-----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, UNIQcZL86AN221xhAurUegDTgpyA68s0UTE8HCmvI6II7TVSn1J59U6GrojdfHBX O98vYXdZcNjWpCbtBJ23yQ== 0000898430-00-000997.txt : 20000411 0000898430-00-000997.hdr.sgml : 20000411 ACCESSION NUMBER: 0000898430-00-000997 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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 SEC ACT: SEC FILE NUMBER: 001-04034 FILM NUMBER: 583758 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 1 FORM 10-K405 (PERIOD ENDED 12/31/99) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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 (I.R.S. Employer of incorporation or organization) Identification No.)
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, 2000, based on the price at which the common stock was sold as of March 15, 2000, was $218,343,253. The number of shares of the Registrant's common stock outstanding as of March 15, 2000 was 81,244,001 shares. Documents Incorporated by Reference None. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Item 1. Business. The following should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Form 10-K. This Form 10-K contains forward-looking statements which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Overview We are the second largest provider of dialysis services in the United States for patients suffering from chronic kidney failure, also known as end stage renal disease, or ESRD. As of December 31, 1999, we provided dialysis and ancillary services to approximately 40,000 patients through a network of 488 outpatient dialysis facilities in the continental United States, including approximately 3,700 patients and 49 facilities under third party management agreements. In addition, we provide inpatient dialysis services at approximately 330 hospitals. We also offer ancillary services, including ESRD laboratory and ESRD clinical research programs. Outside the continental United States, we provide dialysis and ancillary services to an additional approximately 5,300 patients through a network of 84 dialysis facilities in Argentina, Europe, Hawaii, Puerto Rico and Guam. The Company was formed in 1994 through the spin-off by Tenet Healthcare Corporation, formerly National Medical Enterprises, of its dialysis services business. Prior to 1999 we had an aggressive growth strategy of acquiring other dialysis businesses. In February 1998 we merged with Renal Treatment Centers, or RTC, in a stock-for-stock transaction valued at approximately $1.3 billion. After the merger with RTC, we became the second largest provider of dialysis services in the United States. As a result of this aggressive growth strategy through acquisitions, we have become highly leveraged. On October 18, 1999 we hired Kent J. Thiry as our new Chairman and Chief Executive Officer. Since that time, we have been implementing a new strategy focused on improving our financial infrastructure and facility operations and restructuring our balance sheet. During the fourth quarter of 1999, we announced our intention to sell our dialysis facilities outside the continental United States as an important first step in restructuring our balance sheet and reducing our debt burden. In January 2000 we signed definitive agreements to sell our dialysis businesses in Argentina, Europe, Puerto Rico and Hawaii for approximately $160 million. The sales are subject to the receipt of required bank and regulatory approvals, including antitrust approvals and certificate of need transfers, and other closing conditions. The purchase price will be adjusted for increases or decreases in the net tangible equity of the Argentina and Europe businesses. We currently expect more than 80% of the transactions, in terms of proceeds and asset values, to close during the second quarter of 2000. The remaining divestures are expected to close later in 2000. The proceeds from these sales will be available to pay down outstanding debt. As described further in our financial statements included in this report, we recorded asset impairment and other valuation losses of $120 million and an incremental increase in the provisions for aged accounts receivable of approximately $58 million in the fourth quarter of 1999. As a result of these charges, we are out of compliance with several financial covenants in our credit facilities. We are currently incurring higher interest charges because of our failure to comply with these covenants. As a result of our failure to comply with these covenants, a majority of our lenders could declare an event of default, which would allow them to accelerate the payment of all amounts due under our credit facilities. This event of default would also allow the holders of our subordinated notes to accelerate payment of their notes. Accordingly, we have reclassified these long-term debt balances to current liabilities on our balance sheet. We are currently in discussions with our banks regarding obtaining a waiver of these covenant violations or restructuring our current credit facilities. These discussions are ongoing. The rapid growth through acquisitions over the past several years also had a significant impact on our administrative functions, including billing and cash collection processes, which at times operated below optimal 1 levels of efficiency and effectiveness. During 1999 we halted our aggressive growth strategy and applied additional resources toward stabilizing and improving our business processes. During 1999 we implemented a number of systems, processes and training solutions to begin to improve our financial infrastructure problems. Some of the specific measures we undertook during 1999 include: . Implementing new general ledger and financial systems; . Implementing new billing and collection systems; . Implementing a "data warehouse" to combine all of our financial, reimbursement and clinical data bases in order to provide more detailed management information; . Strengthening the financial management team; and . Enhancing employee training, particularly in the billing and collection areas. During 2000 we will continue to focus on improving our financial infrastructure. Our historical growth The table below shows the results of our aggressive growth strategy over the past several years. The pace of our growth slowed significantly during the second half of 1999 and will continue to be limited during 2000.
Managed Acquisitions Developments Centers Closures ------------ ------------ ------- -------- 1995............................ 23 3 1996............................ 57 9 1997............................ 51 12 1998 (excluding Renal Treatment Centers merger)................ 70 24 32 10 Renal Treatment Centers merger (February 27, 1998)............ 185 1999............................ 45 13 18 12
The dialysis industry End stage renal disease ESRD is the state of advanced kidney impairment that is irreversible and requires routine dialysis treatments or kidney transplantation to sustain life. Dialysis is the removal of waste from the blood of ESRD patients by artificial means. Patients suffering from ESRD generally require dialysis three times per week for their entire lives. The number of ESRD patients in the United States has increased at an approximate compounded annual growth rate of 9% from approximately 150,000 patients in 1989 to an estimated 360,000 patients in 1999. However, during the past three years the ESRD compounded annual patient growth rate slowed to approximately 7%. We believe recent slowing in the historical growth rate is primarily attributable to: . The number of patients diagnosed with ESRD who are not treated has been declining, resulting in a more complete capturing of the ESRD patient population; and . Better treatment of pre-ESRD patients, particularly those with hypertension and diabetes. 2 We expect the number of ESRD patients to continue to grow at approximately the recent historical rate for the foreseeable future due to: . The continued aging of the general population; . Better treatment and longer survival of patients with diseases that typically lead to ESRD, including diabetes and hypertension; and . Improved medical and dialysis technology. Treatment options for ESRD Treatment options for ESRD include hemodialysis, peritoneal dialysis and kidney transplantation. ESRD patients are treated predominantly in outpatient treatment facilities. HCFA estimates that approximately 88% of the dialysis patients in the United States receive hemodialysis treatment, with 12% of the dialysis patients using peritoneal dialysis. . Hemodialysis Hemodialysis, the most common form of ESRD treatment, is usually performed either in a freestanding facility or in a hospital-based facility. A patient can also perform hemodialysis at home with assistance. Hemodialysis uses an artificial kidney, called a dialyzer, to remove toxins, fluids and salt from the patient's blood, combined with a machine to control external blood flow and monitor vital signs. The dialysis process occurs across a semi-permeable membrane that divides the dialyzer into two distinct chambers. While blood is circulated through one chamber, a pre-mixed dialyzer fluid is circulated through the other chamber. The toxins and excess fluid from the blood selectively cross the membrane into the dialyzer fluid, allowing cleansed blood to return into the patient's body. Each hemodialysis treatment typically lasts approximately three and one-half hours. Hemodialysis usually is performed three times per week. . Peritoneal dialysis The patient generally performs peritoneal dialysis at home. There are several variations of peritoneal dialysis. The most common are continuous ambulatory peritoneal dialysis, or CAPD, and continuous cycling peritoneal dialysis, or CCPD. All forms of peritoneal dialysis use the patient's peritoneal, or abdominal, cavity to eliminate fluid and toxins from the patient. Because it does not involve going to a facility three times a week for treatment, peritoneal dialysis is an attractive alternative to hemodialysis for patients who desire more freedom in their lifestyle. However, peritoneal dialysis is not a suitable method of treatment for many patients. CAPD introduces dialysis solution into the patient's peritoneal cavity through a surgically placed catheter. Toxins in the blood continuously cross the peritoneal membrane into the dialysis solution. After several hours, the patient drains the used dialysis solution and replaces it with fresh solution. This procedure usually is repeated four times per day. CCPD is performed in a manner similar to CAPD, but uses a mechanical device to cycle dialysis solution through the patient's peritoneal cavity while the patient is sleeping or at rest. . Transplantation An alternative treatment that we do not provide is kidney transplantation. However, we do provide both pre- and post-transplant nursing services. While transplantation, when successful, is generally the most desirable form of therapeutic intervention, the shortage of suitable donors, side effects of immunosuppressive drugs given to transplant recipients and dangers associated with transplant surgery for some patient populations limit the availability of this treatment option. Only approximately 5% of all dialysis patients received a kidney transplant in 1996 and the number of transplants performed annually has remained relatively stable over the last ten years. 3 Historically stable Medicare reimbursement environment Since 1972, the federal government has provided universal reimbursement for dialysis under the Medicare Program regardless of age or income. Under this system, Congress establishes Medicare reimbursement rates for dialysis patients. Medicare reimbursement rates for dialysis treatments have been essentially flat since 1983 and have declined over 70% in real dollars since 1972. Effective January 1, 2000, Congress enacted a 1.2% increase in the dialysis composite rate. An additional 1.2% increase will be effective January 1, 2001. These are the first rate increases since 1991. Industry consolidation The domestic dialysis services industry has been consolidating, with the five largest dialysis providers increasing their share of dialysis facilities from approximately 30% in 1992 to over 60% in 1999. However, the absolute number of facilities owned by parties other than the five largest dialysis providers has not significantly decreased due to the consistent growth in the patient and facility bases. We expect consolidation by the largest dialysis providers to continue due to their ability to leverage corporate and management resources and increase operating efficiencies. Moreover, the growth of managed care organizations has led physician owners of private facilities to sell their facilities to the multi-facility providers, which we believe are better positioned to meet the challenges of managed care, including the reporting of quality outcomes measures through clinical information systems and the lowering of overall healthcare costs through a reduction in hospitalizations. Location and capacity of our dialysis facilities We operate 488 outpatient dialysis facilities in the continental United States. We own, either directly, through wholly-owned subsidiary corporations or through joint ventures with non-physicians, 412 of these facilities. Of the remaining facilities, 27 are partially owned by us with physicians, and 49 are managed by us. As of December 31, 1999, the locations of our facilities were as follows: Continental United States
Number of Number of Number of State Facilities State Facilities State Facilities ----- ---------- ----- ---------- ----- ---------- Alabama 1 Kentucky 2 New York 28 Arizona 7 Louisiana 8 Ohio 3 California 95 Maryland 16 Oklahoma 22 Colorado 15 Michigan 11 Pennsylvania 21 District of Columbia 4 Minnesota 29 South Carolina 2 Delaware 1 Missouri 6 South Dakota 4 Florida 43 North Carolina 28 Texas 43 Georgia 27 Nebraska 1 Utah 4 Illinois 13 New Jersey 7 Virginia 17 Indiana 9 New Mexico 2 Washington 5 Kansas 9 Nevada 4 Wisconsin 1
4 Operations Outside the Continental U.S.
Number of Facilities ---------- Argentina.................................................... 49 Italy........................................................ 20 Germany...................................................... 3 United Kingdom............................................... 4 Hawaii....................................................... 5 Puerto Rico.................................................. 2 Guam......................................................... 1
We also provide acute inpatient dialysis services to approximately 330 hospitals. Throughout our network of outpatient dialysis facilities, we provide training, supplies and on-call support services to all of our CAPD and CCPD patients. We believe we have adequate capacity within our existing facilities network to accommodate greater patient volume. In addition, we currently are expanding capacity at some of our facilities by adding additional dialysis stations to meet growing demand and developing several facilities where existing facilities cannot be expanded. We have entered into definitive agreements to sell our dialysis businesses in Argentina, Europe, Puerto Rico and Hawaii. We also plan to divest our operations in Guam. These businesses include 84 facilities that provide services to approximately 5,300 dialysis patients. The sales are subject to the receipt of required bank and regulatory approvals, including antitrust approvals and certificate of need transfers, and other closing conditions. Operation of dialysis facilities Our dialysis facilities are designed specifically for outpatient hemodialysis. Many of our facilities also have a designated area for training patients in home dialysis. Participation in the Medicare ESRD program requires that each facility has a qualified medical director. See the subheading "Physician relationships" below for additional information on our medical directors and referring nephrologists. Each facility also has an administrator, typically a registered nurse, who supervises the day-to-day operations of the facility and its staff. The staff of each facility typically consists of registered nurses, licensed practical or vocational nurses, patient care technicians, a social worker, a registered dietician, a unit clerk and bio-medical technicians. All of our facilities offer high-flux and high-efficiency hemodialysis, which most physicians practicing at our facilities deem suitable for most of their patients. High-flux and high-efficiency hemodialysis utilize machinery and dialyzers that allow patients to dialyze in a shorter period of time per treatment because they cleanse the blood at a faster rate than conventional hemodialysis. Many of our facilities also offer conventional hemodialysis. We consider the equipment installed in our facilities to be among the most technologically advanced equipment currently available to the dialysis industry. Many of our facilities also offer various forms of services for home dialysis, primarily CAPD and CCPD. Home dialysis services consist of providing equipment and supplies, training, patient monitoring and follow-up assistance to patients who prefer and are able to receive dialysis treatments in their homes. Registered nurses train patients and their families or other patient assistants to perform either CAPD or CCPD at home. Our training programs for home dialysis generally last two to three weeks. During 1999 approximately 10% of our patients were receiving peritoneal dialysis at any one time. 5 We believe our reputation for quality care is a factor in attracting patients and physicians and in securing relationships with managed care payors. We engage in organized and systematic efforts to measure, maintain and improve the quality of services we deliver through our quality management programs. Our quality management programs are under the direction of our chief medical officer. Our vice president of quality management and over 30 regional quality management coordinators implement these programs. The programs also address areas that affect the quality of our service throughout the U.S., such as education, training and infection control. In addition, our regional biomedical quality management coordinators audit the technical and biomedical quality of our facilities. The corporate and regional teams also work with each facility's multi-disciplinary quality management team, including the medical director, to implement the programs. Inpatient dialysis services We provide inpatient dialysis services, excluding physician professional services, to patients in approximately 330 hospitals. We render these services for a per-treatment fee individually negotiated with each hospital. When a hospital requests our services, we administer the dialysis treatment at the patient's bedside or in a dedicated treatment room in the hospital. Examples of cases in which inpatient dialysis services are required are patients with acute kidney failure resulting from trauma or similar causes, patients in the early stages of ESRD and ESRD patients who require hospitalization for other reasons. Ancillary services We provide a range of ancillary services to ESRD patients, including: . EPO and other pharmaceuticals. The most significant ancillary service that we provide is the administration of pharmaceuticals, including erythropoietin, or EPO, vitamin D analogs and iron supplements, upon a physician's prescription. EPO is a genetically-engineered form of a naturally occurring protein which stimulates the production of red blood cells. EPO is used in connection with all forms of dialysis to treat anemia, a medical complication ESRD patients frequently experience. . ESRD laboratory services. We own two licensed clinical laboratories, located in Florida and Minnesota, specializing in ESRD patient testing. Our laboratories provide routine laboratory tests, which are included in the Medicare composite rate for dialysis, and other laboratory tests. Our laboratories provide these tests primarily for our own, but also for other, ESRD patients throughout the United States. These tests are performed to monitor a patient's ESRD condition, including the adequacy of dialysis, as well as other diseases a patient may have. In addition, our Minnesota laboratory provides certain highly-specialized tests, including therapeutic drug monitoring, bone deterioration and renal stone monitoring and certain pre- and post-kidney transplant testing. Our Florida laboratory, which serves most of our dialysis facilities, utilizes our proprietary KlinLab information system, which provides extensive reporting and information to our dialysis facilities regarding critical outcome indicators. These laboratories have additional capacity available to accommodate our expanding patient base. . ESRD clinical research programs. Our commitment to improve treatment outcomes, reduce costs and enhance the quality of life for ESRD patients includes participating in the research and development of new products and services. Total Renal Research, or TRR, which operated for over 15 years as the Drug Evaluation Unit, became our subsidiary in 1997. TRR conducts Phase I through Phase IV clinical trials on devices, drugs and new technologies in the renal and renal-related fields utilizing over 45 clinical trial sites. This clinical research organization has conducted over 260 clinical trials, working with more than 70 drug companies and 12 device companies, over the last 15 years. 6 Physician relationships A key factor in the success of a dialysis facility is our relationship with local nephrologists. We currently have relationships with more than 800 nephrologists in our continental United States markets. As is often true in the dialysis industry, one or a few physicians, usually the medical director, account for all or a significant portion of a dialysis facility's patient referral base. In the continental United States, our medical directors account for approximately 80% of our patient referrals. The loss of one or more key referring physicians at a particular facility could materially reduce the revenue of that facility. An ESRD patient generally seeks treatment at a facility that is near to his or her home and at which his or her nephrologist has practice privileges. Consequently, in order to continue to receive physician referrals of ESRD patients, we rely on our ability to meet the needs of referring physicians. The conditions of participation in the Medicare ESRD program mandate that treatment at a dialysis facility be "under the general supervision of a director who is a physician." We have engaged qualified physicians or groups of qualified physicians to serve as medical directors for each of our facilities. Generally, the medical director must be board eligible or board certified in internal medicine or nephrology and have had at least 12 months of experience or training in the care of patients at dialysis facilities. At some facilities, we also contract with one or more physicians to serve as assistant or associate medical directors or to direct specific programs, such as home dialysis training, or in a few instances, to provide medical director services for acute dialysis services provided at hospitals. Medical directors, associate medical directors and assistant medical directors enter into written contracts with us for a fixed period of time which specify their duties and establish their compensation. The compensation of the medical directors and other physicians under contract is separately negotiated for each facility and generally depends upon competitive factors in the local market, the physician's professional qualifications, and the specific duties and responsibilities of the physician. Written agreements with medical directors and other contracted physicians fix their compensation for periods of one year or more. Generally, we have non-competition agreements with our medical directors. Also, in all cases in which we acquire a facility from one or more physicians, or where one or more physicians own interests in facilities as partners, co- shareholders, or members of a limited liability company with us, these physicians have agreed to refrain from owning interests in competing facilities within a defined geographic area for various periods. While infrequent, we have from time to time experienced competition from a dialysis facility established by a former medical director following the termination of his or her relationship with us. The agreements with medical directors at approximately 8% of our facilities will expire over the next three years. We may not be successful in renewing or extending these agreements on terms acceptable to us. If we are unable to renew or extend our agreement with the medical director at a particular facility, the revenues of that facility could be materially reduced. We have a Physician Advisory Board, consisting of nephrologists from facilities located in different regions of the country, which advises management on our various programs. The Physician Advisory Board has two components: a Guideline Development Committee, which provides assistance with clinical guideline development, quality management, and other related issues; and a Laboratory Advisory Committee, which provides feedback on all matters concerning our two clinical laboratories. These committees meet periodically to discuss quality and related operational issues. Limited growth strategy We have curtailed our growth strategy during the last part of 1999 and into 2000 as we focus on restructuring our balance sheet and improving our financial infrastructure and facility operations. As we complete 7 our financial restructuring we will again examine selective expansion in order to achieve local market leadership through acquisitions, opening new facilities and management agreements. In the near and medium term we will not be aggressively developing new facilities until we complete our restructuring efforts. By developing 58 facilities since 1995 we believe that we have gained an expertise in the design, construction and operation of new dialysis facilities. The development of a typical outpatient facility generally requires an average of $1.2 million for initial construction and equipment and $300,000 for working capital in the first year. Based on our experience, a new facility typically takes six to nine months to open from the date of the signing of a lease for the property, achieves operating profitability by the ninth to eighteenth month of operation and reaches maturity within three years. Sources of revenue The following table provides information for the periods indicated regarding the percentage of our net patient operating revenues provided by the respective payor category for our continental U.S. operations, which represent more than 90% of our operating revenues.
1999 1998 1997 ---- ---- ---- Percent of total dialysis revenues for continental U.S. operations: Medicare............................................. 54% 53% 59% Medicaid............................................. 5 4 5 --- --- --- 59 57 64 HMO's, health insurance carriers and private patient payment............................................. 41 43 36 --- --- --- 100% 100% 100% === === ===
Medicare reimburses dialysis providers for the treatment of individuals who are diagnosed with ESRD and are eligible for participation in the Medicare ESRD program, regardless of age or financial circumstances. For each treatment, Medicare pays 80% of the amount set by the Medicare reimbursement system. In most cases, a secondary payor, usually Medicare supplemental insurance or a state Medicaid program is responsible for the remaining 20%. If a patient does not qualify for state provided Medicaid based on financial need and does not purchase secondary insurance through a private insurer, the dialysis provider may not be reimbursed for the 20% portion of the ESRD composite rate that Medicare does not pay. A recent Congressional action will allow dialysis providers to pay their patients' premiums for secondary insurance, following the enactment of implementing regulations. These insurance premiums are generally less than the 20% co-payment that a private insurer would pay. Dialysis providers could capture, as incremental profit, the difference between the premiums paid to these secondary insurers and the reimbursement amounts received from them. We would pay for a patient's secondary insurance premium only if the patient did not qualify for Medicaid and the patient demonstrated an inability to pay for this insurance. Dialysis providers will be able to pay directly their patients' premiums for secondary insurance only upon the enactment of regulations implementing the Congressional action. We expect these regulations will be enacted in the second or third quarter of 2000. ESRD patients receiving dialysis become eligible for primary Medicare coverage at various times, depending on their age or disability status, as well as whether they are covered by an employer group health plan. Generally, for patients not covered by an employer group health plan, Medicare becomes the primary payor either immediately or after a three-month waiting period. For patients covered by an employer group health plan, Medicare generally becomes the primary payor after 33 months. 8 Medicare reimbursement Under the Medicare reimbursement system, the reimbursement rates are fixed in advance and have been adjusted from time to time by Congress. Medicare has established a composite rate set by HCFA that determines the Medicare reimbursement available for a designated group of dialysis services, including the dialysis treatment, supplies used for that treatment, some laboratory tests and some medications. The Medicare composite rate is subject to regional differences based upon several factors, including regional differences in wage levels. Other services and items are eligible for separate reimbursement under Medicare and are not part of the composite rate, including some injectible drugs like EPO, Calcijex(R), Infed(R), Zemplar(R), and others. Claims for Medicare reimbursement must generally be presented within 15 to 27 months of treatment depending on the month in which the service was rendered. We generally submit claims monthly and are typically paid by Medicare within 17 days after submission. We receive reimbursement for outpatient dialysis services provided to Medicare-eligible patients at composite rates that are currently between $117 and $139 per treatment, with an average rate of $128 per treatment. This rate is subject to change by legislation. The Medicare ESRD composite rate was increased effective January 1, 2000 by 1.2%. The same legislation also included a further 1.2% composite rate increase, which will become effective January 1, 2001. Historically, there have been very few changes to the Medicare reimbursement rate. The rate did not change from commencement of the program in 1972 until 1983. From 1983 through December 1990 numerous Congressional actions resulted in a net reduction of the average reimbursement rate from a fixed fee of $138 per treatment in 1983 to approximately $125 per treatment in 1990. Congress increased the ESRD reimbursement rate, effective January 1, 1991, by $1.00 per treatment. The recent increase was the first change in the rate since 1991. In January 1996, HCFA announced a three-year demonstration project involving the enrollment of ESRD patients in managed care organizations. The demonstration project is evaluating the appropriateness of fixed, or capitated, reimbursement for dialysis services. There were initially four demonstration project sites selected. Three sites are now actually implementing the pilot program and we are participating in the project with the two largest sites. We expect the ESRD demonstration project and the analysis of the results of the project to continue over the next three to four years. The pilot program, if successful, could result in HCFA allowing ESRD patients to enroll in managed care organizations. The likelihood and timing of this decision is impossible for us to predict. Medicaid reimbursement Medicaid programs are state-administered programs partially funded by the federal government. These programs are intended to provide health coverage for patients whose income and assets fall below state defined levels and who are otherwise uninsured. In some states, these programs also serve as supplemental insurance programs for the Medicare co-insurance portion of the ESRD composite rate and provide reimbursement for additional services, like oral medications, that are not covered by Medicare. State regulations generally follow Medicare schedules for reimbursement levels and coverages. Certain states, however, require beneficiaries to pay a monthly share of the cost based upon levels of income or assets. We are a licensed ESRD Medicaid provider in the states in which we conduct our business. Private payors Before Medicare becomes the primary payor, a patient's employer group health plan or other private insurance, if any, is responsible for payment at its negotiated rates or, in the absence of negotiated rates, at our usual and customary rates. The patient is responsible for any deductibles and co- payments under the terms of the employer group health plan or other insurance. After Medicare becomes the primary payor, these private payors generally reimburse us for the 20% of the Medicare reimbursement rates that Medicare does not pay. Our usual and customary rates are, and the rates we negotiate with private payors typically are, higher than Medicare 9 reimbursement rates. We also have agreements with over 350 managed care payors, at rates that are generally lower than those negotiated with other private payors, but above Medicare rates. Hospital inpatient dialysis services We provide inpatient dialysis services, excluding physician professional services, to patients in hospitals pursuant to written agreements with the hospitals. We provide these services for a per-treatment fee which is individually negotiated with each hospital. Some of these agreements provide that we are the exclusive provider of dialysis services to the hospital, but many of them are non-exclusive. Some of these agreements also allow either party to terminate the agreement without cause. Competition for the provision of dialysis services at hospitals with which we have a non-exclusive agreement and the termination of inpatient dialysis services agreements could have an adverse effect on us. Reimbursement for EPO and other drugs On June 1, 1989, the FDA approved the production and sale of EPO, and HCFA approved Medicare reimbursement for the use of EPO for dialysis patients. EPO stimulates the production of red blood cells and is beneficial in the treatment of anemia, with the effect of reducing or eliminating the need for blood transfusions for dialysis patients. Physicians began prescribing EPO for their patients in our dialysis facilities in August 1989. Most of our dialysis patients receive EPO. Approximately 24% of our net operating revenues in 1999 were generated from the administration of EPO. Therefore, EPO reimbursement significantly impacts our net income. The Office of the Inspector General of the Department of Health and Human Services has recommended that Medicare reimbursement for EPO be reduced from the current amount of $10 to $9 per 1,000 units. The Department of Health and Human Services, or HHS, has concurred with this recommendation; however, HHS has not determined whether it will pursue this change through the rulemaking process. In addition, President Clinton's proposed budget for fiscal year 2001 includes a reduction in the Medicare reimbursement for EPO by this amount. President Clinton proposed the same EPO reimbursement reduction in his fiscal year 2000 budget proposal, but Congress did not pass any EPO reimbursement reduction. EPO reimbursement programs have been, and in the future may be, subject to these and other legislative or administrative proposals. We cannot predict whether future rate or reimbursement method changes will be made. If such changes are made, they could have a material adverse effect on our business, results of operations or financial condition. Furthermore, EPO is produced by a single manufacturer, Amgen Corporation, and any interruption of supply or product cost increases could adversely affect our operations. In February 2000, Amgen unilaterally increased its stated price for EPO by 3.9%, which will likely have an adverse effect on our net income. Medicare generally reimburses for EPO only when it is administered to patients whose hematocrits do not exceed 36%. When the patient's hematocrit exceeds 36%, Medicare reimbursement is contingent upon the medical justification. Hematocrit is a measure of red blood cell concentration. The other intravenous drugs we administer include Calcijex, iron supplements, various antibiotics and other medications. Medicare currently reimburses us separately for the intravenous drugs at a rate of 95% of the average wholesale price of each drug. The Clinton administration has proposed a reduction in the reimbursement rate for outpatient prescription drugs to 83% of the average wholesale price in its fiscal year 2001 budget. Congress did not approve this rate change. However, we do not know whether future rate changes will be implemented. If rate changes are implemented, it could have a material adverse effect on our business, results of operations or financial condition. Government regulation Our dialysis operations are subject to extensive federal, state and local governmental regulations. These regulations require us to meet various standards relating to, among other things, reimbursement from government 10 programs, premises, management of facilities, personnel, the maintenance of proper records, equipment, and quality assurance programs/patient care. Our dialysis facilities are subject to periodic inspection by state agencies and other governmental authorities to determine if we satisfy applicable standards and requirements. All of our dialysis facilities are certified by HCFA, as is required for the receipt of Medicare reimbursement. Our business would be adversely impacted by: . Any loss or suspension of federal certifications; . Any loss or suspension of authorization to participate in the Medicare or Medicaid programs; . Any loss or suspension of licenses under the laws of any state or governmental authority in which we generate substantial revenues; or . Reduction of reimbursement or reduction or elimination of coverage for dialysis and ancillary services. To date, we have not had any difficulty in maintaining our licenses or our Medicare and Medicaid authorizations. However, our industry will continue to be subject to government regulation, the scope and effect of which are difficult to predict. This regulation could adversely impact us in a material way. In addition, various governmental authorities periodically may review or challenge our operations, which could have an adverse effect on us. Fraud and abuse under federal law The "antikickback" statute contained in the Social Security Act imposes criminal and civil sanctions on persons who receive or make payments in return for: . The referral of a patient for treatment; or . The ordering or purchasing of items or services that are paid for in whole or in part by Medicare, Medicaid or similar state programs. Federal penalties for the violation of these laws include imprisonment, fines and exclusion of the provider from future participation in the Medicare and Medicaid programs. Civil penalties for violation of these laws include assessments of $10,000 per improper claim for payment plus twice the amount of the claim and suspension from future participation in Medicare and Medicaid. Some state antikickback statutes also include criminal penalties. The federal statute expressly prohibits traditionally criminal transactions, such as kickbacks, rebates or bribes for patient referrals. Court decisions have also said that, under certain circumstances, the statute is also violated when a purpose of a payment is to induce referrals. In July 1991, November 1992, and November 1999, the Secretary of HHS published regulations that create exceptions or "safe harbors" for some business transactions. Transactions structured within these safe harbors do not violate the antikickback statute. A business arrangement must satisfy each and every element of a safe harbor to be protected by that safe harbor. Transactions that do not satisfy all elements of a relevant safe harbor do not necessarily violate the antikickback statute but may be subject to greater scrutiny by enforcement agencies. We believe our arrangements with referring physicians are in material compliance with these laws. We seek to structure our various business arrangements to satisfy as many safe harbor elements as is practical. Some of our arrangements with referring physicians do not satisfy all elements of a relevant safe harbor. Although we have never been challenged under these statutes and believe we materially comply with these and other applicable laws and regulations, we could in the future be required to change our practices or experience a material adverse effect as a result of a challenge. 11 Because our medical directors and other contract physicians refer patients to our facilities, the federal antikickback statute may apply. We believe our arrangements with these physicians materially comply with the antikickback statute. Among the available safe harbors is one for personal services which is relevant to our arrangements with our medical directors and the other physicians under contract. Most of our agreements with our medical directors or other physicians under contract do not satisfy all seven of the requirements of the personal services safe harbor. We believe that, except in cases where a facility is in transition from one medical director to another or where the term of an agreement with a physician has expired and a new agreement is in negotiation, our agreements with our medical directors and other contract physicians satisfy at least six of the seven requirements for this safe harbor. The requirement typically not satisfied is a requirement that if the services provided under the agreement are on a part-time basis, the agreement must specify the schedule of intervals, their precise length and the exact charge for such intervals. Because of the nature of our medical directors' duties, we believe it is impractical to meet this requirement. At some of our dialysis facilities, physicians who refer patients to the dialysis facilities hold interests in partnerships or limited liability companies owning the facilities. The antikickback statute may apply in these situations. Among the available safe harbors with respect to these arrangements is one for small entity investment interests. While none of our arrangements satisfy all of the elements of this small entity investment interests safe harbor, we believe that each of these partnerships and limited liability companies satisfies a majority of the safe harbor's elements, and that each of these business arrangements is in material compliance with the antikickback statute. We lease some of our facilities from entities in which interests are held by physicians who refer patients to those facilities, and we also sublease space to referring physicians at some of our dialysis facilities. The antikickback statute may apply in these situations. Among the available safe harbors with respect to these arrangements is one for space rentals. We believe that the leases we have entered into are in material compliance with the antikickback statute and that the leases satisfy in all material respects each of the elements of the space rental safe harbor applicable to these arrangements. Because we are purchasing and selling items and services in the operation of our facilities which may be paid in whole, or in part, by Medicare or a state healthcare program, and because these items and services might be purchased or sold at a discount, the federal antikickback statute may apply. Among the available safe harbors is one for discounts which is relevant to our discount arrangements. We believe that the discount arrangements that we have entered into are in material compliance with the antikickback statute and that these arrangements satisfy in all material respects each of the elements of the discounts safe harbor applicable to these arrangements. Fraud and abuse under state law In several states, including California, Florida, Georgia, Kansas, Louisiana, Maryland, New York, Utah and Virginia, in which we operate dialysis facilities jointly owned with referring physicians, statutes prohibit physicians from holding financial interests in various types of medical facilities to which they refer patients. Some states also have laws similar to the federal antikickback statute that may affect our ability to receive referrals from physicians with whom we have financial relationships, such as our medical directors. Some of these statutes include exemptions applicable to our medical director and other physician relationships. Some, however, include no explicit exemption for medical director services or other services for which we contract with and compensate referring physicians or for joint ownership interests of the type held by some of our referring physicians. If these statutes are interpreted to apply to referring physicians with whom we contract for medical director and similar services or to referring physicians who hold joint ownership interests, we would be required to restructure some or all of our relationships with these referring physicians. We cannot predict the consequences of this type of restructuring. We currently believe that our financial and joint ownership interests with referring physicians are in material compliance with these state statutes. 12 Stark I / Stark II The Omnibus Budget Reconciliation Act of 1989 includes certain provisions, known as Stark I, that restrict physician referrals for clinical laboratory services to entities with which a physician or an immediate family member has a "financial relationship." Stark I may be interpreted by HCFA to apply to our operations. Regulations interpreting Stark I, however, have created an exception to its applicability regarding services furnished in a dialysis facility if payment for those services is included in the ESRD composite rate. We believe that our compensation arrangements with medical directors and other physicians under contract are in material compliance with Stark I. The Omnibus Budget Reconciliation Act of 1993, or OBRA 93, contains certain provisions, known as Stark II, that restrict physician referrals for "designated health services" to entities with which a physician or immediate family member has a "financial relationship." The entity is prohibited under Stark II, as is the case for entities restricted by Stark I, from claiming payment for such services under the Medicare or Medicaid programs, is liable for the refund of amounts received pursuant to prohibited claims, is subject to civil penalties of up to $15,000 per service and can be excluded from future participation in the Medicare and Medicaid programs. Comparable provisions applicable to clinical laboratory services became effective in 1992. Stark II provisions which may be relevant to us became effective on January 1, 1995. Although proposed Stark II regulations were published on January 9, 1998, we cannot determine what provisions will be contained in the final Stark II regulations, nor when the final Stark II regulations will become effective. A "financial relationship" under Stark II is defined as an ownership or investment interest in, or a compensation arrangement with, the entity. We have entered into compensation agreements with our medical directors and with other referring physicians. Some of our medical directors own equity interests in entities which operate our dialysis facilities. Some of our dialysis facilities are leased from entities in which referring physicians hold interests, and we sublease space to referring physicians at some of our dialysis facilities. In addition, some of the medical directors and other physicians from whom we have acquired dialysis facilities own our common stock or options to acquire our common stock. We believe that the ownership of the stock and stock options and the other ownership interests and lease arrangements for such facilities are in material compliance with Stark II. The proposed Stark II regulations could, however, require us to restructure the stock and stock option ownership. Stark II includes certain exceptions. We believe that our compensation arrangements with medical directors and other contract physicians materially satisfy the personal services compensation arrangement exception to the Stark II prohibitions. Payments made by a lessor to a lessee for the use of premises are also excepted from Stark II prohibitions if specific requirements are met. We believe that our leases with referring physicians materially satisfy this exception to the Stark II prohibitions. The Stark II exception applicable to physician ownership interests in entities to which they make referrals does not encompass the kinds of ownership arrangements that referring physicians hold in several of our subsidiaries that operate dialysis facilities. For purposes of Stark II, "designated health services" include clinical laboratory services, equipment and supplies, home health services, outpatient prescription drugs and inpatient and outpatient hospital services. We believe that the language and legislative history of Stark II and the proposed and related regulations indicate that Congress did not intend to include dialysis services and the services and items provided incident to dialysis services. Our provision of, or arrangement and assumption of financial responsibility for, outpatient prescription drugs, including EPO, clinical laboratory services, facility dialysis services and supplies, home dialysis supplies and equipment and services to hospital inpatients and outpatients under our dialysis services agreements with hospitals, include services and items which could, however, be construed as designated health services within the meaning of Stark II. Although we do not bill Medicare or Medicaid for hospital inpatient and outpatient services, our medical directors may request or establish a plan of care that includes dialysis services for hospital inpatients and outpatients that may be considered a referral within the meaning of Stark II. 13 HCFA may interpret Stark II to apply to our operations. Consequently, Stark II may require us to restructure existing compensation agreements with our medical directors and to repurchase or to request the sale of ownership interests in subsidiaries and partnerships held by referring physicians or, alternatively, to refuse to accept referrals for designated health services from these physicians. We believe, but cannot assure, that if Stark II is interpreted to apply to our operations, we will be able to bring our financial relationships with referring physicians into material compliance with Stark II. We would be materially impacted if HCFA interprets Stark II to apply to us and we could not achieve that compliance. A broad interpretation of Stark II to include items provided incident to dialysis services would apply to our competitors as well. Medicare Because the Medicare program represents a substantial portion of the federal budget, Congress takes action in almost every legislative session to modify the Medicare program for the purpose of, or with the result of, reducing the amounts payable from the program to healthcare providers. Legislation or regulations may be enacted in the future that may significantly modify the ESRD program or substantially reduce the amount paid for our services. Further, statutes or regulations may be adopted which impose additional requirements for eligibility to participate in the federal and state payment programs. Any legislation or regulations of this type could adversely affect our business operations in a material way. The False Claims Act The federal False Claims Act, or FCA, is another means of policing false bills or requests for payment in the healthcare delivery system. In part, the FCA imposes a civil penalty on any person who: . Knowingly presents, or causes to be presented, to the federal government a false or fraudulent claim for payment or approval; . Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the federal government; . Conspires to defraud the federal government by getting a false or fraudulent claim allowed or paid; or . Knowingly makes, uses or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the federal government. The penalty for a violation of the FCA ranges from $5,000 to $10,000 for each fraudulent claim plus three times the amount of damages caused by each such claim. The federal government has used the FCA to prosecute Medicare fraud in areas such as coding errors, billing for services not rendered, the submission of false cost reports, billing services at a higher reimbursement rate than is appropriate, billing services under a comprehensive code as well as under one or more component codes, and billing for care which is not medically necessary. Although subject to some dispute, at least two federal district courts have also determined that alleged violations of the federal antikickback statute or Stark I and Stark II are sufficient to state a claim for relief under the FCA. In addition to the civil provisions of the FCA, the federal government can use several criminal statutes to prosecute persons who submit false or fraudulent claims for payment to the federal government. The Health Insurance Portability and Accountability Act of 1996 The Health Insurance Portability and Accountability Act of 1996, or HIPAA, among other things, allows individuals who lose or change jobs to transfer their insurance, limits exclusions for preexisting conditions, and establishes a pilot program for medical savings accounts. In addition, HIPAA also expands federal attempts to combat healthcare fraud and abuse by making amendments to the Social Security Act and the federal criminal code. Among other things, HIPAA creates a new "Health Care Fraud and Abuse Control Account," under which "advisory opinions" are issued by the Office of the Inspector General, or OIG, regarding the application of the antikickback statute, certain criminal penalties for Medicare and Medicaid fraud are extended to other federal healthcare programs, the exclusion authority of the OIG is expanded, Medicare and Medicaid civil monetary penalty provisions are extended to other federal healthcare programs, the amounts of civil monetary penalties are increased, and a criminal healthcare fraud statute is established. 14 HIPAA also required Congress to enact privacy legislation by August 21, 1999. If legislation was not enacted by this deadline, HIPAA required HHS to promulgate regulations. Congress failed to enact such legislation, resulting in recently proposed regulations from HHS regarding privacy rules and security and electronic signature standards. Based on our review of the proposed privacy rules, compliance will require the development of extensive policies and procedures, the designation of privacy officers, and the implementation of elaborate administrative safeguards with respect to private health information in our possession. Similarly, based on our review of the proposed security and electronic signature standards, compliance will require us to develop information systems, administrative, and electronic safeguards to protect data integrity. Complying with the proposed privacy rules and the proposed security and electronic signature standards will require substantial time and may require us to incur significant expenditures. Under HIPAA, compliance with these proposed regulations will be required within 24 months after the regulations become final. It is not known with certainty what provisions will be contained in the final regulations nor can we determine when the final regulations will become effective. Additionally, in the event Congress subsequently enacts privacy legislation, that legislation may preempt any final privacy regulations HHS may promulgate. We cannot determine the likelihood of Congress subsequently enacting privacy legislation nor the provisions of any such legislation. Other regulations Our operations are subject to various state hazardous waste and non- hazardous medical waste disposal laws. Those laws do not classify as hazardous most of the waste produced from dialysis services. Occupational Safety and Health Administration regulations require employers to provide workers who are occupationally subject to blood or other potentially infectious materials with certain prescribed protections. These regulatory requirements apply to all healthcare facilities, including dialysis facilities, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide or employ hepatitis B vaccinations, personal protective equipment, infection control training, post-exposure evaluation and follow-up, waste disposal techniques and procedures and engineering and work practice controls. Employers are also required to comply with various record-keeping requirements. We believe that we are in material compliance with these laws and regulations. Some states have established certificate of need programs regulating the establishment or expansion of healthcare facilities, including dialysis facilities. We believe that we are in material compliance with all applicable state certificate of need laws. Although we believe we comply materially with current applicable laws and regulations, our industry will continue to be subject to substantial regulation, the scope and effect of which are difficult to predict. We cannot assure that our activities will not be reviewed or challenged by regulatory authorities in the future. Corporate compliance program We have implemented a company-wide corporate compliance program as part of our commitment to comply fully with all applicable laws and regulations and to maintain the high standards of conduct we expect from all of our employees. We continuously review this program and enhance it as necessary. The primary purposes of the program include: . Increasing the awareness of our employees and affiliated professionals of the importance of complying with all applicable laws and regulations in an increasingly complicated regulatory environment; . Auditing our facilities and billing offices on a regular basis to identify quickly any potential instances of non-compliance; and . Ensuring that we take steps to resolve instances of non-compliance promptly as we become aware of them. 15 We have adopted a code of conduct that each of our employees and affiliated professionals must follow, and have implemented a confidential, toll-free compliance hotline (888-272-7272). Our chief compliance officer administers the compliance program. The chief compliance officer reports directly to our president and the audit committee of our board of directors. Florida laboratory payment dispute Our Florida-based laboratory subsidiary is the subject of a third-party carrier review relating to certain claims it submits for Medicare reimbursement. We understand that carriers have undertaken similar reviews with respect to other providers' laboratory activities in Florida and elsewhere. The carrier has alleged that 99.3% of the tests this laboratory performed during the review period it initially identified, from January 1995 to April 1996, and 96% of the tests performed in a second period, from May 1996 to March 1998, were not properly supported by the prescribing physicians' medical justification. The carrier has issued formal overpayment determinations in the amount of $5.6 million for the review period from January 1995 to April 1996 and $14.2 million for the review period from May 1996 to March 1998. The carrier has also suspended all payments of claims related to this laboratory, regardless of when the laboratory performed the tests. The carrier had withheld approximately $30 million in reimbursement as of December 31, 1999. The carrier has requested additional billing records with respect to the time period April 1998 to August 1999. In addition, the carrier has informed the local offices of the Department of Justice, or DOJ, and HHS of this matter, and we are cooperating with the DOJ and HHS. We have consulted with outside counsel, reviewed our records, are disputing the overpayment determinations and have provided supporting documentation of our claims. We have cooperated with the carrier to resolve this matter and have initiated the process of a formal review of the carrier's determinations. The first step in this formal review process is a hearing before a hearing officer at the carrier. We have received minimal responses from the carrier to our repeated requests for clarification and information regarding the continuing payment suspension. The hearing regarding the initial review period from January 1995 to April 1996 was held on July 27 and July 28, 1999. On January 27, 2000, the hearing officer issued a decision regarding the initial review period upholding the overpayment determination of $5.6 million. We have filed an appeal to a federal administrative law judge. In February 1999, our Florida-based laboratory subsidiary filed a complaint against the carrier and HHS seeking a court order to lift the payment suspension. In July 1999, the court dismissed our complaint because we had not exhausted all administrative remedies. We are unable to determine at this time: . When this matter will be resolved or when the laboratory's payment suspension will be lifted; . What, if any, of the laboratory claims will be disallowed; . What action the carrier, DOJ or HHS may take with respect to this matter; . Whether the carrier may review additional periods; or . Any outcome of this investigation. Any determination adverse to us could have an adverse impact on our business, results of operations or financial condition. Competition A significant portion of the dialysis industry consists of many small, independent facilities. The dialysis industry is highly competitive, particularly in terms of acquiring existing dialysis facilities and developing relationships with referring physicians. Competition for qualified physicians to act as medical directors and for inpatient dialysis services agreements is also vigorous. We have also, from time to time, experienced competition from former medical directors or referring physicians who have opened their own dialysis facilities. A portion of our business consists of monitoring and providing supplies for ESRD treatments in patients' homes. Some 16 physicians also provide similar services, and if the number of such physicians were to increase, our business, results of operations or financial condition could be adversely affected. The market share of the large multi-facility providers has increased significantly over the last several years. However, because of the growth in the total number of facilities, the absolute number of dialysis facilities owned by hospitals and independent physicians has remained relatively constant. Large multi-facility dialysis providers that we compete with include Fresenius Medical Care, Gambro, Renal Care Group and Everest Healthcare Services. Some of our competitors have substantially greater financial resources than us and may compete with us for acquisitions and the development of new facilities in markets targeted by us. There are also a number of large healthcare providers that have entered or may decide to enter the dialysis business. We cannot assure that our facilities will continue to compete successfully with the facilities of these other companies. Our two largest competitors, Fresenius and Gambro, are vertically integrated dialysis providers. Both companies manufacture a full-line of dialysis supplies and equipment while also owning and operating dialysis clinics. This may give them cost advantages over us because of their ability to manufacture their own products. In addition, Fresenius is our largest supplier of dialysis products and is also our largest competitor in the dialysis services market. Insurance We carry property and general liability insurance, professional liability insurance and other insurance coverage in amounts deemed adequate by our management, based on our claims experience. However, we cannot assure that any future claims will not exceed our applicable insurance coverage. Physicians practicing at our facilities are required to maintain their own malpractice insurance, and our medical directors maintain coverage for their individual private medical practices. We do, however, provide insurance coverage for our medical directors with respect to the performance of their duties as medical directors of our facilities. Employees As of March 15, 2000, we had more than 12,300 employees, including a professional staff of approximately 8,500 employees, a corporate and regional staff of approximately 1,200 employees and a facilities support and maintenance staff of approximately 2,600 employees. Approximately 8,600 of our employees are employed on a full-time basis. Risk factors If our lenders accelerate payment of the amounts we owe them, we could become insolvent or be forced to file for bankruptcy. As a result of charges and expenses we have recorded in the fourth quarter of 1999, we are not in compliance with several financial covenants in our credit facilities. Due to our failure to comply with these covenants a majority of our lenders could declare us in default under our credit facilities, which would allow them to accelerate payment of all amounts we owe them. If they accelerated payment, it would force us to file for bankruptcy or reorganize our business. In addition, we are paying penalties of approximately $12 million annually to our banks for being out of compliance with these covenants. We cannot predict what actions our lenders will take while we are out of compliance with these covenants. We may not have sufficient cash flow from our business to pay our debt. The amount of our outstanding debt is large compared to our cash flows and the net book value of our assets. We have substantial repayment obligations under our outstanding debt. As of December 31, 1999 we had: . Total consolidated debt of approximately $1.458 billion, including $960 million outstanding under our credit facilities; 17 . Shareholders' equity of approximately $326 million; and . A ratio of earnings to fixed charges of less than 1:1, due to our loss in 1999. The following chart shows our aggregate interest and principal payments due on all of our currently outstanding debt for each of the next five fiscal years, assuming our lenders do not accelerate payment of the amounts due under our credit facilities. Also, because the interest rate under our credit facilities is based upon a variable market rate plus a margin determined by the amount of debt we incur relative to our earnings before income taxes, depreciation and amortization, the amount of these interest payments could fluctuate in the future. In addition, as a result of our failure to comply with several financial covenants, our lenders could accelerate payment of substantially all of these amounts.
