Federal............................ (1,985,000) (6,054,000) (15,557,000) State.............................. (201,000) (920,000) (2,020,000) ----------- ----------- ------------ $22,031,000 $35,654,000 $ 38,449,000 =========== =========== ============
F-18 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Temporary differences which give rise to deferred tax assets and liabilities are as follows:
December 31, ------------------------ 1997 1998 Receivables, primarily allowance for doubtful accounts....................................... $12,644,000 $27,143,000 Merger costs.................................... 6,159,000 Accrued benefits payable........................ 2,114,000 2,821,000 Deferred compensation........................... 67,000 -- Stock compensation.............................. 1,600,000 2,800,000 Foreign receivable.............................. 798,000 798,000 Foreign NOL carryforward........................ 944,000 944,000 Foreign tax credit carryforward................. 200,000 200,000 Other........................................... 417,000 324,000 ----------- ----------- Gross deferred tax assets....................... 18,784,000 41,189,000 Fixed assets.................................... (2,821,000) (4,115,000) Intangible assets............................... (778,000) (4,330,000) Other........................................... (17,000) ----------- ----------- Gross deferred tax liabilities................ (3,616,000) (8,445,000) Valuation allowance........................... (1,942,000) (1,942,000) ----------- ----------- Net deferred tax assets....................... $13,226,000 $30,802,000 =========== ===========
The valuation allowance relates to deferred tax assets established under SFAS No. 109 for foreign net operating loss carryforwards of $2.86 million, foreign receivables of $798,000 and foreign tax credit carryforwards of $200,000. The unutilized loss and credit carryforwards which expire in 2002, will be carried forward to future years for possible utilization. No benefit of these deferred items has been recognized on the financial statements. The reconciliation between our effective tax rate and the U.S. federal income tax rate on income is as follows:
Years ended December 31, ---------------------------- 1996 1997 1998 Federal income tax rate...................... 35.0% 35.0% 35.0% State taxes, net of federal benefit.......... 4.1 4.1 3.1 Foreign income taxes......................... 0.5 Nondeductible amortization of intangible assets...................................... 1.2 0.9 2.0 Valuation allowance.......................... 2.3 Other........................................ 0.8 -------- -------- -------- Effective tax rate........................... 40.3 43.6 40.1 Minority interests in partnerships........... (2.4) (2.0) (9.4) Merger charges............................... 38.3 -------- -------- -------- Effective tax rate before minority interests and merger charges.......................... 37.9% 41.6% 69.0% ======== ======== ========
F-19 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Long-term debt Long-term debt comprises:
December 31, ---------------------------- 1997 1998 Credit facilities............................ $590,000,000 $ 749,575,000 Convertible subordinated notes, 7%, due 2009........................................ 345,000,000 Convertible subordinated notes, 5 5/8%, due 2006........................................ 125,000,000 125,000,000 Acquisition obligations and other notes payable..................................... 38,822,000 24,160,000 Capital lease obligations (see Note 9)....... 5,180,000 3,893,000 ------------ -------------- 759,002,000 1,247,628,000 Less current portion......................... (27,810,000) (21,847,000) ------------ -------------- $731,192,000 $1,225,781,000 ============ ==============
Maturities of long-term debt are as follows: 1999........................................................ $ 21,847,000 2000........................................................ 10,893,000 2001........................................................ 94,579,000 2002........................................................ 153,567,000 2003........................................................ 241,559,000 Thereafter.................................................. 725,183,000
12% senior subordinated discount notes In July and September 1996, we retired the remaining 65% of our 12% senior subordinated discount notes then outstanding for $68,499,000, including consent payments of $1,100,000. An extraordinary loss on the early extinguishment of debt of $12,623,000, net of income tax effect of $4,923,000, was recorded in 1996. Credit facilities At December 31, 1998 and 1997, we had outstanding borrowings under our revolving credit facility of $353,575,000 and $353,000,000, respectively, and at December 31, 1998, $396,000,000 was outstanding under our fixed term loan. On April 30, 1998, we replaced our existing $1,050,000,000 credit facilities with an aggregate of $1,350,000,000 in two senior bank facilities. These credit facilities consist of a seven-year $950,000,000 revolving senior credit facility and a ten-year $400,000,000 senior term facility. Up to $75,000,000 may be utilized for foreign financing. In general, borrowings under the credit facilities bear interest at one of two floating rates selected by us: (a) the Alternate Base Rate (defined as the higher of The Bank of New York's prime rate or the federal funds rate plus 0.5%); or (b) Adjusted LIBOR (defined as the 30- , 60-, 90- or 180-day London Interbank Offered Rate, adjusted for statutory reserves) plus a margin that ranges from 0.45% to 1.75% depending on our leverage ratio. As a result of this financing, 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 1998. Maximum borrowings under the $950,000,000 revolving credit facility will be reduced by $89,100,000 on September 30, 2001, $148,400,000 on September 30, 2002, and another $237,500,000 on September 30, 2003, F-20 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and the revolving credit facility terminates on March 31, 2005. Under the $400,000,000 term facility, payments of $4,000,000 shall be made each consecutive year beginning on September 30, 1998 and continuing through September 30, 2007. The remaining balance of $360,000,000 is due on March 31, 2008 when the term facility terminates. 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 impose limitations on our ability to make capital expenditures, to incur other indebtedness and to pay dividends. We are in compliance with all such covenants. Certain of our subsidiaries, including Total Renal Care, Inc., or TRC, TRC West, Inc., Total Renal Care Acquisition Corp., RTC, Renal Treatment Centers- Mid Atlantic, Inc., Renal Treatment Centers-Northeast, Inc., Renal Treatment Centers-California, Inc., Renal Treatment Centers-West, Inc. and Renal Treatment Centers-Southeast, Inc., have guaranteed our obligations under the credit facilities on a senior basis. RTC also had a credit agreement which provided for a $350,000,000 revolving credit/term facility available to fund acquisitions and general working capital requirements, of which $237,000,000 was outstanding as of December 31, 1997. The RTC credit agreement was terminated and repaid with borrowings under our credit facilities on February 27, 1998 in connection with the completion of our merger with RTC. The remaining net amortized deferred financing costs in the amount of $4,392,000 related to the RTC credit agreement were recognized as an extraordinary loss, net of tax effect of $1,580,000, in 1998. 5 5/8% convertible subordinated notes In June 1996, RTC issued $125,000,000 of 5 5/8% convertible subordinated notes due 2006. These notes are convertible, at the option of the holder, at any time after August 12, 1996 through maturity, unless previously redeemed or repurchased, into our common stock at a conversion price of $25.62 principal amount per share, subject to certain adjustments. At any time on or after July 17, 1999, all or any part of these notes will be redeemable at our option on at least 15 and not more than 60 days' notice as a whole or, from time to time, in part at redemption prices ranging from 103.94% to 100% of the principal amount thereof, depending on the year of redemption, together with accrued interest to, but excluding, the date fixed for redemption. These notes are guaranteed by TRCH. The following is summarized financial information of RTC:
December 31, ------------------------- 1997 1998 Cash and cash equivalents........................ $ 743,000 $ 5,396,000 Accounts receivable, net......................... 95,927,000 130,129,000 Other current assets............................. 19,484,000 19,106,000 ------------ ------------ Total current assets........................... 116,154,000 154,631,000 Property and equipment, net...................... 72,777,000 75,641,000 Intangible assets, net........................... 384,529,000 406,603,000 Other assets..................................... 10,296,000 9,249,000 ------------ ------------ Total assets................................... $583,756,000 $646,124,000 ============ ============ Current liabilities (includes $306,628,000 intercompany payable to TRC at December 31, 1998)........................................... $ 61,978,000 $354,489,000 Long-term debt................................... 367,219,000 125,199,000 Other long-term liabilities...................... 444,000 Stockholders' equity............................. 154,115,000 166,436,000 ------------ ------------ Total liabilities and stockholders' equity..... $583,756,000 $646,124,000 ============ ============