Scheduled payments ------------------ Interest Principal -------- --------- (in thousands) For the year ending December 31: 2000....................................................... $135,779 $ 26,585 2001....................................................... 135,255 4,876 2002....................................................... 131,931 109,702 2003....................................................... 110,538 466,986 2004....................................................... 72,784 4,217
Due to the large amount of these principal and interest payments, we may not generate enough cash from our operations to meet these obligations. The large amount and terms of our outstanding debt may prevent us from taking actions we would otherwise consider in our best interest. Our credit facilities contain numerous financial and operating covenants that limit our ability, and the ability of most of our subsidiaries, to engage in activities such as incurring additional senior debt, disposing of our assets, or repurchasing our common stock. These covenants require that we meet financial ratios including interest coverage, net worth and leverage tests. Additionally, we are highly leveraged and we are not in compliance with our covenants. We may be required to renegotiate the terms of our credit facilities on terms that are more unfavorable, including: higher interest rates, shorter maturities or more restrictive borrowing terms; all of which may have an adverse impact on our business prospects and our financial results. Our lenders may require additional concessions from us before giving us a waiver or providing us with a new credit facility. Our current level of debt and the limitations our credit facilities impose on us could have other important consequences, including: . Based upon the preceding table, we will have to use much of our cash flow, approximately $162 million in 2000 and $140 million in 2001, for scheduled debt service rather than for our operations; . We may not be able to increase our borrowings under the credit facilities or obtain other additional debt financing for future working capital, capital expenditures, acquisitions or other corporate purposes; and . We could be less able to take advantage of significant business opportunities, including acquisitions, and react to changes in market or industry conditions. 18 If we do not further improve our internal systems and controls soon, our revenues, cash flows and net income may be adversely affected. We have experienced rapid growth in the last five years, especially in 1998 and the first half of 1999, as a result of our business strategy to acquire, develop and manage a large number of dialysis centers. This historical growth and business strategy has led to a number of adverse consequences, including: . Our billing and collection processes, systems and personnel were at times inadequate to collect all amounts owed to us for services we have rendered, resulting in a failure to achieve expected cash flow and significant charges for uncollectible accounts receivable; . A need for additional management, administrative and clinical personnel to manage and support our expanded operations. We may not be able to attract and retain sufficient additional personnel to meet these needs; . Our assessment of the requirements of our growth on our information systems underestimated our needs, and we have spent, and may continue to spend, substantial amounts to enhance and replace our information systems; . Our expanded operations required cash expenditures in excess of the cash available to us after paying our debt service obligations and required us to increase our debt balances; . We inaccurately assessed the historical and projected results of operations of some acquired businesses, which caused us to overpay for these acquisitions; and . In retrospect we have not integrated acquired facilities as quickly or smoothly as we expected, which prevented us from achieving the results of operations expected for these acquired facilities. If we fail to improve our performance in these areas, it will have a negative impact on our cash flow and could impact our ability to meet our substantial debt obligations. If the percentage of our patients that pay at or near our list prices declines, then our revenues, cash flows and net income would be substantially reduced. Approximately 41% of our net operating revenues in 1999 was generated from patients who had domestic private payors as the primary payor. A minority of these patients have insurance policies that reimburse us at or near our list prices, which are substantially higher than Medicare rates. Domestic private payors, particularly managed care payors, have become more aggressive in demanding contract rates approaching or at Medicare reimbursement rates. We believe that the financial pressures on private payors to decrease the rates at which they reimburse us will continue to increase. If the percentage of patients who have insurance that reimburses us at or near our list prices changes significantly, it will have a material impact on our revenues, cash flows and net income. Future declines, or the lack of further increases, in Medicare reimbursement rates could substantially decrease our net income and cash flows. Approximately 54% of our net operating revenues in 1999 were generated from patients who had Medicare as the primary payor. We are reimbursed for dialysis services primarily at fixed rates established in advance under the Medicare ESRD program. Unlike many other Medicare programs, the Medicare ESRD program has not provided periodic inflation increases in its reimbursement rates. Congress recently enacted two increases of 1.2% each, effective January 1, 2000 and January 1, 2001, to the Medicare composite reimbursement rate for dialysis. These were the first increases since 1991, and are significantly less than the cumulative inflation since 1991. Increases in operating costs that are subject to inflation, such as labor and supply costs, have occurred and are expected to continue to occur without a compensating increase in reimbursement rates. In addition, if Medicare should begin to include in its composite reimbursement rate any ancillary services that it currently reimburses separately, our revenue would decrease to the extent there was not a corresponding increase in that composite rate. We cannot predict the nature or extent of future rate changes, if any. 19 HHS has recommended, and the Clinton administration has included in its fiscal year 2001 budget proposal to the Congress, a 10% reduction in Medicare reimbursement for erythropoietin, or EPO. We cannot predict whether Congress will enact this proposal, or whether other future rate or reimbursement method changes will be made. Approximately 14% of our net operating revenues in 1999 was generated from EPO reimbursement through Medicare and Medicaid programs. Consequently, any reduction in the rate of EPO reimbursement through Medicare and Medicaid programs could materially reduce our revenues, cash flows and net income. Medicare separately reimburses us for other outpatient prescription drugs that we administer to dialysis patients at the rate of 95% of the average wholesale price of each drug. The Clinton administration has also included in its fiscal year 2001 budget proposal to the Congress a reduction in the reimbursement rate for outpatient prescription drugs to 83% of the average wholesale price. We cannot predict whether Congress will enact this proposal, or whether other reductions in reimbursement rates for outpatient prescription drugs will be made. If such changes are implemented, they could have a material adverse effect on our revenues, cash flows and net income. If Medicare changes its ESRD program to a capitated reimbursement system, our revenues, cash flows and profits could be materially reduced. Under the current Medicare demonstration project, Medicare is paying managed care plans a capitated rate equal to 95% of Medicare's current average cost of treating dialysis patients. Under a capitated plan we or managed care plans would receive a fixed periodic payment for servicing all of our Medicare- eligible ESRD patients regardless of fluctuations in the number of services provided in that period or possibly even the number of patients treated. If HCFA considers the pilot program successful, HCFA or Congress could implement such a capitated program more broadly or could lower the average Medicare reimbursement for dialysis. Over the long-term, we expect the profit margins in the dialysis industry to decline, which will have a negative impact on our net income and cash flows. During the past few years, industry operating margins have increased due to . Increased provision of ancillary services, particularly the administration of EPO; . The extension of the period for which private payors remain the primary insurer, until Medicare becomes the primary insurer; and . Pricing increases for private pay patients. We believe that some of these trends have reached a plateau, particularly the increases in ancillary services intensity and the additional profits from the extension of the private insurance coverage period. There are also market forces that may result in long-term industry margin compression. These forces include increases in labor and supply costs at a faster rate than reimbursement rate increases, the potential for Medicare reimbursement cuts for ancillary services and an inability to achieve future pricing increases for both private pay and managed care patients. If our assumptions regarding the beneficial life of our goodwill prove to be inaccurate, or subsequently change, our current earnings may be overstated and future earnings also may be affected. Our balance sheet has an amount designated as "goodwill" that represents 43% of our assets and 270% of our shareholders' equity at December 31, 1999. Goodwill arises when an acquiror pays more for a business than the fair value of the tangible and separately measurable intangible net assets. Generally accepted accounting principles require the amortization of goodwill and all other intangible assets over the period benefited. The current average useful life is 35 years for our goodwill. We have determined that most acquisitions after December 31, 1996 will continue to provide a benefit to us for no less than 40 years after the acquisition. In making this determination, we have reviewed with our independent accountants the significant factors that we considered in arriving at the consideration we paid for, and the expected period of benefit from, acquired businesses. 20 We continuously review the appropriateness of the amortization periods we are using and change them as necessary to reflect current expectations. This information is also reviewed with our independent accountants. If the factors we considered, and which give rise to a material portion of our goodwill, result in an actual beneficial period shorter than our determined useful life, earnings reported in periods immediately following some acquisitions would be overstated. In addition, in later years, we would be burdened by a continuing charge against earnings without the associated benefit to income. Earnings in later years could also be affected significantly if we subsequently determine that the remaining balance of goodwill has been impaired. Interruption in the supply of, or cost increases in, EPO could materially reduce our net income and cash flows and affect our ability to care for our patients. In the future, Amgen may be unwilling or unable to supply us with EPO. Additionally, Amgen is the sole supplier of EPO, and may unilaterally decide to increase its price for EPO. For example, Amgen unilaterally decided to increase its price for EPO by 3.9% in February 2000. Interruptions of the supply of EPO or additional increases in the price we pay for EPO could have a material adverse effect on our financial condition as well as our ability to provide appropriate care to our patients. The cost of our medical supplies on a per treatment basis has been increasing, and if this trend continues it could impact our net income and cash flows. During the past two years we have seen an increase in the cost per treatment of our medical supplies due to an increase in our utilization of supplies and increases in pricing from suppliers. Two of our major competitors are also major providers of medical supplies and equipment and our largest supplier, Fresenius, is also the largest provider of dialysis services in the world. The number of suppliers of dialysis-specific medical supplies has declined recently, due to consolidation among these suppliers. If we are not able to manage our medical supply utilization better or to achieve cost savings from our suppliers, we may have a reduction in our net income and cash flows due to higher medical supply costs. If we sell our non-continental U.S. operations for less than we expect, our impairment loss of $83 million recorded in the fourth quarter of 1999 may be understated. We recently entered into agreements to sell most of our operations outside of the continental U.S. to a competitor for approximately $160 million in proceeds, subject to final closing adjustments. We recorded a charge of $83 million for the impairment of the value of our non-continental operations in the fourth quarter of 1999, which includes the cost of buying out minority interests and direct transaction costs of completing the sales. If we do not complete the sale as we anticipate, then our actual losses may prove higher than the recorded charge. The agreements are conditioned on the consent of our lenders under our credit facilities, regulatory approvals and other closing conditions. If we fail to adhere to all of the complex government regulations that apply to our business, we could incur substantial fines or be excluded from participating in government reimbursement programs. Our dialysis operations are subject to extensive federal, state and local government regulations. Any of the following could adversely impact our revenues: . Suspension of payments from government programs; . Loss of required government certifications; . Loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare ESRD Program and Medicaid programs; and . Loss of licenses required to operate health care facilities in some of the states in which we operate. 21 The regulatory scrutiny of healthcare providers, including dialysis providers, has increased significantly in recent years. For example, the Office of Inspector General of HHS has reported that it recovered $1.2 billion in fiscal year 1997 and $480 million in fiscal year 1998 from health care fraud investigations. Also, in January 2000 one of our competitors entered into a $486 million settlement as a result of an Office of Inspector General of HHS investigation into some of its practices. We expect this regulatory scrutiny to continue, if not increase. We may never collect the revenues from the payments suspended as a result of an investigation of our laboratory subsidiary. Our Florida-based laboratory subsidiary is the subject of a third-party carrier review relating to claims the laboratory submitted for Medicare reimbursement. In May 1998, the carrier suspended all further Medicare payments to this laboratory. Medicare revenues from this laboratory represent approximately 2% of our net revenues. The suspension of payments relates to all payments due after the suspension started, regardless of when the laboratory performed the tests. From the beginning of the suspension through December 31, 1999, the carrier had withheld approximately $30 million, which has adversely affected our cash flow. We may never recover the amounts withheld, for which no reserves have been established. Our failure to comply with federal and state fraud and abuse statutes could result in sanctions. Neither our arrangements with the medical directors of our facilities nor the minority ownership interests of referring physicians in some of our dialysis facilities meet all of the requirements of published safe harbors to the anti-kickback provisions of the Social Security Act and similar state laws. These laws impose civil and criminal sanctions on anyone who receives or makes payments for referring a patient for any service reimbursed by Medicare, Medicaid or similar federal and state programs. Arrangements within published safe harbors are deemed not to violate these provisions. Enforcement agencies may subject arrangements that do not fall within a safe harbor to greater scrutiny. If we are challenged under these statutes, we may have to change our relationships with our medical directors and with referring physicians holding minority ownership interests. The laws of several states in which we do business prohibit a physician from making referrals for laboratory services to entities with which the physician, or an immediate family member, has a financial interest. We currently operate a large number of facilities in these states, which account for a significant percentage of our business. These state statutes could apply to laboratory services incidental to dialysis services. If so, we may have to change our relationships with referring physicians who serve as medical directors of our facilities or hold minority interests in any of our facilities. Forward-looking statements This Form 10-K contains statements that are forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "believe" and similar language. These statements involve known and unknown risks, including risks resulting from economic and market conditions, the regulatory environment in which we operate, competitive activities and other business conditions, and are subject to uncertainties and assumptions set forth elsewhere in this Form 10-K. Our actual results may differ materially from results anticipated in these forward-looking statements. We base our forward-looking statements on information currently available to us, and we assume no obligation to update these statements. Item 2. Properties. Twelve of our dialysis facilities, including five facilities in the continental United States, are operated on properties that we own. We also own a 50% interest in a limited liability company that owns an additional property on which we operate a dialysis facility. The remaining dialysis facilities that we operate are located on premises leased by us or our general partnerships, limited liability companies or subsidiary corporations or by 22 entities that we manage. We lease at fair market value certain facilities from entities in which referring physicians hold an interest. Our leases generally cover periods from five to ten years and typically 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. Our facilities range in size from approximately 500 to 19,500 square feet, with an approximate average size of 5,900 square feet. We maintain our corporate headquarters in approximately 35,800 square feet of office space in Torrance, California, which we currently lease for a term expiring in 2008. Our business office in Tacoma, Washington, is in an 80,000 square foot facility leased for a term expiring in 2009. We maintain a 43,000 square foot facility in Berwyn, Pennsylvania for additional billing and collections purposes and limited corporate and regional staff. The Berwyn lease expires in 2001. Our Florida-based laboratory is located in a 30,000 square foot facility owned by us, with a ground lease, and our Minnesota-based laboratory is located in a 9,500 square foot facility leased by us. Some of our dialysis facilities are operating at or near capacity. However, we believe that we have adequate capacity within most of our existing facilities to accommodate additional patient volume through increased hours and/or days of operation, or, if additional space is available within an existing facility, through the addition of dialysis stations at a facility upon obtaining appropriate governmental approvals. In addition, we can build de novo facilities if existing facilities reach capacity. With respect to relocating facilities or building de novo facilities, we believe that we can generally lease space at economically reasonable rates in the area planned for each of these facilities. Expansion or relocation of our facilities would be subject to review for compliance with conditions relating to participation in the Medicare ESRD program. In states that require a certificate of need or facility license, approval of our application generally would be necessary for expansion or relocation. Item 3. Legal Proceedings. Following the announcement on February 18, 1999 of our preliminary results for the 4th quarter of 1998 and the full year then ended, 13 class action lawsuits were filed against us and certain of our officers in the United States District Court for the Central District of California. The lawsuits are: 1. Joseph Lipsky v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel, Leonard Frie and John E. King, Central District of California, Western Division, Case No. CV-99-1745CBM (RCx); 2. Andrew W. Davitt v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-01750DT (RCx); 3. Tozour Energy Systems Retirement Plan v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-01799DDP (RNBx); 4. Trust Advisors Equity Plus LLC v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel, John E. King and Barbara A. Bednar, Central District of California, Western Division, Case No. CV-99-01800SVW (AJWx); 5. Alex Goldsleger v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel, John E. King and Barbara A. Bednar, Central District of California, Western Division, Case No. CV-99-01883ER (Ex); 6. Timothy Carlson and Kathleen O. Stack v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-01920ER (RZx); 7. Kurt W. Steidle v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-02016ABC (RZx); 8. Daniel Petroski v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-02022CM (Mcx); 9. Dan Whalen v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-02146CM (CWx); 10. Daniel K. Bloomfield v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel, John E. King and Barbara A. Bednar, Central District of California, Western Division, Case No. CV-99-02150DT (AIJx); 23 11. Mary Ann King v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-02252ABC (Mcx); 12. Albert Parker and Lawrence G. Maglione v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-02337LGB (Shx); and 13. State of Louisiana School Employees' Retirement System v. Total Renal Care Holdings, Inc., Victor M.G. Chaltiel and John E. King, Central District of California, Western Division, Case No. CV-99-03100CAS (Mcx). The complaints in the lawsuits are similar and allege violations of federal securities law arising from allegedly false and misleading statements primarily regarding our accounting for the integration of RTC into TRCH and request unspecified monetary damages. The lawsuits have been consolidated under the caption, In Re Total Renal Care Securities Litigation, Master File No. CV-99-1745-CBM (RCx). A Consolidated Amended Complaint was filed on October 6, 1999. This complaint alleges violations of the federal securities laws arising from allegedly false and misleading statements during a class period of March 11, 1997 to July 18, 1999 and seeks unspecified monetary damages. The primary allegations of this complaint are that we booked revenues at inflated amounts, failed to disclose that a material portion of our accounts receivable were uncollectible, reported excessive non-Medicare revenues, billed for treatments that were never provided, failed to disclose accurately the basis for the suspension of payments to our Florida-based laboratory subsidiary on Medicare claims, accounted for goodwill to overstate income, and manipulated the value of intangible assets. On January 24, 2000, all defendants responded to this complaint by filing a motion to dismiss. The motion is set to be heard on June 5, 2000, and all discovery is stayed pending the court's hearing and decision on the motion. 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 this consolidated litigation will be covered primarily by our directors and officers insurance. Any determination adverse to the company could have an adverse impact on the company's business, results of operations or financial condition. See the heading "Florida laboratory payment dispute" in "Item 1. Business" of this report for information on our pending payment dispute with our Florida laboratory's Medicare carrier. 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 financial condition. Item 4. Submission of Matters to a Vote of Security Holders. Our annual meeting of shareholders was held on December 17, 1999. Proposal 1 submitted to our shareholders at the meeting was the election of directors. The following directors, being all of our directors, were elected at the meeting, with the number of votes cast for each director or withheld from each director set forth after the director's respective name.
Votes for Authority Name Director Withheld ---- ---------- --------- Maris Andersons....................................... 72,117,368 2,870,117 Richard B. Fontaine................................... 72,545,000 2,502,485 Peter T. Grauer....................................... 72,171,940 2,875,545 Shaul G. Massry....................................... 72,296,944 2,750,541 Kent J. Thiry......................................... 72,698,703 2,348,782
24 Proposal 2 submitted to our shareholders at the meeting was the approval of our 1999 Equity Compensation Plan. The votes were cast as follows:
For Against Abstain --- ------- ------- 56,971,099 17,953,485 125,401
Proposal 3 submitted to our shareholders at the meeting was the approval of an increase in the number of shares authorized for issuance under our Employee Stock Purchase Plan. The votes were cast as follows:
For Against Abstain --- ------- ------- 73,164,677 1,609,504 276,255
25 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Our common stock is traded on the New York Stock Exchange under the symbol "TRL." The following table sets forth, for the periods indicated, the high and low closing prices for our common stock as reported by the New York Stock Exchange.
High Low ------ ------ Fiscal year ended December 31, 1998 1st quarter.............................................. $35.69 $22.88 2nd quarter.............................................. 36.13 30.31 3rd quarter.............................................. 35.00 19.00 4th quarter.............................................. 30.19 19.50 Fiscal year ended December 31, 1999 1st quarter.............................................. $28.00 $ 7.50 2nd quarter.............................................. 15.94 9.81 3rd quarter.............................................. 15.31 7.06 4th quarter.............................................. 8.56 5.88
The closing price of our common stock on March 15, 2000 was $2 11/16 per share. As of March 15, 2000 there were 2,235 holders of our common stock named as holders of record by The Bank of New York, our registrar and transfer agent. Since our recapitalization in 1994, we have not declared or paid cash dividends to holders of our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We are subject to restrictions on our ability to pay dividends on our common stock. For more details, see the heading "Liquidity and capital resources" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the notes to our consolidated financial statements. 26 Item 6. Selected Financial Data. The following table presents selected consolidated financial and operating data for the periods indicated. The consolidated financial data for the year ended December 31, 1995 is unaudited but includes all adjustments consisting solely of normal recurring adjustments necessary to present fairly our results of operations for that period. 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.
Year ended December 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ------------ ---------- -------- -------- -------- (in thousands, except per share) Income statement data: Net operating revenues.. $ 1,445,351 $1,203,738 $758,403 $496,651 $299,411 Total operating expenses(1)............ 1,509,333 1,068,825 646,816 428,698 247,834 ------------ ---------- -------- -------- -------- Operating income (loss)................. (63,982) 134,913 111,587 67,953 51,577 Other income (loss)..... (1,895) 4,894 3,175 3,858 1,029 Debt expense(2)......... 110,797 84,003 29,082 13,670 12,921 Minority interests in income of consolidated subsidiaries........... (5,152) (7,163) (4,502) (3,578) (2,544) ------------ ---------- -------- -------- -------- Income (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle.............. (181,826) 48,641 81,178 54,563 37,141 Income tax expense (benefit).............. (34,570) 38,449 35,654 22,031 13,841 ------------ ---------- -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle.............. $ (147,256) $ 10,192 $ 45,524 $ 32,532 $ 23,300 ============ ========== ======== ======== ======== Net income (loss)(3).... $ (147,256) $ (9,448) $ 45,524 $ 24,832 $ 20,745 ============ ========== ======== ======== ======== Earnings (loss) per common share: Income (loss) before extraordinary item and cumulative effect of change in accounting principle............ $ (1.81) $ 0.12 $ 0.59 $ 0.43 $ 0.43 ============ ========== ======== ======== ======== Net income (loss)(3).. $ (1.81) $ (0.12) $ 0.59 $ 0.33 $ 0.38 ============ ========== ======== ======== ======== Earnings (loss) per common share--assuming dilution: Income (loss) before extraordinary item and cumulative effect of change in accounting principle............ $ (1.81) $ 0.12 $ 0.57 $ 0.42 $ 0.40 ============ ========== ======== ======== ======== Net income (loss)(3).. $ (1.81) $ (0.12) $ 0.57 $ 0.32 $ 0.36 ============ ========== ======== ======== ======== Ratio of earnings to fixed charges (4)...... (See note 5) 1.50 3.18 3.88 3.28
Year ended December 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ---------- ---------- -------- -------- (in thousands) Balance sheet data: Working capital(6)......... $(1,043,796) $ 388,064 $ 205,798 $185,904 $ 98,071 Total assets............... 2,056,718 1,911,619 1,279,261 664,799 338,866 Long-term debt(7).......... 5,696 1,225,781 731,192 233,126 96,979 Shareholders' equity....... 326,404 473,864 422,446 358,677 193,162
- -------- (1) Total operating expenses include impairments and valuation losses of $139,805 in 1999 and merger related costs of $78,188 in 1998. 27 (2) Debt expense includes a write-off of deferred financing costs of $1,601 in 1999 and loss on termination of interest rate swap agreements related to refinanced debt of $9,893 in 1998. (3) Extraordinary losses associated with early extinguishment of debt were $12,744 ($0.16 per share) in 1998, $7,700 ($0.10 per share) in 1996, and $2,555 ($0.09 per share) in 1995. In 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 be expensed as incurred. As a result, unamortized deferred pre-opening and organizational costs of $6,896 ($0.08 per share) were written-off as a cumulative effect of a change in accounting principle, in 1998. (4) The ratio of earnings to fixed charges is computed by dividing fixed charges into earnings. Earnings for this purpose is defined as pretax income from continuing operations adjusted by adding fixed charges and excluding interest capitalized during the period. Fixed charges is defined for this purpose as the total of interest expense, amortization of deferred financing costs and the estimated interest component of rental expense on operating leases. (5) Due to the company's loss in 1999, the ratio coverage in 1999 is less than 1:1. The company would have had to generate additional earnings of $181,826 to achieve a coverage of 1:1. (6) The working capital calculation as of December 31, 1999 includes long-term debt potentially callable under covenant provisions of $1,425,610 (7) Long-term debt excludes $1,425,610 as of December 31, 1999 that is potentially callable under covenant provisions. 28 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 (pages F-2 through F-32) and Item 1. Prior to mid 1999 the company had a very aggressive growth strategy of acquiring other dialysis businesses, and in early 1998 merged with RTC in a stock-for-stock transaction valued at approximately $1.3 billion. After the merger with RTC, the company became the second largest provider of dialysis services in the United States. In addition to operating approximately 490 dialysis facilities in the continental United States, the company currently operates 84 facilities outside the continental United States. This aggressive growth strategy through acquisitions has resulted in the company becoming highly leveraged. During the fourth quarter of 1999 we announced our intention to sell our dialysis facilities outside the continental United States as an important first step in restructuring our balance sheet and reducing the debt burden. In January 2000 we signed definitive agreements to sell substantially all of the company's operations outside the continental U.S. The rapid growth through acquisitions over the past several years also has had a significant impact on the company's administrative functions, including billing and cash collection processes, which at times operated below optimal levels of efficiency and effectiveness. During the second half of 1999, the aggressive growth strategy was halted, and additional resources were applied toward stabilizing and improving the business processes. In 2000, we plan to focus on improving our business processes and capital structure. There are no plans for significant future acquisitions until the company is well positioned to manage such a growth strategy, and then only if it will clearly increase our shareholder value. Results of operations Operating results for the non-continental U.S. operations, which the company has committed to selling or otherwise discontinuing, were as follows (in millions): Non-continental U.S. operations
Year ended December 31, --------------- 1999 1998 1997 ---- ---- ---- Net operating revenues..................................... $124 $89 $48 Operating expenses: Dialysis and lab facilities.............................. 100 71 34 General and administrative............................... 7 4 4 Depreciation and amortization............................ 13 7 5 Provision for uncollectible accounts..................... 6 3 1 ---- --- --- 126 85 44 ---- --- --- Operating income (loss).................................... $ (2) $ 4 $ 4 ==== === ===
29 Consolidated operating results, excluding the non-continental U.S. operations to be divested, were as follows (in millions): Continental U.S. operations
Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- Net operating revenue.................. $1,321 100% $1,115 100% $710 100% Operating expenses: Dialysis and lab facilities.......... 893 68% 709 64% 480 68% General and administrative........... 124 9% 72 6% 46 6% Depreciation and amortization........ 99 7% 83 7% 49 7% Provision for uncollectible accounts............................ 127 10% 42 4% 27 4% ------ --- ------ --- ---- --- 1,243 94% 906 81% 602 85% ------ ------ ---- Operating income before impairment losses and merger costs............... $ 78 6% $ 209 19% $108 15% ====== === ====== === ==== === Impairment losses and merger costs: Non-continental U.S. operations...... $ 83 Continental U.S. operations.......... 57 Merger costs......................... $ 78 ------ ------ $ 140 $ 78 ====== ======
Because all operations outside the U.S. are being divested, the non- continental U.S. operating results are excluded from the revenue and cost trends discussed below. Revenues. Operating revenues consist of revenues from dialysis services, lab and pharmacy services, and facility management fees.
Year ended December 31, -------------------- 1999 1998 1997 ------ ------ ---- Total net operating revenues ($ in millions).............. $1,445 $1,204 $758 Percent of total revenues: Continental U.S. operations: Dialysis services..................................... 87% 89% 90% Lab and pharmacy services............................. 3 3 3 Management fee income................................. 1 1 1 ------ ------ ---- 91 93 94 Non-continental U.S. operations......................... 9 7 6 ------ ------ ---- 100% 100% 100% ====== ====== ====
The significant increases in revenues from 1997 through 1999 reflect the company's aggressive acquisition strategy that existed until the latter part of 1999. Dialysis services. Dialysis services include outpatient facility hemodialysis (approximately 85% of total dialysis treatments), home dialysis, inpatient hemodialysis with contracted hospitals, the administration of EPO and other pharmaceuticals, and other ancillary dialysis services. Dialysis services are paid for primarily by Medicare and by state Medicaid programs in accordance with rates established by HCFA and other third party- payors such as HMOs and health insurance carriers. Services provided to patients covered by third party insurance companies are normally reimbursed at rates higher than Medicare or Medicaid rates. Patients covered by employer group health plans generally convert to Medicare after 33 months of treatment. 30 The majority of earnings from dialysis services are derived from payors other than Medicare and Medicaid. The average revenue per treatment rates for these other payor categories is under continued pressure as we negotiate contract rates with large HMO's and insurance carriers and as patients transition from private coverage or private payment to Medicare coverage. Dialysis services revenue by payor type were as follows:
Year ended December 31, ---------------- 1999 1998 1997 ---- ---- ---- Percent of total dialysis revenues for continental U.S. operations: Medicare................................................... 54% 53% 59% Medicaid................................................... 5 4 5 --- --- --- 59 57 64 HMO's, health insurance carriers and private patient payment................................................... 41 43 36 --- --- --- 100% 100% 100% === === ===
The percent of Medicare and Medicaid revenues to total revenues declined in 1998 compared to 1997 due to the mix of payors associated with newly acquired facilities and an increase in the Medicare coordination period that became effective in the latter part of 1997. The coordination period, which is the period that private health insurers are responsible for dialysis reimbursement before Medicare coverage becomes available, was extended from 18 months to 33 months for the primary method of dialysis treatment. This had the result of delaying the transition from non-Medicare rates to the generally lower Medicare rates for a significant percentage of dialysis patients during 1998 and the first part of 1999, as compared to 1997. The number of equivalent hemodialysis treatments associated with the continental U.S. operations totaled 5.1 million, 4.4 million, and 3.1 million for 1999, 1998, and 1997, respectively. The increases in the number of treatments accounted for approximately 97% and 72% of the total growth in dialysis services revenue for 1999 and 1998. These increases were principally due to the acquisition and development of new dialysis facilities. The treatment growth rate for facilities in place for at least one year was approximately 5% for 1999 and 1998. The average reimbursement rates per equivalent hemodialysis treatment were $246, $245 and $220 for 1999, 1998, and 1997 respectively. The significant rate increase for 1998 compared with 1997 was primarily attributable to the increase in the Medicare coordination period discussed above and the payor mix associated with acquired facilities during that time. Another significant factor in average revenue per treatment is the level of medication administered, which varies depending on medical need and medical practices among the various dialysis facilities and patient demographics. We have experienced a general flattening in the growth trend for the administration of pharmaceuticals, which has additionally constrained revenue per treatment growth. Approximately 3% of the increase in revenue for 1999 and 28% in 1998 was attributable to the increase in the average rate per treatment. As of year-end 1999, the Medicare ESRD composite rates were between $117 and $139 per treatment, with an overall average of $128 per treatment. Effective January 1, 2000, the Medicare ESRD composite rate was increased by 1.2%, and is scheduled to increase another 1.2% effective January 1, 2001. Lab and pharmacy services. The company operates two licensed clinical laboratories specializing in ESRD patient testing, principally for its own patients. Routine lab tests are included in the Medicare composite treatment rates and do not generate incremental revenue. See Note 15 regarding revenue collection contingencies associated with our laboratory operations. Management fee income. We currently manage 49 third-party dialysis facilities utilizing our existing infrastructure. The management fee income is typically based on a percentage of revenue of the managed facility. 31 Dialysis and lab facilities expenses. Facility operating expenses consist of costs and expenses specifically attributable to the operations of dialysis and lab facilities, including direct labor, drugs, medical supplies, and other patient care service costs. Total facility operating expenses as a percentage of dialysis, lab and pharmacy services revenues, excluding non-continental U.S. operations, were 68%, 64% and 68% for 1999, 1998 and 1997, respectively. The lower percentage for facility costs in 1998 reflects the effect of the higher average revenue rate per treatment realized in 1998 as compared to 1997. This effect was partially offset by cost increases and lower margins associated with new facilities acquired during that time. The higher percentage for 1999 facility costs reflects cost growth in excess of the average revenue increases realized. Cost increases as a percentage of revenues for 1999 were principally associated with compensation expense and medical supply costs. General and administrative expenses. General and administrative expenses consist of those costs not specifically attributable to the dialysis and lab facilities and include expenses for corporate and regional administration, centralized accounting, billing and cash collection functions, quality improvement programs and information systems. General and administrative expenses as a percentage of total revenues, excluding non-continental U.S. operations, were 9%, 6%, and 6% for 1999, 1998, and 1997, respectively. The higher level of general and administrative expenses in 1999 was principally associated with compensation costs (including severance and retention payments), legal and other professional fees, and consulting fees. Compensation costs increased in 1999 as additional management and staff were added to address the process problems that had developed following the merger with RTC in early 1998. Shortly after the merger, many of the RTC general and administrative departments were eliminated in an attempt to achieve integration synergies more quickly, as discussed below. While the actions in 1998 lowered some general administrative costs during 1998, the resulting process inefficiencies impacted the company's revenue collections and other business processes. The significant increase in general administrative expense as a percent of revenue for 1999 compared to 1998 reflects both the reductions in staffing in 1998 and the increases in staffing in 1999. In addition to the increases during 1999 in staffing levels for centralized business processes, there were increases in the operations management structure to accommodate the growth through acquisitions and penetration in new geographic markets. Also included in 1999 were special retention and severance compensation costs. Professional and consulting fees were similarly higher in 1999 due to the numerous business issues encountered during the year. Provisions for uncollectible accounts receivable. The provision for uncollectible accounts receivable as a percentage of revenue was approximately 4% for both 1997 and 1998, and approximately 9% for 1999. The higher level of provisions for uncollectible amounts in 1999, which amounted to approximately $80 million, compared to the levels in 1998 and 1997 when measured as a percentage of revenue, resulted from our inability to achieve our projected cash collection trends during 1999. As discussed above, the rapid growth through acquisitions and the merger with RTC in 1998 had a significant impact on the company's administrative functions, including billing and cash collection processes, which at times operated below optimal levels of efficiency and effectiveness. The backlog of aged accounts receivable continued to increase during the first half of 1999 due to high turnover of billing and collection personnel and process inefficiencies. For the second quarter of 1999, an increase in the provision of $24 million was recorded based on historical collection trend projections developed at that time. Although subsequent collection experience with respect to current billings was generally tracking as anticipated through the second half of 1999, the collection rates for the older billings did not match our earlier projections and estimates. Those earlier estimates had been based on prior collection experience, but the build-up of the backlog of aged accounts not processed on a timely basis created collection difficulties at a level not previously experienced or anticipated. As of December 31, 1999 the net balance of domestic accounts receivable aged more than six months amounted to approximately $37 million, which we believe will be substantially collected by the middle of 2000. This amount does not include amounts related to the Florida lab contingency discussed in Note 15. 32 Impairment and valuation losses. Impairment and valuation losses for the year ended December 31, 1999 consisted of the following (in millions):
Quarter ended: -------------------------------- Total June 30 September 30 December 31 1999 ------- ------------ ----------- ----- Operations outside the continental U.S................................. $ 83 $ 83 Facility closures and other impairments associated with continental U.S. facilities......... 21 21 Investments in and advances to third- party dialysis related businesses... $15 13 28 Physical inventory of capital assets.............................. 3 3 Abandoned software acquisition....... 2 2 Termination of corporate jet lease agreement........................... $ 3 3 --- --- ---- ---- $17 $ 3 $120 $140 === === ==== ====
During the fourth quarter of 1999, the company announced its intention to sell its dialysis operations outside the continental United States as an important first step in reducing its debt burden and allowing management to focus its attention on the core operations in the continental U.S. Definitive agreements to sell the principal operations outside the U.S. were signed in January 2000. More than 80% of the divestitures, in terms of proceeds and asset values, are currently expected to close during the second quarter of 2000, and the remaining divestitures are expected to close later in 2000. The sales are subject to required bank and regulatory approvals. Gross cash proceeds will be approximately $160 million, subject to changes in the tangible net worth of the operations being sold until the sales are complete. The impairment charge of $83 million associated with the divestiture of the company's non-continental U.S. operations represents the losses on the sales of these operations including the costs of buying out minority interests and the direct transaction costs of completing the sales. The $83 million impairment charge was principally recorded as a reduction to goodwill. Future operating results for the non-continental U.S. will continue to be included in the Consolidated Statement of Income until the divestitures are completed. The impairment and valuation losses associated with dialysis facilities within the continental U.S. similarly relate to actions taken and decisions made during the fourth quarter of 1999. In addition to divesting non- continental U.S. operations, the company took immediate actions to curtail new facility acquisitions and developments and to close facilities not supporting the company's new strategic direction. The losses principally relate to facilities identified for closure or sale during the first half of 2000. Additionally, certain new facility plans were terminated and certain projects abandoned. The impairment losses were determined based on estimated net realizable values and projections of cash flows. The closure and abandonment losses averaged less than $1 million per facility, and were principally associated with the impairment of leasehold improvements and intangible assets specifically identified with these facilities. The company's new strategic direction and curtailed new facility acquisition plans also affected the valuation of several partnership investments, resulting in investment write-offs in the fourth quarter of 1999. Additionally, an investment in a third party dialysis business, which was in the form of a loan with equity conversion rights, was determined to be substantially impaired based on the borrower's missed commitments, operating difficulties and liquidity concerns. This third-party dialysis business is now formally in default of its loan agreement with us. The investment losses recorded in the second quarter of 1999 were similarly associated with impairments of loans to and investments in third-party dialysis related businesses that experienced serious operating difficulties and liquidity problems. The impairment losses associated with the investments and loans were determined based on estimated net realizable values and projections of net cash flows. We do not expect recovery of the impairment losses even 33 through potential bankruptcy processes. With respect to impaired loans, we will not accrue interest receivable unless the estimated recovery amounts justify such accruals in the future. We perform impairment reviews for our investments in and advances to third- party dialysis businesses whenever a change in condition occurs, including changes in our business strategy and plans, or when the third-party dialysis business experiences deteriorating operating performance or liquidity problems. With regard to the potential impairment of goodwill balances, we routinely review cash flows for the specific facility operations associated with the respective goodwill balances that resulted from the acquisition of that specific group of facilities. Other than in connection with the impairment losses discussed above, we determined that there were no goodwill impairments as of year-end 1999. Merger related costs. Merger related costs were incurred in 1998 in connection with the RTC merger, which is reported under the pooling-of- interests method of accounting. These costs included merger transaction costs, integration costs, employee severance costs and other directly associated compensation expenses. Transaction costs associated with all other acquisitions, which were accounted for under the purchase method of accounting, were capitalized as goodwill. The merger related costs and remaining unpaid balances were as follows (in millions):
Direct transaction Severance and Integration costs employment costs costs Total ------------------ ---------------- ----------- ----- Cost recognized in 1998................... $21 $42 $16 $79 Amounts utilized during 1998................... 21 38 15 74 --- --- --- --- Liability balance as of December 31, 1998...... 4 1 5 Amounts utilized during 1999................... 1 1 --- --- --- --- Liability balance as of December 31, 1999...... $-- $ 3 $ 1 $ 4 === === === ===
Direct transaction costs consisted 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. Severance and other compensation costs directly resulting from the merger included a constructive termination of pre-existing employment contracts with RTC executive officers (approximately $6 million); severance payments to approximately 80 RTC employees (approximately $2 million); the exercise of RTC stock options with tendered shares (less than six months from exercise date) permitted under pre-existing terms of RTC stock option grants (approximately $16 million); and special merger bonuses awarded (approximately $16 million). Integration costs of the combined operations were principally associated with the elimination of redundant overhead functions and business processes. We eliminated the following RTC departments: human resources, managed care, laboratory, and all finance functions, with the exception of patient accounting. In addition, RTC's laboratory, located in Las Vegas, Nevada, was closed prior to its commencement of operation. Integration costs included termination of a long-term laboratory management service agreement (approximately $4 million), write-off of leasehold improvements and other capitalized costs associated with the RTC lab closure (approximately $5 million), and incremental costs of integrating operations, including training and travel expenses (approximately $5 million). Debt expense Debt expense for 1999 consisted of interest expense of approximately $107 million and amortization and write-off of deferred financing costs of approximately $4 million. As a result of the company not being in compliance with certain formula-based debt covenants at December 31, 1999 as discussed below, the company 34 is currently incurring interest charges at rates significantly higher than the interest rates in effect during 1999. We are currently in discussions with our banks regarding obtaining a waiver of these violations or restructuring our current credit facilities. Debt expense for 1998 included a charge of approximately $10 million associated with early termination of interest rate swaps. Provision for income taxes The provision for income taxes for 1999 was a tax benefit (negative expense) of $35 million, reflecting current and deferred tax benefits resulting from the 1999 pre-tax loss. The 1999 tax benefit was reduced by a deferred tax asset valuation allowance for impairment and valuation losses that are capital in nature. For tax purposes, such losses may only be offset against capital gains within a limited carryback and carryforward period. Due to the company's limited ability to generate capital gains from operations, a tax benefit cannot be recorded for these losses. The provision for income taxes for 1998 was $38 million, resulting in an effective tax rate of 79%. This high effective rate was primarily due to non- deductible merger expenses. The provision for income taxes for 1997 was $36 million or an effective rate of 44%. Based on current plans and projections, non-deductible expenses for the year 2000 are estimated at approximately $2 million per quarter, and the marginal tax rate (applied to pre-tax income plus non-deductible expenses) is expected to be approximately 40%. Extraordinary items In conjunction with our merger with RTC in 1998, we terminated RTC's revolving credit agreement and recorded all of the remaining unamortized deferred financing costs as an extraordinary loss of $2.8 million, net of income tax effect. In conjunction with replacing our senior credit facilities, we also recognized as an extraordinary loss the remaining $9.9 million of unamortized deferred financing costs in connection with obtaining new senior credit facilities. Cumulative effect of change in accounting principle Effective January 1, 1998 we adopted SOP 98-5, which requires that pre- opening and organizational costs incurred in conjunction with our new facilities be expensed as incurred. Previously we had amortized such costs over five years. We recorded a 1998 charge of $6.9 million, net of income tax effect, representing the cumulative effect of this change in accounting. Projections for 2000 Based on current conditions and recent experience, our current projections for the year 2000 are for normal operating earnings before debt expense and taxes to be in the range of $130 million to $150 million for our ongoing operations in the continental U.S. ($240 million to $260 million excluding non-cash depreciation and amortization expense). These projections assume minimal acquisitions, an internal annual growth rate of the number of dialysis treatments of approximately 5 percent, continued downward pressure on the average revenue per treatment rate, limited opportunities to improve the mix of non-Medicare treatments, and cost growth trends for medical supplies and compensation expense consistent with recent years. These and other underlying assumptions involve significant risks and uncertainties, and actual results may vary significantly from these current projections. Refer to the liquidity and capital resources discussion and contingencies discussion regarding additional risks and uncertainties that may impact these forward looking estimates. 35 Non-operating charges that we believe are reasonably likely to occur in 2000 include . the write-off of deferred financing costs associated with long-term debt that is refinanced or otherwise restructured; and . foreign currency exchange losses previously recognized in comprehensive income that will be realized with the divestiture of the non-continental U.S. operations in 2000. These anticipated losses could not be recorded as of December 31, 1999 under current generally accepted accounting principles. Also, see Note 15 regarding contingencies. Liquidity and capital resources Our primary capital requirements have been the funding of an aggressive growth strategy through acquisitions and the opening of new facilities, equipment purchases and working capital needs. The rapid growth through acquisitions over the past several years was funded through increases in long- term debt. Long-term debt increased by $706 million over the three years ended December 31, 1999. During the second half of 1999, the aggressive growth strategy was halted. At December 31, 1999 long-term debt consisted of outstanding borrowings under the revolving credit facility of $568 million, outstanding borrowings under our fixed term loan credit facility of $392 million, $345 million of 7% convertible subordinate notes due 2009, $125 million of 5 5/8% convertible subordinate notes due 2006, deferred acquisition payments of $21 million, and capital lease obligations of $7 million. 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 the covenants impose limitations on our ability to make capital expenditures, to incur other indebtedness and to pay dividends. In August 1999 the lenders under the credit facilities waived compliance with a financial covenant that established a maximum leverage ratio. In November 1999 this waiver was extended on revised terms because we exceeded the maximum leverage ratio allowed under the terms of the original waiver. When measured as of December 31, 1999, we are not in compliance with the maximum leverage ratio established in the November 1999 waiver and other covenants under our credit facilities. 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. 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. As a result of this non- compliance, all debt as of December 31, 1999 that is potentially due within one year, including the subordinated convertible notes, has been reclassified from long-term debt to a current classification. Under these conditions we are also unable to draw additional amounts under the credit facilities. Additionally, this noncompliance will result in higher interest costs. We are currently in discussions with the lenders regarding obtaining a waiver of these violations or restructuring our current credit facilities. Actions we have taken and are taking to ensure our ongoing ability to cover our scheduled debt servicing include divestiture of our operations outside the continental U.S., curtailment of new facility acquisitions and developments, improvements in our billing and cash collections processes, increased management controls over expenditures, and evaluations of alternative capital sources, as well as pursuing debt restructuring with our lenders. Prior to March 2000, we focused our attention primarily on those actions that would improve our operating performance and cash flows, as well as filling key senior management positions. Given the progress we have made in these areas, we are now entering into more active discussions with our lenders for an acceptable restructuring arrangement. We believe it is unlikely that an event of default will be declared because of the company's substantial cash balance and because we believe that cash flows will be sufficient to cover operating requirements and scheduled debt servicing through 2000. 36 Under the $400 million fixed term loan credit facility, principal payments of $4 million are scheduled to be due annually on September 30 and the remaining balance of $368 million is due when the facility is scheduled to terminate, on March 31, 2006. Under the revolving credit facility, principal payments of $105 million are scheduled to be due in September 2002, and the balance is scheduled to be due in March 2003. Scheduled maturities of long- term debt in 2000, including deferred acquisition price payments, amount to $27 million. Net cash provided by operating activities amounted to $169 million, $11 million and $31 million for 1999, 1998 and 1997. Net cash provided by operating activities consists of our net income (loss), increased by non-cash expenses such as depreciation, amortization, impairment and valuation losses, deferred income taxes, cumulative change in accounting principle, and extraordinary loss, and adjusted by changes in components of working capital. Net cash used in investing activities amounted to $297 million, $469 million and $530 million for 1999, 1998, and 1997, respectively. Our principal uses of cash in investing activities have been for acquisitions, purchases of new equipment and leasehold improvements for our facilities, and the development of new facilities. Net cash provided by financing activities was $200 million for 1999, $493 million for 1998, and $484 million in 1997 primarily consisting of borrowings under our credit facilities and the proceeds from our 7% convertible subordinated notes offering. As of December 31, 1999 we had working capital, before considering the reclassification of long-term debt to current liabilities described below, of $382 million, including cash of $108 million. We believe that we will have sufficient liquidity and operating cash flows to fund our scheduled debt service and other obligations over the next twelve months unless the lenders were to declare an event of default and accelerate the payment of amounts due under our credit facilities and other long-term debt. Contingencies The company's Florida based laboratory subsidiary is the subject of a third- party carrier review relating to claims for Medicare reimbursement. The carrier has issued formal overpayment determinations in the amount of $5.6 million for the period from January 1, 1995 to April 1996 and $14.2 million for the period from May 1996 to March 1998. The carrier has also suspended all payments of claims related to this laboratory, regardless of when the laboratory performed the tests. The carrier has requested additional billing records with respect to the time period April 1998 to August 1999. The cumulative amount withheld was approximately $30 million as of December 31, 1999. We are disputing the overpayment determinations and have provided supporting documentation for our claims. We have initiated the process of a formal review of the carrier's determinations. The first step in this formal review process is a hearing before a hearing officer at the carrier. The hearing regarding the initial review period from January 1995 to April 1996 was held in July 1999. In January 2000 the hearing officer issued a decision regarding the initial review period upholding the overpayment determination of $5.6 million. We have filed an appeal to a federal administrative law judge. No provisions or allowances have been recorded for this matter. Any determination adverse to us could have an adverse impact on our business, results of operations or financial condition. Following the announcement on February 18, 1999 of the Company's preliminary results for the fourth quarter of 1998 and the full year then ended, several class action lawsuits were filed against the company and several of its officers in the U.S. District Court for the Central District of California. The lawsuits have been consolidated into a single action. The consolidated complaint alleges violations of the federal securities laws arising from allegedly false and misleading statements during a class period of March 11, 1997 to July 18, 1999 and seeks unspecified monetary damages. The primary allegations of this complaint are that the company booked revenues at inflated amounts, failed to disclose that a material portion of our accounts receivable were uncollectible, reported excessive non-Medicare revenues, billed for treatments that were never provided, failed to disclose accurately the basis for the suspension of payments to our Florida-based laboratory subsidiary on 37 Medicare claims, accounted for goodwill to overstate income, and manipulated the value of intangible assets. On January 24, 2000, all defendants responded to this complaint by filing a motion to dismiss. The motion is set to be heard on June 5, 2000, and all discovery is stayed pending the court's hearing and decision on the motion. Management believes that all of the claims are without merit. It is anticipated that the attorneys' fees and related costs of defending these lawsuits will be covered primarily under insurance policies. Any determination adverse to us could have an adverse impact on our business, results of operations or financial condition. Year 2000 considerations During 1998 and 1999 we established project teams to address Y2K programming issues and develop contingency plans. Our planning and preparation addressed the following areas: . Software applications and hardware, with a particular focus on our billing and accounts receivable; . Operating systems; . Dialysis centers and equipment with a particular focus on our bio- medical equipment and devices, including dialysis machines; and . External parties such as our suppliers and our third party payors, including the two primary fiscal intermediaries that we utilize to process Medicare claims and non-governmental payors. As of the date of this report, we have not experienced any significant Y2K problems. We incurred approximately $1.2 million of Y2K related costs, primarily in 1999. Due to the overall complexity of Y2K issues, we may still experience unanticipated negative consequences or material costs caused by undetected errors or defects during the remainder of 2000. Quarterly results of operations The following table sets forth selected unaudited quarterly financial data and operating information for 1999 and 1998.
Quarter ended -------------------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, 1999 1999 1999 1999 1998 1998 1998 1998 --------- -------- ------------- ------------ --------- -------- ------------- ------------ (in thousands, except per share and per treatment data) Financial data: Net operating revenues.. $352,244 $352,819 $367,168 $ 373,120 $257,833 $288,350 $318,585 $338,970 Facility operating expenses............... 229,640 250,548 250,433 262,618 168,440 184,399 200,773 226,128 General and administrative expenses............... 23,608 29,559 32,725 44,663 16,622 18,087 18,292 22,685 Operating income (loss)................. 62,128 (6,353) 35,107 (154,864) (33,016) 55,725 66,684 45,520 Income before extraordinary item and cumulative effect of change in accounting principle.............. 23,207 (22,059) 2,259 (150,664) (47,959) 16,841 28,058 13,252 Net income (loss)....... 23,207 (22,059) (2,259) (150,664) (57,667) 6,909 28,058 13,252 Per Share data: Income (loss) per share before extraordinary item and cumulative effect of change in accounting principle... $ 0.28 $ (0.27) $ 0.03 $ (1.86) $ (0.61) $ 0.20 $ 0.33 $ 0.16 Income (loss) per share.................. 0.28 (0.27) 0.03 (1.86) (0.73) 0.08 0.33 0.16 Selected operating statistics: Outpatient facilities... 541 564 569 572 391 423 477 508 Treatments.............. 1,393 1,467 1,510 1,541 1,100 1,187 1,284 1,342 Net operating revenues per treatment.......... $ 253 $ 241 $ 243 $ 242 $ 234 $ 243 $ 248 $ 253 Operating income margin................. 17.6% (1.8)% 9.6% (41.5)% (12.8)% 19.3% 20.9% 13.4%
Certain reclassifications have been made to conform with the 1999 year-end presentation. 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest rate sensitivity The table below provides information about our derivative financial instruments and other financial instruments, primarily borrowings under our credit facilities, that are sensitive to a change in interest rates. The interest rates of our financial instruments that are sensitive to changes in interest rates are partially hedged through interest rate swap agreements for fixed rates. For our debt obligations, the table presents principal repayments and current weighted average interest rates on these obligations as of December 31, 1999. For our debt obligations with variable interest rates, the rates presented reflect the current rates in effect as a result of the company's non-compliance with debt covenants. These rates are based on the prime rate plus a margin of 2.25% and 2.5% for the revolving and term debt, respectively. The table shows expected maturity without giving effect to the potential acceleration of amounts due resulting from our failure to comply with all of the financial covenants in our credit facilities.
Expected maturity date Average ----------------------------------- Fair interest 2000 2001 2002 2003 2004 Thereafter Total value rate ---- ---- ---- ---- ---- ---------- ----- ----- -------- (dollars in millions) Long-term debt Fixed rate ......... $470 $470 $307 6.63% Variable rate ...... $26 $ 5 $110 $467 $ 4 $376 $988 $988 10.87%
For our interest rate swap agreements, the table below presents the expiration of the notional amounts of these swaps at maturity, the fixed weighted average interest rates we must pay the swap holders according to the swap agreements, and the weighted average interest rates we will receive from the swap holders, based upon the current LIBOR. Notional amounts are used to calculate the contracted payments we will exchange with the swap holders under the swap agreements. The interest rates we will receive from the swap holders are variable, and are based on the LIBOR. The fair value of the swap agreements was approximately $17 million at December 31, 1999. Some of our swaps have a one-time cancellation provision for our counterparty at varying times based upon the maturity of the underlying swaps as presented in the table below.
Weighted average ---------------- Swap Cancellation Fixed pay Variable maturity date option date Notional amount rate receive rate ------------- ------------ --------------- --------- ------------ (in millions) May 2008 May 2005 $200 5.84% 6.08% May 2008 May 2003 200 5.65% 5.93% June 2005 June 2002 100 5.61% 6.12% June 2005 June 2001 100 5.52% 5.82% June 2003 June 2000 100 5.51% 6.12% ---- ---- ---- $700 5.66% 6.01% ==== ==== ====
The average interest rate on our variable rate long-term debt has increased from 1998 because of changes in the terms of our credit facilities in connection with the waivers of the covenant violations that occurred in 1999. The expected maturity dates for substantial amounts of the variable debt were accelerated in connection 39 with the waivers. In addition, during 1999 two of our swap agreement counterparties exercised their right to cancel agreements in the aggregate notional amount of $100 million. The cancelled swap agreements would have otherwise matured in 2001. The total outstanding amount of our debt obligations exceeds the aggregate notional amount of our swap agreements. Exchange rate sensitivity We have foreign operations in Argentina, Germany, Italy and the United Kingdom. Because the Argentine peso trades evenly with the U.S. dollar and because our operations in Germany, Italy and the United Kingdom are new and relatively small, we have not experienced significant foreign exchange rate risk. Through December 31, 1999 we have not utilized any derivative financial instruments to manage foreign exchange rate risk. In September 1999, however, we converted approximately $50 million of our outstanding borrowings under our revolving credit facility from U.S. dollar denominated borrowings to Euro denominated borrowings, primarily as a hedge of our net investment in European operations and to assist in our management of foreign exchange rate risk. As of December 31, 1999, $43 million of total outstanding debt is denominated in Euros. Item 8. Financial Statements and Supplementary Data. See the Index included at "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K." Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None. 40 PART III Item 10. Directors and Executive Officers of the Registrant. Information concerning members of our board of directors The following table sets forth certain information concerning members of our board of directors as of December 31, 1999:
Name Age Position ---- --- -------- Kent J. Thiry............. 43 Chairman of the Board and Chief Executive Officer Maris Andersons........... 63 Director Richard B. Fontaine....... 56 Director Peter T. Grauer........... 54 Director C. Raymond Larkin, Jr. ... 51 Director Shaul G. Massry........... 69 Director
Kent J. Thiry became our Chairman of the Board and Chief Executive Officer on October 18, 1999. From June 1997 until he joined us, Mr. Thiry served as Chairman of the Board and Chief Executive Officer of Vivra Holdings, Inc., which was formed to operate the non-dialysis business of Vivra Incorporated, or Vivra, after Gambro AB acquired the dialysis services business of Vivra in June 1997. At the time, Vivra was the second largest provider of dialysis services in the United States. From September 1992 to June 1997, Mr. Thiry was the President and Chief Executive Officer of Vivra. From April 1992 to August 1992, Mr. Thiry served as President and co-Chief Executive Officer of Vivra, and from September 1991 to March 1992, as President and Chief Operating Officer of Vivra. From 1983 to 1991, Mr. Thiry was associated with Bain & Company, first as a Consultant, and then as Vice President. Mr. Thiry is also a director of Oxford Health Plans, Inc. Maris Andersons has been one of our directors since August 1994. Mr. Andersons was a Senior Vice President and Senior Advisor, Corporate Finance, of Tenet Healthcare Corporation, or Tenet, until his retirement in 1997. Mr. Andersons also has held various senior executive offices with Tenet since 1976. Prior to joining Tenet, Mr. Andersons served as a Vice President of Bank of America. Richard B. Fontaine has been one of our directors since November 1999. Mr. Fontaine has been an independent health care consultant since 1992. Mr. Fontaine has also been an adjunct instructor at Westminster College since 1992. From June 1995 to September 1995, he served as interim Chief Executive Officer of Health Advantage, Inc., a subsidiary of VIVRA Specialty Partners, Inc. In 1993, he served as interim Chief Executive Officer of Vivocell Therapy, Inc. From 1988 to 1992, he served as Senior Vice President of CR&R Incorporated. From 1984 to 1988, he served as Vice President, Business Development, of Caremark, Inc. Mr. Fontaine is also a director of Celeris Corp. Peter T. Grauer has been one of our directors since August 1994. Mr. Grauer has been a Managing Director of DLJ Merchant Banking, Inc., or DLJMB, since September 1992. From April 1989 to September 1992, he was a Co-Chairman of Grauer & Wheat, Inc., an investment firm specializing in leveraged buyouts. Prior thereto Mr. Grauer was a Senior Vice President of Donaldson, Lufkin & Jenrette Securities Corporation, or DLJ. Mr. Grauer is also a director of Ameriserv Food Distribution, Inc., DecisionOne Holdings Corporation, Doane Pet Care Enterprises, Inc., Formica Corporation, Nebco Evans Holding Co., and Thermadyne Holdings Corporation. C. Raymond Larkin, Jr. has been one of our directors since December 1999. Mr. Larkin has been a principal of 3x NELL, which invests in and provides consulting services to the medical device, biotechnology and pharmaceutical industries, since July 1998. From 1983 to March 1998, he held various executive positions with Nellcor Incorporated, a medical products company, for which he served as President and Chief Executive Officer from 1989 until August 1995, when he became President and Chief Executive Officer of Nellcor Puritan Bennett 41 Incorporated upon the merger of Nellcor Incorporated with Puritan-Bennett Corporation. Mr. Larkin is also a director of Arthrocare Corporation and Neuromedical Systems, Inc. Shaul G. Massry has been one of our directors since April 1997. Dr. Massry has been a Professor of Medicine, Physiology and Biophysics and Chief, Division of Nephrology, at the University of Southern California School of Medicine since 1974. Dr. Massry served as the president of the National Kidney Foundation from 1990 through 1992. No arrangement or understanding exists between any director and any other person or persons pursuant to which any director was or is to be selected as a director other than pursuant to the shareholders agreement described in "Item 13. Certain Relationships and Related Transactions." None of the directors has any family relationship among themselves or with any of our executive officers. Each director is elected to hold office until the next annual meeting of shareholders and until his or her respective successor is elected and qualified. Information concerning our executive officers The following table sets forth certain information concerning our executive officers as of December 31, 1999:
Name Age Position ---- --- -------- Kent J. Thiry........... 43 Chairman of the Board and Chief Executive Officer George B. DeHuff........ 46 President and Chief Operating Officer Barry C. Cosgrove....... 42 Senior Vice President, General Counsel and Secretary Stan M. Lindenfeld...... 52 Senior Vice President and Chief Medical Officer John J. McDonough....... 36 Vice President and Chief Accounting Officer
Our executive officers are elected by and serve at the discretion of our board of directors. Set forth below is a brief description of the business experience of all executive officers other than Mr. Thiry, who is also a director. See "Information concerning members of our board of directors" above. George B. DeHuff was our President and Chief Operating Officer from May 1999 until February 2000, when he resigned. He also served as our interim Chief Executive Officer from August 1999 to October 1999. Prior to joining us, Mr. DeHuff served as an executive officer of American Medical Response, including President and Chief Executive Officer from September 1997 to March 1999, Chief Operating Officer from August 1995 to August 1997 and Chief Executive Officer of American Medical Response West from September 1994 to July 1995. From July 1991 to July 1994, he was President and Chief Operating Officer of LifeFleet, Inc. From 1989 to 1991, he was President and Chief Executive Officer of EECO, Inc. Prior to 1989, Mr. DeHuff held executive positions with Price Waterhouse and HI-TEK Corporation. Barry C. Cosgrove was promoted to Senior Vice President in October 1998 from Vice President, a position he held since August 1994. Mr. Cosgrove served as our Secretary from August 1994 to March 2000. From August 1994 until February 2000, he also served as our General Counsel. In February 2000 he became Special Counsel to TRC. Prior to joining us, from May 1991 to April 1994, Mr. Cosgrove served as Vice President, General Counsel and Secretary of Total Pharmaceutical Care, Inc. From February 1988 to 1991, Mr. Cosgrove served as Vice President and General Counsel of McGaw Laboratories, Inc. (a subsidiary of the Kendall Company). Prior to February 1988, Mr. Cosgrove was with the Kendall Company for seven years in numerous corporate, legal and management positions, including Assistant to the General Counsel. Stan M. Lindenfeld, a nephrologist, was promoted to Senior Vice President, Quality Management in October 1998 from Vice President, Quality Management and Integrated Programs, a position he held since August 1994. Dr. Lindenfeld has also served as our Chief Medical Officer since January 1995 and as one of our medical directors since 1981. Since 1988 he has held the position of Clinical Professor of Medicine at the University of 42 California Medical Center in San Francisco. Dr. Lindenfeld developed the Office of Clinical Resources Management at the University of California Medical Center in San Francisco and served as its director from July 1993 until July 1997. John J. McDonough became our Vice President and Chief Accounting Officer in March 1999. From August 1998, when Mr. McDonough joined us, to March 1999, Mr. McDonough served as Divisional Vice President of Finance and Accounting. During 1996, Mr. McDonough served as Vice President and Chief Financial Officer of Palatin Technologies, Inc. From 1992 through 1995, Mr. McDonough held a variety of positions, including Vice President and Chief Financial Officer, at MedChem Products, Inc. In January 2000, we announced the appointment of David P. Barry as our President and Chief Operating Officer, to be effective in March 2000. On March 2, 2000, Mr. Barry resigned for personal reasons. Mr. Barry has agreed to work through a transition period while we conduct a search for his replacement. From March 1999 to February 2000 Mr. Barry served as Chief Executive Officer of Accentcare, Inc. From August 1995 to June 1997, Mr. Barry served as President of Vivra Renal Care, the dialysis services business of Vivra. From May 1992 to August 1995, he served as a Vice President of Vivra Renal Care. In February 2000, Richard K. Whitney became our Chief Financial Officer. From September 1998 until his appointment as Chief Financial Officer, Mr. Whitney served as Vice President and General Manager of our International Operations. Mr. Whitney joined us in June 1995 and has also served as Director of Corporate Development and Vice President of Corporate Development. Prior to joining us, Mr. Whitney was associated with RFE Investment Partners, a private equity investment firm, and Deloitte & Touche. None of the executive officers has any family relationship with any other executive officer or with any of our directors. Section 16(a) beneficial ownership reporting compliance Section 16(a) of the Exchange Act requires "insiders," including our executive officers, directors and beneficial owners of more than 10% of our common stock, to file reports of ownership and changes in ownership of our common stock with the Securities and Exchange Commission and the New York Stock Exchange, and to furnish us with copies of all Section 16(a) forms they file. We became subject to Section 16(a) in conjunction with the registration of our common stock under the Exchange Act effective October 31, 1995. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons that no Form 5's were required for those persons, we believe that our insiders complied with all applicable Section 16(a) filing requirements during 1999. 43 Item 11. Executive Compensation. The following table sets forth the compensation paid or accrued by us for each of the fiscal years in the three-year period ended December 31, 1999 to the following persons: . each individual who served as our chief executive officer or acted in a similar capacity during 1999; . our four most highly compensated executive officers other than our chief executive officer at December 31, 1999; and . two former executive officers who would have been among the four most highly compensated executive officers at December 31, 1999 if they were still serving as executive officers at December 31, 1999. Summary Compensation Table
Long Term Compensation --------------------------------- Awards Payouts --------------------- ------- Annual Compensation All ---------------------------------------- Restricted Securities Other Other Annual Stock Underlying LTIP Compen- Name and Principal Salary Bonus Compensation Award(s) Options* Payouts sation Position Year ($) ($) ($) ($) (#) ($) ($) ------------------ ---- ------- ---------- ------------ ---------- ---------- ------- -------- Kent J. Thiry........... 1999 $83,074 -- -- -- 500,000 -- -- Chairman of the Board and Chief Executive Officer George B. DeHuff, III... 1999 190,768 -- -- -- 450,000 -- -- President and Chief Operating Officer(1) Barry C. Cosgrove....... 1999 184,374 $ 456,000(2) -- -- 200,000 -- $ 8,320(3) Senior Vice President, 1998 182,309 490,004(4) -- -- 200,000 -- 40,293(5) General Counsel and 1997 149,817 115,004 -- -- 111,916 -- 11,582(6) Secretary Stan M. Lindenfeld...... 1999 262,028 375,000(7) -- -- 200,000 -- 30,883(8) Senior Vice President 1998 273,883 382,211(9) -- -- 150,000 -- 425(10) and Chief Medical Officer 1997 214,791 169,020 -- -- 58,333 -- -- John J. McDonough....... 1999 152,692 32,500 -- -- 100,000 -- 35,000(11) Vice President and 1998 49,561 -- -- -- 80,000 -- -- Chief Accounting Officer Victor M.G. Chaltiel.... 1999 190,912 279,209 -- -- -- -- 786,161(12) Former Chairman 1998 315,026 8,250,000(13) 3,536(14) -- 1,000,000(15) -- 5,598(16) of the Board, 1997 288,652 890,409(17) -- -- 333,334(15) -- 5,522(18) Chief Executive Officer President and Director John E. King............ 1999 100,385 456,000(19) -- -- 100,000 -- 40,566(20) Former Senior Vice President; 1998 181,154 487,500(21) -- -- 200,000 -- 8,620(22) Finance and Chief 1997 130,504 112,500 -- -- 111,916 -- 14,089(23) Financial Officer Leonard W. Frie......... 1999 122,250 276,390(24) -- -- 100,000 -- 285,584(25) Former Executive Vice 1998 200,410 321,254(26) -- -- 150,000 -- 13,197(27) President and Chief 1997 182,245 143,754 -- -- 111,916 -- 14,153(28) Operations Officer, West
- -------- * Includes options repriced in April 1997. (1) Mr. DeHuff served as our interim Chief Executive Officer from August 1999 to October 1999. (2) Includes the second installment, in the amount of $375,000, related to a special bonus received for services rendered in connection with the merger with RTC. (3) Includes (a) an automobile allowance of $7,800 and (b) $520 paid by us for an umbrella insurance policy. (4) Includes the first installment, in the amount of $375,000, related to a special bonus received for services rendered in connection with the merger with RTC. 44 (5) Includes (a) an automobile allowance of $8,100, (b) $520 paid by us for an umbrella insurance policy, and (c) $31,673 in the payment of cash value of accrued paid time off. (6) Includes (a) an automobile allowance of $7,800, (b) $520 paid by us for an umbrella insurance policy, and (c) $3,262 in deferred interest income. (7) Includes the second installment, in the amount of $375,000, related to a special bonus received for services rendered in connection with the merger with RTC. (8) Includes (a) $850 for a waiver of medical insurance premiums and (b) $30,033 in payment of cash value of accrued paid time off. (9) Includes the first installment, in the amount of $187,500, related to a special bonus received for services rendered in connection with the merger with RTC. (10) Consists entirely of a waiver of medical insurance premiums. (11) Consists entirely of a relocation allowance. (12) Include (a) $520 paid by us for an umbrella insurance policy, (b) $19,061 in payment of cash value of accrued paid time off and (c) $766,580 in severance. (13) Consists entirely of a special bonus received for services rendered in connection with the merger with RTC. (14) Paid as a gross-up adjustment to offset the personal income tax resulting from Mr. Chaltiel's personal use of our leased corporate jet. (15) In February 1999, Mr. Chaltiel voluntarily cancelled all 1,000,000 of the options granted to him in 1998 and 166,667 of the options granted to him in 1997 to increase the number of options available for grant under our existing stock option plans. (16) Includes (a) $520 paid by us for an umbrella insurance policy, and (b) $5,078 representing imputed income from Mr. Chaltiel's personal use of our leased corporate jet. (17) Mr. Chaltiel's 1997 bonus of $451,776 was prepaid in December 1997. (18) Includes (a) an automobile allowance of $5,002, and (b) $520 paid by us for an umbrella insurance policy. (19) Includes the second installment, in the amount of $375,000, related to a special bonus received for services rendered in connection with the merger with RTC. (20) Includes (a) an automobile allowance of $4,500, (b) $520 paid by us for an umbrella policy and (c) $35,546 in payment of cash value of accrued paid time off. Mr King also received a severance payment of $180,000 in January 2000. (21) Includes the first installment, in the amount of $375,000, related to a special bonus received for services rendered in connection with the merger with RTC. (22) Includes (a) an automobile allowance of $8,100 and (b) $520 paid by us for an umbrella insurance policy. (23) Includes (a) an automobile allowance of $7,800, (b) $520 paid by us for an umbrella insurance policy, and (c) $5,769 in payment of cash value of accrued paid time off. (24) Includes the second installment, in the amount of $187,500, related to a special bonus received for services rendered in connection with the merger with RTC. (25) Includes (a) an automobile allowance of $5,231, (b) $520 paid by us for an umbrella insurance policy, (c) $197,423 in severance, (d) $27,277 in payment of cash value of accrued paid time off and (e) $5,133 in deferred compensation. (26) Includes the first installment, in the amount of $187,500, related to a special bonus received for services rendered in connection with the merger with RTC. (27) Includes (a) an automobile allowance of $8,827, (b) $520 paid by us for an umbrella insurance policy, and (c) $3,850 in deferred compensation. (28) Includes (a) an automobile allowance of $8,500, (b) $520 paid by us for an umbrella insurance policy, and (c) $5,133 in deferred compensation. 45 The following table sets forth information concerning options granted to each of the named executive officers during 1999: Option/SAR Grants in Last Fiscal Year