F-21 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year ended December 31, -------------------------------------- 1996 1997 1998 Net operating revenues.............. $225,077,000 $322,792,000 $472,355,000 Total operating expenses............ 203,402,000 279,607,000 446,367,000 ------------ ------------ ------------ Operating income.................... 21,675,000 43,185,000 25,988,000 Interest expense, net............... 4,384,000 11,802,000 8,993,000 ------------ ------------ ------------ Income before income taxes.......... 17,291,000 31,383,000 16,995,000 Income taxes........................ 6,609,000 14,376,000 19,959,000 ------------ ------------ ------------ Income before extraordinary item and cumulative effect of change in accounting principle............... 10,682,000 17,007,000 (2,964,000) Extraordinary loss related to early extinguishment of debt, net of tax................................ 2,812,000 Cumulative effect of change in accounting principle, net of tax... 3,993,000 ------------ ------------ ------------ Net income (loss)................. $ 10,682,000 $ 17,007,000 $ (9,769,000) ============ ============ ============
7% convertible subordinated notes In November 1998, we issued $345,000,000 of 7% convertible subordinated notes due 2009, or the 7% notes, in a private placement offering. The 7% notes are convertible, at the option of the holder, at any time into common stock at a conversion price of $32.81 principal amount per share. We may redeem the 7% notes on or after November 15, 2001. The 7% notes are general, unsecured obligations junior to all of our existing and future senior debt and, effectively all existing and future liabilities of ours and our subsidiaries. We subsequently filed a registration statement covering the resale of the 7% notes. Acquisition obligations In 1994, pursuant to a business acquisition, RTC entered into an agreement to pay $7,364,100 in annual installments commencing June 1995 through June 1998. Interest on the unpaid principal amount of the note accrued at an annual rate of 6.5%, payable in arrears each June 1 from 1995 from 1998. The note allowed the seller to convert the principal amount of the note into that number of shares of common stock of RTC based upon the average daily closing sale price of RTC stock during December 1994. During 1997, the note payable was paid in full through the issuance of common stock. In 1996, pursuant to a business acquisition, RTC entered into an agreement to pay a total of $8,050,000 to the seller in a single installment in January 1997. During 1997, pursuant to several business acquisitions, RTC entered into several other agreements to pay the various sellers a total of $24,468,000 in single installments in January 1998. In conjunction with certain facility acquisitions, we have issued three letters of credit. Two of these were released on April 1, 1997. The remaining letter of credit of $3,000,000 is being released to the seller in three annual principal installments of $1,000,000 commencing January 1997. We have also agreed to pay the seller interest at 6.50% on the outstanding principal. As of December 31, 1997 and December 31, 1998 the aggregate amount outstanding, including accrued interest, was $2,183,000 and $1,106,000 respectively. In December 1998, we purchased two facilities for a combined total of $15,223,000 with a short term loan made to the sellers, which subsequently has been repaid. Because of its short term maturity it has been included in other accrued liabilities as of December 31, 1998. F-22 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Interest rate swap agreements On November 25, 1996, we entered into a seven-year interest rate swap agreement involving the exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts. At December 31, 1997, the total notional principal amount of this interest rate swap agreement was $100,000,000 and the effective interest rate thereon was 7.57%. On July 24, 1997, we entered into a ten-year interest rate swap agreement. At December 31, 1997, the total notional principal amount of this interest rate swap agreement was $200,000,000 and the effective interest rate thereon was 7.77%. In April 1998, in conjunction with the refinancing of our senior credit facilities, these two forward interest rate swap agreements were cancelled. The loss associated with the early cancellation of those swaps was approximately $9,823,000. In May 1998, we 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 rate is fixed at approximately 5.65% plus an applicable margin based upon our current leverage ratio. At December 31, 1998, the effective interest rate for borrowings under the swap agreement is 6.90%. 9. Leases We lease the majority of our facilities under noncancelable operating leases expiring in various years through 2021. Most lease agreements cover periods from five to ten years and contain renewal options of five to ten years at the fair rental value at the time of renewal or at rates subject to consumer price index increases since the inception of the lease. In the normal course of business, operating leases are generally renewed or replaced by other similar leases. Future minimum lease payments under noncancelable operating leases are as follows: 1999....................................................... $ 41,794,000 2000....................................................... 32,317,000 2001....................................................... 28,388,000 2002....................................................... 25,784,000 2003....................................................... 23,545,000 Thereafter................................................. 84,908,000 ------------ Total minimum lease payments............................... $236,736,000 ============
Rental expense under all operating leases for 1996, 1997 and 1998 amounted to $15,901,000, $24,589,000 and $38,975,000 respectively. We also lease certain equipment under capital lease agreements. Future minimum lease payments under capital leases are as follows: 1999....................................................................... $ 2,675,000 2000....................................................................... 1,303,000 2001....................................................................... 712,000 2002....................................................................... 267,000 2003....................................................................... 91,000 Thereafter................................................................. -- Less portion representing.................................................. (1,155,000) ----------- Total capital lease obligation, including current portion.................. $ 3,893,000 ===========
The net book value of fixed assets under capital lease was $5,649,000 and $4,314,000 at December 31, 1997 and 1998, respectively. Capital lease obligations are included in long-term debt (see Note 8). F-23 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Stockholders' equity Public offerings of common stock On April 3, 1996, and October 31, 1996 we completed equity offerings of 13,416,667 and 4,166,667 shares of our common stock, respectively; 5,833,333 and 833,334, respectively, of which were sold for our account and 7,583,333 and 3,333,333 respectively, of which were sold by certain of our stockholders. The net proceeds received by us of $109,968,000 and $18,350,000, respectively, were used to repay borrowings incurred under our credit facilities in connection with acquisitions, to repurchase and subsequently retire our 12% senior subordinated notes, to finance other acquisitions and de novo developments and for working capital and other corporate purposes. Change in shares, stock splits and dividends Dividend distributions paid during 1996 were to the former shareholders of entities acquired by RTC in transactions accounted for as poolings of interests as described in Note 1. On September 30, 1997 we announced a common stock dividend to all stockholders of record as of October 7, 1997, to be paid on October 20, 1997. Each stockholder received two additional shares of common stock for each three shares held. Fractional shares calculated as a result of the stock dividend were paid out in cash in the amount of approximately $14,000. As such, all share and per share amounts presented in the financial statements and related notes thereto have been retroactively restated to reflect this dividend which was accounted for as a stock split. Earnings per share The reconciliation of the numerators and denominators used to calculate earnings per share is as follows:
Year ended December 31, ------------------------------------- 1996 1997 1998 Income before extraordinary item and cumulative effect of change in accounting principle: As reported........................... $32,532,000 $45,524,000 $10,192,000 =========== =========== =========== Income before extraordinary item and cumulative effect of change in accounting principle--assuming dilution: As reported........................... $32,532,000 $45,524,000 $10,192,000 Add back interest on RTC earnout note, tax effected......................... 233,000 34,000 ----------- ----------- ----------- $32,765,000 $45,558,000 $10,192,000 =========== =========== =========== Applicable common shares: Average outstanding during the year... 74,172,000 77,649,000 80,156,000 Reduction in shares in connection with notes receivable from employees...... (130,000) (125,000) (13,000) ----------- ----------- ----------- Weighted average number of shares outstanding for use in computing basic earnings per share..................... 74,042,000 77,524,000 80,143,000 Outstanding stock options (based on the treasury stock method)........... 2,411,000 2,288,000 1,558,000 Dilutive effect of RTC earnout note... 772,000 163,000 ----------- ----------- ----------- Adjusted weighted average number of common and common share equivalent shares outstanding--assumming dilution............................. 77,225,000 79,975,000 81,701,000 =========== =========== =========== Earnings per common share--basic........ $ 0.43 $ 0.59 $ 0.12 Earnings per common share--assuming dilution............................... $ 0.42 $ 0.57 $ 0.12
F-24 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-based compensation plans At December 31, 1998, we had four stock-based compensation plans, which are described below. 1994 plan. In August 1994, we established the Total Renal Care Holdings, Inc. 1994 Equity Compensation Plan which provides for awards of nonqualified stock options to purchase our common stock and other rights to purchase shares of our common stock to certain of our employees, directors, consultants and facility medical directors. Under terms of the 1994 plan, we may grant awards for up to 8,474,078 shares of our common stock. Original options granted generally vest on the ninth anniversary of the date of grant, subject to accelerated vesting in the event that we meet certain performance criteria. In April 1996, we changed the vesting schedule for new options granted so that options vest over four years from the date of grant. The exercise price of each option equals the market price of our stock on the date of grant, and an option's maximum term is ten years. Purchase rights to acquire 1,314,450 common shares for $0.90-$3.60 per share have been awarded to certain employees under the 1994 plan. All of these rights were exercised and we received notes for the uncollected portion of the purchase proceeds. These notes bear interest at the lesser of The Bank of New York's prime rate or 8%, are full recourse to the employees, and are secured by the employees' stock. The notes are repayable four years from the date of issuance, subject to certain prepayment requirements. At December 31, 1997 and 1998 the outstanding notes plus accrued interest totaled $212,000 and $215,000, respectively. During fiscal 1995, 1,477,778 of the options issued to purchase our common stock were issued to Victor M.G. Chaltiel. These options originally vested 50% over four years and 50% in the same manner as other options granted under the 1994 plan. In September 1995, our board of directors and stockholders agreed to accelerate Mr. Chaltiel's vesting period and all of the options became 100% vested. Pursuant to this action, Mr. Chaltiel exercised all of the stock options through the issuance of a full recourse note of $1,330,000 bearing interest at the lesser of prime or 8%. Additionally, Mr. Chaltiel executed a full recourse note for $1,349,000 bearing interest at the lesser of prime or 8% per annum to meet his tax liability in connection with the stock option exercise. In April 1996, this note was increased by an additional $173,000. These notes were secured by other shares of company stock and matured in September 1999 or upon disposition of the common stock by Mr. Chaltiel. During 1998, this note was repaid in full. 1995 plan. In November 1995, we established the Total Renal Care Holdings, Inc. 1995 Equity Compensation Plan which provides awards of stock options and the issuance of our common shares, subject to certain restrictions, to certain employees, directors and other individuals providing services to us. There are 1,666,667 common shares reserved for issuance under the 1995 plan. Options granted generally vest over four years from the date of grant and an option's maximum term is ten years, subject to certain restrictions. We generally issue awards with the exercise prices equal to the market price of our stock on the date of grant. 1997 plan. In July 1997, we established the Total Renal Care Holdings, Inc. 1997 Equity Compensation Plan which provides awards of stock options and the issuance of our common shares, subject to certain restrictions, to certain employees, directors and other individuals providing services to us. In February 1998, we increased the shares reserved for issuance under the 1997 plan to 7,166,667 common shares. Options granted generally vest over four years from the date of grant and an option's maximum term is ten years. We generally issue awards with the exercise prices equal to the market price of our stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants for 1996, 1997, and 1998, respectively: dividend F-25 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) yield of 0% for all periods; weighted average expected volatility of 36.35%, 35.12% and 33.98%; risk-free interest rates of 6.56%, 6.40% and 5.51% and expected lives of six years for all periods. A combined summary of the status of the 1994 plan, the 1995 plan, and the 1997 plan as of and for the years ended December 31, 1996, 1997 and 1998 is presented below:
Year ended Year ended Year ended December 31, 1996 December 31, 1997 December 31, 1998 -------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding at beginning of period.............. 1,441,685 $ 1.91 3,118,394 $13.82 5,039,838 $16.01 Granted................. 1,818,913 22.28 3,931,080 19.74 5,570,567 31.10 Exercised............... (111,647) 0.92 (275,620) 3.96 (254,220) 9.48 Forfeited............... (30,557) 2.43 (1,734,016) 22.46 (308,401) 28.25 ---------- ------ ---------- ------ ---------- ------ Outstanding at end of year................... 3,118,394 $13.82 5,039,838 $16.01 10,047,784 24.15 ========== ====== ========== ====== ========== ====== Options exercisable at year end............... 663,007 797,474 1,959,913 ========== ========== ========== Weighted-average fair value of options granted during the year................... $10.52 $ 9.15 $13.67 ====== ====== ======
Forfeitures and grants include the effects of modifications to the terms of awards as if the original award was repurchased and exchanged for a new award of greater value. On April 24, 1997, 1,649,735 shares were cancelled and reissued at the market price as of that date. The new awards vest annually over three years on the anniversary date of the new award. The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------ -------------------------- Range of Weighted Average Weighted Weighted Exercise Remaining Average Average Exercise Prices Options Contractual Life Exercise Price Options Price $ 0.01-$ 5.00 812,937 5.8 years $ 1.15 770,474 $ 1.10 $ 5.01-$10.00 16,545 5.8 years 5.40 12,204 5.40 $10.01-$15.00 13,890 6.8 years 11.82 10,705 11.82 $15.01-$20.00 3,650,919 7.9 years 18.68 1,023,984 18.56 $20.01-$25.00 260,891 9.1 years 21.84 36,454 21.76 $25.01-$30.00 435,043 8.9 years 26.31 82,836 26.50 $30.01-$35.00 4,854,559 9.5 years 32.15 23,256 30.79 $35.01-$40.00 3,000 9.2 years 35.58 ---------- --------- ------ --------- ------ 10,047,784 8.6 years $24.15 1,959,913 $12.12 ========== ========= ====== ========= ======
RTC plans. In September 1990, RTC established a stock plan, which provided for awards of incentive and nonqualified stock options to certain directors, officers, employees and other individuals. In 1995 and 1996, the stock plan was amended to increase the number of RTC common shares available for grant to 3,253,395 and 4,321,395 respectively. In addition, in 1996, RTC established an option plan for outside directors pursuant to which nonqualified stock options to purchase up to 80,100 shares of RTC common stock were reserved for issuance. Options granted under RTC's plans generally vest from three to five years and an option's maximum term is ten years, subject to certain restrictions. Incentive stock options were granted at an exercise price not less F-26 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) than the fair market value of RTC's common stock on the date of grant. Nonqualified stock options were permitted to be granted as low as 50% of market value, subject to certain floor restrictions. Accordingly, compensation expense for the difference between the fair market value and the exercise price for nonqualified stock options is recorded over the vesting period of these options. In May 1995, RTC granted 559,557 incentive stock options to certain directors, officers and employees of RTC. These options were granted at an exercise price equal to the fair market value of RTC's common stock on the date of the grant. These options vest over three years. Certain options totaling 407,175 vest upon the earlier of attainment of predetermined earnings per share targets or nine years. In March 1996, RTC granted 821,495 incentive stock options to certain directors, officers and employees of RTC. These options were granted at an exercise price equal to the fair market value of RTC's common stock on the date of the grant and vest over four years. Certain options aggregating 231,398 vest upon the earlier of attainment of predetermined earnings per share targets or nine years. In December 1996, RTC granted 133,500 incentive stock options to one of its officers. These options were granted at an exercise price equal to the fair market value of RTC's common stock on the date of the grant and were fully vested on the grant date. Also in December 1996, RTC granted 40,050 non-qualified stock options in connection with the release of RTC from certain obligations. The options were granted at an exercise price equal to the fair market value of RTC's common stock on the date of grant and were fully vested as of December 31, 1997. During 1997, RTC granted 1,182,543 incentive stock options to certain directors, officers and employees. These options were granted at an exercise price equal to the fair market value of RTC's common stock on the dates of the grants and vest in two to five years. In 1997 RTC granted 26,700 options to acquisition consultants for covenants not to compete. These options were granted at a price equal to the fair market values of RTC's common stock on the date of the grant and were valued at $235,000. Upon consummation of our merger with RTC, all outstanding options were converted to Total Renal Care Holdings Inc. Special Purpose Option Plan options. This plan provides for awards of incentive and nonqualified stock options in exchange for outstanding RTC stock plan options. Options under this plan have the same provisions and terms provided for in the RTC stock plan, including acceleration provisions upon certain sale of assets, mergers and consolidations. On the merger date, there was a conversion of 2,156,426 of RTC's options. Further, options for 1,305,738 shares became fully vested due to change in control accelerated vesting provisions which were contained in the original grants. Options for 1,662,356 shares were exercised subsequent to the merger date. Our Stock Plan Committee has the option of accelerating the remaining options upon certain sales of assets, mergers and consolidations. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for 1996 and 1997, respectively: dividend yield of 0% for all periods; weighted average expected volatility of 29.3% and 43%; risk free interest rates of 6.18% and 6.55%; and expected lives of 5.63 and 4.29 years. F-27 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of the status of the RTC plans as of and for the years ended December 31, 1996, 1997 and 1998, is presented below:
Year ended Year ended Year ended December 31, 1996 December 31, 1997 December 31, 1998 ------------------- ------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding at beginning of period ............. 1,658,601 $ 7.33 2,293,483 $11.09 3,285,192 $13.20 Granted................. 997,376 16.50 1,182,543 16.84 Exercised............... (351,814) 8.73 (171,830) 7.60 (2,901,218) 12.88 Forfeited............... (10,680) 9.09 (19,004) 13.09 (16,341) 15.45 --------- ------ --------- ------ ---------- ------ Outstanding at end of year................... 2,293,483 $11.09 3,285,192 $13.33 367,633 15.66 ========= ====== ========= ====== ========== ====== Options exercisable at year end............... 966,903 1,785,169 248,958 ========= ========= ========== Weighted-average fair value of options granted during the year................... $ 7.35 $ 9.70 ====== ======
The following table summarizes information about RTC fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable --------------------------------------- ---------------------- Range of Weighted Average Weighted Weighted Exercise Remaining Average Average Prices Options Contractual Life Exercise Price Options Exercise Price 5.01-15.00 30,972 6.0 $ 8.58 24,564 $ 8.57 15.01-20.00 336,661 8.0 16.31 224,394 16.45 ------- --- ------ ------- ------ 367,633 7.9 $15.66 248,958 $15.68 ======= === ====== ======= ======
Stock Purchase Plan. In November 1995, we established the Total Renal Care Holdings, Inc. Employees Stock Purchase Plan which entitles qualifying employees to purchase up to $25,000 of common stock during each calendar year. The amounts used to purchase stock are typically accumulated through payroll withholdings and through an optional lump sum payment made in advance of the first day of the plan. The plan allows employees to purchase stock for the lesser of 100% of the fair market value on the first day of the purchase right period or 85% of the fair market value on the last day of the purchase right period. Each purchase right period begins on January 1 or July 1, as selected by the employee and ends on December 31. Payroll withholdings related to the plan, included in accrued employee compensation and benefits, were $1,120,000 and $1,892,000 at December 31, 1997, and 1998 respectively. Subsequent to December 31, 1996, and December 31, 1997, 174,775 and 49,060 shares, respectively were issued to satisfy our obligations under the plan. For the November 1995 and July 1996 purchase right periods the fair value of the employees' purchase rights were estimated on the beginning date of the purchase right period using the Black-Scholes model with the following assumptions for grants on November 3, 1995, July 1, 1996, January 1, 1997 and July 1, 1997, respectively: dividend yield of 0% for all periods; expected volatility of 36.6% in 1995 and 1996 and 34.23% in 1997; risk-free interest rate of 5.5%, 6.6%, 6.8% and 6.8% and expected lives of 1.2, 0.5, 1.0, and 0.5 years. Using these assumptions, the weighted-average fair value of purchase rights granted were $2.86, $7.37, $15.31, and $11.17, respectively. The fair value of the January 1, 1998 and July 1, 1998 purchase right periods were not estimated at December 31, 1998 because of the employees' ability to withdraw from participation through December 31. F-28 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Pro forma net income and earnings per share. We applied APB Opinion No. 25 and related interpretations in accounting for all of our employee stock compensation plans. Accordingly, no compensation cost has been recognized for our fixed stock option plans and our stock purchase plan for employees. Had compensation cost for our stock-based compensation plans been determined consistent with SFAS 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Year ended Year ended December December Year ended 31, 31, December 31, 1996 1997 1998 Income before extraordinary item and cumulative effect of change in accounting principle................... $26,955,000 $33,779,000 $ 4,004,000 Extraordinary loss.................... (7,700,000) (12,744,000) Cumulative effect of change in accounting principle................. (6,896,000) ----------- ----------- ------------ Net income (loss)..................... $19,255,000 $33,779,000 $(15,636,000) =========== =========== ============ Earnings per common share Income before extraordinary item...... $ 0.36 $ 0.44 $ 0.04 Extraordinary loss.................... (0.10) (0.16) Cumulative effect of change in accounting principle................. (0.08) ----------- ----------- ------------ Net income (loss)..................... $ 0.26 $ 0.42 $ (0.20) =========== =========== ============ Weighted average number of common shares and equivalents outstanding 74,042,000 77,524,000 80,143,000 =========== =========== ============ Earnings per common share--assuming dilution: Income before extraordinary item...... $ 0.32 $ 0.43 $ 0.05 Extraordinary loss.................... ( 0.09) (0.16) Cumulative effect of change in accounting principle................. (0.08) ----------- ----------- ------------ Net income (loss)..................... $ 0.23 $ 0.41 $ (0.19) =========== =========== ============ Weighted average number of common shares and equivalents outstanding--assuming dilution............................... 83,477,000 78,982,000 81,076,000 =========== =========== ============