Individual Grants -------------------------------------------------------- Number of % of Total Grant Securities Options/SARs Exercise Date Underlying Granted to or Base Present Options/SARs Employees in Price Expiration Value Name Granted(#)(1) Fiscal Year ($/Sh) Date ($)(2) - ---- ------------- ------------ -------- ---------- --------- Kent J. Thiry......... 500,000 10.9 6.00 10/18/09 1,966,650 George B. DeHuff, III.................. 300,000(3) 6.6 14.875 5/17/09 2,839,770 150,000 3.3 8.3125 8/26/09 817,379 Barry C. Cosgrove .... 200,000 4.4 9.0625 3/11/09 891,060 Stan M. Lindenfeld ... 200,000 4.4 9.0625 3/11/09 891,060 John J. McDonough..... 100,000 2.2 9.0625 3/11/09 445,530 Victor M.G. Chaltiel.. -- -- -- -- -- John E. King ......... 100,000(4) 2.2 9.0625 3/11/09 445,530 Leonard W. Frie ...... 100,000(3) 2.2 9.0625 3/11/09 445,530
- -------- (1) All options are nonqualified stock options and were granted under our 1997 Equity Compensation Plan. The options vest over four year periods at an annual rate of 25% beginning on the first anniversary of the date of grant. (2) The estimated grant date present value reflected in the above table was determined using the Black-Scholes model. The material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the options reflected in the above table include the following: (a) the respective option exercise price for each individual grant, equal to the fair market value of the underlying stock on the date of grant; (b) the exercise of options within six years of the date that they become exercisable; (c) a risk-free interest rate of 5.50% to 6.17%% per annum; (d) volatility of 41.64% to 68.22% calculated using the daily prices of our common stock; (e) a dividend yield of 0%, and (f) an assumed forfeiture rate of 5.0% for all periods. The ultimate values of the options will depend on the future market price of our common stock, which cannot be forecasted with reasonable accuracy. The actual value, if any, an optionee will realize upon exercise of an option will depend on the excess of the market value of our common stock over the exercise price on the date the option is exercised. We cannot assure that the value realized by an optionee will be at or near the value estimated by the Black-Scholes model or any other model applied to value the options. (3) These options were cancelled upon resignation of employment and are no longer outstanding. (4) Pursuant to the terms of Mr. King's severance agreement, 25,000 option shares vested on March 11, 2000 and will remain exercisable for 90 days after March 11, 2000. The remaining 75,000 option shares were cancelled, and are no longer outstanding. 46 The following table sets forth information concerning the aggregate number of options exercised by and year-end option values for each of the named executive officers during 1999: Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised Unexercised In-the- Options at FY- Money Options at End FY-End ---------------- ------------------- Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise(#) Realized($) Unexercisable(#) Unexercisable($)(1) ---- --------------- ----------- ---------------- ------------------- Kent J. Thiry........... -- -- --/500,000 --/343,750 George B. DeHuff, III... -- -- 150,000/300,000 --/-- Barry C. Cosgrove ...... -- -- 127,388/247,028 361,718/-- Stan M. Lindenfeld ..... -- -- 141,277/274,805 120,570/-- John J. McDonough....... -- -- 20,000/160,000 --/-- Victor M.G. Chaltiel.... -- -- 166,667/-- --/-- John E. King ........... -- -- 135,721/107,445 120,570/-- Leonard W. Frie ........ -- -- 141,227/-- 610,899/--
- -------- (1) Value is determined by subtracting the exercise price from the fair market value of $6.6875 per share, the closing price for our common stock as reported by the New York Stock Exchange as of December 31, 1999, and multiplying the remainder by the number of underlying shares of common stock. Employment agreements On October 18, 1999, we entered into an employment agreement with Kent J. Thiry. The employment agreement provides for an initial term through December 31, 2001 and will continue thereafter with no further action by either party for successive one year terms. Mr. Thiry's annual compensation will be subject to annual increases consistent with the California consumer price index. Mr. Thiry will be entitled to receive a bonus of up to 150% of his base salary each year, based upon our achievement of performance goals to be mutually agreed upon by Mr. Thiry and our compensation committee. For the year 2000, Mr. Thiry is guaranteed a minimum bonus of $500,000. In the event of a constructive discharge following a change in control or a termination for any reason other than material cause, Mr. Thiry will be entitled to a lump sum payment equal to his then-current base salary. Any additional compensation payable to Mr. Thiry upon a change in control of TRCH would not be reduced by tax obligations possibly imposed by sections 280G or 4999 of the Internal Revenue Code of 1986. On March 2, 1998 we entered into new employment agreements with each of Barry C. Cosgrove and Stan M. Lindenfeld. These employment agreements provide for an initial term through December 31, 1998 and will continue thereafter with no further action by either party for successive one year terms. Each of these executive officers' base salaries will be subject to annual increases consistent with the California consumer price index. Each of these executive officers also will be entitled to receive a bonus of up to 75% of his base salary each year. Fifty percent of this bonus will be based upon our achievement of earnings per share targets and 50% will be granted at the discretion of our compensation committee. In the event of a constructive discharge following a change in control of TRCH or a termination for any reason other than material cause, each of these executive officers will be entitled to a lump sum payment equal to his then-current base salary. Any additional compensation payable to these executive officers upon a change in control would not be reduced by tax obligations possibly imposed by sections 280G or 4999 of the Internal Revenue Code of 1986. On March 1, 1998 we entered into an employment agreement with John J. McDonough. The agreement continues until either party terminates the agreement. Mr. McDonough's employment with the Company can be terminated by either the Company or Mr. McDonough with or without cause at any time. Mr. McDonough's base salary will be subject to annual increases consistent with the consumer price index for the most proximate 47 geographic area in which Mr. McDonough is employed. Mr. McDonough will also be entitled to receive a bonus of up to 50% of his base salary each year. Fifty percent of this bonus will be based upon our achievement of earnings per share targets and 50% will be granted at the discretion of our compensation committee. In the event of discharge for any reason other than material cause, disability or death, Mr. McDonough will be entitled to a lump sum payment equal to one-half his then-current base salary and any bonus provided for under his employment agreement. In September 1999 we implemented a key employee retention program approved by our board of directors. Messrs. Cosgrove, McDonough, and Dr. Lindenfeld were selected to participate in this program. The program guaranteed each executive a stay bonus, $100,000 for Mr. Cosgrove, $75,000 for Dr. Lindenfeld, and $50,000 for Mr. McDonough, if he continued his employment with us through January 1, 2000. The program also guaranteed payment of 50% of each executive's target bonus amount for 1999, if he continued his employment with us through March 1, 2000. In order to be eligible to participate in this plan, each key employee was required to relinquish voluntarily his or her stock options with an exercise price in excess of $30.00 per share, if any. Messrs Cosgrove, McDonough, and Dr. Lindenfeld received these bonus amounts in 2000. George B. DeHuff resigned as our President and Chief Operating Officer effective March 15, 2000. Mr. DeHuff will receive, as severance, twelve months of base salary, payable in bi-weekly installments. This severance will be offset by Mr. DeHuff's earnings from other employment or consulting services during this twelve-month period. On May 17, 1999 we had entered into an employment agreement with Mr. DeHuff. The employment agreement provided for an initial term through May 16, 2001, to continue thereafter with no further action by either party for successive one year terms. Mr. DeHuff's annual compensation was subject to annual increases consistent with the California consumer price index. Mr. DeHuff was entitled to receive a bonus of up to 100% of his base salary each year. Fifty percent of this bonus was to be based upon our achievement of earnings per share targets and 50% was to be granted at the discretion of the compensation committee. In the first year of Mr. DeHuff's employment agreement he was guaranteed a minimum bonus of $155,000 which was paid on March 1, 2000. In the event of a constructive discharge following a change in control of TRCH or a termination for any reason other than material cause, Mr. DeHuff was entitled to a lump sum payment equal to his then-current base salary. Victor M.G. Chaltiel resigned as our Chairman of the Board and Chief Executive Officer effective August 4, 1999. On October 6, 1999, we entered into a severance agreement with Mr. Chaltiel. The severance agreement provided for a separation payment to Mr. Chaltiel of $766,580, which was paid to Mr. Chaltiel on October 26, 1999, and the payment of $9,000 to Mr. Chaltiel to reimburse him for his legal fees incurred in connection with the negotiation of the severance agreement and related matters. Also, Mr. Chaltiel's option to purchase up to 166,667 shares of common stock was amended so that the unvested portion of the option, covering 55,555 shares, became fully vested as of August 4, 1999, and to provide that the option will remain exercisable until August 4, 2002. Mr. Chaltiel had entered into an employment agreement with us on August 14, 1994, pursuant to which he was employed for an initial term of three years, with one year automatic extensions at the end of each year. We could terminate this agreement at any time, subject, among other things, to severance payments as provided in the employment agreement. His base salary paid during 1998 was $315,026 and was subject to annual review by our board for possible increases, with a minimum increase tied to the California consumer price index. Until May 31, 1999, Mr. Chaltiel was entitled to a yearly bonus of up to 150% of his base salary based upon our achieving certain EBITDA performance targets. He also could be awarded an additional bonus at the discretion of our board of directors if EBITDA targets were exceeded by more than 15%. After May 31, 1999, Mr. Chaltiel would be awarded bonuses in a manner as determined in the sole discretion of the board, on a basis reasonably consistent with past bonuses for similar performance. On March 2, 1998 we amended Mr. Chaltiel's employment agreement to ensure that any additional compensation payable to Mr. Chaltiel upon a change in control of TRCH would not be reduced by tax obligations possibly imposed by sections 280G or 4999 of the Internal Revenue Code of 1986. 48 Pursuant to Mr. Chaltiel's employment agreement and our 1994 Equity Compensation Plan, Mr. Chaltiel purchased 1,855,557 shares of common stock at $0.90 per share during the fiscal year ended May 31, 1995. Mr. Chaltiel paid $835,000 of the purchase price in cash, with the remainder evidenced by a four-year promissory note bearing interest at the lesser of the prime rate or 8% per annum. This note was secured by a pledge of shares of our stock owned by Mr. Chaltiel. In July 1995, the board approved a one-year deferral of all scheduled principal and accrued interest payments under all outstanding promissory notes from our officers, including this four-year promissory note. Mr. Chaltiel also was granted options pursuant to our 1994 Equity Compensation Plan representing a total of approximately 1,477,778 shares of common stock. The options had an exercise price of $0.90. By their terms, half of the options were to vest over a four-year period and the other half were to vest on the ninth anniversary of the date of grant, subject to accelerated vesting in the event that we satisfied EBITDA performance targets. In September 1995 our board and our shareholders approved an agreement with Mr. Chaltiel pursuant to which the vesting schedule for these options was accelerated so that all of Mr. Chaltiel's outstanding options became vested and exercisable immediately. In connection with this agreement, Mr. Chaltiel agreed to exercise at that time all of his options to purchase 1,477,778 shares of common stock. Mr. Chaltiel paid the exercise price pursuant to a $1,330,000 four-year promissory note bearing interest at the lesser of the prime rate or 8%. This note was subject to prepayment, in part or in full, to the extent of the receipt of any proceeds received by Mr. Chaltiel upon disposition of such shares of common stock, and Mr. Chaltiel pledged these shares as collateral for repayment of this note. We also agreed to advance Mr. Chaltiel funds of up to $1,521,520 relating to Mr. Chaltiel's tax liability in connection with the exercise of such options. The amount advanced was evidenced by two additional promissory notes executed by Mr. Chaltiel. The first note for $1,348,447 was executed concurrently with Mr. Chaltiel's exercise of his options. The second note for $173,073 was executed in April 1996. Simultaneously with the execution of the agreement, we entered into a Release and Pledge Agreement with Mr. Chaltiel whereby we released 1,855,555 shares of common stock owned by Mr. Chaltiel from the previous pledge agreement and substituted the newly acquired 1,477,778 shares of common stock. On March 31, 1998, Mr. Chaltiel repaid his outstanding loan balances with us and we released those shares held as collateral under the Release and Pledge Agreement. John E. King resigned as our Senior Vice President, Finance and Chief Financial Officer effective July 16, 1999. On October 18, 1999 we entered into a severance agreement with Mr. King. The severance agreement provided for a severance payment to Mr. King of $180,000, to be paid on January 3, 2000, and for Mr. King to provide services to us on the following terms. From July 16, 1999 through August 18, 1999, Mr. King provided services to us on a full-time, exclusive basis and received compensation for his services at the rate of $5,000 per week. From September 13, 1999 until December 31, 1999 Mr. King continued to provide services to us on an as-needed, non-exclusive basis. During this period, Mr. King was compensated at the rate of $1,000 per day for services rendered. We were also required to reimburse Mr. King for his reasonable out-of-pocket expenses incurred in providing these services, subject to our Chief Executive Officer's approval. Mr. King also remains obligated under his employment agreement with us to provide up to 120 hours per year of additional services until July 16, 2001. Furthermore, Mr. King's options to purchase our common stock were amended: to allow them to continue to vest for one year following his resignation as if Mr. King was still our employee during that period; to extend until July 16, 2000 the exercise period of his options that were already vested on July 19, 1999; to allow him to exercise any portion of his options that vests after his resignation as if he had been terminated for cause effective on the date on which the options vest, and to accelerate the vesting of his options that would otherwise vest before July 16, 2000 in the event of a change in control of TRCH before July 16, 2000. In connection with the termination of his employment effective August 9, 1999, Leonard W. Frie received a lump sum payment of $197,423, the amount of his then-current base annual salary. Mr. Frie was entitled to receive this payment under his employment agreement. The terms of the employment agreements we had with Messrs. King and Frie were similar to our employment agreements with Mr. Cosgrove and Dr. Lindenfeld, which are described above. Each of Messrs. Thiry, Cosgrove, DeHuff, Frie, King, McDonough and Dr. Lindenfeld also have been granted options pursuant to our equity compensation plans. These options generally vest at a rate of 25% per year over four years. The exercise prices of the options range from $0.90 per share to $32.1875 per share. 49 Options granted to our executive officers provide for the immediate vesting of all of their stock options at any time following the sale of 50% or more of our stock or assets, or upon a merger, consolidation or reorganization in which we do not survive, if their employment is terminated for any reason. Compensation of directors Directors who are our employees or officers do not receive compensation for service on our board of directors or any committee of the board. Effective in December 1999 each of our directors who is not one of our officers or employees is entitled to receive $30,000 per year and additional compensation of $2,500 for each board meeting attended in person and $1,000 for each meeting held via telephone conference. For committee meetings, additional compensation is paid as follows: $1,500 if attended in person, and $1,000 per telephone meeting for committee members; $2,500 if attended in person, and $2,500 per telephone meeting for committee chairpersons. Committee chairpersons also receive an additional $10,000 per year. Prior to December 1999, each of our directors who was not one of our officers or employees was entitled to receive $60,000 per year and $2,500 per meeting attended, including telephone conference meetings. We also reimburse our directors for their reasonable out-of-pocket expenses in connection with their travel to and attendance at the meetings of the board. In addition, each director who is not one of our officers or employees is entitled to receive options to purchase 25,000 shares of our common stock each year they are elected to serve on our board. These options have an exercise price equal to the fair market value of our common stock on the date of grant and generally vest over four years at an annual rate of 25% beginning on the first anniversary of the date of grant, with acceleration of vesting upon a change in control of TRCH. All options granted prior to December 1999, however, were accelerated and became fully vested upon the hiring of Mr. Thiry as our new Chief Executive Officer in October 1999. In addition to these standard arrangements, in August 1999 Mr. Andersons, Regina E. Herzlinger, who is no longer a director, and Dr. Massry each received additional options to purchase 25,000 shares of our common stock at an exercise price of $8.50 per share, the fair market value of our common stock on the date of grant. Ms. Herzlinger's and Dr. Massry's options fully vested upon the hiring of Mr. Thiry as our new Chief Executive Officer. Mr. Andersons' options vested over four years at an annual rate of 25% beginning on the first anniversary of the date of grant, but were accelerated and became fully vested when we hired a new Chief Financial Officer in February 2000. Also, in October 1999 Ms. Herzlinger received an additional option to purchase 25,000 shares at an exercise price of $6.06 per share, the fair market value of our common stock on the date of grant. This option was fully vested on the date of grant. Each member of the board of directors is also required to purchase at least $50,000 of our stock in the open market by December 17, 2000. For additional information regarding amounts received by Mr. Andersons and Dr. Massry, in addition to compensation received as a board member, see "Item 13. Certain Relationships and Related Transactions." Compensation committee interlocks and insider participation None of our executive officers or directors serves as a member of the board of directors or compensation committee of any other entity which has one or more executive officers serving as a member of our board. During 1999, Messrs. Thiry, Chaltiel and Andersons and Dr. Massry were our officers, employees or consultants. Messrs. Andersons, Fontaine, Grauer, and Larkin and Ms. Herzlinger, who is no longer a director, each served as a member of the compensation committee of our board of directors during 1999. 50 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information regarding the ownership of our common stock as of March 15, 2000 by (a) all those persons known by us to own beneficially more than 5% of our common stock, (b) each of our directors and executive officers, (c) all directors and executive officers as a group and (d) each of the executive officers named in the "Summary Compensation Table" included in "Item 11. Executive Compensation." Except as otherwise noted under "Item 13. Certain Relationships and Related Transactions," we know of no agreements among our shareholders which relate to voting or investment power over our common stock or any arrangement the operation of which may at a subsequent date result in a change of control of us.
Number of shares Percentage of shares Name of beneficial owner beneficially owned beneficially owned ------------------------ ------------------ -------------------- Massachusetts Financial Services Company(1) ....................... 10,478,067 12.9% 500 Boylston Street Boston, Massachusetts 02116 Maverick Capital Ltd(2)............ 5,528,200 6.8% 300 Crescent Court, Suite 1850 Dallas, Texas 75201 Ardsley Advisory Partners and Philip J. Hempleman(3)............ 4,752,500 5.8% 646 Steamboat Road Greenwich, Connecticut 06836 Kent J. Thiry(4)................... 12,500 * George B. DeHuff(5) ............... 150,000 * Barry C. Cosgrove(6)............... 256,426 * Stan M. Lindenfeld(7) ............. 269,971 * John J. McDonough(8)............... 46,189 * Maris Andersons(9) ................ 134,055 * Shaul G. Massry(10)................ 124,862 * Peter T. Grauer(11)................ 72,500 * Richard B. Fontaine................ -- -- C. Raymond Larkin Jr............... -- -- All directors and executive officers as a group (12 persons)(12).................. 1,146,762 1.4% Victor M.G. Chaltiel(13)........... 1,200,857 1.5% Leonard W. Frie(14)................ 287,488 * John E. King(15) .................. 260,495 *
- -------- *Amount represents less than 1% of our common stock. (1) Based upon information contained in Amendment No. 1 to Schedule 13G filed with the SEC on February 11, 2000. The number of shares beneficially owned includes 60,957 shares which may be acquired upon the conversion of our convertible notes. (2) Based upon information contained in a Schedule 13G filed with the SEC on February 23, 2000. (3) Based upon information contained in a Schedule 13G filed with the SEC on February 14, 2000. By virtue of his position as managing partner of Ardsley Advisory Partners, Mr. Hempleman may be deemed to have the shared power to vote or dispose of these shares held by the discretionary accounts managed by Ardsley and Mr. Hempleman. Therefore, Mr. Hempleman may be deemed the beneficial owner of these shares. (4) All shares are held in a family trust. (5) Includes 150,000 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. (6) Includes 209,832 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. 51 (7) Includes 251,498 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. (8) Includes 45,000 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. (9) Includes 121,417 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. (10) Includes 124,862 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. (11) Includes 72,500 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. (12) All directors and executive officers in office on March 15, 2000. Includes 930,109 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. (13) Includes 166,667 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. Based on information available to us at the time of the employee's resignation. (14) Includes 141,247 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. Based on information available to us at the time of the employee's resignation. (15) Includes 243,165 shares issuable upon the exercise of options which are exercisable as of, or will become exercisable within 60 days of, March 15, 2000. Based on information available to us at the time of the employee's resignation. Item 13. Certain Relationships and Related Transactions. Mr. Chaltiel has received loans from us as described above under "Employment Agreements." Certain of our other officers and employees also have received loans from us in connection with the purchase of shares of our common stock. All of the loans have similar terms. The loans bear interest at the lower of 8% or the prime rate, and are secured by all of the borrower's interests in our common stock, including all vested stock options. When made, the loans had a four-year term and one quarter of the original principal amount thereof plus all accrued interest thereon had to be paid annually, subject to the limitation that the borrower was not required to make any payment that exceeded 50% of the after-tax proceeds of such borrower's bonus from us, based on maximum tax rates then in effect. To date, our board has approved deferrals of all scheduled principal and accrued interest payments under all such loans. No other terms of the loans have been changed. As of March 2000, Barry C. Cosgrove had a loan outstanding from us with a principal amount of $50,000. Maris Andersons, one of our directors, serves as a consultant to us. In addition to receiving compensation as a member of the board, Mr. Andersons has been granted options, vesting over four years, to purchase an aggregate of 76,972 shares of our common stock in consideration for these services. As of March 15, 2000, Mr. Andersons had exercised 55,555 of these options leaving a balance of 21,417 options to purchase shares of our common stock. Mr. Andersons is also receiving consulting fees from us of $25,000 per month in consideration of the substantial time and energy required of him in overseeing our financial operations and his role in negotiations with our senior lenders. These additional fees commenced in September 1999 and continued until we hired a new chief financial officer in February 2000. Shaul G. Massry, one of our directors, serves as a consultant to us. In addition to receiving compensation as a member of the board, Dr. Massry also receives $120,000 per year, $70,000 of which is an advance against the commissions described below, and has been granted options, vesting over four years, to purchase an aggregate 52 of 87,222 shares of our common stock in consideration for these services. As of March 15, 2000, Dr. Massry had exercised 11,110 of these options leaving a balance of 76,112 options to purchase shares of our common stock. Also, for acquisitions that he introduces to us and materially assists in closing the transaction, Dr. Massry receives a commission of 1.0% to 1.5% of the purchase price, depending on the amount of the purchase price. The commission on any single transaction cannot exceed $100,000. DLJ and certain of its affiliates from time to time perform various investment banking and other services for us, for which we pay customary consideration. In addition, affiliates of DLJMBP are included in the syndicate of lenders under our credit facilities. An affiliate of DLJMBP, Peter T. Grauer, serves on our board. We have entered into indemnity agreements with each of our directors and all of our officers, which agreements require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as our directors, officers, employees or agents, other than liabilities arising from conduct in bad faith or which is knowingly fraudulent or deliberately dishonest, and, under certain circumstances, to advance their expenses incurred as a result of proceedings brought against them. 53 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, 1998 and December 31, 1999.................................................................... F-2 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 1997, December 31, 1998 and December 31, 1999........ F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31, 1998 and December 31, 1999........................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, December 31, 1998 and December 31, 1999.............. 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) 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 DLJMBP and affiliates, NME Properties, Continental Bank, as voting trustee, and TRCH.(4) 4.2 Agreement and Amendment, dated as of June 30, 1995, between DLJMBP and affiliates, 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.(4) 4.3 Indenture, dated June 12, 1996 by RTC to PNC Bank including form of RTC Note.(5) 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.(6) 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.(6) 4.8 Purchase Agreement, dated as of November 12, 1998, between TRCH and the initial purchasers.(6) 10.1 Noncompetition Agreement, dated August 11, 1994, between TRCH 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)*
54 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.(7)* 10.5 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Barry C. Cosgrove.(8)* 10.6 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Leonard W. Frie.(8)* 10.7 Employment Agreement, dated as of March 2, 1998, by and between TRCH and John E. King.(8)* 10.8 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Stan M. Lindenfeld.(8)* 10.9 Amendment to Dr. Lindenfeld's employment agreement, dated September 1, 1998.(7)* 10.10 Employment Agreement, dated as of May 6, 1999, by and between TRCH and George DeHuff.(9)* 10.11 Employment Agreement, dated as of October 18, 1999, by and between TRCH and Kent J. Thiry.(10)* 10.12 Employment Agreement, dated as of March 1, 1998, by and between TRCH and John J. McDonough.[X]* 10.13 Agreement, dated as of October 6, 1999, by and between TRCH and Victor M.G. Chaltiel.(10)* 10.14 Agreement, dated as of October 18, 1999, by and between TRCH and John E. King.(10)* 10.15 Consulting Agreement, dated as of October 1, 1998, by and between Total Renal Care, Inc. and Shaul G. Massry, M.D.(10)* 10.16 Second Amended and Restated 1994 Equity Compensation Plan.[X]* 10.17 Form of Stock Subscription Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.18 Form of Promissory Note and Pledge Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.19 Form of Purchased Shares Award Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.20 Form of Nonqualified Stock Option relating to the 1994 Equity Compensation Plan.(4)* 10.21 First Amended and Restated 1995 Equity Compensation Plan.[X]* 10.22 Employee Stock Purchase Plan, 1999 Amendment and Restatement.[X]* 10.23 Option Exercise and Bonus Agreement, dated as of September 18, 1995 between TRCH and Victor M.G. Chaltiel.(3)* 10.24 First Amended and Restated 1997 Equity Compensation Plan.[X]* 10.25 First Amended and Restated Special Purpose Option Plan.[X]* 10.26 1999 Equity Compensation Plan.(11)* 10.27 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.(12) 10.28 Amendment No. 1 and Consent No. 1, dated as of August 5, 1998, to the Revolving Credit Agreement.(7) 10.29 Amendment No. 2, dated as of November 12, 1998, to the Revolving Credit Agreement.(7) 10.30 Amendment No. 3 and Waiver, dated as of August 9, 1999, to and under the Revolving Credit Agreement.(9)
55 10.31 Amendment No. 4 and Waiver, dated as of November 8, 1999, to and under the Revolving Credit Agreement.(10) 10.32 Amendment No. 5 and Consent, dated as of February 22, 2000, to and under the Revolving Credit Agreement.[X] 10.33 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.(12) 10.34 First Amendment, dated as of August 5, 1998, to the Term Loan Agreement.(13) 10.35 Limited Waiver and Second Amendment, dated as of August 9, 1999, to the Term Loan Agreement.(9) 10.36 Limited Waiver and Third Amendment, dated as of November 8, 1999, to the Term Loan Agreement.(10) 10.37 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).(14) 10.38 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).(14) 10.39 Amendment to Borrower Pledge Agreement, dated February 27, 1998, executed by TRCH in favor of The Bank of New York, as Collateral Agent.(7) 10.40 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).(14) 10.41 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).(7) 10.42 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.(12) 10.43 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.(12) 10.44 First Amendment to the Subsidiary Guaranty dated February 17, 1998.(2) 10.45 Guaranty, entered into as of March 31, 1998, by TRCH in favor of and for the benefit of PNC Bank.(2) 12.1 Statement re Computation of Ratios of Earnings to Fixed Charges.[X] 21.1 List of our subsidiaries.[X]
56 23.1 Consent of PricewaterhouseCoopers LLP.[X] 24.1 Powers of Attorney with respect to TRCH (included on page II-1). 27.1 Financial Data Schedule.[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 as an exhibit to RTC's Form 10-Q for the quarter ended June 30, 1996. (6) Filed on December 18, 1998 as an exhibit to our Registration Statement on Form S-3 (Registration Statement No. 333-69227). (7) Filed on March 31, 1999 as an exhibit to our Form 10-K for the year ended December 31, 1998. (8) Filed as an exhibit to our Form 10-Q for the quarter ended September 30, 1998. (9) Filed on August 16, 1999 as an exhibit to our Form 10-Q for the quarter ended June 30, 1999. (10) Filed on November 15, 1999 as an exhibit to our Form 10-Q for the quarter ended September 30, 1999. (11) Filed on February 18, 2000 as an exhibit to our Registration Statement on Form S-8 (Registration Statement No. 333-30736). (12) 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. (13) Filed on October 8, 1999 as an exhibit to our Form 10-K/A (Amendment No. 1) for the year ended December 31, 1998. (14) Filed on December 19, 1997 as an exhibit to our Current Report on Form 8- K. 57 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Total Renal Care Holdings, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, of shareholders' 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States 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. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10, the Company is not in compliance with certain debt covenants which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Seattle, Washington March 22, 2000 F-1 TOTAL RENAL CARE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, ---------------------- 1999 1998 ---------- ---------- ASSETS Cash and cash equivalents.............................. $ 107,981 $ 41,487 Accounts receivable, less allowance of $67,315 and $61,848............................................... 390,329 416,822 Inventories............................................ 32,916 23,470 Other current assets................................... 32,082 45,721 Income tax receivable.................................. 45,645 Deferred income taxes.................................. 45,795 39,014 ---------- ---------- Total current assets............................... 654,748 566,514 Property and equipment, net............................ 285,449 233,337 Intangible assets, net................................. 1,069,672 1,073,500 Investments in third-party dialysis businesses......... 35,552 31,360 Deferred taxes......................................... 6,553 Other long-term assets................................. 4,744 6,908 ---------- ---------- $2,056,718 $1,911,619 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable....................................... $ 121,561 $ 45,710 Accrued compensation and benefits...................... 47,647 34,778 Other liabilities...................................... 77,141 69,432 Current portion of long-term debt...................... 26,585 21,847 Income taxes payable................................... 6,683 Long-term debt potentially callable under covenant provisions............................................ 1,425,610 ---------- ---------- Total current liabilities.......................... 1,698,544 178,450 Long-term debt, less $1,425,610 and $0 potentially callable classified as current........................ 5,696 1,225,781 Deferred income taxes.................................. 8,212 Other long-term liabilities............................ 3,497 1,890 Minority interests..................................... 22,577 23,422 Commitments and contingencies (Notes 10, 11, 13 and 15) Shareholders' equity Preferred stock ($0.001 par value; 5,000,000 shares authorized; none issued or outstanding)............. Common stock ($0.001 par value, 195,000,000 shares authorized; 81,193,011 and 81,029,560 shares issued and outstanding).................................... 81 81 Additional paid-in capital........................... 426,025 421,675 Notes receivable from shareholders .................. (192) (356) Accumulated other comprehensive loss................. (4,718) Retained earnings (deficit).......................... (94,792) 52,464 ---------- ---------- Total shareholders' equity......................... 326,404 473,864 ---------- ---------- $2,056,718 $1,911,619 ========== ==========
See notes to consolidated financial statements. F-2 TOTAL RENAL CARE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (dollars in thousands, except per share data)
Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- Net operating revenues........................ $1,445,351 $1,203,738 $758,403 Operating expenses Dialysis and lab facilities................. 993,239 779,740 514,372 General and administrative.................. 130,555 75,686 49,934 Depreciation and amortization............... 112,481 90,353 53,611 Provision for uncollectible accounts........ 133,253 44,858 28,899 Impairment and valuation losses............. 139,805 Merger related costs........................ 78,188 ---------- ---------- -------- Total operating expenses................... 1,509,333 1,068,825 646,816 ---------- ---------- -------- Operating income (loss)....................... (63,982) 134,913 111,587 Other income (loss)........................... (1,895) 4,894 3,175 Debt expense.................................. 110,797 84,003 29,082 Minority interests in income of consolidated subsidiaries................................. (5,152) (7,163) (4,502) ---------- ---------- -------- Income (loss) before income taxes, extraordinary item and change in accounting principle............. (181,826) 48,641 81,178 Income tax expense (benefit).................. (34,570) 38,449 35,654 ---------- ---------- -------- Income (loss) before extraordinary item and change in accounting principle............. (147,256) 10,192 45,524 Extraordinary loss related to early extinguishment of debt, net of tax of $7,668....................................... (12,744) Cumulative effect of change in accounting principle, net of tax of $4,300.............. (6,896) ---------- ---------- -------- Net income (loss)........................... $ (147,256) $ (9,448) $ 45,524 ========== ========== ======== Earnings (loss) per common share: Income (loss) before extraordinary item and change in accounting principle............. $ (1.81) $ 0.12 $ 0.59 Extraordinary loss, net of tax.............. (0.16) Cumulative effect of change in accounting principle, net of tax...................... (0.08) ---------- ---------- -------- Net income (loss)........................... $ (1.81) $ (0.12) $ 0.59 ========== ========== ======== Weighted average number of common shares outstanding.................................. 81,152 80,143 77,524 ========== ========== ======== Earnings (loss) per common share--assuming dilution: Income (loss) before extraordinary item and change in accounting principle............. $ (1.81) $ 0.12 $ 0.57 Extraordinary loss, net of tax.............. (0.16) Cumulative effect of change in accounting principle, net of tax...................... (0.08) ---------- ---------- -------- Net income (loss)........................... $ (1.81) $ (0.12) $ 0.57 ========== ========== ======== Weighted average number of common shares and equivalents outstanding--assuming dilution... 81,152 81,701 79,975 ========== ========== ======== STATEMENTS OF COMPREHENSIVE INCOME Net income (loss)........................... $ (147,256) $ (9,448) $ 45,524 Other comprehesive income: Foreign currency translation............... (4,718) ---------- ---------- -------- Comprehensive income (loss)................. $ (151,974) $ (9,448) $ 45,524 ========== ========== ========
See notes to consolidated financial statements. F-3 TOTAL RENAL CARE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Year ended December 31, ---------------------------------- 1999 1998 1997 ---------- ----------- --------- Cash flows from operating activities Net income (loss)........................ $ (147,256) $ (9,448) $ 45,524 Non-cash items included in net income (loss): Depreciation and amortization.......... 112,481 90,353 53,611 Impairment and valuation losses........ 139,805 Deferred income taxes.................. (21,546) (17,577) (9,689) Stock option expense and tax benefits.. 2,280 33,912 8,994 Equity investment losses (income)...... 140 (157) (40) Minority interests in income of consolidated subsidiaries............. 5,152 7,163 4,502 Extraordinary loss..................... 20,412 Cumulative effect of change in accounting principle.................. 11,196 ---------- ----------- --------- 91,056 135,854 102,902 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable.................... 28,486 (155,393) (80,912) Inventories............................ (8,742) (7,152) (1,843) Other current assets................... 14,171 (30,104) (143) Other long-term assets................. 5,503 8,414 (9,166) Accounts payable....................... 72,694 10,131 (992) Accrued compensation and benefits...... 11,541 8,933 8,539 Other liabilities...................... 5,200 36,580 2,791 Income taxes........................... (52,464) 11,004 2,329 Other long-term liabilities............ 1,498 (7,725) 7,423 ---------- ----------- --------- Net cash provided by operating activities.......................... 168,943 10,542 30,928 ---------- ----------- --------- Cash flows from investing activities Additions of property and equipment, net..................................... (106,657) (82,820) (61,592) Acquisitions, net........................ (154,226) (338,164) (455,090) Intangible assets........................ (11,167) (30,810) (38,939) Investments in affiliates, net........... (25,380) (16,785) 25,765 ---------- ----------- --------- Net cash used in investing activities.......................... (297,430) (468,579) (529,856) ---------- ----------- --------- Cash flows from financing activities Proceeds from bank credit facilities..... 2,337,790 1,567,225 505,000 Payments on bank credit facilities....... (2,127,590) (1,407,650) Proceeds from convertible notes.......... 345,000 Proceeds from other long-term borrowings.............................. 188 3,395 4,511 Payments on other long-term obligations.. (8,683) (35,675) (26,269) Net proceeds from issuance of common stock................................... 2,046 24,157 3,827 Distributions to minority interests...... (4,052) (3,628) (2,768) ---------- ----------- --------- Net cash provided by financing activities.......................... 199,699 492,824 484,301 Effect of exchange rate changes on cash.... (4,718) ---------- ----------- --------- Net increase (decrease) in cash ........... 66,494 34,787 (14,627) Cash and cash equivalents at beginning of year ..................................... 41,487 6,700 21,327 ---------- ----------- --------- Cash and cash equivalents at end of year... $ 107,981 $ 41,487 $ 6,700 ========== =========== ========= Supplemental cash flow information: (Note 18)
See notes to consolidated financial statements. F-4 TOTAL RENAL CARE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Notes Accumulated Common stock Additional receivable other Retained ------------- paid-in from comprehensive earnings Shares Amount capital shareholders income (deficit) Total ------ ------ ---------- ------------ ------------- --------- -------- Balance at December 31, 1996................... 76,686 $77 $345,039 $(2,827) $ 16,388 $358,677 Shares issued in acquisitions........... 18 273 273 Shares issued to employees and others... 175 1,773 1,773 Options exercised....... 447 2,019 2,019 Shares issued to repay debt................... 665 1 5,147 5,148 Interest accrued on notes receivable, net of payments............ (203) (203) Income tax benefit related to stock options exercised...... 5,453 5,453 Grant of stock options.. 235 235 Issuance of treasury stock to repay debt.... 1 6 6 Stock option expense.... 3,541 3,541 Net income.............. 45,524 45,524 ------ --- -------- ------- ------- --------- -------- Balance at December 31, 1997................... 77,992 78 363,486 (3,030) 61,912 422,446 Shares issued in acquisitions........... 99 2,796 2,796 Shares issued to employees and others... 49 1,085 1,085 Options exercised....... 2,890 3 36,396 36,399 Repayment of notes receivable, net of interest accrued....... 2,674 2,674 Income tax benefit related to stock options exercised...... 14,199 14,199 Grant of stock options.. 128 128 Stock option expense.... 3,585 3,585 Net loss................ (9,448) (9,448) ------ --- -------- ------- ------- --------- -------- Balance at December 31, 1998................... 81,030 81 421,675 (356) 52,464 473,864 Shares issued to employees and others... 77 1,937 1,937 Options exercised....... 86 109 109 Repayment of notes receivable, net of interest accrued....... 164 164 Income tax benefit related to stock options exercised...... 375 375 Grant of stock options.. 813 813 Stock option expense.... 1,116 1,116 Foreign currency translation............ $(4,718) (4,718) Net loss................ (147,256) (147,256) ------ --- -------- ------- ------- --------- -------- Balance at December 31, 1999................... 81,193 $81 $426,025 $ (192) $(4,718) $ (94,792) $326,404 ====== === ======== ======= ======= ========= ========
See notes to consolidated financial statements. F-5 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. Organization and summary of significant accounting policies Organization TRCH operates kidney dialysis facilities and provides related medical services in dialysis facilities in the United States, and also in Argentina, Puerto Rico, Europe and Guam. These operations represent a single business segment. See Note 2 regarding the company's plans to divest of its operations outside of the continental United States. Basis of presentation The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 10 to the financial statements, the company is not in compliance with certain formula- based debt covenants. Because of this non-compliance with covenant formulas, the majority of the lenders could declare an event of default and an acceleration of amounts due. The company would be unable to pay the accelerated amounts becoming immediately payable. The ability of the lenders to accelerate the loans raises uncertainty about the company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The company is currently in discussions with the lenders regarding obtaining a waiver to these covenant violations or restructuring the credit facilities. Management believes it is unlikely that an event of default will be declared because of the company's substantial cash balance and because cash flows are expected to be sufficient to cover operating requirements and scheduled debt service through 2000. See Note 10. The long-term debt that could potentially become immediately due and payable has been classified as a current liability in accordance with requirements of generally accepted accounting principles. Our consolidated financial statements include wholly-owned and majority- owned subsidiaries and partnerships. Other non-consolidated equity investments are recorded under the equity method of accounting, unless TRCH's equity interest is less than 20%. For all periods presented, the results of our operations outside the U.S. are based on the twelve-month period ended November 30 to accommodate our consolidated reporting time schedules. Net operating revenues Revenues are recognized as services are provided to patients. Operating revenues consist primarily of reimbursement for dialysis and ancillary services to patients. A usual and customary fee schedule is maintained for our dialysis treatment and other patient services, however, actual billable revenue is normally at a discount to the fee schedule. Medicare and Medicaid programs are billed at pre-determined net realizable rates per treatment that are established by statute or regulation. Most non-governmental payors, including contracted managed care payors, are billed at our usual and customary rates, but a contractual allowance is recorded to reflect the expected net realizable revenue for services provided. Contractual and bad debt allowances are established based upon credit risk of specific third-party payors, contractual terms and collection experience. Net revenue recognition and allowances for uncollectible billings require the use of estimates, and any changes in these estimates are reflected as they become known. Management services are provided to dialysis facilities not owned by the company. The management fees are typically determined as a percentage of the facilities' patient revenues and are included in net operating revenues as earned. Any costs incurred in performing these management services are recognized in facility operating and general and administrative expenses. Other Income Other income includes interest income on cash investments, earnings and losses of non-consolidated equity investments and gains and losses on the disposition of assets. F-6 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) Cash and cash equivalents Cash equivalents are highly liquid investments with original maturities of three months or less. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist principally of drugs and dialysis related supplies. Property and equipment Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense are computed using the straight-line method over the useful lives of the assets estimated as follows: buildings, 20 to 40 years; leaseholds and improvements, over the shorter of their estimated useful life or the lease term; and equipment, 3 to 15 years. Upon disposition of an asset, its accumulated depreciation is deducted from the original cost, and any gain or loss is reflected in current earnings. Capitalized interest Applicable interest charges incurred during significant facility expansion and construction are capitalized as one of the elements of cost and are amortized over the assets' useful lives. Interest capitalized was $709, $804 and $685 for 1999, 1998, and 1997, respectively. Intangible assets The excess of aggregate purchase price over the fair value of the net assets of businesses acquired is recorded as goodwill. Goodwill is amortized over 15 to 40 years using the straight-line method. As of December 31, 1999, the blended average life of our goodwill is 35 years. 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 ten years, using the straight-line method. Deferred debt issuance costs are amortized over the term of the debt using the effective interest method. After 1997, pre-opening and development costs for new dialysis facilities are expensed as incurred. Impairment of long-lived assets Goodwill, other intangible assets, property and equipment, and investment balances are reviewed for possible impairment whenever significant events or changes in circumstances indicate a potential impairment may have occurred, or when the sum of the expected future undiscounted net cash flows identifiable to that asset or group of assets is less than book value. With regard to potential impairment of goodwill balances, cash flows are reviewed for the specific facility operations compared to the respective goodwill balance that resulted from the acquisition of that specific group of facilities. Impairment losses are determined based on net realizable values or projections of net cash flows. Income taxes Federal, state and foreign income taxes are computed at current tax rates, less tax credits. Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are F-7 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the times when items of income and expense are recognized for financial reporting and income tax purposes. Minority interests Minority interests represent the proportionate equity interest of other partners and shareholders in consolidated entities which are not wholly-owned. As of December 31, 1999, these included 17 active partnerships and corporations. Stock-based compensation Stock-based compensation for employees is determined in accordance with APB No. 25. Stock options do not result in an expense if the exercise price is at least equal to the market price at the date of grant. Stock options issued to contract labor, outside consultants and medical directors under contract are valued using the Black-Scholes model and attributed to the respective 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. Earnings per share Basic earnings per share is calculated by dividing net income before extraordinary items and the cumulative effect of changes in accounting principle 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. The convertible debt has been antidilutive and therefore not included in the diluted EPS calculation. Interest rate swap agreements The company has entered into interest rate swap agreements (see Note 10) as a means of managing interest rate exposure. These agreements are not for trading or speculative purposes, and have the effect of converting a portion of our variable rate debt 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 the company to financial risk that will vary during the life of the agreements in relation to prevailing market interest rates. The company is also exposed to credit loss in the event of non-performance by these counterparties. However, the company does not anticipate non-performance by the other parties, and no material loss would be expected from non- performance by the counterparties. Foreign currency translation The company's 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, is tied to the U.S. dollar. Other operations outside the U.S. are translated at year-end exchange rates and any unrealized gains and losses are accounted for as a component of other comprehensive income. Unrealized gains or losses on debt denominated in foreign currency, which is considered a hedge of the net investment in foreign operations, are accounted for as a component of other comprehensive income. F-8 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) 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, 2000. Accordingly, SFAS 133 will be implemented effective January 1, 2001. 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, which 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. The company has not yet determined the impact that the adoption of SFAS 133 will have on earnings or the statement of financial position. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on reported earnings. 2. Impairments and valuation losses Impairment and valuation losses for the year ended December 31, 1999 consisted of the following:
Quarter ended: -------------------------------- Total June 30 September 30 December 31 1999 ------- ------------ ----------- -------- Operations outside the continental U.S.............................. $ 82,812 $ 82,812 Facility closures and other impairments associated with continental U.S. facilities...... 20,943 20,943 Investments in, and advances to third-party dialysis related businesses....................... $15,000 13,200 28,200 Physical inventory of capital assets........................... 3,305 3,305 Abandoned software acquisition.... 1,600 $ 368 1,968 Termination of corporate jet lease agreement........................ 2,577 2,577 ------- ------ -------- -------- $16,600 $2,945 $120,260 $139,805 ======= ====== ======== ========
F-9 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) During the fourth quarter of 1999, the company announced its intention to sell its dialysis operations outside the continental United States as an important first step in reducing its debt burden and allowing management to focus its attention on the company's core operations in the continental U.S. Definitive agreements to sell substantially all of the company's principal operations outside the U.S. were signed in January 2000. More than 80% of the sales, in terms of proceeds and asset values, are currently expected to close during the second quarter of 2000 and the remaining sales are expected to close later in 2000. The sales are subject to required bank and regulatory approvals. Gross cash proceeds associated with these sales agreements will be approximately $160,000, subject to changes in tangible net worth of the operations being sold until the sales are complete. The impairment charge of $82,812 associated with the divestiture of the company's non-continental U.S. operations includes the losses on the sales of the operations to be sold under the definitive agreements entered into in January 2000, including the costs of buying out minority interests and the direct transaction costs of completing the sales. The impairment has been principally recorded as a reduction of goodwill. Future operating results of the non-continental U.S. operations will continue to be included in the consolidated statement of income until the divestitures are completed. Assets and liabilities for the non-continental U.S. operations as of December 31, 1999 were as follows, excluding impairment loss for divestiture: Assets Cash............................................................. $ 5,182 Accounts receivable.............................................. 49,379 Inventories...................................................... 2,895 Other current assets............................................. 9,558 Property and equipment, net...................................... 30,787 Intangible assets, net........................................... 156,583 Other long-term assets........................................... 5,212 -------- $259,596 ======== Liabilities and minority interests Accounts payable................................................. $ 15,975 Accrued compensation and benefits................................ 4,285 Other current liabilities........................................ 12,528 Other long-term liabilities...................................... 390 Minority interests............................................... 1,116 -------- $ 34,294 ========
F-10 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) Operating results for the non-continental U.S. operations excluding impairment charges were as follows (in thousands):
Year ended December 31, ------------------------- 1999 1998 1997 -------- ------- ------- Net operating revenue............................. $124,410 $88,978 $48,137 Operating expenses Dialysis and lab facilities..................... 100,204 70,873 33,665 General and administrative...................... 7,396 3,940 4,212 Depreciation and amortization................... 12,629 7,531 4,670 Provision for uncollectible accounts............ 5,717 2,734 1,239 -------- ------- ------- 125,946 85,078 43,786 -------- ------- ------- Operating income (loss)........................... $ (1,536) $ 3,900 $ 4,351 ======== ======= =======
The impairment and valuation losses associated with dialysis facilities within the continental U.S. similarly relate to actions taken and decisions made during the fourth quarter of 1999. In addition to divesting operations outside the continental U.S., the company took aggressive actions to curtail new facility acquisitions and developments, and to close facilities not supporting the company's new strategic direction. The losses principally related to facilities identified for closure or sale during the first half of 2000. Additionally, several new facility plans were terminated and several projects abandoned. The impairment losses were determined based on estimated net realizable values and projections of cash flows. The closure and abandonment losses averaged less than $1,000 per facility, and were principally associated with the impairment of leasehold improvements and intangible assets specifically identified with these facilities. The company's new strategic direction and curtailment of new facility acquisition plans also affected the valuation of certain partnership investments, resulting in investment write-offs in the fourth quarter of 1999. Additionally, an investment in a third party dialysis business, which was in the form of a loan with equity conversion rights, was determined to be substantially impaired based on the borrower's missed commitments, operating difficulties and liquidity concerns. This third-party dialysis business is now formally in default of its loan agreement. The investment losses recorded in the second quarter of 1999 were similarly associated with impairments of loans to and investments in third-party dialysis-related businesses that experienced serious operating difficulties and liquidity problems. The impairment losses associated with the investments and loans were determined based on estimated net realizable values and projections of net cash flows. The company does not expect recovery of the impairment losses even through potential bankruptcy processes. With respect to impaired loans, interest receivable will not accrue unless the estimated recovery amounts justify such accruals in the future. Impairment reviews are performed for investments in and advances to third- party dialysis businesses whenever a change in condition occurs, including changes in our business strategy and plans, or when a third-party dialysis business experiences deteriorating operating performance or liquidity problems. With regard to potential impairment of goodwill balances, cash flows are routinely reviewed for the specific facility operations associated with the goodwill resulting from the acquisition of that specific group of facilities. Other than in connection with the impairment losses discussed above, there were no goodwill impairments as of December 31, 1999. F-11 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) 3. Accounts receivable The total provisions for uncollectible accounts were $133,253, $44,858 and $28,899 for 1999, 1998 and 1997, respectively. The company's rapid growth through acquisitions through 1998 and the merger with RTC in 1998 had a significant impact on the company's administrative functions, including billing and cash collection processes, which at times operated below optimal levels of efficiency and effectiveness. The backlog of aged accounts receivable continued to increase during the first half of 1999 due to high turnover of billing and collection personnel and process inefficiencies. The subsequent collection rates for the older billings did not match our earlier projections and estimates. Those earlier estimates had been based on prior collection experience, but the build-up of the backlog of aged accounts not processed on a timely basis created collection difficulties at a level not previously experienced or anticipated. As of December 31, 1999, the net balance of domestic accounts receivable aged more than six months amounted to approximately $37 million, excluding the Florida lab withhold contingency discussed in Note 15. During 1999, 1998 and 1997, the company received approximately 59%, 57% and 64%, respectively, of dialysis revenues in the continental U.S. from Medicare and Medicaid programs. Accounts receivable from Medicare and Medicaid were approximately $150,000 and $190,000, excluding the Florida lab withhold contingency, as of December 31, 1999 and 1998, respectively. Medicare historically pays approximately 80% of government established rates for services provided. The remaining 20% typically is paid by state Medicaid programs, private insurance companies or directly by the patients receiving the services. 4. Other current assets Other current assets are comprised of the following:
December 31, --------------- 1999 1998 ------- ------- Supplier rebates and other non-trade receivables............ $19,043 $17,222 Operating advances to managed facilities.................... 8,310 20,695 Prepaid expenses............................................ 4,391 7,165 Deposits.................................................... 338 639 ------- ------- $32,082 $45,721 ======= =======
Operating advances to managed facilities are generally unsecured and interest bearing under the terms of the applicable management agreements. 5. Property and equipment Property and equipment are comprised of the following:
December 31, -------------------- 1999 1998 --------- --------- Land................................................... $ 1,193 $ 1,410 Buildings.............................................. 9,846 10,622 Leasehold improvements................................. 150,067 113,409 Equipment.............................................. 248,428 204,156 Construction in progress............................... 17,575 11,849 --------- --------- 427,109 341,446 Less accumulated depreciation and amortization......... (141,660) (108,109) --------- --------- Property and equipment, net............................ $ 285,449 $ 233,337 ========= =========
F-12 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) Depreciation and amortization expense on property and equipment was $51,045, $40,032, and $22,160 for 1999, 1998, and 1997, respectively. 6. Intangible assets Intangible assets are comprised of the following:
December 31, ---------------------- 1999 1998 ---------- ---------- Goodwill............................................. $ 971,344 $ 939,989 Patient lists........................................ 137,469 132,048 Noncompetition agreements............................ 112,378 96,670 Deferred debt issuance costs......................... 24,524 19,329 ---------- ---------- 1,245,715 1,188,036 Less accumulated amortization........................ (176,043) (114,536) ---------- ---------- $1,069,672 $1,073,500 ========== ==========
Amortization expense applicable to intangible assets was $61,436, $50,321 and $31,451 for 1999, 1998, and 1997, 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 ($6,896 net of tax) were recognized as the cumulative effect of a change in accounting principle in 1998. 7. Investments in third-party dialysis businesses During 1997 and 1998, the company entered into various agreements to provide funding for expansion to companies that provide dialysis related services. Investments in third-party dialysis businesses and related advances were as follows:
December 31, --------------- 1999 1998 ------- ------- Investments in non-consolidated businesses.................. $ 3,782 $ 7,991 Acquisition advances and loans generally convertible to equity investments, less allowance of $14,000 in 1999...... 31,770 23,369 ------- ------- $35,552 $31,360 ======= =======
Non-consolidated equity investments are recorded under the equity method of accounting unless TRCH's constructive equity interest is less than 20%. The loans to third-party dialysis businesses are in the form of notes receivable that are secured by the assets and operations of these companies, and are convertible to equity investments. The notes receivable as of F-13 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) December 31, 1999 bear interest at the prime rate plus 1.5%. The valuation assessments assume that the conversion options will be exercised in most instances. 8. Other liabilities Other accrued liabilities are comprised of the following:
December 31, --------------- 1999 1998 ------- ------- Payor accounts.............................................. $40,505 $22,483 Acquisition price payable................................... 15,223 Accrued interest............................................ 14,664 10,986 Merger accrual (Note 16).................................... 3,788 4,765 Other....................................................... 18,184 15,975 ------- ------- $77,141 $69,432 ======= =======
9. Income taxes The provision for income taxes consists of the following:
Year ended December 31, -------------------------------- 1999 1998 1997 -------- -------- ------- Current Federal................................... $(11,497) $ 46,061 $35,128 State..................................... (2,527) 8,913 6,430 Foreign................................... 1,000 1,052 1,070 Deferred Federal................................... (18,199) (15,557) (6,054) State..................................... (3,347) (2,020) (920) -------- -------- ------- $(34,570) $ 38,449 $35,654 ======== ======== =======
F-14 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) Temporary differences which give rise to deferred tax assets and liabilities are as follows:
December 31, ----------------- 1999 1998 -------- ------- Receivables, primarily allowance for doubtful accounts................. $ 34,991 $27,143 Unrealized asset impairment losses........ 46,291 Merger costs.............. 5,323 6,159 Accrued benefits payable.. 7,664 2,821 Stock compensation........ 2,855 2,800 Foreign NOL carryforward.. 1,207 1,742 Foreign tax credit carryforward............. 210 210 Other..................... 572 314 -------- ------- Gross deferred tax assets................... 99,113 41,189 Fixed assets.............. (4,134) (4,115) Intangible assets......... (10,842) (4,330) Other..................... (1,197) -------- ------- Gross deferred tax liabilities............ (16,173) (8,445) Valuation allowance..... (30,592) (1,942) -------- ------- Net deferred tax assets................. $ 52,348 $30,802 ======== =======
The valuation allowance relates to deferred tax assets established under SFAS No. 109 for foreign net operating loss carryforwards of $1,200, foreign tax credit carryforwards of $210, which expire in 2002, and capital losses of $29,200. These amounts will be carried forward to future years for possible utilization. No benefit of these deferred items has been recognized in the financial statements because the company's ability to utilize such benefits is considered remote. The reconciliation between our effective tax rate and the U.S. federal income tax rate is as follows:
Year ended December 31, ------------------ 1999 1998 1997 ----- ---- ---- Federal income tax rate.................................. 35.0 % 35.0% 35.0% State taxes, net of federal benefit...................... 3.7 3.1 4.1 Foreign income taxes..................................... (0.7) 0.5 Nondeductible amortization of intangible assets.......... (2.1) 2.0 0.9 Valuation allowance...................................... (15.6) 2.3 Other.................................................... (1.3) 1.1 ----- ---- ---- Effective tax rate....................................... 19.0 40.1 43.9 Merger charges........................................... 38.9 ----- ---- ---- Effective tax rate....................................... 19.0 % 79.0% 43.9% ===== ==== ====
F-15 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) 10. Long-term debt Long-term debt comprises the following:
December 31, ----------------------- 1999 1998 ----------- ---------- Credit facilities................................. $ 959,610 $ 749,575 Convertible subordinated notes, 7%, due 2009...... 345,000 345,000 Convertible subordinated notes, 5 5/8%, due 2006.. 125,000 125,000 Acquisition obligations and other notes payable... 21,482 24,160 Capital lease obligations (see Note 11)........... 6,799 3,893 ----------- ---------- 1,457,891 1,247,628 Less current portion and long-term debt potentially callable under covenant provisions... (1,452,195) (21,847) ----------- ---------- $ 5,696 $1,225,781 =========== ==========
Scheduled maturities of long-term debt are as follows: 2000................................................................ $ 26,585 2001................................................................ 4,876 2002................................................................ 109,702 2003................................................................ 466,986 2004................................................................ 4,217 Thereafter.......................................................... 845,525
Included in debt expense was interest expense, net of capitalized interest, of $106,633, $72,804, and $28,214 for 1999, 1998, and 1997, respectively. Also included in debt expense were amortization and write-off of deferred financing costs of $4,164, $1,376, and $868 for 1999, 1998, and 1997, respectively, and interest rate swap early termination costs of $9,823 in 1998. Credit facilities At December 31, 1999 and 1998, outstanding borrowings under the revolving credit facility were $567,610 and $353,575, respectively, and outstanding borrowings under the fixed-term credit facility were $392,000 and $396,000, respectively. In 1998, the existing credit facilities were replaced with an aggregate of $1,350,000 in two senior bank facilities. These credit facilities consisted of a seven-year $950,000 revolving senior credit facility and a ten-year $400,000 senior term facility. As a result of this refinancing, remaining net deferred financing costs in the amount of approximately $16,019, less tax of $6,087, were recognized as an extraordinary loss in 1998. The credit facilities contain financial and operating covenants including, among other things, requirements that the company maintain certain financial ratios and satisfy certain financial tests, and also impose limitations on our ability to make capital expenditures, to incur other indebtedness and to pay dividends. In August 1999 the lenders under the credit facilities had waived compliance with a financial covenant that established a maximum leverage ratio. In November 1999, this waiver was extended on revised terms because the company exceeded the maximum leverage ratio allowable under the terms of the August waiver. F-16 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) Key terms of the last revised waiver were as follows: . Permanent reduction in the maximum borrowings of the revolving credit facility from $950,000 to $700,000. (in accordance with the original terms, the revolving credit facility will be reduced by an additional $105,110 on September 30, 2002); . Reduction in permitted borrowings under the revolving credit facility to $650,000 during the waiver period; . Limits on the amounts that may be spent for acquisitions and developments, expansion or relocation of existing dialysis centers during the waiver period; . Acceleration of the maturity dates on the term loan and revolving credit facility by two years, to March 31, 2006 and March 31, 2003, respectively; . Permanent increase in the applicable margins used to determine the interest rates for borrowings under the credit facilities; and . An increase in the maximum allowable debt to EBITDA ratio, as defined in the revolving credit agreement, to 4.8 until March 15, 2000. Under the $400,000 term facility, principal payments of $4,000 are due annually on September 30, with the remaining balance of $368,000 due when the facility is scheduled to terminate, on March 31, 2006. As of December 31, 1999, the current average interest rate on the credit facilities was 10.87%. When measured as of December 31, 1999 the company was not in compliance with certain formula-based covenants in the credit facilities. If the 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 the credit facilities. Additionally, this noncompliance will result in higher interest costs, and the lenders may require additional concessions from the company before giving a waiver. In the event of default under the credit facilities, the holders of the convertible subordinated notes could also declare the company to be in default. The company is highly leveraged and would be unable to pay the accelerated amounts that would become immediately payable if a default is declared. As a result of this non- compliance, all debt as of December 31, 1999 that is potentially due within one year has been reclassified from long-term debt to a current classification. Under these conditions, the company is currently unable to draw additional amounts under the credit facilities. F-17 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) The company is currently in discussions with the lenders regarding obtaining a waiver of these violations or restructuring the credit facilities. Actions the company has taken and is taking to ensure its ongoing ability to cover scheduled debt servicing include divestiture of operations outside the continental U.S. (see Note 2), curtailment of new facility acquisitions and developments, improvements in billing and cash collections processes, increased management controls over expenditures, and evaluations of alternative capital sources, as well as pursuing debt restructuring with lenders. Prior to March 2000, the company focused its attention primarily on those actions that would improve operating performance and cash flows, as well as filling key senior management positions. Given the progress made in these areas, the company is now entering into more active discussions with its lenders for an acceptable restructuring arrangement. Management believes it is unlikely that an event of default will be declared because of the company's substantial cash balance and because cash flows are expected to be sufficient to cover operating requirements and scheduled debt service through 2000. Several of the company's subsidiaries, including subsidiaries owning substantially all of the company's dialysis facilities assets, have guaranteed the obligations under the credit facilities. RTC also had a credit agreement which provided for a $350,000 revolving credit/term facility available to fund acquisitions and general working capital requirements. The RTC credit agreement was terminated and repaid with borrowings under the 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 $4,393 related to the RTC credit agreement were recognized as an extraordinary loss, net of tax effect of $1,580, in 1998. 7% convertible subordinated notes In November 1998, $345,000 of 7% convertible subordinated notes due 2009 were issued in a private placement offering. The 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, and the notes may be redeemed on or after November 15, 2001. The notes are general, unsecured obligations junior to all existing and future senior debt and, effectively all existing and future liabilities of the company and its subsidiaries. The company subsequently filed a registration statement covering the resale of the notes, which was declared effective on February 1, 2000. Commencing May 18, 1999, the company incurred monetary penalties on a weekly basis until the registration was declared effective. Penalties of $976 were included in debt expense for the year ended December 31, 1999. 5 5/8% convertible subordinated notes In June 1996, RTC (a wholly-owned subsidiary following the merger with TRCH in 1998) issued $125,000 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. After July 17, 1999, all or any part of these notes are redeemable at the company's option on at least 15 and not more than 60 days' notice as a whole or, from time to time, in part at redemption prices ranging from 103.94% to 100% of the principal amount thereof, depending on the year of redemption, together with accrued interest to, but excluding, the date fixed for redemption. These notes are guaranteed by TRCH. F-18 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) The following is summarized financial information of RTC (a wholly-owned subsidiary):
December 31, ----------------- 1999 1998 -------- -------- Cash and cash equivalents.................................... $ 4,118 $ 5,396 Accounts receivable, net..................................... 115,442 130,129 Other current assets......................................... 11,946 19,106 -------- -------- Total current assets....................................... 131,506 154,631 Property and equipment, net.................................. 86,572 75,641 Intangible assets, net....................................... 346,756 406,603 Other assets................................................. 167 9,249 -------- -------- Total assets............................................... $565,001 $646,124 ======== ======== Current liabilities (includes $161,720 and $306,628, respectively, of intercompany payable to TRCH at December 31, 1999 and 1998).......................................... $274,144 $354,489 Long-term debt potentially callable under covenant provisions.................................................. 125,000 125,000 Other long-term liabilities.................................. 1,504 199 Shareholder's equity......................................... 164,353 166,436 -------- -------- Total liabilities and shareholder's equity................. $565,001 $646,124 ======== ========
Year ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Net operating revenues........................... $496,380 $472,355 $322,792 Total operating expenses......................... 499,560 446,367 279,607 -------- -------- -------- Operating income (loss).......................... (3,180) 25,988 43,185 Debt expense..................................... 7,988 8,993 11,802 Other income (loss).............................. (3,639) -------- -------- -------- Income (loss) before income taxes................ (14,807) 16,995 31,383 Income tax expense............................... 9,296 19,959 14,376 -------- -------- -------- Income (loss) before extraordinary item and change in accounting principle.................. (24,103) (2,964) 17,007 Extraordinary loss related to early extinguishment of debt, net of tax.............. 2,812 Cumulative effect of change in accounting principle, net of tax........................... 3,993 -------- -------- -------- Net income (loss).............................. $(24,103) $ (9,769) $ 17,007 ======== ======== ========
Interest rate swap agreements In November 1996, the company entered into a seven-year interest rate swap agreement involving the exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts. At December 31, 1997, the total notional principal amount of this interest rate swap agreement was $100,000 and the effective interest rate thereon was 7.57%. In July 1997, the company entered into a ten-year interest rate swap agreement. At December 31, 1997, the total notional principal amount of this interest rate swap agreement was $200,000 and the effective interest rate thereon was 7.77%. In April 1998, in conjunction with the refinancing of senior credit facilities, these two interest rate swap agreements were cancelled. The loss associated with the early cancellation of those swaps was $9,823, and was included in debt expense for 1998. F-19 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) In May 1998, the company entered into cancelable interest rate swap agreements, with a combined notional amount of $800,000. During 1999 two of the swap agreement counterparties exercised their right to cancel agreements in the aggregate notional amount of $100,000. The remaining $700,000 of swap agreements mature between 2003 and 2008 with cancellation clauses at the swap holders' option from 2000 to 2005. As a result of these swap agreements, the effective underlying blended rate for $700,000 of outstanding debt is fixed at approximately 5.66% plus an applicable margin based upon our current leverage ratio. At December 31, 1999, the effective interest rate for borrowings covered under the swap agreements was 9.30%. 11. Leases The majority of the company's facilities are leased 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: 2000............................................................... $ 42,903 2001............................................................... 40,037 2002............................................................... 36,420 2003............................................................... 33,545 2004............................................................... 31,600 Thereafter......................................................... 120,362 -------- Total minimum lease payments....................................... $304,867 ========
Rental expense under all operating leases for 1999, 1998, and 1997 amounted to $52,504, $38,975 and $24,589, respectively. Certain equipment is leased under capital lease agreements. Future minimum lease payments under capital leases are as follows: 2000................................................................ $ 2,004 2001................................................................ 1,399 2002................................................................ 1,001 2003................................................................ 842 2004................................................................ 544 Thereafter.......................................................... 5,302 Less portion representing interest.................................. (4,293) ------- Total capital lease obligation, including current portion........... $ 6,799 =======
The net book value of fixed assets under capital lease was $7,719 and $4,314 at December 31, 1999 and 1998, respectively. Capital lease obligations are included in long-term debt (see Note 10). F-20 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands, except per share data) 12. Shareholders' equity Change in shares, stock splits and dividends On September 30, 1997 the company declared a common stock dividend to all shareholders of record as of October 7, 1997, to be paid on October 20, 1997. Each shareholder received two additional shares of common stock for each three shares held. Fractional shares calculated as a result of the stock dividend were paid out in cash in the amount of approximately $14. All share and per share amounts presented in the financial statements and related notes thereto have been restated to reflect this stock dividend 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, --------------------------- 1999 1998 1997 --------- ------- ------- (in thousands, except per share) Income (loss) before extraordinary item and cumulative effect of change in accounting principle: As reported.................................... $(147,256) $10,192 $45,524 ========= ======= ======= Income (loss) before extraordinary item and cumulative effect of change in accounting principle--assuming dilution: As reported.................................... $(147,256) $10,192 $45,524 Add back interest on RTC earnout note, tax effected...................................... 34 --------- ------- ------- $(147,256) $10,192 $45,558 ========= ======= ======= Applicable common shares: Average outstanding during the year............ 81,168 80,156 77,649 Reduction in shares in connection with notes receivable from employees..................... (16) (13) (125) --------- ------- ------- Weighted average number of shares outstanding for use in computing basic earnings per share....... 81,152 80,143 77,524 Outstanding stock options (based on the treasury stock method)........................ 1,558 2,288 Dilutive effect of RTC earnout note............ 163 --------- ------- ------- Adjusted weighted average number of common and common share equivalent shares outstanding-- assuming dilution............................. 81,152 81,701 79,975 ========= ======= ======= Earnings (loss) per common share--basic.......... $ (1.81) $ 0.12 $ 0.59 Earnings (loss) per common share--assuming dilution........................................ $ (1.81) $ 0.12 $ 0.57
All options to purchase common stock, as described below, were excluded from the 1999 EPS calculation because they were anti-dilutive. Options to purchase 4,726,975 and 401,676 shares of common stock at $28.43 to $36.13 per share and $24.21 to $32.25 per share, were outstanding during 1998 and 1997, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares or the effect was anti-dilutive. The shares of common stock from the assumed conversion of the 7% convertible subordinated notes and the 5 5/8% convertible subordinated notes (see Note 10) were not included in the computation of diluted EPS for any period because the effect was anti- dilutive. F-21 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands, except per share data) Stock-based compensation plans The company's stock-based compensation plans are described below. 1994 plan. The 1994 Equity Compensation Plan provides for awards of nonqualified stock options to purchase common stock and other rights to purchase shares of common stock to certain employees, directors, consultants and facility medical directors. There are 4,935,874 shares of common stock reserved for issuance under the 1994 plan. Original options granted generally vest on the ninth anniversary of the date of grant, subject to accelerated vesting in the event that certain performance criteria are met. In April 1996, the vesting schedule was changed 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. In December 1999, the plan was amended so that no further grants may be made under this plan. 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 the company 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, 1999 and 1998 the outstanding notes plus accrued interest totaled $192 and $356, respectively. 1995 plan. The 1995 Equity Compensation Plan provides awards of stock options and the issuance of restricted stock to certain employees, directors and other individuals providing services. There are 1,247,709 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. Awards are generally issued with the exercise prices equal to the market price of the stock on the date of grant. In December 1999, the plan was amended so that no further grants may be made under this plan. 1997 plan. The 1997 Equity Compensation Plan provides awards of stock options and the issuance of restricted stock to certain employees, directors and other individuals providing services. In February 1998, the shares reserved for issuance under the 1997 plan were increased 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. Awards are generally issued with the exercise prices equal to the market price of the stock on the date of grant. 1999 plans. The 1999 Equity Compensation Plan provides awards of stock options to employees, directors and other individuals providing services. There are 3,000,000 common shares reserved for issuance under this plan. Options granted under this plan generally vest over four years from the date of grant and an option's maximum term is seven years, subject to certain restrictions. Awards under this plan are generally issued with the exercise prices equal to the market price of the stock on the date of grant. The 1999 Non-Executive Officer and Non-Director Equity Compensation Plan provides awards of stock options to employees other than executive officers and to other individuals providing services. There are 1,267,500 common shares reserved for issuance under this plan. Options granted under this plan generally vest over four years from the date of grant, subject to certain restrictions. Awards under this plan are generally issued with the exercise prices equal to the market price of the stock on the date of grant. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants for 1999, 1998, and 1997, respectively: dividend yield of 0% for all periods; weighted average expected volatility of 50.01%, 33.98% and 35.12%; risk-free interest rates of 5.63%, 5.51% and 6.40% and expected lives of six years for all periods. F-22 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands, except per share data) Stock options issued under these plans to non-employees at fair value and those issued to employees with intrinsic value generated stock option expense of $1,116, $3,585, and $3,541 for the years ended December 31, 1999, 1998, and 1997, respectively. A combined summary of the status of the plans is presented below:
Year ended December 31, -------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------- -------- ---------- -------- ---------- -------- Outstanding at beginning of period ............. 10,047,784 $24.15 5,039,838 $16.01 3,118,394 $13.82 Granted ................ 4,575,000 9.35 5,570,567 31.10 3,931,080 19.74 Exercised .............. (82,320) .99 (254,220) 9.48 (275,620) 3.96 Forfeited .............. (4,331,881) 28.64 (308,401) 28.25 (1,734,016) 22.46 ---------- ------ ---------- ------ ---------- ------ Outstanding at end of year .................. 10,208,583 $15.80 10,047,784 $24.15 5,039,838 $16.01 ========== ====== ========== ====== ========== ====== Options exercisable at year end .............. 3,841,397 1,959,913 797,474 ========== ========== ========== Weighted-average fair value of options granted during the year ....................... $12.74 $13.67 $ 9.15 ====== ====== ======
Forfeitures and grants include the effects of modifications to the terms of awards as if the original award was repurchased and exchanged for a new award of greater value. On April 24, 1997, 1,649,735 shares were cancelled and 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. Effective September 20, 1999 1,750,000 options with exercise prices greater than $30 per share were forfeited for the right to participate in a retention bonus program. Retention compensation expense of $2.6 million was recognized in 1999, and no replacement options were awarded as of December 31, 1999. The following table summarizes information about fixed stock options outstanding at December 31, 1999:
Options Options Outstanding Exercisable ---------------- ------------------ Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Range of Exercise Prices Options Contractual Life Price Options Price - ------------------------ ---------- ---------------- -------- --------- -------- $ 0.01-$ 5.00........... 718,522 4.8 $ 1.17 718,522 $ 1.17 $ 5.01-$10.00........... 3,583,545 9.3 8.47 344,045 8.48 $10.01-$15.00........... 467,612 9.2 13.86 11,112 11.70 $15.01-$20.00........... 3,324,477 6.7 18.65 2,015,943 18.61 $20.01-$25.00........... 400,058 8.1 22.63 149,012 22.12 $25.01-$30.00........... 433,866 8.0 26.40 181,512 26.42 $30.01-$35.00........... 1,278,503 8.5 32.09 420,751 32.05 $35.01-$40.00........... 2,000 8.3 35.81 500 35.82 ---------- --- ------ --------- ------ 10,208,583 7.9 $15.80 3,841,397 $16.40 ========== === ====== ========= ======
Special Purpose Option Plan (RTC Plans). Upon consummation of the merger with RTC, all outstanding options under RTC plans 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, F-23 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands, except per share data) including acceleration provisions upon certain sale of assets, mergers and consolidations. On the merger date, there was a conversion of 2,156,426 options. Further, options for 1,305,738 shares became fully vested due to change in control acceleration vesting provisions that were contained in the original grants. Options for 1,662,356 shares were exercised subsequent to the merger date. In December 1999, the plan was amended so that no further grants may be made under this plan. 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. During 1997, RTC also 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. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for 1997: dividend yield of 0%; weighted average expected volatility of 43%; risk free interest rate of 6.55%; and an expected life of 4.29 years. A summary of the status of the RTC plans as of and for the years ended December 31, 1999, 1998 and 1997, is presented below:
Year ended December 31, ----------------------------------------------------------- 1999 1998 1997 ------------------ -------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------- -------- ---------- -------- --------- -------- Outstanding at beginning of period ............. 367,633 $15.66 3,285,192 $13.20 2,293,483 $11.09 Granted ................ 1,182,543 16.84 Exercised .............. (2,403) 9.31 (2,901,218) 12.88 (171,830) 7.60 Forfeited .............. (151,968) 16.24 (16,341) 15.45 (19,004) 13.09 -------- ------ ---------- ------ --------- ------ Outstanding at end of year .................. 213,262 $15.32 367,633 $15.66 3,285,192 $13.33 ======== ====== ========== ====== ========= ====== Options exercisable at year end .............. 163,278 248,958 1,785,169 ======== ========== ========= Weighted-average fair value of options granted during the year ....................... $ 9.70 ======
The following table summarizes information about RTC fixed stock options outstanding at December 31, 1999:
Options Options Outstanding Exercisable ------------------- ---------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Range of Exercise Prices Options Life Price Options Price - ------------------------ ------- ----------- -------- ------- -------- 5.01-15.00....................... 24,564 5.1 $ 8.58 24,564 $ 8.58 15.01-20.00...................... 188,698 7.1 16.20 138,714 16.24 ------- --- ------ ------- ------ 213,262 6.9 $15.32 163,278 $15.09 ======= === ====== ======= ======
Stock purchase plan. The Employee Stock Purchase Plan entitles qualifying employees to purchase up to $25 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 F-24 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands, except per share data) 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 elected by the employee and ends on December 31. Payroll withholdings related to the plan, included in accrued employee compensation and benefits, were $1,937 and $1,892 at December 31, 1999 and 1998, respectively. Subsequent to December 31, 1999, and December 31, 1998, 77,106 and 49,060 shares, respectively were issued to satisfy obligations under the plan. 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 July 1, 1998, January 1, 1998, July 1, 1997, and January 1, 1997, respectively: dividend yield of 0% for all periods; expected volatility of 42.10% in 1998 and 34.23% in 1997; risk-free interest rate of 5.5%, 5.7%, 6.8% and 6.8%; and expected lives of 0.5 and 1.0 years. Using these assumptions, the weighted-average fair value of purchase rights granted were $6.24, $7.84, $11.17, and $15.31, respectively. The fair value of the 1999 purchase right periods were not estimated at December 31, 1999 because of the employees' ability to withdraw from participation through December 31. Pro forma net income and earnings per share. The company applied APB Opinion No. 25 and related interpretations in accounting for all of our employee stock compensation plans. Had compensation cost for our stock-based compensation plans been determined consistent with SFAS 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Year ended December 31, ----------------------------- 1999 1998 1997 ---------- -------- ------- (in thousands, except per share) Income (loss) before extraordinary item and cumulative effect of change in accounting principle...................................... $(162,472) $ 4,004 $33,779 Extraordinary loss............................ (12,744) Cumulative effect of change in accounting principle ................................... (6,896) ---------- -------- ------- Net income (loss) ............................ $(162,472) $(15,636) $33,779 ========== ======== ======= Earnings (loss) per common share Income (loss) before extraordinary item....... $ (2.00) $ 0.04 $ 0.44 Extraordinary loss............................ (0.16) Cumulative effect of change in accounting principle.................................... (0.08) ---------- -------- ------- Net income (loss)............................. $ (2.00) $ (0.20) $ 0.42 ========== ======== ======= Weighted average number of common shares and equivalents outstanding........................ 81,152 80,143 77,524 ========== ======== ======= Earnings (loss) per common share--assuming dilution: Income (loss) before extraordinary item....... $ (2.00) $ 0.05 $ 0.43 Extraordinary loss............................ (0.16) Cumulative effect of change in accounting principle.................................... (0.08) ---------- -------- ------- Net income (loss)............................. $ (2.00) $ (0.19) $ 0.41 ========== ======== ======= Weighted average number of common shares and equivalents outstanding--assuming dilution..... 81,152 81,076 78,982 ========== ======== =======
F-25 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) 13. Transactions with related parties Tenet Tenet Healthcare Corporation, or Tenet, owns less than 5% of our common stock and the company 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 accounts receivable are amounts related to these services of $1,211 and $350 at December 31, 1999 and 1998, respectively. Net operating revenues received from Tenet for these services were $7,037, $2,424, and $2,640, for 1999, 1998 and 1997, respectively. DLJ A managing director of Donaldson, Lufkin & Jenrette, or DLJ, serves on the company's board of directors and, prior to August 1997, an affiliate of DLJ held an ownership interest in the company. Effective with the August 1997 public offering of common stock, DLJ and its affiliates no longer own an interest in the Company. During 1998, DLJ advised the company on the acquisition of RTC and assisted us in the issuance of the 7% notes. The company has entered into a business arrangement with DLJ under which the company will manage third-party dialysis facilities with options to acquire the facilities at future dates, and has guaranteed third-party debt of approximately $11 million as of December 31, 1999. 14. Employee benefit plan The company has 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. The company may make a contribution under the plan each fiscal year as determined by our board of directors. Company matched contributions were $76 and $58 for the years ended December 31, 1999 and 1998, in accordance with specific state requirements. RTC had a defined contribution savings plan covering substantially all of its employees. RTC's contributions under the plan were approximately $641 and $1,069 for years ended December 31, 1998 and 1997, respectively. Effective July 1, 1998, the plan was terminated and merged into TRCH's plan. 15. Contingencies Health care providers' revenues may be subject to adjustment as a result of 1) the examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; 2) different interpretations of government regulations by different fiscal intermediaries; 3) differing opinions regarding a patient's medical diagnosis or the medical necessity or services provided; and 4) retroactive implications or interpretations of governmental requirements. The company's Florida-based laboratory subsidiary is the subject of a third- party carrier review relating to claims for Medicare reimbursement. The carrier has issued formal overpayment determinations in the amount of $5,600 for the period from January 1, 1995 to April 1996 and $14,200 for the period from May 1996 to March 1998. The carrier has also suspended all payments of claims related to this laboratory, regardless of when the laboratory performed the tests. The carrier has requested additional billing records with respect to the time period April 1998 to August 1999. The cumulative amount withheld was approximately $30,000 as of December 31, 1999. F-26 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) The company is disputing the overpayment determinations and has provided supporting documentation of its claims. The company has initiated the process of a formal review of the carrier's determinations. The first step in this formal review process is a hearing before a hearing officer at the carrier. The hearing regarding the initial review period from January 1995 to April 1996 was held in July 1999. In January 2000 the hearing officer issued a decision regarding the initial review period upholding the overpayment determination of $5,600. The company has filed an appeal to a federal administrative law judge. No provisions or allowances have been recorded for this matter. Any determination adverse to the company could have an adverse impact on the company's business, results of operations or financial condition. Following the announcement on February 18, 1999 of the company's preliminary results for the fourth quarter of 1998 and the full year then ended, several class action lawsuits were filed against the company and several of its officers in the U.S. District Court for the Central District of California. The lawsuits have been consolidated into a single action. The consolidated complaint alleges violations of the federal securities laws arising from allegedly false and misleading statements during a class period of March 11, 1997 to July 18, 1999 and seeks unspecified monetary damages. The primary allegations of this complaint are that the company booked revenues at inflated amounts, failed to disclose that a material portion of our accounts receivable were uncollectible, reported excessive non-Medicare revenues, billed for treatments that were never provided, failed to disclose accurately the basis for the suspension of payments to the company's Florida-based laboratory subsidiary on Medicare claims, accounted for goodwill to overstate income, and manipulated the value of intangible assets. On January 24, 2000, all defendants responded to this complaint by filing a motion to dismiss. The motion is set to be heard on June 5, 2000, and all discovery is stayed pending the court's hearing and decision on the motion. Management believes that all of the claims are without merit. It is anticipated that the attorneys' fees and related costs of defending these lawsuits will be covered primarily under insurance policies. Any determination adverse to the company could have an adverse impact on the company's business, results of operations or financial condition. In addition, TRCH is subject to claims and suits in the ordinary course of business for which the company is believed to be covered by insurance. Management believes that the ultimate resolution of these additional pending proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on the company's financial condition, results of operations or cash flows. 16. Merger and acquisitions Merger . Renal Treatment Centers On February 27, 1998 TRCH merger with Renal Treatment Centers, Inc., or RTC. In connection with the merger, TRCH issued 34,565,729 shares of TRCH common stock in exchange for all of the outstanding shares of RTC common stock. In addition, TRCH guaranteed $125,000 of RTC's 5 5/8% convertible subordinated notes. In conjunction with this transaction, an additional 140,000 shares of common stock was authorized by the shareholders. The RTC merger transaction was accounted for as a pooling of interests and the TRCH consolidated financial statements have been restated to include the results of operations and account balances of RTC for all periods presented. There were no transactions between RTC and TRCH prior to the combination. F-27 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) As a result of the merger, RTC's revolving credit agreement was terminated and the outstanding balance of approximately $297,228 was paid off through additional borrowings under our credit facilities. The remaining net unamortized deferred financing costs in the amount of $4,393, less tax of $1,580, related to RTC's revolving credit agreement were recognized as an extraordinary loss in 1998. Merger and related costs recorded during 1998 included transaction costs, integration costs, employee severance and other directly associated compensation expense. A summary of merger and related costs and accrual activity through December 31, 1999 is as follows:
Severance Direct and Costs to transaction employment integrate costs costs operations Total ----------- ---------- ---------- -------- Initial expense................. $ 21,580 $ 41,960 $ 15,895 $ 79,435 Amounts utilized during 1998.... (22,885) (37,401) (13,137) (73,423) Adjustment of estimates......... 1,305 (959) (1,593) (1,247) -------- -------- -------- -------- Accrual, December 31, 1998...... 3,600 1,165 4,765 Amounts utilized during 1999.... (600) (377) (977) -------- -------- -------- -------- Accrual, December 31, 1999...... $ -- $ 3,000 $ 788 $ 3,788 ======== ======== ======== ========
Direct transaction costs consisted 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. Severance and other compensation directly resulting from the merger included a constructive termination of preexisting employment contracts with RTC officers (approximately $6,500); severance payments to approximately 80 employees of RTC (approximately $1,600); exercise of RTC stock options by tendered shares (less than six months from exercise date) permitted under pre- existing terms of RTC stock option grants (approximately $16,000); and special merger bonuses awarded (approximately $16,300). Integration costs of the combined operations were principally associated with the elimination of redundant overhead functions and business processes. TRCH 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 corporate offices. The finance functions, with the exception of patient accounting, were consolidated into our Tacoma, Washington business office. RTC's laboratory, located in Las Vegas, Nevada, was closed prior to its commencement of operation. Integration costs included termination of a long-term laboratory management service agreement (approximately $3,800), write-off of leasehold improvements and other capitalized costs associated with the RTC lab closures (approximately $5,100), and incremental costs of integrating operations, including training and travel expenses (approximately $5,400). The remaining balance of severance and employment costs represents tax gross-up payments and the remaining balance of costs to integrate operations represents remaining lease payments on RTC's vacant laboratory lease space. F-28 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) Acquisitions The following is a summary of acquisitions that were accounted for as purchases for 1999, 1998 and 1997.