11. Transactions with related parties Tenet Tenet Healthcare Corporation, or Tenet, owns less than 5% of our common stock and we provide dialysis services to Tenet hospital patients under agreements with terms of one to three years. The contract terms are comparable to contracts with unrelated third parties. Included in the receivable from Tenet are amounts related to these services of $534,000 and $350,000 at December 31, 1997 and 1998, respectively. Net operating revenues received from Tenet for these services were $2,260,000, $2,640,000 and $2,424,000 for 1996, 1997 and 1998, respectively. DLJ A managing director of Donaldson, Lufkin & Jenrette, or DLJ, serves on our board of directors and, prior to August 1997, an affiliate of DLJ held an ownership interest in us. During 1996 DLJ was one of several underwriters for two public stock offerings in which we issued 11,666,667 and 833,334 shares, respectively. Fees for these transactions to DLJ or its affiliates were $5,075,000, and $780,000, respectively. Effective with the August 1997 public offering of common stock, DLJ and its affiliates no longer own an interest in us. During 1998, DLJ advised us on our acquisition of RTC and assisted us in the issuance of the 7% notes. F-29 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Employee benefit plan We have a savings plan for substantially all employees, which has been established pursuant to the provisions of Section 401(k) of the Internal Revenue Code, or IRC. The plan provides for employees to contribute from 1% to 15% of their base annual salaries on a tax-deferred basis not to exceed IRC limitations. We may make a contribution under the plan each fiscal year as determined by our board of directors. We made matched contributions of $58,000, in accordance with specific state requirements, in 1998. RTC had a defined contribution savings plan covering substantially all of its employees. RTC's contributions under the plan were approximately $548,000, and $1,069,000 and $641,000 for years ended December 31, 1996, 1997 and 1998, respectively. Effective July 1, 1998, the plan was terminated and merged into our plan. 13. Contingencies Our Florida-based laboratory subsidiary is presently the subject of a Medicare carrier review. The carrier has requested certain medical and billing records for certain patients and we have provided the requested records. The carrier has suspended further payments to the laboratory subsidiary, amounting to approximately $11 million from the beginning of the suspension through December 31, 1998, and made a formal overpayment determination. We are appealing the overpayment determination and have filed a suit to lift the payment suspension. Following the announcement on February 18, 1999 of our preliminary results of the fourth quarter of fiscal 1998 and the full year then ended, several class action lawsuits were filed against us and certain of our officers in the U.S. District Court for the Central District of California. The complaints are similar and allege violations of federal securities laws arising from alleged false and misleading statements primarily regarding our accounting for the integration of RTC into TRCH and request unspecified monetary damages. We believe that all of the claims are without merit and we intend to defend ourselves vigorously. We anticipate that the attorneys' fees and related costs of defending these lawsuits should be covered primarily by our directors and officers insurance policies and we believe that any additional costs will not have a material impact on our financial condition, results of operations or cash flows. In addition, we are subject to claims and suits in the ordinary course of business for which we believe we will be covered by insurance. We do not believe that the ultimate resolution of these additional pending proceedings, whether the underlying claims are covered by insurance or not, will have a material adverse effect on our financial condition, results of operations or cash flows. 14. Mergers and acquisitions Mergers During the fiscal year 1996, RTC completed the following three mergers: . The Kidney Center Group On July 23, 1996, RTC acquired the Kidney Center Group. The two dialysis facilities acquired are located in Florida and serviced a total of approximately 185 patients as of the acquisition date. The transaction was accounted for under the pooling-of-interests method of accounting. In the transaction, RTC issued 482,377 shares of its common stock in exchange for all of the outstanding stock of the Kidney Center Group. F-30 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) . MDU On February 29, 1996, RTC acquired MDU. The 11 dialysis facilities acquired are located in Oklahoma and serviced a total of approximately 317 patients as of the acquisition date. The transaction was accounted for under the pooling- of-interests method of accounting. In the transaction, RTC issued 767,168 shares of its common stock in exchange for all of the outstanding stock of MDU. . IMS On February 20, 1996, RTC acquired IMS. The four dialysis facilities acquired are located in Hawaii and serviced a total of approximately 444 patients as of the acquisition date. The transaction was accounted for under the pooling-of- interests method of accounting. In the transaction, RTC issued 1,047,464 shares of its common stock in exchange for all of the outstanding stock of IMS. The consolidated financial statements give retroactive effect to the mergers with the Kidney Center Group, IMS and MDU and include the Kidney Center Group, IMS and MDU for all periods presented. The following is a summary of the separate and combined results of operations for 1996:
Pooling RTC Companies* RTC Combined Net patient revenue.................. $217,529,000 $7,548,000 $225,077,000 Income from operations............... 20,495,000 1,180,000 21,675,000 Net income........................... 9,985,000 697,000 10,682,000
- -------- * Includes pooling transactions only for period prior to acquisition. Activity subsequent to acquisition dates is included in RTC. Acquisitions We have implemented an acquisition strategy which, through December 31, 1998, has resulted in the acquisition of (a) 396 facilities providing services to ESRD patients; (b) two laboratories; (c) a pharmacy; (d) a vascular access management company; and (e) a clinical research company specializing in renal and renal-related services. The following is a summary of acquisitions that were accounted for as purchases for 1996, 1997 and 1998.
Year ended December 31, -------------------------------------- 1996 1997 1998 Number of facilities acquired.......... 67 119 76 Number of common shares issued......... 102,645 17,613 98,549 Estimated fair value of common shares issued................................ $ 1,830,000 $ 273,000 $ 2,796,000 Acquisition obligations (Note 8)....... 15,886,000 15,233,000 Cash paid, net of cash acquired........ 179,002,000 455,090,000 338,164,000 ------------ ------------ ------------ Aggregate purchase price............... $196,718,000 $455,363,000 $356,193,000 ============ ============ ============
In addition, during this period we developed 52 de novo facilities, three of which we manage, entered into management contracts covering an additional 29 unaffiliated facilities, and purchased the minority interest at nine of our existing facilities. The assets and liabilities of the acquired entities in the preceding table were recorded at their estimated fair market values at the dates of acquisition. The results of operations of the facilities and laboratories have been included in our financial statements from their effective acquisition dates. We prefer to close acquisitions on or near a month-end but in many instances acquisitions close mid-month. Our policy is to utilize the nearest F-31 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) month-end as the effective date for recording acquisitions that close during the month because it is a practical convention given the high number, typical size and recurring nature of our acquisitions and the monthly billing cycle prevalent in the dialysis industry. Further, many of the acquired businesses do not have accounting and billing systems that would facilitate preparation of accurate mid-month financial information. The effect of this practice is not material to our consolidated financial position or results of operations. We have acquired all of our foreign operations and several of our domestic operations through purchases of capital stock. Any settlements with tax authorities relating to pre-acquisition income tax liabilities will result in an adjustment to the goodwill attributable to that acquisition. The initial allocations of fair value are based upon available information for the acquired businesses and are finalized when we complete our analysis of acquired tangible assets and liabilities and evaluation of acquired intangible assets. We do not believe that the final allocation will differ materially from the initial allocation. These initial allocations were as follows:
Years ended December 31, ---------------------------------------- 1996 1997 1998 Identified intangibles................ $ 34,682,000 $ 87,498,000 $ 39,992,000 Goodwill.............................. 135,456,000 366,121,000 315,655,000 Tangible assets....................... 44,265,000 47,053,000 30,650,000 Liabilities assumed................... (17,685,000) (45,309,000) (30,104,000) ------------ ------------ ------------ Total purchase price................ $196,718,000 $455,363,000 $356,193,000 ============ ============ ============
The following summary, prepared on a pro forma basis, combines the results of operations as if the acquisitions had been consummated as of the beginning of each of the periods presented, after including the impact of certain adjustments such as amortization of intangibles, interest expense on acquisition financing and income tax effects.
Year ended Year ended Year ended December 31, December 31, December 31, 1996 1997 1998 (unaudited) (unaudited) (unaudited) Net revenues......................... $792,862,000 $996,439,000 $1,344,220,000 Net income before extraordinary item and cumulative effect of change in accounting principle................ $ 48,378,000 $ 54,964,000 $ 14,380,000 Net income (loss).................... 40,678,000 54,964,000 (5,260,000) Pro forma net income per share before extraordinary item and cumulative effect of change in accounting principle........................... $ 0.65 $ 0.71 $ 0.18 Pro forma net income per share before extraordinary item and cumulative effect of change in accounting principle--assuming dilution........ $ 0.63 $ 0.69 $ 0.18 Pro forma net income (loss) per share............................... 0.55 0.71 (0.07) Pro forma net income (loss) per share--assuming dilution............ 0.53 0.69 (0.06)
The unaudited pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been completed prior to the beginning of the periods presented. In addition, they are not intended to be a projection of future results and do not reflect any of the synergies, additional revenue-generating services or direct facility operating expense reduction that might be achieved from combined operations. Since December 31, 1998, we have acquired 17 additional facilities in ten separate transactions for an aggregate purchase price of approximately $44.6 million all of which will be accounted for as purchases. F-32 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Supplemental cash flow information The table below provides supplemental cash flow information:
Years ended December 31, ----------------------------------- 1996 1997 1998 Cash paid for: Income taxes............................. $30,069,000 $37,402,000 $13,676,000 Interest................................. 5,730,000 25,039,000 66,409,000 Noncash investing and financing activities: Estimated value of stock and options issued in acquisitions.................. 2,810,000 273,000 2,796,000 Fixed assets acquired under capital lease obligations............................. 3,670,000 829,000 583,000 Contribution to partnerships............. 943,000 2,318,000 2,592,852 Issuance of common stock in connection with earn out note...................... 1,474,000 5,148,000 Issuance of common stock in connection with Kidney Center Group, IMS and MDU mergers................................. 3,204,000 Grant of stock options in connection with covenant not to compete................. 235,000
F-33 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. Selected quarterly financial data (unaudited) Summary unaudited quarterly financial data for 1997 and 1998 is as follows (in thousands, except per share amounts). The unaudited quarterly financial data presented below has been restated in accordance with Notes 1A and 1.
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, 1997 1997 1997 1997 1998 1998 1998 1998 (restated) (restated) (restated) (restated) (restated) (restated) (restated) (restated) Net operating revenues............. $156,788 $179,408 $197,525 $224,682 $257,833 $288,350 $318,585 $338,970 Operating income...... 22,764 27,599 26,086 34,270 (33,571) 55,409 66,481 45,218 Income (loss) before extraordinary item and cumulative effect of change in accounting principle............ 10,705 12,793 9,362 12,664 (47,959) 16,841 28,058 13,252 Net income (loss)..... 10,705 12,793 9,362 12,664 (57,667) 6,909 28,058 13,252 Income (loss) per common share: Income before extraordinary item and cumulative effect of change in accounting principle........... 0.14 0.17 0.12 0.16 (0.61) 0.21 0.35 0.16 Extraordinary loss... (0.03) (0.12) Cumulative effect of change in accounting principle........... (0.09) -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share............... 0.14 0.17 0.12 0.16 (0.73) 0.09 0.35 0.16 ======== ======== ======== ======== ======== ======== ======== ======== Income (loss) per common share-- assuming dilution: Income (loss) before extraordinary item and cumulative effect of change in accounting principle........... 0.14 0.16 0.12 0.16 (0.61) 0.20 0.33 0.16 Extraordinary loss... (0.03) (0.12) Cumulative effect of change in accounting principle........... (0.09) -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share............... 0.14 0.16 0.12 0.16 (0.73) 0.08 0.33 0.16 ======== ======== ======== ======== ======== ======== ======== ========
F-34 SIGNATURES Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this Report on Form 10-K/A to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Torrance, State of California, on January 18, 2000. TOTAL RENAL CARE HOLDINGS, INC. /s/ Kent J. Thiry By: _________________________________ Kent J. Thiry Chairman and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kent J. Thiry, George DeHuff and Barry C. Cosgrove, and each of them his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratify and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K/A has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Kent J. Thiry Chairman and Chief January 18, 2000 ____________________________________ Executive Officer Kent J. Thiry (Principal Executive Officer) /s/ John J. McDonough Vice President and Chief January 18, 2000 ____________________________________ Accounting Officer John J. McDonough (Principal Accounting Officer and Principal Financial Officer) /s/ Maris Andersons Director January 18, 2000 ____________________________________ Maris Andersons /s/ Richard B. Fontaine Director January 18, 2000 ____________________________________ Richard B. Fontaine /s/ Peter T. Grauer Director January 18, 2000 ____________________________________ Peter T. Grauer /s/ C. Raymond Larkin, Jr. Director January 18, 2000 ____________________________________ C. Raymond Larkin, Jr. /s/ Shaul G. Massry Director January 18, 2000 ____________________________________ Shaul G. Massry
II-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Total Renal Care Holdings, Inc. Our audit of the consolidated financial statements referred to in our report dated March 29, 1999, except for Note 1A which is as of January 18, 2000 appearing on page F-1 of this Annual Report on Form 10K/A (Amendment No. 2) also included audits of the information included in the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10K/A (Amendment No. 2) for the years ended December 31, 1996, 1997 and 1998. In our opinion, based upon our audit, the Financial Statement Schedule presents fairly, in all material respects, the information for the years ended December 31, 1996, 1997 and 1998 set forth therein when read in conjunction with the related consolidated financial statements. As discussed in Note 1A, the accompanying consolidated financial statements as of and for the three years ended December 31, 1998 have been restated. During the first quarter of 2000 the Company determined it would not be in compliance with financial covenants in its primary credit facilities when measured as of December 31, 1999 and the potential effects are discussed in Note 1A to the consolidated financial statements. PricewaterhouseCoopers LLP Seattle, Washington March 29, 1999, except for Note 1A which is as of January 18, 2000 S-1 TOTAL RENAL CARE HOLDINGS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Additions Deductions ---------------------- ----------- Balances Balance at Amounts of Beginning Charged to Companies Amounts Balance at Description of Year Income Acquired Written off End of Year Allowance for doubtful accounts: Year ended December 31, 1996.. $ 9,172,000 $15,737,000 $1,896,000 $11,040,000 $15,765,000 Year ended December 31, 1997.. 15,765,000 28,899,000 2,962,000 16,931,000 30,695,000 Year ended December 31, 1998.. 30,695,000 44,858,000 679,000 14,384,000 61,848,000