Year ended December 31, -------------------------- 1999 1998 1997 -------- -------- -------- Number of facilities acquired................... 45 76 119 Number of common shares issued.................. 98,549 17,613 Estimated fair value of common shares issued.... $ 2,796 $ 273 Deferred purchase payments and acquisition obligations.................................... $ 12,737 15,233 Cash paid, net of cash acquired................. 154,226 338,164 455,090 -------- -------- -------- Aggregate purchase price........................ $166,963 $356,193 $455,363 ======== ======== ========
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 the financial statements from their effective acquisition dates. The nearest month-end has been used as the effective date for recording acquisitions that close during the month because there were no partial month accounting cutoffs and partial month results associated with these acquisitions would not have a material impact on consolidated operating results. The company acquired all of its foreign operations and several domestic operations through purchases of capital stock. Any settlement with tax authorities relating to pre-acquisition income tax liabilities will result in an adjustment to goodwill attributable to that acquisition. The initial allocations of fair value are based upon available information for the acquired businesses and are finalized when the contingent acquisition amounts are determined. The final allocations are not expected to differ materially from the initial allocations. Allocations were as follows:
Year ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Identified intangibles......................... $ 18,061 $ 39,992 $ 87,498 Goodwill....................................... 140,111 315,655 366,121 Tangible assets................................ 20,359 30,650 47,053 Liabilities assumed............................ (11,568) (30,104) (45,309) -------- -------- -------- Total purchase price......................... $166,963 $356,193 $455,363 ======== ======== ========
F-29 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands, except per share amounts) 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 December 31, ----------------------------------- 1999 1998 1997 (unaudited) (unaudited) (unaudited) ----------- ---------- ---------- Net revenues............................. $1,472,396 $1,285,546 $840,211 Net income (loss) before extraordinary item and cumulative effect of change in accounting principle.................... $ (145,049) $ 15,587 $ 54,964 Net income (loss)........................ (145,049) (4,053) 54,964 Pro forma net income (loss) per share before extraordinary item and cumulative effect of change in accounting principle............................... $ (1.79) $ 0.19 $ 0.66 Pro forma net income (loss) per share before extraordinary item and cumulative effect of change in accounting principle--assuming dilution............ $ (1.79) $ 0.19 $ 0.66 Pro forma net income (loss) per share.... (1.79) (0.05) 0.64 Pro forma net income (loss) per share-- assuming dilution....................... (1.79) (0.05) 0.64
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. 17. Fair value of financial instruments Financial instruments consist primarily of cash, accounts receivable, notes receivable, accounts payable, accrued compensation and benefits, and other accrued liabilities. These balances, as presented in the financial statements at December 31, 1999, approximate their fair value. Borrowings under credit facilities, of which $959,610 was outstanding as of December 31, 1999, reflect fair value as they are subject to fees and rates competitively determined in the marketplace. The fair value of the 7% convertible subordinated notes and the RTC 5 5/8% convertible subordinated notes were approximately $230,000, and $77,000 at December 31, 1999. The fair value of the interest rate swap agreements is based on the present value of expected future cash flows from the agreements and was in a net receivable position of $17,393 at December 31, 1999. F-30 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands) 18. Supplemental cash flow information The table below provides supplemental cash flow information:
Year ended December 31, ------------------------ 1999 1998 1997 -------- ------- ------- Cash paid for: Income taxes.................................... $ 32,324 $13,676 $37,402 Interest........................................ 102,125 66,409 25,039 Non cash investing and financing activities: Estimated value of stock and options issued in acquisitions................................... 2,796 273 Fixed assets acquired under capital lease obligations.................................... 3,405 583 829 Contribution to partnerships.................... 2,195 2,592 2,318 Issuance of common stock in connection with earnout note................................... 5,148 Grant of stock options in connection with covenant not to compete........................ 235
F-31 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (dollars in thousands, except per share amounts) 19. Selected quarterly financial data (unaudited) Summary unaudited quarterly financial data for 1999 and 1998 is as follows:
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, 1999 1999 1999 1999 1998 1998 1998 1998 --------- -------- ------------- ------------ --------- -------- ------------- ------------ Net operating revenues.. $352,244 $352,819 $367,168 $ 373,120 $257,833 $288,350 $318,585 $338,970 Operating income (loss)................. 62,128 (6,353) 35,107 (154,864) (33,016) 55,575 66,684 45,520 Income (loss) before extraordinary item and cumulative effect of change in accounting principle.............. 23,207 (22,059) 2,259 (150,664) (47,959) 16,841 28,058 13,252 Net income (loss)....... 23,207 (22,059) 2,259 (150,664) (57,667) 6,909 28,058 13,252 Income (loss) per common share: Income (loss) before extraordinary item and cumulative effect of change in accounting principle............. $ 0.29 $ (0.27) $ 0.03 $ (1.86) $ (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................. $ 0.29 $ (0.27) $ 0.03 $ (1.86) $ (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............. $ 0.28 $ (0.27) $ 0.03 $ (1.86) $ (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................. $ 0.28 $ (0.27) $ 0.03 $ (1.86) $ (0.73) $ 0.08 $ 0.33 $ 0.16 ======== ======== ======== ========= ======== ======== ======== ========
Certain reclassifications have been made to conform with the 1999 year-end presentation. F-32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this Report on Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Torrance, State of California, on March 29, 2000. TOTAL RENAL CARE HOLDINGS, INC. /s/ Kent J. Thiry By: _________________________________ Kent J. Thiry Chairman and Chief Executive Officer KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Kent J. Thiry and Steven J. Udicious, 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 attorneys-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 ratifying 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 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 March 29, 2000 ______________________________________ Executive Officer Kent J. Thiry (Principal Executive Officer) /s/ Richard K. Whitney Chief Financial Officer March 29, 2000 ______________________________________ (Principal Financial Richard K. Whitney Officer) /s/ John J. McDonough Vice President and Chief March 29, 2000 ______________________________________ Accounting Officer John J. McDonough (Principal Accounting Officer) /s/ Maris Andersons Director March 29, 2000 ______________________________________ Maris Andersons /s/ Richard B. Fontaine Director March 29, 2000 ______________________________________ Richard B. Fontaine /s/ Peter T. Grauer Director March 29, 2000 ______________________________________ Peter T. Grauer /s/ C. Raymond Larkin, Jr. Director March 29, 2000 ______________________________________ C. Raymond Larkin, Jr. /s/ Shaul G. Massry Director March 29, 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 audits of the consolidated financial statements referred to in our report dated March 22, 2000, appearing on page F-1 of this Annual Report on Form 10-K also included audits of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K for the years ended December 31, 1999, 1998 and 1997. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10, the Company is not in compliance with certain debt covenants which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Seattle, Washington March 22, 2000 S-1 TOTAL RENAL CARE HOLDINGS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Additions ---------------------- Balance at Amounts Balances of Balance beginning charged to companies Amounts at end Description of year income acquired written off of year ----------- ---------- ---------- ----------- ----------- ------- (in thousands) Allowance for uncollectible accounts: Year ended December 31, 1997............. $15,765 $ 28,899 $2,962 $ 16,931 $30,695 Year ended December 31, 1998............. 30,695 44,858 679 14,384 61,848 Year ended December 31, 1999............. 61,848 133,253 -- 127,786 67,315
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 DLJMBP and affiliates, NME Properties, Continental Bank, as voting trustee, and TRCH.(4) 4.2 Agreement and Amendment, dated as of June 30, 1995, between DLJMBP and affiliates, 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.(4) 4.3 Indenture, dated June 12, 1996 by RTC to PNC Bank including form of RTC Note.(5) 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.(6) 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.(6) 4.8 Purchase Agreement, dated as of November 12, 1998, between TRCH and the initial purchasers.(6) 10.1 Noncompetition Agreement, dated August 11, 1994, between TRCH 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.(7)* 10.5 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Barry C. Cosgrove.(8)* 10.6 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Leonard W. Frie.(8)* 10.7 Employment Agreement, dated as of March 2, 1998, by and between TRCH and John E. King.(8)* 10.8 Employment Agreement, dated as of March 2, 1998, by and between TRCH and Stan M. Lindenfeld.(8)* 10.9 Amendment to Dr. Lindenfeld's employment agreement, dated September 1, 1998.(7)* 10.10 Employment Agreement, dated as of May 6, 1999, by and between TRCH and George DeHuff.(9)* 10.11 Employment Agreement, dated as of October 18, 1999, by and between TRCH and Kent J. Thiry.(10)*
EXHIBIT INDEX--(Continued)
Exhibit Page Number Description Number ------- ----------- ------ 10.12 Employment Agreement, dated as of March 1, 1998, by and between TRCH and John J. McDonough.[X]* 10.13 Agreement, dated as of October 6, 1999, by and between TRCH and Victor M.G. Chaltiel.(10)* 10.14 Agreement, dated as of October 18, 1999, by and between TRCH and John E. King.(10)* 10.15 Consulting Agreement, dated as of October 1, 1998, by and between Total Renal Care, Inc. and Shaul G. Massry, M.D.(10)* 10.16 Second Amended and Restated 1994 Equity Compensation Plan.[X]* 10.17 Form of Stock Subscription Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.18 Form of Promissory Note and Pledge Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.19 Form of Purchased Shares Award Agreement relating to the 1994 Equity Compensation Plan.(4)* 10.20 Form of Nonqualified Stock Option relating to the 1994 Equity Compensation Plan.(4)* 10.21 First Amended and Restated 1995 Equity Compensation Plan.[X]* 10.22 Employee Stock Purchase Plan, 1999 Amendment and Restatement.[X]* 10.23 Option Exercise and Bonus Agreement, dated as of September 18, 1995 between TRCH and Victor M.G. Chaltiel.(3)* 10.24 First Amended and Restated 1997 Equity Compensation Plan.[X]* 10.25 First Amended and Restated Special Purpose Option Plan.[X]* 10.26 1999 Equity Compensation Plan.(11) 10.27 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.(12) 10.28 Amendment No. 1 and Consent No. 1, dated as of August 5, 1998, to the Revolving Credit Agreement.(7) 10.29 Amendment No. 2, dated as of November 12, 1998, to the Revolving Credit Agreement.(7) 10.30 Amendment No. 3 and Waiver, dated as of August 9, 1999, to and under the Revolving Credit Agreement.(9) 10.31 Amendment No. 4 and Waiver, dated as of November 8, 1999, to and under the Revolving Credit Agreement.(10) 10.32 Amendment No. 5 and Consent, dated as of February 22, 2000, to and under the Revolving Credit Agreement.[X] 10.33 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.(12) 10.34 First Amendment, dated as of August 5, 1998, to the Term Loan Agreement.(13) 10.35 Limited Waiver and Second Amendment, dated as of August 9, 1999, to the Term Loan Agreement.(9)
EXHIBIT INDEX--(Continued)
Exhibit Page Number Description Number ------- ----------- ------ 10.36 Limited Waiver and Third Amendment, dated as of November 8, 1999, to the Term Loan Agreement.(10) 10.37 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).(14) 10.38 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).(14) 10.39 Amendment to Borrower Pledge Agreement, dated February 27, 1998, executed by TRCH in favor of The Bank of New York, as Collateral Agent.(7) 10.40 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).(14) 10.41 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).(7) 10.42 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.(12) 10.43 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.(12) 10.44 First Amendment to the Subsidiary Guaranty dated February 17, 1998.(2) 10.45 Guaranty, entered into as of March 31, 1998, by TRCH in favor of and for the benefit of PNC Bank.(2) 12.1 Statement re Computation of Ratios of Earnings to Fixed Charges.[X] 21.1 List of our subsidiaries.[X] 23.1 Consent of PricewaterhouseCoopers LLP.[X] 24.1 Powers of Attorney with respect to TRCH (included on page II- 1). 27.1 Financial Data Schedule.[X]
EXHIBIT INDEX--(Continued) - -------- [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 as an exhibit to RTC's Form 10-Q for the quarter ended June 30, 1996. (6) Filed on December 18, 1998 as an exhibit to our Registration Statement on Form S-3 (Registration Statement No. 333-69227). (7) Filed on March 31, 1999 as an exhibit to our Form 10-K for the year ended December 31, 1998. (8) Filed as an exhibit to our Form 10-Q for the quarter ended September 30, 1998. (9) Filed on August 16, 1999 as an exhibit to our Form 10-Q for the quarter ended June 30, 1999. (10) Filed on November 15, 1999 as an exhibit to our Form 10-Q for the quarter ended September 30, 1999. (11) Filed on February 18, 2000 as an exhibit to our Registration Statement on Form S-8 (Registration Statement No. 333-30736). (12) 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. (13) Filed on October 8, 1999 as an exhibit to our Form 10-K/A (Amendment No. 1) for the year ended December 31, 1998. (14) Filed on December 19, 1997 as an exhibit to our Current Report on Form 8- K. EX-10.12 2 EMPLOYMENT AGREEMENT DATED AS OF MARCH 1, 1998 EXHIBIT 10.12 TERMS OF EMPLOYMENT - DIVISIONAL V.P. These Terms of Employment (this "Agreement") shall govern the employment of John McDonough("Employee") by Total Renal Care Holdings, Inc. or any of its direct or indirect subsidiaries (the entity employing Employee at any time is referred to herein as the "Company"). In consideration of the Company's agreement to employ or to continue to employ Employee and the mutual promises set forth in this Agreement, the Company and Employee, intending to be legally bound, agree as follows: Section 1. Employment and Duties. The Company shall employ Employee, --------------------- and Employee accepts such employment, on an "at will" basis and on the terms and conditions set forth in this Agreement. Employee shall serve the Company in such capacities as the Company deems appropriate from time to time and shall perform such duties as may be assigned to Employee from time to time during the continuance of Employee's employment by the Company by the Chief Executive Officer of the Company or his designee. Employee shall devote Employee's best efforts and skills to the business and interests of the Company on a full-time basis. Employee shall not engage in any other business activity while employed by the Company; provided, however, that Employee may manage personal investments and participate in charitable and civic affairs to the extent that such activities do not adversely affect the performance of Employee's responsibilities to the Company hereunder. Employee shall at all times observe and abide by the Company's policies and procedures as in effect from time to time. Section 2. Compensation. In consideration of the services to be ------------ performed by Employee hereunder, Employee shall receive: 2.1 Base Salary. A salary at the rate of $130,000 per year (the ----------- "Base Salary"), effective as of March 1, 1998. The Base Salary shall be payable in installments consistent with the Company's payroll schedule. The Base Salary shall be subject to adjustment annually for increases, if any, in the Consumer Price Index for the most proximate geographic area in which Employee is then employed (as published by the United States Department of Labor for the immediately preceding calendar year) and will be reviewed each year during the Company's annual salary review and the Company may, in its sole discretion, increase the Base Salary as a result of any such review. 2.2 Benefits. Employee shall be provided employee benefits -------- (including life, health, accident and disability insurance, stock options and vacation) on the same basis as such benefits are generally made available to other employees of similar position with the Company. 2.3 Bonuses. ------- (a) Employee shall be eligible to receive such bonuses as are approved by the Compensation Committee of the Board of Directors of the Company, provided that Employee shall be eligible to receive a bonus of up to 50% of the Base Salary each year pursuant to such bonus plans as may be approved by the Compensation Committee (the "Bonus"). Except as otherwise provided herein, up to 50% of the Bonus will be awarded in connection with the achievement of a Company earnings per share ("EPS") target (the "EPS Bonus") and the remainder of the Bonus shall be subject to the absolute discretion of the Committee based upon the Committee's subjective judgment. (b) Except as set forth below, the Company EPS target for determination of Employee's EPS Bonus shall be determined in the sole discretion of the Committee, provided that the EPS target used to determine Employee's EPS Bonus shall be identical to the EPS target used to determine the EPS Bonuses for the executive officers of the Company. For the calendar year ending December 31, 1998 , the EPS Bonus will represent 50% of the Bonus and Employee shall be entitled to receive (i) 50% of the EPS Bonus if the Company's EPS for such year ("1998 EPS") equals or exceeds 125% of the Company's EPS for the calendar year ended December 31, 1997 ("1997 EPS"), (ii) 100% of the EPS Bonus if 1998 EPS equals or exceeds 150% of 1997 EPS, and (iii) a pro rated amount between 50% and 100% of the EPS Bonus if 1998 EPS is greater than 125% of 1997 EPS but less than 150% of 1997 EPS. (c) The Bonus for any year shall be paid within a reasonable period of time after the EPS for such year has been determined, but in no event later than 75 days after the last day of such year. Employee must be employed by the Company (or an affiliate) on the date any Bonus is paid to be eligible to receive such Bonus, and if Employee is not employed by the Company (or an affiliate) on the date any Bonus is paid for any reason whatsoever, Employee shall not be entitled to receive such Bonus; provided, however, that in the event Employee (i) dies, (ii) is terminated by the Company by reason of Disability (as defined below), or (iii) is terminated without Material Cause (as defined below) following a Change of Control (as defined below), Employee shall be entitled to receive a pro rated Bonus for that portion of any year prior to such termination (or for the whole year and a portion of a year if such termination occurs after December 31 of any year and prior to the date on which the Bonus for such year is paid) regardless of whether Employee is employed on the date such Bonus is paid. Any such prorated Bonus shall be paid at such time as bonuses for such year are otherwise paid. Section 3. Provisions Relating to Termination of Employment. ------------------------------------------------ 3.1 Employment At Will. Employee's employment with the Company ------------------ is "at will" and is terminable by the Company or by Employee at any time without prior notice and for any reason or for no reason. Except as expressly provided in this Section 3 or as otherwise required by law, upon the termination of --------- Employee's employment with the Company for any reason, Employee (i) shall be entitled to receive the Base Salary and benefits as set forth in Section 2.1 and ----------- Section 2.2 through the effective date of such termination and (ii) shall not be - ----------- entitled to receive any other 2 compensation, benefits or payments of any kind, except as otherwise required by law or by the terms of any benefit or retirement plan or other arrangement that would by its terms apply. 3.2 Termination Following a Change of Control. Although Employee's ----------------------------------------- employment hereunder is "at will" and may be terminated at any time by the Company for any reason or for no reason, if, at any time following a Change of Control, Employee's employment is terminated for any reason other than Material Cause, death or Disability (as defined below), Employee shall be obligated to provide consulting services to the Company as provided in Section 4 and shall be --------- entitled to receive (i) to the extent applicable, the bonus provided for in Section 2.3(c) and (ii) in consideration for such consulting services, within two business days of the effective date of such termination, a lump sum payment in an amount equal to one-half (1/2) of Employee's then current Base Salary. 3.3 Termination Due To Disability. In the event the Company ----------------------------- terminates Employee for Disability, unless Employee is eligible to receive full disability benefits under the disability insurance, if any, provided to Employee by the Company, the Company shall continue to pay the Base Salary to Employee until the first to occur of (i) six (6) months or (ii) full disability benefits are available to Employee. 3.4 Definitions. For the purposes of this Section 3, the following ----------- --------- terms shall have the meanings indicated: (a) "Change of Control" shall mean (i) any transaction or series of transactions in which any person or group (within the meaning of Rule 13d-5 under the Exchange Act and Sections 13(d) and 14(d) of the Exchange Act) becomes the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), by way of a stock issuance, tender offer, merger, consolidation, other business combination or otherwise, of greater than 50% of the total voting power (on a fully diluted basis as if all convertible securities had been converted and all warrants and options had been exercised) entitled to vote in the election of directors of the Company (including any transaction in which the Company becomes a wholly owned or majority owned subsidiary of another corporation), (ii) any merger or consolidation or reorganization in which the Company does not survive, (iii) any merger or consolidation in which the Company survives, but the shares of the Company's Common Stock outstanding immediately prior to such merger or consolidation represent 50% or less of the voting power of the Company after such merger or consolidation, and (iv) any transaction in which more than 50% of the Company's assets are sold. (b) "Disability" shall mean the inability, for a period of six (6) months to adequately perform Employee's regular duties due to a physical or mental illness, condition or disability. 3 (c) "Material Cause" shall mean: (i) conviction of a felony involving moral turpitude relating to the business of the Company and which does, in fact, adversely and directly affect the business of the Company; (ii) the adjudication by a court of competent jurisdiction that Employee has committed any act of fraud or dishonesty resulting or intended to result directly or indirectly in personal enrichment at the expense of the Company; (iii) repeated failure or refusal by Employee to follow policies or directives reasonably established by the Chief Executive Officer of the Company or his designee that goes uncorrected for a period of thirty (30) consecutive days after written notice has been provided to Employee; or (iv) intentional breach by Employee of Section 5.1 or Section 5.2 of this Agreement. ----------- ----------- 3.5 Effect of Termination. Upon termination, this Agreement --------------------- shall be of no further force and effect and neither party shall have any further right or obligation hereunder; provided, however, that no termination shall modify or affect the rights and obligations of the parties which have accrued prior to termination; and provided further, that the rights and obligations of the parties under Section 3, Section 4, Section 5, Section 6 and --------- --------- --------- --------- Section 7 shall survive termination of this Agreement. Notwithstanding anything to the contrary set forth herein, upon the termination of this Agreement, Employee shall be entitled to receive any payments or benefits under any benefit, or retirement plans or other arrangements that would, by their terms, apply. Section 4. Consulting Services. If Employee is entitled to receive a ------------------- lump sum payment upon the termination of employment pursuant to Section 3.2 and ----------- receives such payment, acceptance of such payment shall be deemed to constitute an agreement by Employee to provide consulting services to the Company for a period of one year after the termination of employment (the "Consulting Period") on an "as needed" basis (which shall not exceed 120 hours per year). The consulting services to be provided during the Consulting Period will include advising the Company as to those matters which were within the scope of Employee's responsibilities while employed by the Company and such other consulting services as may be mutually agreed upon by the Company and Employee. The times and locations at which such consulting services will be provided will be mutually agreed upon by Employee and the Company. During the Consulting Period, Employee will not provide any similar consulting services in any manner, directly or indirectly, to any Person described in clause (i) or (ii) of Section ------- 5.2(a). - ------ Section 5. Information and Competition. --------------------------- 5.1 (a) Employee acknowledges and agrees that: (i) in the course of Employee's employment or continued employment by the Company, it will or may be necessary for Employee to create, use or have access to (A) technical, business, or customer information, materials, or data relating to the Company's present or planned business which has not previously been released to the public with the Company's authorization, including, but not limited to, confidential information, materials or proprietary data belonging to the Company or relating to the 4 Company's affairs (collectively, "Confidential Information") and (B) information and materials that concern the Company's business that come into Employee's possession by reason of employment with the Company (collectively, "Business Related Information"); (ii) all Confidential Information and Business Related Information are the property of the Company; (iii) the use, misappropriation or disclosure of any Confidential Information or any Business Related Information would constitute a breach of trust and could cause serious and irreparable injury to the Company; and (iv) it is essential to the protection of the Company's goodwill and to the maintenance of the Company's competitive position that all Confidential Information and Business Related Information be kept confidential and that Employee not disclose any Confidential Information or Business Related Information to others or use any Confidential Information or Business Related Information to Employee's own advantage or the advantage of others. (b) In recognition of the acknowledgments contained in Section ------- 5.1(a) above, Employee agrees that, during the Term and thereafter until the - ------ Confidential Information and Business Related Information becomes publicly available (otherwise than through breach by Employee), Employee shall: (i) hold and safeguard all Confidential Information and Business Related Information in trust for the Company, its successors and assigns; (ii) not appropriate or disclose or make available to anyone for use outside of the Company's organization at any time, either during employment with the Company or subsequent to the termination of employment with the Company for any reason, any Confidential Information or Business Related Information, whether or not developed by Employee, except as required in the performance of Employee's duties to the Company; (iii) keep in strictest confidence any Confidential Information or Business Related Information; and (iv) not to disclose or divulge, or allow to be disclosed or divulged by any person within Employee's control, to any person, firm or corporation, or use directly or indirectly, for Employee's own benefit or the benefit of others, any Confidential Information or Business Related Information. 5.2 Competition. ----------- (a) Employee agrees that, during the Term and for a period of one (1) year from the date Employee's employment terminates for any reason, Employee shall not: (i) directly or indirectly, on Employee's behalf or as an officer, director, consultant, partner, owner, stockholder, employee, creditor, agent, trustee or advisor of any individual, partnership or limited liability company, corporation, independent practice association or management services organization or other entity ("Person") that is in the business of, or directly or indirectly derives any economic benefit from, providing, arranging, offering, managing or subcontracting dialysis services or renal care services; or (ii) in any other capacity, own, manage, control, operate, invest or acquire an interest in or otherwise engage in or act for or on behalf of any Person (other than the Company and its subsidiaries and affiliates) engaged in any activity in the United States and those countries outside the United States in which the Company or any of its subsidiaries or affiliates had conducted any 5 business during Employee's employment hereunder, where such activity is similar to or competitive with the activities carried on by the Company or any of its subsidiaries or affiliates. As used herein, the term "dialysis services" or "renal care services" includes, but shall not be limited to, all dialysis services and nephrology-related services provided by the Company at any time during the period, including, but not limited to, hemodialysis, acute dialysis, apheresis services, peritoneal dialysis of any type, staff-assisted hemodialysis, home hemodialysis, dialysis-related laboratory and pharmacy services, access-related services, Method II dialysis supplies and services, and any other service or treatment for persons diagnosed as having end stage renal disease ("ESRD") or pre-end stage renal disease, as well as any dialysis services provided in an acute hospital. To the extent such regulation is changed or amended, the term "ESRD" shall have the same meaning as set forth in Title 42, Code of Federal Regulations 405.2101 et seq. or any successor thereto. Employee acknowledges that the nature of the Company's activities is such that competitive activities could be conducted effectively regardless of the geographic distance between the Company's place of business and the place of any competitive business. Notwithstanding anything herein to the contrary, such activity shall not include the ownership of 5% or less of the issued and outstanding stock of a public company. (b) Employee agrees that, during the Term and for a period of one (1) years from the date Employee's employment terminates for any reason, Employee shall not, directly or indirectly: (i) induce any patient or customer of the Company, either individually or collectively, to patronize any competing dialysis facility; (ii) request or advise any patient, customer or supplier of the Company to withdraw, curtail or cancel such person's business with the Company; (iii) enter into any contract the purpose or result of which would benefit Employee if any patient or customer of the Company were to withdraw, curtail or cancel such person's business with the Company; (iv) solicit, induce or encourage any physician (or former physician) affiliated with the Company or induce or encourage any other person employed by or under contract with the Company to curtail or terminate such person's affiliation or employment or contractual relationship with the Company; (iv) disclose to any Person the names or physician addresses of any customer of the Company; or (vi) disparage the Company or any of its agents, employees or affiliate physicians in any fashion. 5.3 Enforcement. In the event that any part of this Section 5 shall ----------- --------- be held unenforceable or invalid, the remaining parts hereof shall nevertheless continue to be valid and enforceable as though the invalid portions had not been a part hereof. In the event that the area, period of restriction, activity or subject established in accordance with this Section 5 shall be deemed to exceed --------- the maximum area, period of restriction, activity or subject that a court of competent jurisdiction deems enforceable, such area, period of restriction, activity or subject shall, for the purpose of this Section 5, be reduced to the --------- extent necessary to render them enforceable. 5.4 Equitable Relief. Employee agrees that any violation by Employee ---------------- of any covenant in this Section 5 may cause such damage to the Company as will --------- be serious and irreparable 6 and the exact amount of which will be difficult to ascertain, and for that reason, Employee agrees that the Company shall be entitled, as a matter of right, to a temporary, preliminary and/or permanent injunction and/or other injunctive relief, ex parte or otherwise, from any court of competent jurisdiction, restraining any further violations by Employee. Such injunctive relief shall be in addition to and in no way in limitation of, any and all other remedies the Company shall have in law and equity for the enforcement of such covenants and provisions. 5.5 Documents. Upon the termination of Employee's employment --------- with the Company for any reason, Employee shall promptly deliver to the Company all materials and documents belonging to or concerning the Company or relating to its affairs and, without limiting the foregoing, will promptly deliver to the Company any and all other documents or materials containing or constituting Confidential Information or Business Related Information. Section 6. Amendment of Stock Options. This Agreement shall serve to -------------------------- memorialize the amendment approved by the Board of Directors of the Company on March 2, 1998 to any and all stock options held by Employee prior to such date (the "Options") to provide that the Options may be exercised through the delivery of shares of Common Stock owned by Employee having a fair market value as of the date of such exercise equal to the cash exercise price of the Options being exercised, provided that such shares of Common Stock being so delivered have been owned by Employee for at least six (6) months prior to the date of such exercise. The parties acknowledge and agree that, the Options will become fully vested and exercisable without regard to their vesting provisions in the event that Employee is terminated by the Company for any reason at any time following a Change of Control as set forth in Section 3.4(a) hereof. Section 7. Miscellaneous. ------------- 7.1 Mediation of Disputes Concerning Employment. In the event of ------------------------------------------- any dispute concerning Employee's employment by the Company, whether or not relating to this Agreement, Employee and the Company shall first attempt to resolve such dispute through mediation as provided in this Section 7.1 before ----------- instituting any legal action or other proceedings with respect thereto; provided, however, that neither party shall be required to utilize such mediation procedures to the extent that equitable relief is being sought by a party in the good faith belief that an immediate remedy is required to avoid irreparable injury to such party. Except as otherwise provided in the proviso to the immediately preceding sentence, in the event that either party desires to institute litigation or other legal proceedings to resolve a dispute concerning Employee's employment by the Company, such party shall first give written notice to the other party setting forth in detail the nature of the dispute and the facts which such party believes supports such party's position in such dispute. The parties shall then promptly (and, in any event, within ten (10) business days of the giving of notice of a dispute) engage the services of an impartial, experienced employment mediator (the "Mediator") under the auspices of JAMS/Endispute (or such other mediation service as the parties 7 may mutually select) in Los Angeles County, California and shall promptly schedule a mediation session with the Mediator for a date which is not later than forty-five (45) days after the date of the selection of the Mediator. The Mediator shall conduct a one-day mediation session, attended by both parties and their counsel, in an attempt to informally resolve the dispute. By oral or written agreement of both parties, follow-up or additional mediation sessions may be scheduled, but neither party shall be required to participate in more than one day of mediation. Neither party shall be required to submit briefs or position papers to the Mediator, but both parties shall have the right to do so, subject to such rules and procedures as the Mediator may establish in his or her sole discretion. Except as otherwise agreed by the parties, all written submissions to the Mediator shall remain confidential as between the submitting party and the Mediator. The mediation process shall be treated as a settlement negotiation and no evidence introduced in the mediation process may be used in any way by either party or any other person in connection with any subsequent litigation or other legal proceedings (except to the extent independently obtained through discovery in such litigation or proceedings) and the disclosure of any privileged information to the Mediator shall not operate as a waiver of privilege with respect to such information. Each party shall bear all of its own costs, attorneys' fees and expenses related to preparing for and attending any mediation conducted under this Agreement. The fees and expenses of the Mediator and the mediation service used, if any, shall be borne equally by the Company and Employee. 7.2 Entire Agreement; Amendment. This Agreement represents the --------------------------- entire understanding of the parties hereto with respect to the employment of Employee and supersedes all prior agreements with respect thereto; provided, however, that except as set forth in Section 6, this Agreement shall not affect --------- any stock option agreement or similar agreement relating to equity incentives between the Company and Employee. This Agreement may not be altered or amended except in writing executed by both parties hereto. 7.3 Assignment; Benefit. This Agreement is personal and may not be ------------------- assigned by Employee. This Agreement may be assigned by the Company and shall inure to the benefit of and be binding upon the successors and assigns of the Company. 7.4 Applicable Law. This Agreement shall be governed by the laws of -------------- the State of California, without regard to the principles of conflicts of laws. 7.5 Notice. Notices and all other communications provided for in ------ this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Company at its principal office and to Employee at Employee's principal residence as shown in the Company's personnel records, provided that all notices to the Company shall be directed to the attention of the Chief Executive Officer with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of 8 change of address shall be effective only upon receipt. 7.6 Waiver. The waiver by any party of a breach of any provision of ------ this Agreement by the other shall not operate or be construed as a waiver of any other or subsequent breach of such or any provision. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the 1/st/ day of March, 1998. TOTAL RENAL CARE HOLDINGS, INC. EMPLOYEE By:_______________________________ ________________________________ Signature Its:______________________________ ________________________________ John McDonough 9 EX-10.16 3 SECOND AMENDED & RESTATED 1994 EQUITY PLAN EXHIBIT 10.16 SECOND AMENDED AND RESTATED TOTAL RENAL CARE HOLDINGS, INC. 1994 EQUITY COMPENSATION PLAN SECTION 1. Purpose. The purposes of this Total Renal Care Holdings, ------- Inc. 1994 Equity Compensation Plan (the "Plan") are to promote the interests of Total Renal Care Holdings, Inc. (together with any successor thereto, the "Company") and its stockholders by (i) attracting and retaining key employees, directors, consultants and advisers of the Company and its Affiliates; (ii) motivating such individuals by means of performance-related incentives to achieve longer-range performance goals; and (iii) enabling such individuals to participate in the long-term growth and financial success of the Company. SECTION 2. Definitions. As used in the Plan, the following terms ----------- shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or through one or more intermediaries, controls or is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. "Award" shall mean any Option or Purchased Shares Award. "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant, unless otherwise determined by the Committee. "Board" shall mean the Board of Directors of the Company. "Cause" shall mean "Cause" as defined in the applicable employment agreement between the Participant and the Company, or if there is no such agreement at the relevant time or such agreement does not define such term, then (i) a Participant's willful and continued failure substantially to perform his duties with, or services for, the Company or its Affiliates (other than as a result of death or Disability), (ii) a Participant's dishonesty in the performance of his duties with, or services for, the Company or its Affiliates, (iii) an act or acts on a Participant's part constituting a felony under the laws of the United States or any state thereof, (iv) any other act or omission by a Participant which is materially injurious to the financial condition or business reputation of the Company or any of its Affiliates, or (v) the occurrence of a Non-Compete Trigger or Confidentiality Trigger. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean (i) a committee of the Board designated by the Board to administer the Plan and composed of not less than the minimum number of persons from time to time required by any applicable law and, during any period in which the Company has become subject to the provisions of Section 16, Rule 16b-3, each of whom, to the extent necessary to comply with Rule 16b-3 only, is a "disinterested person" within the meaning of Rule 16b-3 or (ii) if the Board has not so designated a committee, the Board. "Confidentiality Trigger" shall mean a Participant's disclosure or use for his own benefit or purposes or for the benefit or purposes of any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its Subsidiaries or Affiliates (whether during or after the termination of his employment, consulting or advisory relationship with the Company), of any trade secrets, information, data, or other confidential information relating to customers, development, programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, financing methods, plans, or the business and affairs of the Company generally, or of any Subsidiary or Affiliate of the Company; provided that the foregoing shall not apply to -------- information which is not unique to the Company or which is generally known to the industry or the public other than as a result of the Participant's breach of this covenant or to disclosure that is required by any applicable law, rule or regulation (including compliance with any oral or written questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process to which the Participant is subject). "Disability" shall mean "Disability" as defined in the applicable employment agreement between the Participant and the Company, or if there is no such agreement at the relevant time or such agreement does not define such term, then the physical or mental incapacity resulting in the Participant being unable for a period of six (6) consecutive months or for an aggregate of six (6) months in any twenty-four (24) consecutive month period to perform his duties with, or services for, the Company, as determined in good faith by the Committee, which determination shall be final and conclusive for all purposes of this Plan. "Effective Date" shall mean the effective date of the Plan as determined pursuant to Section 9. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean, (A) with respect to any property other than the Shares or any Option, the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee and (B) with respect to the Shares, except as otherwise provided in the applicable employment agreement between the Participant and the Company, as of any date: (i) if there is a public market for the Shares as of such date (x) the last reported sales price of the Shares on the principal national securities exchange on which the Shares are listed or admitted to trading on the date immediately preceding such date or, if no such reported sale takes place on such day, the average of the closing bid and asked prices 2 thereon, as reported in The Wall Street Journal, or (y) if the Shares are not ----------------------- then listed or admitted to trading on a national securities exchange, the last reported sales price on the NASDAQ National Market System on the date immediately preceding such date or, if no such reported sale takes place on such day, the average of the closing bid and asked prices thereon, as reported in The --- Wall Street Journal, or (z) if the Shares are not then quoted on such National - ------------------- Market System or listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices, as reported by The --- Wall Street Journal for the over-the-counter market on the date immediately - ------------------- preceding such date; or (ii) if there is no public market for the Shares as of such date, then (x) $1.00 per Share if Fair Market Value is being determined as of a date within one (1) year of the Effective Date or (y) the per share value as determined by an accounting firm, investment banking firm or appraisal firm of national standin g selected by the Committee; provided that if such value has -------- previously been determined for the Company by an accounting firm, investment banking firm or appraisal firm of national standing with respect to a date not more than twelve months prior to such date, at the Committee's option, the Fair Market Value will equal the value as so determined. "Fair Market Value Per Option" shall mean with respect to any Option, the excess, if any, of the aggregate Fair Market Value of the Shares represented by the unexercised and uncancelled portion of such Option over the aggregate purchase price of such Shares pursuant to such Option. "Initial Grant Options" shall mean those Options granted as of the Effective Date pursuant to Section 6(a). "Initial Public Offering" shall mean the initial sale of Shares pursuant to an effective registration statement under the Securities Act of 1933 (other than a registration statement on Form S-8 or any successor form), if, as a result of such sale, the Company receives net proceeds of at least $15,000,000. "Initial Purchased Shares" shall mean the Purchased Shares made available for purchase pursuant to Purchased Shares Awards granted as of the Effective Date pursuant to Section 6(b). "Non-Compete Trigger" shall mean the occurrence during the Participant's employment with or retention by the Company or during the period from the date the Participant ceases employment with, or providing consulting or advisory services to, the Company, as the case may be, through the first anniversary of that date, of (i) the Participant's engagement in or becoming an employee, director, or principal or shareholder of, consultant to or equity participant in, any Person that engages in, activities that are in competition with the Company within the United States of America or such other geographic area as is specified in the applicable Award 3 Agreement; provided that such activities will be limited to those businesses of -------- the Company in which the Company was engaged during the term of such Participant's employment or provision of consulting or advisory services to the Company; provided further that the Participant may make passive investments of -------- ------- not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market or (ii) (x) the Participant's direct or indirect inducement of any employee of the Company or any of its Subsidiaries, any Medical Director who is an independent contractor for the Company or its Subsidiaries or any physician referring patients to the Company or its Subsidiaries to (A) engage in any activity that would result in the occurrence of a Non-Compete Trigger if engaged in by the Participant or (B) terminate his or her employment, contractual relationship or referring relationship, respectively, with the Company or any of its Subsidiaries or (y) the Participant's direct or indirect employment of, or offer of employment or other similar arrangement with, any person who is or was during the period of the Participant's employment or consulting or advisory relationship with the Company, or was beforehand, employed by the Company or its Subsidiaries, a Medical Director of a dialysis facility owned or operated by the Company or its Subsidiaries or a referring physician for any dialysis center owned or operated by the Company or its Subsidiaries. "Note" shall have the meaning set forth in Section 6(b)(i) hereof. "Option" shall mean any Option (including any Initial Grant Option) granted pursuant to Section 6(a). "Participant" shall mean any employee or director of, or consultant or adviser to, the Company granted an Award under the Plan. "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Pledge" shall have the meaning set forth in Section 6(c)(vi) hereof. "Prime Rate" shall mean the rate of interest publicly announced by The Bank of New York from time to time as its prime rate. "Purchased Shares" shall mean the shares made available for purchase pursuant to Section 6(b) (including the Initial Purchased Shares). "Purchased Shares Award" shall have the meaning set forth in Section 6(b) hereof. "Purchased Shares Loan" shall have the meaning set forth in Section 6(b)(i) hereof. 4 "Replaced Award" shall have the meaning set forth in Section 6(a)(iv) hereof. "Repurchase Notice" shall have the meaning set forth in Section 6(a)(iii) hereof. "Repurchase Right" shall have the meaning set forth in Section 6(a)(iii) hereof. "Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission, or any successor thereto. "Section 16" shall mean Section 16 of the Exchange Act, or any successor provision thereto as in effect from time to time. "Shareholders Agreement" shall mean an agreement substantially in the form of Exhibit A to the Subscription Agreement dated as of May 26, 1994 among DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., NME Properties Corp., the Company and National Medical Enterprises, Inc. "Shares" shall mean shares of Class A Common Stock of the Company, $.001 par value, and such other securities or property as may become the subject of Awards or become subject to Awards pursuant to an adjustment made under Section 4(b) of the Plan. "Subsidiary" shall mean any entity (including, without limitation, any partnership) of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions (including, in the case of a partnership, a general partner) are at the time directly or indirectly owned by the Company. SECTION 3. Administration. The Plan shall be administered by the -------------- Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible director or employee of, or consultant or advisor to, the Company; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under 5 what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any shareholder and any Employee. SECTION 4. Shares Available for Awards. --------------------------- (a) Shares Available. Subject to adjustment as provided in Section ---------------- 4(b): (i) Calculation of Number of Shares Available. The number of ----------------------------------------- Shares with respect to which Awards may be granted under the Plan shall be 5,084,447. If, after the effective date of the Plan, any Shares covered by an Award granted under the Plan, or to which such an Award relates, are forfeited, or if an Award otherwise terminates or is canceled without the delivery of Shares or of other consideration, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted, to the extent of any such forfeiture, termination or cancellation, shall again be, or shall become, Shares with respect to which Awards may be granted. (ii) Accounting for Awards. For purposes of this --------------------- Section 4, the number of Shares covered by any Award, or to which such Award relates, shall be counted on the date of grant of such Award against the aggregate number of Shares with respect to which Awards may be granted under the Plan, provided, that Awards that operate in tandem with (whether granted -------- simultaneously with or at a different time from), or that are substituted for, other Awards may be counted or not counted under procedures adopted by the Committee in order to avoid double counting. Any Shares delivered by the Company, any Shares with respect to which Awards are made by the Company, or any Shares with respect to which the Company becomes obligated to make Awards, through the assumption of, or in substitution for, outstanding awards previously granted by an acquired company, shall not, except in the case of Shares with respect to which Awards are granted to employees of the Company who are officers or directors of the Company for purposes of Section 16 or any successor section thereto during any period in which the Company is subject to Section 16, be counted against the Shares available for Awards under the Plan. 6 (iii) Sources of Shares Deliverable Under Awards. Any Shares ------------------------------------------ delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. (b) Adjustments. In the event that the Committee determines that ----------- any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided that the number of Shares subject to any -------- Award denominated in Shares shall always be a whole number. SECTION 5. Eligibility. Any employee or director of, or consultant ----------- or adviser to, the Company or any Affiliate who is not a member of the Committee, including any officer or employee-director of the Company or any Affiliate, shall be eligible to be designated a Participant. SECTION 6. Awards. ------ (a) Options. The Committee is hereby authorized to grant to any ------- Participant an option to purchase Shares (an "Option") which shall contain the following terms and conditions and such additional terms and conditions, which are not inconsistent with the provisions of the Plan, as the Committee shall determine; provided that such Options are not intended to constitute Incentive -------- Stock Options within the meaning of Section 422 of the Code: (i) Exercise Price. The purchase price per Share purchasable -------------- under an Option shall be such amount as shall be determined by the Committee in its sole discretion, provided that the purchase price per Share for any Initial Grant Options shall be $1.00 per Share. (ii) Time and Method of Exercise. The Committee shall --------------------------- determine the time or times during which any Option may be exercised, in whole or in part, and the conditions, if any, upon which any Option shall vest and become exercisable on an accelerated basis or be canceled without consideration. 7 (iii) Restrictions. Except as otherwise provided in any ------------ applicable Award Agreement, any Shares acquired by a Participant upon the exercise of an Option shall, if so requested by the Committee in its sole discretion, be held by the Participant subject to the terms and conditions of the Shareholders Agreement, by which such Participant shall agree to be bound. In addition, except as otherwise provided in any applicable Award Agreement, upon termination of a Participant's employment, consulting or advising relationship with the Company, or upon the occurrence of a Non-Compete Trigger or a Confidentiality Trigger (whether during or after the termination of such relationship), any portion of an Option which is not canceled by reason of such termination and each Share acquired upon exercise of an Option shall be subject to repurchase by the Company (the "Repurchase Right") at (A) Fair Market Value Per Option or Fair Market Value Per Share, as the case may be, in the event of such Participant's death, voluntary termination of his employment, consulting or advisory relationship with the Company, or termination of such relationship due to Disability or by the Company without Cause, as the case may be; provided than -------- such Repurchase Right shall not arise solely by reason of a voluntary termination of such relationship with the Company or termination by reason of the Participant's death or Disability, if such event occurs after an Initial Public Offering and (B) 80% of Fair Market Value Per Option or Fair Market Value per Share, as the case may be, in the event of the termination of such Participant's relationship with the Company by the Company with Cause or upon the occurrence of a Non-Compete Trigger or Confidentiality Trigger. The Company may exercise its Repurchase Right by giving written notice (a "Repurchase Notice") to the Participant by no later than the 30th day following the date on which such Repurchase Right arises. The closing for the exercise of the Repurchase Right shall occur as promptly as practicable (but no later than 120 days) after delivery of the Repurchase Notice. On or prior to the closing of the exercise of the Repurchase Right, the Participant shall deliver to a representative of the Company certificates representing all the Shares subject to the Repurchase Right, duly endorsed, together with all documents required to be executed in connection with the sale of such Shares (it being understood that in no event will the Participant be obligated to make any representations and warranties, or to provide indemnities, with respect to any matters other than title to the Shares subject to the Repurchase Right held by the Participant and the authority to sell such Shares). (iv) Substitute Awards. In the event an Option is granted ----------------- hereunder in substitution for an option or other award granted under this Plan or any other plan or arrangement (a "Replaced Award"), the grant of the Option hereunder may be conditioned and contingent upon the Participant's execution of a written acknowledgement that such Option is in satisfaction in full of all obligations and liabilities of the Company, its Subsidiaries and Affiliates with respect to the Replaced Award. (b) Purchased Shares. The Committee is hereby authorized to grant to ---------------- any Participant the right to purchase Shares from the Company (the "Purchased Shares") at a purchase price to be determined in the sole discretion of the Committee (a "Purchased Shares 8 Award"); provided that the purchase price with respect to the Initial Purchased -------- Shares shall be equal to $1.00 per Share. The Purchased Shares shall be subject to such conditions or restrictions as may be determined by the Committee as evidenced in the applicable Award Agreement. Without limiting the generality of the foregoing, except as otherwise provided in any applicable Award Agreement, the Purchased Shares shall, if so requested by the Committee in its sole discretion, be held by the Participant subject to the terms and conditions of the Shareholders Agreement, by which such Participant shall agree to be bound, and each Purchased Share shall be subject to the Company's Repurchase Right at (A) Fair Market Value Per Share in the event of such Participant's death, voluntary termination of his employment, consulting or advisory relationship with the Company, or termination of such relationship due to Disability or by the Company without Cause, as the case may be; provided that such Repurchase -------- Right shall not arise solely by reason of a voluntary termination of such relationship with the Company or termination by reason of the Participant's death or Disability, if such event occurs after an Initial Public Offering, and (B) 80% of Fair Market Value Per Share in the event of the termination of such Participant's relationship with the Company by the Company with Cause or upon the occurrence of a Non-Compete Trigger or Confidentiality Trigger (whether during or after the termination of such relationship). The Company may exercise its Repurchase Right by giving a Repurchase Notice to the Participant by no later than the 30th day following the date on which such Repurchase Right arises. The closing for the exercise of the Repurchase Right shall occur as promptly as practicable (but no later than 120 days) after delivery of the Repurchase Notice. On or prior to the closing of the exercise of the Repurchase Right, the Participant shall deliver to a representative of the Company certificates representing all the Shares subject to the Repurchase Right, duly endorsed, together with all documents required to be executed in connection with the sale of such Shares (it being understood that in no event will the Participant be obligated to make any representations and warranties, or to provide indemnities, with respect to any matters other than title to the Shares subject to the Repurchase Right held by the Participant and the authority to sell such Shares). (i) Purchased Shares Loan. In order to assist Participants in --------------------- financing the purchase of Shares pursuant to any Purchased Shares Award, with respect to any Purchased Shares Award the Participant will be eligible to receive a loan from the Company (the "Purchased Shares Loan") with a principal amount equal to up to 100% of the aggregate purchase price of the Shares subject to the Purchased Shares Award, as determined by the Committee. The Purchased Shares Loan will be evidenced by a full recourse promissory note substantially in the form of Exhibit I hereto (the "Note") and will be secured by a pledge by the Participant in favor of the Company of all Shares purchased by the Participant pursuant to any Purchased Shares Award or otherwise acquired by the Participant upon the exercise of any Option. (c) General. ------- (i) Awards May Be Granted Separately or Together. Awards may, -------------------------------------------- in the discretion of the Committee, be granted either alone or in addition to, in tandem with, 9 or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate or under any plan of an acquired company. Awards granted in addition to or in tandem with other Awards or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at different times from the grant of such other Awards or awards. (ii) Form of Payment by Company Under Awards. Subject to the --------------------------------------- terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments. (iii) Limits on Transfer of Awards. ---------------------------- (A) Each Award, and each right under any Award, shall be exercisable only by the Participant during the Participant's lifetime, or, if permissible under applicable law, by the Participant's legal representative. (B) No Award and no right under any such Award, may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of community property or of descent and distribution (or, in the case of Purchased Shares, to the Company) and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate. (iv) Term of Awards. The term of each Award shall be for such -------------- period as may be determined by the Committee; provided, that the term of the -------- Initial Grant Options shall be 10 years from the date of grant, subject to earlier cancellation as provided in the applicable Award Agreement. (v) Rule 16b-3 Six-Month Limitations. During any period in -------------------------------- which the Company is subject to the provisions of Section 16, to the extent required in order to comply with Rule 16b-3 only, any equity security offered pursuant to the Plan must be held for at least six months after the date of grant, and with respect to any derivative security issued pursuant to the Plan at least six months must elapse from the date of acquisition of such derivative security to the date of disposition (other than upon exercise or conversion) of the derivative security or its underlying equity security, except in case of death or disability. Terms 10 used in the preceding sentence shall, for the purposes of such sentence only, have the meanings, if any, assigned or attributed to them under Rule 16b-3. (vi) Share Certificates. All certificates for Shares or other ------------------ securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. The Company shall register in the name of the Participant the number of Shares received by the Participant upon the exercise of any Option or acquired upon the purchase of Shares pursuant to any Purchased Shares Award; provided that the -------- Company may retain possession of the certificates relating to all such Shares, which Shares shall be pledged (the "Pledge") by the Participant to the Company as security for any Purchased Shares Loan provided to the Participant pursuant to Section 6(b) on the terms and conditions set forth in the Note. (vii) Consideration for Grants. Awards may be granted for ------------------------ no cash consideration or for such minimal cash consideration as may be required by applicable law. (viii) Delivery of Shares or Other Securities and Payment by ----------------------------------------------------- Participant of Consideration. No Shares or other securities shall be delivered - ---------------------------- pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award Agreement is received by the Company. Such payment may be made by such method or methods and in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof; provided that the combined value, as determined by the Committee, of -------- all cash and cash equivalents and the Fair Market Value of any such Shares or other property so tendered to the Company, as of the date of such tender, is at least equal to the full amount required to be paid pursuant to the Plan or the applicable Award Agreement to the Company. SECTION 7. Amendment and Termination. Except to the extent ------------------------- prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) Amendments to the Plan. The Board may amend, alter, suspend, ---------------------- discontinue, or terminate the Plan without the consent of any shareholder, Participant, other holder or beneficiary of an Award, or other Person; provided -------- that any such amendment, alteration, suspension, discontinuation, or termination that would impair the rights of any Participant, or any other holder or beneficiary of any Award theretofore granted, shall not to that extent be effective except to the extent the Committee shall have obtained the consent of such Participant, holder or beneficiary pursuant to Section 7(b); and provided -------- further, that notwithstanding any other provision of the Plan or any Award - ------- Agreement, in the event the Company is at such time subject to the requirements of Section 16, without the approval of the 11 shareholders of the Company no such amendment, alteration, suspension, discontinuation, or termination shall be made that would: (i) increase the total number of Shares available for Awards under the Plan, except as provided in Section 4 of the Plan; or (ii) otherwise cause the Plan to cease to comply with any tax or regulatory requirement, including for these purposes any approval or other requirement which is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act during any period in which the Company is subject to Section 16. (b) Amendments to Awards. The Committee may waive any conditions or -------------------- rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively, without the consent of any relevant Participant or holder or beneficiary of an Award; provided that any such amendment, alteration, suspension, discontinuation, cancellation or termination that would impair the rights of any Participant, or any other holder or beneficiary of any Award, shall not to that extent be effective without the consent of the Participant or such other holder or beneficiary. (c) Adjustments of Awards Upon Certain Acquisitions. In the event ----------------------------------------------- the Company or any Affiliate shall assume outstanding employee awards or the right or obligation to make future employee awards in connection with the acquisition of another business or another corporation or business entity, the Committee may make such adjustments, not inconsistent with the terms of the Plan, in the terms of Awards as it shall deem appropriate in order to achieve reasonable comparability or other equitable relationship between the assumed awards and the Awards as so adjusted. (d) Adjustment of Awards Upon the Occurrence of Certain Unusual or -------------------------------------------------------------- Nonrecurring Events. Notwithstanding any other provision in the Plan or any - ------------------- Award granted hereunder, the Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. (e) Correction of Defects, Omissions and Inconsistencies. The ---------------------------------------------------- Committee may correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Award or Award Agreement in the manner and to the extent it shall deem desirable to carry the Plan into effect. In the event of a conflict between any term or provision contained in an Award or an Award Agreement and a term or provision contained in the Plan, the applicable terms and conditions of the Plan shall govern and prevail. 12 SECTION 8. General Provisions. ------------------ (a) No Rights to Awards. No Participant or other Person shall have ------------------- any claim to be granted any Award, and there is no obligation for uniformity of treatment of Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (b) Delegation. Subject to the terms of the Plan and applicable law, ---------- the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect to, or to alter, discontinue, suspend, or terminate Awards held by, Participants who are not officers or directors of the Company for purposes of Section 16, or any successor section thereto, or who are otherwise not subject to such Section. (c) Withholding. The Company or any Affiliate is hereby authorized ----------- to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (d) No Limit on Other Compensation Arrangements. Nothing contained ------------------------------------------- in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other compensation arrangements (subject to shareholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (e) No Right to Employment, Etc. The grant of an Award shall not be --------------------------- construed as giving a Participant the right to be retained in the employ of, or to provide continued consulting or advisory services to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, consulting or advisory relationship with the Company, as the case may be, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (f) Governing Law. The validity, construction, and effect of the ------------- Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of California. Except as otherwise provided in the applicable Award Agreement, any and all controversies, claims and matters of difference arising out of or in respect of Awards that are granted under the Plan shall be subject to final and binding arbitration in Los Angeles, California, 13 according to the rules and practices of the American Arbitration Association, including the selection of an arbitrator from its Employment panel pursuant to the rules then in effect. (g) Severability. If any provision of the Plan or any Award is or ------------ becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (h) Other Laws. The Committee may refuse to issue or transfer any ---------- Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. (i) No Trust or Fund Created. Neither the Plan nor any Award shall ------------------------ create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (j) No Fractional Shares. No fractional Shares shall be issued or -------------------- delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (k) Headings. Headings are given to the Sections and subsections of -------- the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 9. Effective Date of the Plan. The Plan shall be effective -------------------------- as of the date of its approval by the Board. SECTION 10. Term of the Plan. No Award shall be granted under the ---------------- Plan after December 17, 1999. However, unless otherwise expressly provided in the Plan or in an 14 applicable Award Agreement, any Award theretofore granted may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, extend beyond such date. 15 EX-10.21 4 FIRST AMENDED & RESTATED 1995 EQUITY PLAN EXHIBIT 10.21 First Amended and Restated Total Renal Care Holdings, Inc. 1995 Equity Compensation Plan 1. Purpose. The purpose of the Total Renal Care Holdings, Inc. 1995 ------- Equity Compensation Plan ("Plan") is to promote the interests of Total Renal Care Holdings, Inc. ("Company") and its shareholders by enabling the Company to offer Participants an opportunity to acquire an equity interest in the Company so as to better attract, retain, and reward employees, directors, and other persons providing services to the Company and, accordingly, to strengthen the mutuality of interests between those persons and the Company's shareholders by providing those persons with a proprietary interest in pursuing the Company's long-term growth and financial success. 2. Definitions. For purposes of this Plan, the following terms shall ----------- have the meanings set forth below. (a) "Board" means the Board of Directors of Total Renal Care Holdings, Inc. (b) "Code" means the Internal Revenue Code of 1986, as amended. Reference to any specific section of the Code shall be deemed to be a reference to any successor provision. (c) "Committee" means the administrative Committee of this Plan that is provided in Section 3 below. (d) "Common Stock" means the common stock of Total Renal Care Holdings, Inc. or any security issued in substitution, exchange, or in lieu thereof. (e) "Company" means Total Renal Care Holdings, Inc., a Delaware corporation, or any successor corporation. Except where the context indicates otherwise, the term "Company" shall include its Parent and Subsidiaries. (f) "Disabled" means permanent and total disability, as defined in Code Section 22(e)(3). (g) "Exchange Act" means the Securities Exchange Act of 1934. (h) "Fair Market Value" shall mean, on any given day, the closing price for the Common Stock on that day, or if the Common Stock was not traded on that day, on the next preceding day on which the Common Stock was traded, determined in accordance with the following rules. (i) If the Common Stock is admitted to trading or listed on a national securities exchange, the closing price for any day shall be the last reported sale price regular way, or if no such reported sale takes place on that day, the average of the last reported bid and ask prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed. (ii) If not listed or admitted to trading on any national securities exchange, the last sale price on that day of the Common Stock reported on the Nasdaq National Market of the Nasdaq Stock Market ("Nasdaq National Market") or, if no such reported sale takes place on that day, the average of the closing bid and ask prices on that day. (iiI) If not included in the Nasdaq National Market, the average of the closing bid and ask prices of the Common Stock on that day reported by The Nasdaq Stock Market, or any comparable system on that day. (iv) If the Common Stock is not included in the Nasdaq Stock Market or any comparable system, the closing bid and ask prices on that day as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. In the case of an Incentive Stock Option, "Fair Market Value" shall be determined without reference to any restriction other than one that, by its terms, will never lapse. (i) "Incentive Stock Option" means an option to purchase Common Stock that is an incentive stock option under Section 422 of the Code. (j) "Insider" means a person who is subject to Section 16 of the Exchange Act. (k) "Non-Qualified Stock Option" means any option to purchase Common Stock that is not an Incentive Stock Option. (l) "Option" means an Incentive Stock Option or a Non-Qualified Stock Option. (m) "Parent" shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, as determined in accordance with the rules of Code Section 424(e). -2- (n) "Participant" means a person who was been granted an Option or Restricted Stock. (o) "Plan" means this Total Renal Care Holdings, Inc. 1995 Equity Compensation Plan, as it may be amended from time to time. (p) "Restricted Stock" means shares of Common Stock issued under Section 8 below that are subject to restrictions on ownership. (q) "Severance" means, with respect to a Participant, the termination of the Participant's provision of services to the Company as an employee, director, or independent contractor, whether by reason of death, disability, retirement, or any other reason. For purposes of determining the exercisability of an Incentive Stock Option, a Participant who is on a leave of absence that exceeds ninety (90) days will be considered to have incurred a Severance on the ninety-first (91st) day of the leave of absence, unless the Participant's rights to reemployment are guaranteed by statute or contract. However, a Participant will not be considered to have incurred a Severance because of a transfer of employment between the Company and a Subsidiary or a Parent (or vice versa). (r) "Subsidiary" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, as determined in accordance with the rules of Code Section 424(f). (s) "Ten Percent Shareholder" means any person who owns (after taking into account the constructive ownership rules of Section 424(d) of the Code) more than ten percent (10%) of the stock of Total Renal Care Holdings, Inc. or of any of its Parents or Subsidiaries. 3. Administration. -------------- (a) This Plan shall be administered by a Committee appointed by the Board. The Board may remove members from, or add members to, the Committee at any time. The Committee shall be composed of individuals in a manner that complies with Rule 16b-3 under the Exchange Act and with Code Section 162(m). (b) The Committee may conduct its meetings in person or by telephone. A majority of the members of the Committee shall constitute a quorum, and any action shall constitute the action of the Committee if it is authorized by a majority of the members: -3- (i) Present at any meeting; or (ii) In writing without a meeting. (c) The Committee is authorized to interpret this Plan and to adopt rules and procedures relating to the administration of this Plan. All actions of the Committee in connection with the interpretation and administration of this Plan shall be binding upon all parties. (d) Subject to the limitations of Sections 9 and 14 below, the Committee is expressly authorized to make such modifications to this Plan and the Options granted hereunder as are necessary to effectuate the intent of this Plan as a result of any changes in the tax, accounting, or securities laws treatment of Participants and the Plan. (e) The Committee may delegate its responsibilities to others under such conditions and limitations as it may prescribe, except that the Committee may not delegate its authority with regard to the granting of Options to Insiders. 4. Duration of Plan. ---------------- (a) This Plan shall be effective as of the close of the initial public offering of the Common Stock of Total Renal Care Holdings, Inc., provided this Plan is approved by the majority of the Company's shareholders, in accordance with the provisions of Code Section 422, within twelve (12) months before or after its adoption by the Board. If the Plan is not approved by the shareholders within that time period, the Plan and all Options issued under the Plan will terminate. The approval by the shareholders must relate to: (i) The class of individuals entitled to receive Incentive Stock Options; and (ii) The aggregate number of shares of Common Stock that may be issued under the Plan, except as modified pursuant to Section 12 below. If either of those items are changed, the approval of the shareholders must again be obtained. (b) In the event that this Plan is not so approved, this Plan shall terminate and any Options granted under this Plan shall be void. (c) This Plan shall terminate on December 17, 1999, except with respect to Options then outstanding. -4- 5. Number of Shares. ---------------- (a) The aggregate number of shares of Common Stock which may be issued pursuant to this Plan shall be one million (1,000,000). This aggregate number may be adjusted from time to time as set forth in Section 12 below. The maximum number of shares that may be issued to a single Participant is one million (1,000,000). (b) Upon the forfeiture of shares of Restricted Stock, the forfeited shares of Common Stock shall again become available for use under the Plan. Upon the expiration or termination of an outstanding Option which shall not have been exercised in full, the shares of Common Stock remaining unissued under the Option shall again become available for use under the Plan. (c) The Committee shall prescribe such rules as it deems appropriate regarding the effect that using Common Stock to: (i) Satisfy the withholding obligations; or (ii) Pay part or all of the exercise price of an Option or the purchase price of a grant of Restricted Stock; will have upon the maximum number of shares that may be issued under the Plan. 6. Eligibility. ----------- (a) Persons eligible to receive grants of Options or Restricted Stock under this Plan shall consist of employees, directors, and other persons providing services to the Company. However, Incentive Stock Options may only be granted to employees. (b) In the event that the Company acquires another entity, the Committee may authorize the issuance of Options ("Substitute Options") to the individuals performing services for the acquired entity in substitution of stock options previously granted to those individuals in connection with their performance of services for the acquired entity upon such terms and conditions as the Committee shall determine, taking into account the limitations of Code Section 424(a) in the case of a Substitute Option that is intended to be an Incentive Stock Option. 7. Form of Options. Options shall be granted under this Plan on such --------------- terms and in such form as the Committee may approve, which shall not be inconsistent with the provisions of this Plan, and which need not be the same for each such grant. -5- (a) The exercise price per share of Common Stock purchasable under an Option shall be set forth in the Option. However, the exercise price of an Incentive Stock Option, determined on the date of the grant, shall be no less than: (i) One hundred ten percent (110%) of the Fair Market Value of the Common Stock in the case of a Ten Percent Shareholder; or (ii) One hundred percent (100%) of the Fair Market Value of the Common Stock in the case of any other employee. However, the exercise price of such a substituted Incentive Stock Option (issued pursuant to Section 6 above) may be less than the Fair Market Value on the grant date. (b) An Option shall be exercisable at such time or times and be subject to such terms and conditions as may be set forth in the Option. However, no Option shall be exercisable prior to the date this Plan is approved by the Company's shareholders, as set forth in Section 4 above. (c) The aggregate Fair Market Value (determined as of the date of grant) of the number of shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year shall not exceed one hundred thousand dollars ($100,000) or such other limit as may be required by Code Section 422. 8. Restricted Stock. ---------------- (a) The Committee may issue grants of Restricted Stock, upon such terms and conditions as it may deem appropriate, which need not be the same for each grant. (b) Restricted Stock may be sold to Participants, or it may be issued to Participants without the receipt of any consideration. (c) A Participant shall not have a vested right to the shares subject to the grant of Restricted Stock until the satisfaction of the vesting requirements specified in the grant. (d) The Participant may not assign or alienate the Participant's interest in the shares of Restricted Stock prior to vesting. Otherwise, the Participant shall have all of the rights of a shareholder of the Company, with respect to the shares received under a grant of Restricted Stock, including the right to vote the shares and to receive any cash dividends. Stock dividends issued with respect to the shares covered by a grant of Restricted Stock shall be treated as additional shares received under the grant of Restricted Stock. -6- 9. Modification of Grants. ---------------------- (a) The Committee may modify an existing Option, including the right to: (i) Change the exercise price; (ii) Accelerate the right to exercise it; (iii) Extend or renew it; or (iv) Cancel it and issue a new Option. However, no modification may be made to an Option that would impair the rights of the Participant holding the Option without the Participant's consent. The Committee may make similar modifications to grants of Restricted Stock. (b) In the event that the Board amends the terms of an Option so that it no longer qualifies as an Incentive Stock Option under Code Section 422, the limitations imposed upon the Option under the Code and the Plan by virtue of it (formerly) qualifying as an Incentive Stock Option shall no longer apply, to the extent specified in the amendment. (c) Whether a modification of an existing Incentive Stock Option will be treated as the issuance of a new Incentive Stock Option will be determined in accordance with the rules of Code Section 424(h). (d) Whether a modification of an existing Option granted to an Insider will be treated as a new grant will be determined in accordance with Rule 16b-3. 10. Termination of Options. ---------------------- (a) Except to the extent the terms of an Option require its prior termination, each Incentive Stock Option shall terminate on the earliest of the following dates: (i) The date which is ten (10) years from the date on which the Option is granted or five (5) years in the case of an Option granted to a Ten Percent Shareholder. (ii) The date which is one (1) year from the date of the Severance of the Participant to whom the Option was granted, if the Participant was Disabled at the time of Severance. -7- (iii) The date which is one (1) year from the date of the Severance of the Participant to whom the Option was granted, if the Participant's death occurs: (A) While the Participant is employed by the Company; or (B) Within three (3) months following the Participant's Severance. (iv) In the case of any Severance other than one described in Subparagraphs (ii) or (iii) above, the date that is three (3) months from the date of the Participant's Severance. (b) The rules contained in Paragraph (a) above do not apply to Non- Qualified Stock Options. 11. Non-transferability of Grants. ----------------------------- (a) During the lifetime of the Participant, each Option is exercisable only by the Participant. Options are not assignable or transferable except by will or the laws of descent and distribution. (b) Shares of Restricted Stock shall be subject to such restrictions as may be imposed in the grants. 12. Adjustments ----------- (a) In the event of any change in the capitalization of the Company affecting its Common Stock (e.g., a stock split, reverse stock split, stock dividend, recapitalization, combination, or reclassification), the Committee shall authorize such adjustments as it may deem appropriate with respect to: (i) The aggregate number or kind of shares for which Options may be granted under this Plan; (ii) The number or kind of shares covered by each outstanding Option; and (iii) The exercise price per share in respect of each outstanding Option. (b) The Committee may also make such adjustments in the event of a spinoff or other distribution) of Company assets to shareholders (other than normal cash -8- dividends. 13. Notice of Disqualifying Disposition. A Participant must notify the ----------------------------------- Company if the Participant disposes of stock acquired pursuant to the exercise of an Incentive Stock Option issued under the Plan prior to the expiration of the holding periods required to qualify for capital gains treatment on the sale. 14. Amendment and Termination. The Board may at any time amend or ------------------------- terminate this Plan. However, no amendment or termination may impair the rights of the Participant holding an Option without the Participant's consent. However, except as may otherwise be permitted under Rule 16b-3 under the 1934 Act, no amendment to the Plan may be adopted without the approval of the shareholders that would materially: (a) Increase the number of shares that may be issued to Insiders; (b) Increase the benefits accruing to Insiders; or (c) Modify the requirements for Insiders to participate. 15. Tax Withholding. --------------- (a) The Company shall have the right to take such actions as may be necessary to satisfy its tax withholding obligations arising because of the operation of this Plan. (b) If Common Stock is used to satisfy the Company's tax withholding obligations, the stock shall be its Fair Market Value when the tax withholding is required to be made. 16. No Additional Rights. -------------------- (a) Neither the adoption of this Plan nor the granting of any Option or Restricted Stock shall: (i) Affect or restrict in any way the power of the Company to undertake any corporate action otherwise permitted under applicable law; or (ii) Confer upon any Participant the right to continue performing services for the Company, nor shall it interfere in any way with the right of the Company to terminate the services of any Participant at any time, with or without cause. (b) No Participant shall have any rights as a shareholder with respect to any -9- shares covered by an Option granted to the Participant until the date a certificate for such shares has been issued to the Participant following the exercise of the Option. 17. Securities Law Restrictions. --------------------------- (a) No shares of Common Stock shall be issued under this Plan unless the Committee shall be satisfied that the issuance will be in compliance with applicable federal and state securities laws. (b) The Committee may require certain investment or other representations and undertakings by the person exercising an Option or purchasing Restricted Stock in order to comply with applicable law. (c) Certificates for shares of Common Stock delivered under this Plan may be subject to such restrictions as the Committee may deem advisable. The Committee may cause a legend to be placed on the certificates to refer to these restrictions. 18. Indemnification. To the maximum extent permitted by law, the Company --------------- shall indemnify each member of the Committee and each other member of the Board, as well as any other employee of the Company with duties under this Plan, against expenses (including any amount paid in settlement) reasonably incurred by the individual in connection with any claims against the individual by reason of the performance of the individual's duties under this Plan, unless the losses are due to the individual's gross negligence or lack of good faith. 19. Governing Law. This Plan and all actions taken thereunder shall be ------------- governed by and construed in accordance with the laws of the State of Delaware. -10- EX-10.22 5 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.22 Total Renal Care Holdings, Inc. Employee Stock Purchase Plan 1999 Amendment and Restatement Table of Contents
Page ---- Article I - Purpose and Effective Date.............................................. 1 Article II - Definitions............................................................ 1 2.1 "Account...................................................................... 1 2.2 "Board........................................................................ 1 2.3 "Code......................................................................... 1 2.4 "Committee.................................................................... 1 2.5 "Common Stock................................................................. 1 2.6 "Company...................................................................... 1 2.7 "Continuous Employment........................................................ 1 2.8 "Employee..................................................................... 2 2.9 "Exchange Act"................................................................ 2 2.10 "Fair Market Value"........................................................... 2 2.11 "Leave of Absence............................................................. 2 2.12 "Participant.................................................................. 2 2.13 "Plan......................................................................... 3 2.14 "Purchase Right............................................................... 3 2.15 "Purchase Right Period........................................................ 3 2.16 "Stockholders................................................................. 3 2.17 "Subsidiary................................................................... 3 Article III - Eligibility and Participation......................................... 3 3.1 Eligibility................................................................... 3 3.2 Payroll Withholding........................................................... 3 3.3 Limitations................................................................... 4 3.4 Granting of Purchase Rights................................................... 4 3.5 Establishment of Accounts..................................................... 5 Article IV - Purchase Rights........................................................ 5 4.1 Termination of Purchase Rights................................................ 5 4.2 Exercise of Purchase Rights................................................... 5 4.3 Termination Event............................................................. 6 4.4 Non-Transferability of Purchase Rights........................................ 6 Article V - Common Stock............................................................ 6 5.1 Shares Subject to Plan........................................................ 6 5.2 Adjustment Upon Changes in Capitalization..................................... 7