S-2 EXHIBIT INDEX
Exhibit Page Number Description Number 3.1 Amended and Restated Certificate of Incorporation of TRCH, dated December 4, 1995.(1) 3.2 Certificate of Amendment of Certificate of Incorporation of TRCH, dated February 26, 1998.(2) 3.3 Bylaws of TRCH, dated October 6, 1995.(3) 4.1 Shareholders Agreement, dated August 11, 1994, between DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties, Continental Bank, as voting trustee, and TRCH.(4) 4.2 Agreement and Amendment, dated as of June 30, 1995, between DLJMBP, DLJIP, DLJOP, DLJMBF, DLJESC, Tenet, TRCH, Victor M.G. Chaltiel, the Putnam Purchasers, the Crescent Purchasers and the Harvard Purchasers, relating to the Shareholders Agreement dated as of August 11, 1994 between DLJMB, DLJIP, DLJOP, DLJMBF, NME Properties, Continental Bank, as voting trustee, and TRCH.(4) 4.3 Indenture, dated June 12, 1996 by RTC to PNC Bank including form of RTC Note.(12) 4.4 First Supplemental Indenture, dated as of February 27, 1998, among RTC, TRCH and PNC Bank under the 1996 indenture.(2) 4.5 Second Supplemental Indenture, dated as of March 31, 1998, among RTC, TRCH and PNC Bank under the 1996 indenture.(2) 4.6 Indenture, dated as of November 18, 1998, between TRCH and United States Trust Company of New York, as trustee, and Form of Note.(5) 4.7 Registration Rights Agreement, dated as of November 18, 1998, between TRCH and DLJ, BNY Capital Markets, Inc., Credit Suisse First Boston Corporation and Warburg Dillon Read LLC, as the initial purchasers.(5) 4.8 Purchase Agreement, dated as of November 12, 1998, between TRCH and the initial purchasers.(5) Noncompetition Agreement, dated August 11, 1994, between TRCH 10.1 and Tenet.(4) 10.2 Employment Agreement, dated as of August 11, 1994, by and between TRCH and Victor M.G. Chaltiel (with forms of Promissory Note and Pledge and Stock Subscription Agreement attached as exhibits thereto).(4)* 10.3 Amendment to Mr. Chaltiel's employment agreement, dated as of August 11, 1994.(4)* 10.4 Second Amendment to Mr. Chaltiel's employment agreement, dated as of March 2, 1998.*(13) 10.5 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Barry C. Cosgrove.(6)* 10.6 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Leonard W. Frie.(6)* 10.7 Employment Agreement, dated as of March 2, 1998, by and between TRCH and John E. King.(6)* 10.8 Employment Agreement dated as of March 2, 1998 by and between TRCH and Stan M. Lindenfeld.(6)* 10.9 Amendment to Dr. Lindenfeld's employment agreement, dated September 1, 1998.*(13) 10.10 First Amended and Restated 1994 Equity Compensation Plan of TRCH (with form of Promissory Note and Pledge attached as an exhibit thereto), dated August 5, 1994.(4)* 10.11 Form of Stock Subscription Agreement relating to the 1994 Equity Compensation Plan.(4)*
Exhibit Page Number Description Number 10.12 Form of Purchased Shares Award Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.13 Form of Nonqualified Stock Option relating to the 1994 Equity Compensation Plan.(4)* 10.14 1995 Equity Compensation Plan.(3)* 10.15 Employee Stock Purchase Plan.(3)* 10.16 Option Exercise and Bonus Agreement, dated as of September 18, 1995 between TRCH and Victor M.G. Chaltiel.(3)* 10.17 1997 Equity Compensation Plan.(7) 10.18 Amended and Restated Revolving Credit Agreement, dated as of April 30, 1998, by and among TRCH, the lenders party thereto, DLJ Capital Funding, Inc., as Syndication Agent, First Union National Bank, as Documentation Agent, and The Bank of New York, as Administrative Agent.(8) 10.19 Amendment No. 1 and Consent No. 1, dated as of August 5, 1998, to the Revolving Credit Agreement.(13) 10.20 Amendment No. 2, dated as of November 12, 1998, to the Revolving Credit Agreement.(13) 10.21 Amended and Restated Term Loan Agreement, dated as of April 30, 1998, by and among TRCH, the lenders party thereto, DLJ Capital Funding, Inc., as Syndication Agent, First Union National Bank, as Documentation Agent, and The Bank of New York, as Administrative Agent.(8) 10.22 Subsidiary Guaranty dated as of October 24, 1997 by Total Renal Care, Inc., TRC West, Inc. and Total Renal Care Acquisition Corp. in favor of and for the benefit of The Bank of New York, as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as defined therein) and the Acknowledging Currency Exchangers (as defined therein).(9) 10.23 Borrower Pledge Agreement dated as of October 24, 1997 and entered into by and between the Company, and The Bank of New York, as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as defined therein) and the Acknowledging Currency Exchangers (as defined therein).(9) 10.24 Amendment to Borrower Pledge Agreement, dated February 27, 1998, executed by TRCH in favor of The Bank of New York, as Collateral Agent.(13) 10.25 Form of Subsidiary Pledge Agreement dated as of October 24, 1997 by Total Renal Care, Inc., TRC West, Inc. and Total Renal Care Acquisition Corp., and The Bank of New York, as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as defined therein) and the Acknowledging Currency Exchangers (as defined therein).(9) 10.26 Subsidiary Pledge Agreement, dated as of February 27, 1998, by RTC and The Bank of New York, as Collateral Agent, the lenders to the Revolving Credit Agreement, the lenders to the Term Loan Agreement, the Term Agent (as defined therein), the Acknowledging Interest Rate Exchangers (as defined therein) and the Acknowledging Currency Exchangers (as defined therein).(13)
Exhibit Page Number Description Number 10.27 Form of First Amendment to Borrower/Subsidiary Pledge Agreement, dated April 30, 1998, by and among TRCH, RTC, TRC and The Bank of New York, as Collateral Agent.(8) 10.28 Form of Acknowledgement and Confirmation, dated April 30, 1998, by TRCH, RTC, TRC West, Inc., Total Renal Care, Inc., Total Renal Care Acquisition Corp., Renal Treatment Centers--Mid-Atlantic, Inc., Renal Treatment Centers-- Northeast, Inc., Renal Treatment Centers--California, Inc., Renal Treatment Centers--West, Inc., and Renal Treatment Centers--Southeast, Inc. for the benefit of The Bank of New York, as Collateral Agent and the lenders party to the Term Loan Agreement or the Revolving Credit Agreement.(8) 10.29 Agreement and Plan of Merger dated as of November 18, 1997 by and among TRCH, Nevada Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of TRCH, and RTC.(10) 10.30 First Amendment to the Subsidiary Guaranty dated February 17, 1998.(2) 10.31 Special Purpose Option Plan.(11) 10.32 Guaranty, entered into as of March 31, 1998, by TRCH in favor of and for the benefit of PNC Bank.(2) 10.33 First Amendment, dated as of August 5, 1998, to the Term Loan Agreement.(14) 12.1 Statement re Computation of Ratios of Earnings to Fixed Charges.X 21.1 List of our subsidiaries.(13) 23.1 Consent of PricewaterhouseCoopers LLP.X 24.1 Powers of Attorney with respect to TRCH (included on page II- 1).X 27.1 Financial Data Schedule--year ended December 31, 1998, the year ended December 31, 1997 and the year ended December 31, 1996.X 27.2 Financial Data Schedule--three months ended March 31, 1997, the three months ended June 30, 1997, the three months ended September 30, 1997, the six months ended June 30, 1997 and the nine months ended September 30, 1997.X
- -------- X Included in this filing. * Management contract or executive compensation plan or arrangement. (1) Filed on March 18, 1996 as an exhibit to our Transitional Report on Form 10-K for the transition period from June 1, 1995 to December 31, 1995. (2) Filed on March 31, 1998 as an exhibit to our Form 10-K for the year ended December 31, 1997. (3) Filed on October 24, 1995 as an exhibit to Amendment No. 2 to our Registration Statement on Form S-1 (Registration Statement No. 33-97618). (4) Filed on August 29, 1995 as an exhibit to our Form 10-K for the year ended May 31, 1995. (5) Filed on December 18, 1998 as an exhibit to our Registration Statement on Form S-3 (Registration Statement No. 333-69227). (6) Filed as an exhibit to our Form 10-Q for the quarter ended September 30, 1998. (7) Filed on August 29, 1997 as an exhibit to our Registration Statement on Form S-8 (Registration Statement No. 333-34695). (8) Filed on May 18, 1998 as an exhibit to Amendment No. 1 to our annual report for the year ended December 31, 1997 on Form 10-K/A. (9) Filed on December 19, 1997 as an exhibit to our Current Report on Form 8- K. (10) Filed on December 19, 1997 as Annex A to our Registration Statement on Form S-4 (Registration Statement No. 333-42653). (11) Filed on February 25, 1998 as an exhibit to our Registration Statement on Form S-8 (Registration Statement No. 333-46887). (12) Filed as an exhibit to RTC's Form 10-Q for the quarter ended June 30, 1996. (13) Filed on March 31, 1999 as an exhibit to our Form 10-K for the year ended December 31, 1998. (14) Filed on October 8, 1999 as an exhibit to our Form 10-K/A (Amendment No. 1) for the year ended December 31, 1998. EX-12.1 2 RATIO OF EARNINGS EXHIBIT 12.1 TOTAL RENAL CARE HOLDINGS, INC. RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to fixed charges is computed by dividing fixed charges into earnings. Earnings is defined as pretax income from continuing operations adjusted by adding fixed charges and excluding interest capitalized during the period. Fixed charges means the total of interest expense and amortization of financing costs, and the estimated interest component of rental expense on operating leases. In 1995, we changed our fiscal year end to December 31 from May 31.
Seven months Years ended ended May 31, December 31, Years ended December 31, --------------- --------------- ---------------------------------------- 1994 1995 1994 1995 1995 1996 1997 1998 ------- ------- ------- ------- ------- ---------- ---------- ---------- (restated) (restated) (restated) (in thousands, except for ratio data) Income before income taxes, minority interest, extraordinary items and cumulative effect of a change in accounting principle .. $18,753 $24,323 $14,174 $26,436 $39,685 $58,141 $85,680 $55,804 Minority interest....... 1,046 1,593 878 1,784 2,544 3,578 4,502 7,163 ------- ------- ------- ------- ------- ------- -------- -------- 17,707 22,730 13,296 24,652 37,141 54,563 81,178 48,641 ------- ------- ------- ------- ------- ------- -------- -------- Fixed charges: Interest expense and amortization of debt issuance costs and discounts on all indebtedness........... 1,575 9,087 4,676 8,007 13,375 14,075 30,289 82,627 Interest portion of rental expense......... 1,926 2,475 1,438 1,950 3,347 5,301 8,196 12,992 ------- ------- ------- ------- ------- ------- -------- -------- Total fixed charges..... 3,501 11,562 6,114 9,957 16,722 19,376 38,485 95,619 ------- ------- ------- ------- ------- ------- -------- -------- Earnings before income taxes, extraordinary items, cumulative effect of a change in accounting principle and fixed charges...... $21,208 $34,292 $19,410 $34,609 $53,863 $73,939 $119,663 $144,260 ======= ======= ======= ======= ======= ======= ======== ======== Ratio of earnings to fixed charges.......... 6.06 2.97 3.17 3.48 3.22 3.82 3.11 1.51 ======= ======= ======= ======= ======= ======= ======== ========
EX-23.1 3 OPINION OF EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-84610, No. 33-83018, No. 33-99862, No. 33-99864, No. 333-1620, No. 333-34693, No. 333-34695, No. 333-46887 and No. 333-75361) of Total Renal Care Holdings, Inc. of our report dated March 29, 1999, except for Note 1A which is as of January 18, 2000 relating to the financial statements, which appears in this Annual Report on Form 10-K/A (Amendment No. 2). We also consent to the incorporation by reference of our report dated March 29, 1999 except for Note 1A which is as of January 18, 2000 relating to the Financial Statement Schedule, which appears in this Form 10-K/A (Amendment No. 2). PricewaterhouseCoopers LLP Seattle, Washington January 18, 2000 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 YEAR YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1996 JAN-01-1998 JAN-01-1997 JAN-01-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 41,487,000 6,700,000 0 0 0 0 478,320,000 279,103,000 0 61,848,000 30,695,000 0 23,470,000 15,766,000 0 566,514,000 308,248,000 0 341,446,000 242,005,000 0 108,109,000 69,167,000 0 1,911,619,000 1,279,261,000 0 178,450,000 102,450,000 0 470,000,000 125,000,000 0 0 0 0 0 0 0 81,000 78,000 0 473,783,000 422,368,000 0 1,911,619,000 1,279,261,000 0 0 0 0 1,203,738,000 758,403,000 496,651,000 0 0 0 1,070,201,000 647,684,000 428,951,000 0 0 0 44,858,000 28,899,000 15,737,000 72,804,000 28,214,000 13,417,000 48,641,000 81,178,000 54,563,000 38,449,000 35,654,000 22,031,000 10,192,000 45,524,000 32,532,000 0 0 0 12,744,000 0 7,700,000 6,896,000 0 0 (9,448,000) 45,524,000 24,832,000 (0.12) 0.59 0.33 (0.12) 0.57 0.32
EX-27.2 5 FINANCIAL DATA SCHEDULE
5 3-MOS 3-MOS 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 APR-01-1997 JUL-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 JUN-30-1997 SEP-30-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 156,788,000 179,408,000 197,525,000 336,196,000 533,721,000 156,788,000 179,408,000 197,525,000 336,196,000 533,721,000 0 0 0 0 0 134,024,000 151,809,000 171,439,000 285,833,000 457,272,000 0 0 0 0 0 4,803,000 4,788,000 11,414,000 9,591,000 21,005,000 3,937,000 5,717,000 7,525,000 9,654,000 17,179,000 18,116,000 21,713,000 18,594,000 39,829,000 58,423,000 7,411,000 8,920,000 9,232,000 16,331,000 25,563,000 10,705,000 12,793,000 9,362,000 23,498,000 32,860,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10,705,000 12,793,000 9,362,000 23,498,000 32,860,000 0.14 0.17 0.12 0.30 0.42 0.14 0.16 0.12 0.29 0.43
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