i Article VI - Plan Administration.................................................... 7 6.1 Administration................................................................ 7 6.2 Indemnification............................................................... 8 Article VII - Amendment and Termination............................................. 8 7.1 Amendment and Termination..................................................... 8 7.2 Shareholder Approval.......................................................... 8 Article VIII - Miscellaneous Matters................................................ 9 8.1 Uniform Rights and Privileges................................................. 9 8.2 Application of Proceeds....................................................... 9 8.4 No Additional Rights.......................................................... 9 8.5 Governing Law................................................................. 9
ii Total Renal Care Holdings, Inc. Employee Stock Purchase Plan Article I Purpose and Effective Date The purpose of the Plan is to provide incentives for, and to encourage stock ownership by, Employees of Total Renal Care Holdings, Inc. or any of its Subsidiaries whose Employees participate in the Plan in order to increase their proprietary interest in the success of the Company. The effective date of this 1999 Amendment and Restatement of the Plan is November 9, 1999. Article II Definitions Whenever capitalized in the text, the following terms shall have the meanings set forth below. 2.1 "Account" shall mean the account established pursuant to Section 3.5 ------- to hold a Participant's contributions to the Plan. 2.2 "Board" shall mean the Board of Directors of Total Renal Care ----- Holdings, Inc. 2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- Reference to any specific section of the Code shall be deemed to be a reference to any successor provision. 2.4 "Committee" shall mean the Board of Total Renal Care Holdings, Inc. or --------- a committee designated by the Board to administer the Plan. 2.5 "Common Stock" shall mean the common stock of Total Renal Care ------------ Holdings, Inc. 2.6 "Company" shall mean Total Renal Care Holdings, Inc., a Delaware ------- corporation, as well as any Subsidiary whose employees participate in the Plan with the consent of the Board. 2.7 "Continuous Employment" shall mean employment without interruption by --------------------- the Company. Employment shall not be considered interrupted because of: (a) Transfers of employment between the Company and a Subsidiary (or vice versa); or (b) Any Leave of Absence. 2.8 "Employee" shall mean any person employed by the Company. This term -------- does not include directors unless they are employed by the Company in a position in addition to their duties as a director. 2.9 "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. 2.10 "Fair Market Value" shall mean, on any given day, the closing price ----------------- for the Common Stock on that day, or if the Common Stock was not traded on that day, on the next preceding day on which the Common Stock was traded, determined in accordance with the following rules. (a) If the Common Stock is admitted to trading or listed on a national securities exchange, the closing price for any day shall be the last reported sale price regular way, or if no such reported sale takes place on that day, the average of the last reported bid and ask prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed. (b) If not listed or admitted to trading on any national securities exchange, the last sale price on that day of the Common Stock reported on the Nasdaq National Market of the Nasdaq Stock Market ("Nasdaq National Market") or, if no such reported sale takes place on that day, the average of the closing bid and ask prices on that day. (c) If not included in the Nasdaq National Market, the average of the closing bid and ask prices of the Common Stock on that day reported by The Nasdaq Stock Market, or any comparable system on that day. (d) If the Common Stock is not included in the Nasdaq Stock Market or any comparable system, the closing bid and ask prices on that day as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. 2.11 "Leave of Absence" shall mean an unpaid leave of absence taken in ---------------- accordance with the Company's leave of absence policy. A Participant will not be considered to have incurred a break in Continuous Employment because of a Leave of Absence that does not exceed ninety (90) days. If the Leave of Absence exceeds ninety (90) days, the Participant will be deemed to have incurred a break in Continuous Employment on the ninety-first (91st) day, unless the Participant's rights to reemployment are guaranteed by statute or contract. -2- 2.12 "Participant" shall mean an Employee who has been granted a Purchase ----------- Right under the Plan. 2.13 "Plan" shall mean the 1999 Amendment and Restatement of the Total ---- Renal Care Holdings, Inc. Employee Stock Purchase Plan. 2.14 "Purchase Right" shall mean a right to purchase Common Stock granted -------------- pursuant to the Plan. 2.15 "Purchase Right Period" shall mean the period beginning on January 1 --------------------- or July 1 (whichever is applicable) and terminating on the immediately following December 31. (But see Section 43 for special rules regarding the termination of a Purchase Right Period.) 2.16 "Stockholders" shall mean the holders of Common Stock. ------------ 2.17 "Subsidiary" shall mean any corporation (other than the Company) in ---------- an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. Article III Eligibility and Participation 3.1 Eligibility. ----------- (a) All Employees of the Company who are scheduled to work at least twenty (20) hours per week are eligible to participate in the Plan, provided they have completed at least three (3) months of Continuous Employment prior to the first day of the Purchase Right Period. (b) No Employee may be granted a Purchase Right if the Employee would immediately thereafter own, directly or indirectly, five percent (5%) or more of the combined voting power or value of all classes of stock of the Company or of a Subsidiary. For this purpose, an Employee's ownership interest shall be determined in accordance with the constructive ownership rules of Code Section 424(d). 3.2 Payroll Withholding. ------------------- (a) Employees who have satisfied the eligibility conditions of Section 3.1 may enroll as Participants by executing prior to the commencement of each Purchase Right Period a form provided by the Committee on which they designate: -3- (i) The dollar amount (not a percentage of compensation) to be deducted from their paychecks and contributed to their Accounts for the purchase of Common Stock, which shall not be less than ten dollars ($10) per payroll period; and/or (ii) The amount of funds, if any, which they will deposit at the beginning of the Purchase Right Period for the purchase of Common Stock. (b) Once chosen, the rate of contributions for a Purchase Right Period cannot be decreased or increased without terminating the Purchase Right. However, pursuant to rules and procedures prescribed by the Committee, a Participant may make additional contributions to make up for amounts that he or she failed to make while on a Leave of Absence if the Participant returns to active employment and contributes those amounts before the end of the Purchase Right Period. 3.3 Limitations. ----------- (a) Notwithstanding anything herein to the contrary, a Participant may not accrue a right to purchase shares of Common Stock at a rate that exceeds twenty-five thousand dollars ($25,000) per calendar year, determined in a manner consistent with Code Section 423(b)(8). (b) This limitation shall apply to the Participant's right to purchase Common Stock under the Plan and under all other employee stock purchase plans described in Code Section 423 that are maintained by the Company and its Subsidiaries. (c) This dollar limitation applies to the Fair Market Value of Common Stock determined at the time the Purchase Right is granted. 3.4 Granting of Purchase Rights. The price at which each share covered by --------------------------- a Purchase Right will be purchased will in all instances be the lesser of: (a) One hundred percent (100%) of the Fair Market Value of a share of Common Stock on the first day of the applicable Purchase Right Period; or (b) Eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the last day of that Purchase Right Period. However, in no event will the maximum number of shares that can be purchased pursuant to the provisions of this Section 3.4 in a single Purchase Right Period exceed twenty-five thousand (25,000). -4- 3.5 Establishment of Accounts. ------------------------- (a) All amounts contributed by the Participant to the Plan (whether by means of payroll withholding or a lump sum advance contribution) will be deposited into a separate Account maintained for the Participant. (b) No interest will be earned on those contributions. (c) A Participant may not withdraw any amounts from his or her Account without terminating his or her Purchase Right pursuant to Section 4.1 below. Article IV Purchase Rights 4.1 Termination of Purchase Rights. ------------------------------ (a) A Participant may withdraw from the Plan at any time prior to the last day of the Purchase Right Period by submitting a form prescribed by the Committee to the Human Resources Department of the Company at the Corporate Office in Torrance, California. The Participant's Purchase Right shall terminate upon withdrawal from the Plan. (b) A Purchase Right shall terminate automatically if the Participant holding the Purchase Right ceases to be employed by the Company for any reason (including death, disability, or retirement) prior to the last day of the Purchase Right Period. (c) Upon the termination of a Purchase Right, all amounts held in the Participant's Account shall be refunded to the Participant. 4.2 Exercise of Purchase Rights. --------------------------- (a) Unless previously terminated, Purchase Rights will be exercised automatically on the last day of the Purchase Right Period. (b) Except as provided in Paragraph (b) of Section 3.2 above, payment for shares to be purchased at the termination of the Purchase Right Period may only be made from funds: (i) Deposited at the beginning of a Purchase Right Period; and/or (ii) Accumulated through payroll deductions made during the Purchase Right Period. -5- (c) If the amount in the Participant's Account at the end of the Purchase Right Period is insufficient to purchase all the shares covered by the Purchase Right granted to the Participant, those funds will be used to purchase as many whole shares as possible. (d) If the balance of the Participant's Account on the date of purchase exceeds the purchase price of the whole number of shares to be acquired, the surplus shall be applied to the next Purchase Right Period, unless the Participant elects to receive a refund by submitting a form prescribed by the Committee to the Human Resources Department of the Company at the Corporate Office in Torrance, California. (e) Stock certificates will be distributed within forty-five (45) days following the date of the exercise of the Purchase Right. 4.3 Termination Event. The following provisions of this Section 4.3 shall ----------------- apply, notwithstanding anything herein to the contrary. (a) A "Termination Event" shall be deemed to occur as a result of (i) a transaction in which the Company will cease to be an independent publicly-owned corporation or (ii) a sale or other disposition of all or substantially all the assets of the Company. (b) All Purchase Rights shall be automatically exercised immediately preceding the Termination Event. In such an event, for purposes of applying the rules of Paragraph (b) of Section 3.4, the Fair Market Value of the Common Stock on that date shall be deemed to be the consideration paid for the Common Stock in the transaction. 4.4 Non-Transferability of Purchase Rights. A Purchase Right may not be -------------------------------------- assigned or alienated other than by will and the laws of descent and distribution. Article V Common Stock 5.1 Shares Subject to Plan. ---------------------- (a) Effective November 9, 1999, the maximum number of shares of Common Stock which may be issued under the Plan is one million, three hundred thirty-three thousand, three hundred and three (1,133,333). The number of these shares shall be subject to adjustment under Section 5.2 below. (b) If any outstanding Purchase Right is terminated for any reason prior to its exercise, the shares subject to the Purchase Right will again become subject to purchase -6- under the Plan. (c) The Common Stock issuable under the Plan may be previously unissued or may have been reacquired by the Company in the open market (or otherwise). 5.2 Adjustment Upon Changes in Capitalization. Subject to the provisions ----------------------------------------- of Section 4.3, a proportionate adjustment shall be made by the Committee in the number, price, and kind of shares subject to outstanding Purchase Rights if the outstanding shares of Common Stock are increased, decreased, or exchanged for different securities, through reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend, or other similar transaction. Article VI Plan Administration 6.1 Administration. -------------- (a) The Plan shall be administered by the Committee. The Committee shall have authority to: (i) Interpret the Plan; (ii) Prescribe rules and procedures relating to the Plan; and (iii) Take all other actions necessary or appropriate in connection with the administration of the Plan. (b) A majority of the members of the Committee shall constitute a quorum, and any action shall constitute the action of the Committee if it is authorized by a majority of the members: (i) Present at any meeting; or (ii) In writing without a meeting. (c) All decisions of the Committee shall be final and binding on all Participants. (d) No member of the Committee shall be liable for any action or inaction taken in good faith with respect to the Plan or any Purchase Right granted under it. -7- 6.2 Indemnification. --------------- (a) To the maximum extent permitted by law, the Company shall indemnify each member of the Committee and each other member of the Board, as well as any other Employee with duties under the Plan, against expenses (including any amount paid in settlement or in satisfaction of a judgment) reasonably incurred by the individual in connection with any claims against the individual by reason of the performance of the individual's duties under the Plan. This indemnity shall not apply, however, if: (i) It is determined in the action, lawsuit, or proceeding that the individual is guilty of gross negligence or intentional misconduct in the performance of those duties; or (ii) The individual fails to assist the Company in defending against any such claim. (b) Notwithstanding the above, the Company shall have the right to select counsel and to control the prosecution or defense of the suit. Furthermore, the Company shall not be obligated to indemnify any individual for any amount incurred through any settlement or compromise of any action unless the Company consents in writing to the settlement or compromise. Article VII Amendment and Termination 7.1 Amendment and Termination. The Board may amend or terminate the Plan ------------------------- at any time by means of written action, except with respect to outstanding Purchase Rights. 7.2 Stockholder Approval. No additional shares of Common Stock shall be -------------------- issued solely as a result of the adoption of the 1999 Amendment and Restatement of the Plan unless the Plan is approved by the Stockholders within twelve (12) months before or after the date of its adoption by the Board, which is November 9, 1999. If the 1999 Amendment and Restatement is not approved by the Stockholders within that time period, the prior version of the Plan will remain in effect. The approval by the Stockholders must relate to: (a) The class of individuals eligible to participate; and (b) The aggregate number of shares to be granted under the Plan. If either of those items are changed, approval of the Stockholders must again be obtained. -8- Article VII Miscellaneous Matters 8.1 Uniform Rights and Privileges. The rights and privileges of all ----------------------------- Participants under the Plan shall be the same. 8.2 Application of Proceeds. The proceeds received by the Company from ----------------------- the sale of Common Stock pursuant to Purchase Rights may be used for any corporate purpose. 8.3 Notice of Disqualifying Disposition. A Participant must notify the ----------------------------------- Company if the Participant disposes of stock acquired pursuant to the Plan prior to the expiration of the holding periods required to qualify for capital gains treatment on the sale. 8.4 No Additional Rights. -------------------- (a) Neither the adoption of this Plan nor the granting of any Purchase Right shall: (i) Affect or restrict in any way the power of the Company to undertake any corporate action otherwise permitted under applicable law; or (ii) Confer upon any Participant the right to continue to be employed by the Company, nor shall it interfere in any way with the right of the Company to terminate the employment of any Participant at any time, with or without cause. (b) No Participant shall have any rights as a Shareholder with respect to any shares covered by a Purchase Right granted to the Participant until the Common Stock is actually issued to the Participant. (c) No adjustments will be made for cash dividends or other rights for which the record date is prior to the issuance of the Common Stock. 8.5 Governing Law. ------------- (a) The Plan and all actions taken under it shall be governed by and construed in accordance with the laws of the State of Delaware. (b) The provisions of this Plan shall be interpreted in a manner that is consistent with this Plan satisfying the requirements of Code Section 423. -9- EX-10.24 6 FIRST AMENDED & RESTATED 1997 EQUITY PLAN EXHIBIT 10.24 TOTAL RENAL CARE HOLDINGS, INC. FIRST AMENDED AND RESTATED 1997 EQUITY COMPENSATION PLAN 1. Purpose. The purpose of the Amended and Restated Total Renal Care Holdings, Inc. 1997 Equity Compensation Plan (this "Plan") is to promote the interests of Total Renal Care Holdings, Inc. (the "Company") and its stockholders by enabling the Company to offer Participants an opportunity to acquire an equity interest in the Company so as to better attract, retain, and reward employees, directors, and other persons providing services to the Company and, accordingly, to strengthen the mutuality of interests between Participants and the Company's stockholders by providing Participants with a proprietary interest in pursuing the Company's long-term growth and financial success. 2. Definitions. For purposes of this Plan, the following terms shall have the meanings set forth below. (a) "Award" means an Option granted under this Plan or Restricted Stock issued under this Plan. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended, and the applicable regulations thereunder. Reference to any specific section of the Code shall be deemed to be a reference to any successor provision. (d) "Committee" means the committee appointed by the Board, if any, to administer this Plan as permitted by Section 4 below or, if no such committee is appointed, the Board. (e) "Common Stock" means the common stock of Total Renal Care Holdings, Inc. or any security issued in substitution, exchange, or in lieu thereof. (f) "Company" means Total Renal Care Holdings, Inc., a Delaware corporation, or any successor corporation. Except where the context indicates otherwise, the term "Company" shall include the Subsidiaries of Total Renal Care Holdings, Inc. (g) "Incentive Stock Option" means an option to purchase Common Stock that is an incentive stock option under Section 422 of the Code. (h) "1995 Plan" means the Company's 1995 Equity Incentive Plan. (i) "Non-Qualified Stock Option" means any Option that is not an Incentive Stock Option. (j) "Option" means an Incentive Stock Option or a Non-Qualified Stock Option. (k) "Participant" means a person who has been granted an Option or Restricted Stock. (l) "Plan" means this 1997 Equity Compensation Plan of the Company, as it may be amended from time to time. (m) "Restricted Stock" means shares of Common Stock issued pursuant to this Plan that are subject to contractual restrictions. (n) "Spill-Over Shares" means (i) 66,526 shares of Common Stock which remained available for issuance under the 1995 Plan on the date this Plan was approved by the Company's stockholders, and (ii) shares of Common Stock which would otherwise have become available for issuance under the 1995 Plan due to the expiration or termination of options granted under the 1995 Plan prior to stockholder approval of the 1997 Plan. (o) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, as determined in accordance with the rules of Section 424(f) of the Code. 3. Eligibility. All employees, directors, and other persons providing bona fide services (other than persons only providing services in connection with the offering or sale of securities in a capital raising transaction) to the Company or any Subsidiary are eligible to receive Awards under this Plan; provided, however, that Incentive Stock Options may only be granted to employees of the Company or any Subsidiary. In the event that the Company acquires another entity, the Committee may authorize the issuance of Awards ("Substitute Awards") to employees, directors and other persons in substitution of stock options or restricted stock grants previously granted to such employees, directors and other persons in connection with their performance of services for the acquired entity upon such terms and conditions as the Committee shall determine, taking into account the limitations of Code Section 424(a) in the case of any Substitute Award that is intended to be an Incentive Stock Option. 4. Administration. This Plan shall be administered by the Board or by a committee consisting of two or more members of the Board appointed by the Board to administer this Plan. The Committee is authorized to interpret this Plan and to adopt rules and procedures relating to the administration of this Plan. All actions of the committee in connection with the interpretation and administration of this Plan shall be binding upon all parties. Subject to the limitations set 2 forth below, the Committee is expressly authorized to make such modifications to this plan and the Awards granted hereunder as are necessary to effectuate the intent of this Plan as a result of any changes in the tax, accounting, or securities laws treatment of Participants and the Plan. The Committee may delegate its responsibilities to others under such conditions and limitations as it may prescribe. 5. Effective Date of this Plan. This Plan shall be effective as of July 1, 1997. This Plan may be terminated by the Board at any time. Unless earlier terminated by the Board, this Plan shall terminate as of the close of business on the day prior to the tenth anniversary of the effective date of this Plan. The foregoing notwithstanding, no termination of this Plan shall adversely affect the rights of any Participant with respect to any Award outstanding as of the time of such termination. 6. Shares Subject to this Plan. The aggregate number of shares of Common Stock which may be issued pursuant to this Plan shall be equal to the sum of (i) 7,166,667 shares plus (ii) up to 833,333 Spill-Over Shares from the 1995 Plan. This aggregate number may be adjusted from time to time as set forth in Section 11 below. Subject to adjustments as provided in Section 11 below, the maximum number of shares of Common Stock which may be issuable pursuant to Awards granted during any calendar year to any Participant is 833,333 shares. Upon the expiration or termination of any Option granted under this Plan which shall not have been exercised in full, the shares of Common Stock remaining unissued under such Option shall again become available for granting under the Plan. Upon the repurchase or forfeiture of any shares of Restricted Stock issued hereunder, such repurchased shares of Common Stock shall again become available for issuance under this Plan. 7. Form of Options. Options shall be granted under this Plan on such terms and in such form as the Committee may approve, which shall not be inconsistent with the provisions of this Plan, and which need not be the same for each such grant. Options may be either Nonqualified Stock Options or Incentive Stock Options. The terms and conditions of each Option shall include, in addition to such other terms and conditions as may be established by the Committee, (i) the per share exercise price of such Option, (ii) the termination date of such Option, which shall not be later than ten years after the date of grant, and (iii) the effect on such Option of the termination of the Participant's employment. Any Option which is intended, as evidenced by its designation, as an Incentive Stock Option shall be made subject to such terms and conditions as may be required for such Option to qualify as an Incentive Stock Option under the Code. Incentive Stock Options granted under this Plan shall also include as a requirement that the Participant receiving such Incentive Stock Option notify the Company if he or she disposes of Common Stock acquired pursuant to the exercise thereof prior to the expiration of the holding period prescribed in Section 422(a)(1) of the Code. Any Option which is intended to constitute "qualified performance-based compensation" as such term is defined in the regulations promulgated under Section 162(m) of the Code shall be granted in such manner and made subject to such terms and conditions as may be required for such Option to so qualify as "qualified performance-based compensation." 3 8. Restricted Stock. The Committee may issue Restricted Stock upon such terms, restrictions and conditions as it may deem appropriate, which need not be the same for each grant. Restricted Stock may be issued for such consideration as the Committee may determine; provided, however, that in no case shall shares of Restricted Stock be issued for less than the minimum consideration required by law, if any. Effective for Awards granted after May 1, 1999, no more than five percent (5%) of the total number of shares subject to Awards granted on or after that date may be in the form of Restricted Stock. 9. Modification of Awards. The Committee may modify any outstanding Award as it deems appropriate. Such authority shall include, without limitation, the right to decrease the exercise price of any Option, accelerate the right to exercise any Option and modify any restrictions with respect to any Restricted Stock; provided, however, that no modification may be made to any Award that would adversely affect the rights of the Participant with respect to any outstanding Award without such Participant's consent. In the event that the Board amends the terms of an Option so that it no longer qualifies as an Incentive Stock Option, the limitations imposed upon the Option under the Code and the Plan by virtue of it (formerly) qualifying as an Incentive Stock Option shall no longer apply, to the extent specified in the amendment. Whether a modification of an existing Incentive Stock Option will be treated as an issuance of a new Incentive Stock Option will be determined in accordance with the rules of Code Section 424(h). 10. Transfer Restrictions. During the lifetime of the Participant, Options granted to such Participant under this Plan are exercisable only by the Participant and are not assignable or transferable, except by will or the laws of descent and distribution. Shares of Restricted Stock shall be subject to such restrictions on transferability as may be imposed by the Committee. 11. Adjustments. In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination, reclassification, reorganization, merger, combination, consolidation, exchange of Common Stock or spinoff or other distribution of Company assets to stockholders (other than normal cash dividends), the Committee may, in such manner and to such extent, if any, as it deems appropriate and equitable, authorize such adjustments with respect to: (i) the aggregate number and kind of shares for which Awards may be granted under this Plan; (ii) the number and kind of shares covered by outstanding Awards; and (iii) the per share exercise price of outstanding Options and the per share repurchase price of outstanding Restricted Stock. In connection with any merger or consolidation of the Company with or into another entity in which the Company is not the surviving corporation or as a result of which the Common Stock ceases or will cease to be publicly traded, the Committee may, but shall not be required to, authorize the termination of all outstanding Options upon the consummation of such merger or consolidation, provided that, as a condition to such termination, all restrictions on the exercisability of such Options (i.e., vesting provisions) shall be eliminated and the holders thereof shall be given at least 20 days prior to such termination to exercise such Options without regard to any such restrictions. 4 12. Amendment of this Plan. The Board may amend this Plan at any time; provided, however, that no such amendment may adversely affect the rights of any Participant with respect to any outstanding Award without the Participant's consent. 13. Tax Withholding. The Company shall have the right to take such actions as may be necessary to satisfy its tax withholding obligations arising because of the operation of this Plan. 14. No Additional Rights. Neither the adoption of this Plan nor the granting of any Option or the issuance of any Restricted Stock shall (i) affect or restrict in any way the power of the Company to undertake any corporate action otherwise permitted under applicable law, (ii) confer upon any Participant the right to continue performing services for the Company, or (iii) interfere in any way with the right of the Company to terminate the services of any Participant at any time, with or without cause, subject to such other contractual obligations which may exist. No Participant shall have any rights as a shareholder with respect to any shares covered by an Option granted to the Participant until the date a certificate for such shares has been issued to the Participant following the exercise of the Option. 15. Securities Law Restrictions. No shares of Common Stock shall be issued under this Plan unless the Committee shall be satisfied that the issuance will be in compliance with applicable federal and state securities laws, as well as the requirements of any stock exchange on which the Common Stock is traded. The Committee may require certain investment or other representations and undertakings by the person exercising an Option or purchasing Restricted Stock in order to comply with applicable law. Certificates for shares of Common Stock delivered under this Plan may be subject to such restrictions as the Committee may deem advisable. The Committee may cause a legend to be placed on the certificates to refer to these restrictions. 16. Indemnification. To the maximum extent permitted by law, the Company shall indemnify each member of the Committee and each other member of the Board, as well as any other employee of the Company with duties under this Plan, against expenses (including any amount paid in settlement, provided such settlement is approved by the Company) reasonably incurred by the individual in connection with any claim against the individual by reason of the performance of the individual's duties as a member of the Committee, unless the losses are due to the individual's gross negligence or lack of good faith; provided, however, that the Company shall be entitled to control the defense of any such claim and shall be entitled to engage counsel for such defense; and provided further, that if more than one member of the Committee or such other employee is subject to such claim, or if the Company or other parties entitled to indemnification by the Company are also subject to such claim, the Company, if applicable, and all such parties shall be represented by a single counsel selected by the Company and no member or other party shall be entitled to be represented by separate counsel at the Company's expense unless counsel selected by the Company advises the Company in writing that such counsel cannot represent such member or other party under applicable rules of professional responsibility. 5 17. Governing Law. This Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. 6 EX-10.25 7 SPECIAL PURPOSE OPTION PLAN EXHIBIT 10.25 FIRST AMENDED AND RESTATED TOTAL RENAL CARE HOLDINGS, INC. SPECIAL PURPOSE OPTION PLAN --------------------------- 1. Purpose. This Special Purpose Option Plan (the "Plan") is created to ------- provide for the issuance of Adjusted Options, as such term is defined in that certain Agreement and Plan of Merger (the "Merger Agreement") dated November 18, 1997, by and among Total Renal Care Holdings, Inc., a Delaware corporation (the "Company"), Nevada Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company, and Renal Treatment Centers, Inc., a Delaware corporation ("RTC"), in substitution for the outstanding options under RTC's Amended and Restated 1990 Stock Plan and RTC's Equity Incentive Plan for Outside Directors as required by the Merger Agreement. The Adjusted Options are intended to provide the current and former officers, directors and employees of RTC and its subsidiaries with opportunities to purchase stock in the Company pursuant to options granted hereunder which qualify as "incentive stock options" under Section 422(b) of the Internal Revenue Code of 1986 (the "Code") ("ISO" or "ISOs") and options granted hereunder which do not qualify as ISOs ("Non- Qualified Option" or "Non-Qualified Options"). The Plan may also provide such directors, officers, and employees with awards of stock in the Company ("Awards") and with opportunities to make direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to hereinafter individually as an "Option" and collectively as "Options". Options, Awards and authorizations to make Purchases are referred to hereinafter collectively as "Stock Rights". As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 425 of the Code. 2. Administration of the Plan. -------------------------- A. Board or Committee Administration. The Plan shall be administered --------------------------------- by the Board of Directors of the Company (the "Board"). The Board may appoint a Stock Plan Committee (the "Committee") of two or more directors to administer the Plan. A director of the Company shall be eligible to serve on the Committee only if he or she qualifies as a "non-employee director" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934. In addition, each member of the Committee shall be an "Outside director" within the meaning of Section 162(m) of the Code. Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to the terms of the Plan, the Committee shall have the authority to (i) determine the employees of the Company and any present or future subsidiaries of the Company (collectively, "Related Corporations") (from among the class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be granted, and to determine (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases) to whom Non-Qualified Options, Awards and authorizations to make Purchases may be granted; (ii) determine the time or times at which Options or Awards may be granted or Purchases made; (iii) determine the option price of shares subject to each Option, which price shall not be less than the minimum price specified in paragraph 6, and the purchase price of shares subject to each Purchase; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, Awards and Purchases and the nature of such restrictions, if any; and (vii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by the Board or except as may be specified in the instrument evidencing the grant of a stock right. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. B. Committee Actions. The Committee may select one of its members as ----------------- its chairman, and shall hold meetings at such time and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. 3. Eligible Employees and Others. ISOs may be granted to any employee of ----------------------------- the Company or any Related Corporation. Those officers and directors of the Company who are not employees may not be granted ISOs under the Plan. Non- Qualified Options, Awards and authorizations to make Purchases may be granted to any employee, officer or director (whether or not also an employee) or consultant of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant an ISO, a Non-Qualified Option, an Award or an authorization to make a Purchase. Granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify him from, participation in any other grant of Stock Rights. 4. Stock. The stock subject to Options, Awards and Purchases shall be ----- authorized but unissued shares of Common Stock of the Company, par value $0.00l per share (the "Common Stock"), or shares of Common Stock reacquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 3,239,979, subject to adjustment as provided in paragraph 13. Moreover, for the period commencing on January 1, 2 1994 until December 17, 1999, no employee shall be granted options for more than 500,000 shares pursuant to this Plan. Any such shares may be issued as ISOs, Non-Qualified Options or Awards, or to persons or entities making Purchases, so long as the number of shares so issued does not exceed such number, as adjusted. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if the Company shall reacquire any unvested shares issued pursuant to Awards or Purchases, the unpurchased shares subject to such Options and any unvested shares so reacquired by the Company shall again be available for grants of Stock Rights under the Plan. 5. Granting of Stock Rights. Stock Rights may be granted under the Plan ------------------------ at any time on or after September 28, 1990 and prior to December 17, 1999. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the Stock Right; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. The Committee shall have the right, with the consent of the optionee, to convert an ISO granted under the Plan to a Non-Qualified Option pursuant to paragraph 16. 6. Minimum Option Price; ISO Limitations. ------------------------------------- A. Price for Non-Qualified Options. The exercise price per share ------------------------------- specified in the agreement relating to each Non-Qualified Option granted under the Plan shall in no event be less than the lesser of (i) the book value per share of Common Stock as of the end of the fiscal year of the Company immediately preceding the date of such grant, or (ii) fifty percent (50%) of the fair market value per share of Common Stock on the date of such grant. B. Price for ISOs. The exercise price per share specified in the -------------- agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. C. $100,000 Annual Limitation on ISOs. Each eligible employee may be ---------------------------------- granted ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, such ISOs do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than $100,000 in fair market value (determined at the time the ISOs were granted) of Common Stock in that year. Any options granted to an employee in excess of such amount will be granted as Non- Qualified Options. 3 D. Determination of Fair Market Value. If, at the time an Option is ---------------------------------- granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined on the date such Option is granted (or the first preceding business day for which the prices or quotes are available, if the date of grant is not a business day) and shall mean (i) the closing price (on that date) or the average of the high and low prices (on that date) of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the NASDAQ National Market List, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the- counter securities, if the Common Stock is not reported on the NASDAQ National Market List. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. Option Duration. Subject to earlier termination as provided in --------------- paragraphs 9 and 10, each option shall expire on the date specified by the Committee, but not more than (i) ten years and one day from the date of grant in the case of Non-Qualified Options, (ii) ten years from the date of grant in the case of ISOs generally, and (iii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation. Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. Exercise of Option. Subject to the provisions of paragraphs 9 through ------------------ 12, each Option granted under the Plan shall be exercisable as follows: A. Vesting. The Option shall either be fully exercisable on the date ------- of grant or shall become exercisable thereafter in such installments as the Committee may specify. The Committee may also establish certain conditions, including, without limitation, performance criteria with respect to the Company and/or the optionee, which must be satisfied before an option may be exercised. B. Full Vesting of Installments. Once an installment becomes ---------------------------- exercisable it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. 4 C. Partial Exercise. Each Option or installment may be exercised at ---------------- any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. D. Acceleration of Vesting. The Committee shall have the right to ----------------------- accelerate the date of exercise of any installment of any option, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate; provided that the Committee shall not, without the consent of an optionee, accelerate the exercise date of any installment of any option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(C). 9. Termination of Employment. If an ISO optionee ceases to be employed ------------------------- by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his ISOs shall become exercisable, and his ISOs shall terminate after the passage of ninety (90) days from the date of termination of his employment, but in no event later than on their specified expiration dates, except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. Employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under the Plan, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. Death; Disability. ----------------- A. Death. If an ISO optionee ceases to be employed by the Company ----- and all Related Corporations by reason of his death, any ISO of his may be exercised, to the extent of the number of shares with respect to which he could have exercised it on the date of his death (or to such greater extent as may be specified in the instrument evidencing the grant of such ISO), by his estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the optionee's death. 5 B. Disability. If an ISO optionee ceases to be employed by the ---------- Company and all Related Corporations by reason of his disability, he shall have the right to exercise any ISO held by him on the date of termination of employment, to the extent of the number of shares with respect to which he could have exercised it on that date (or to such greater extent as may be specified in the instrument evidencing the grant of such ISO), at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the termination of the optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22(e)(3) of the Code or successor statute. 11. Assignability. No option or right to make Purchases shall be ------------- assignable or transferable by the optionee or grantee thereof except by will or by the laws of descent and distribution, and during the lifetime of the optionee or grantee, each Option or right to make Purchases shall be exercisable only by him or his guardian. 12. Terms and Conditions of Options. Options shall be evidenced by ------------------------------- instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. In granting any Non-Qualified Option, the Committee may specify that such Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. Adjustments. Upon the occurrence of any of the following events, an ----------- optionee's rights with respect to Options granted to him hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: A. Stock Dividends and Stock Splits. If the shares of Common Stock -------------------------------- shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. Consolidations or Mergers. If the Company is to be consolidated ------------------------- with or acquired by another entity in a merger, sale of all or substantially all of the Company's 6 assets or otherwise (an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition; or (ii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable (or to such greater extent as may be specified in the instrument evidencing the grant of the Option), within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options to the extent then exercisable (or to such greater extent as may be specified in the instrument evidencing the grant of the Option) over the exercise price thereof. C. Recapitalization or Reorganization. In the event of a ---------------------------------- recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he would have received if he had exercised his Option prior to such recapitalization or reorganization. D. Modification of ISOs. Notwithstanding the foregoing, any -------------------- adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 425 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it shall offer the holder of such ISOs the option to convert the ISOs into Non-Qualified Options as provided in paragraph 16 or refrain from making such adjustments. E. Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. F. Issuances of Securities. Except as expressly provided herein, no ----------------------- issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. 7 G. Fractional Shares. No fractional shares shall be issued under the ----------------- Plan and the optionee shall receive from the Company cash in lieu of such fractional shares. H. Adjustments. Upon the happening of any of the events described in ----------- subparagraphs A, B or C above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Stock Rights which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee or the Successor Board shall determine the specific adjustments to be made under this paragraph 13 and, subject to paragraph 2, its determination shall be conclusive. If any person or entity owning restricted Common Stock obtained by exercise of a Stock Right made hereunder receives shares or securities or cash in connection with a corporate transaction described in subparagraphs A, B or C above as a result of owning such restricted Common Stock, such shares or securities or cash shall be subject to all of the conditions and restrictions applicable to the restricted Common Stock with respect to which such shares or securities or cash were issued, unless otherwise determined by the Committee or the Successor Board. 14. Means of Exercising Stock Rights. A Stock Right (or any part or -------------------------------- installment thereof) shall be exercised by giving written notice to the Company at its principal office address. Such notice shall identify the Stock Right being exercised and specify the number of shares as to which such Stock Right is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, or (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Stock Right, or (c) at the discretion of the Committee, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Committee, by any combination of (a), (b) and (c) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), or (d) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of a Stock Right shall not have the rights of a shareholder with respect to the shares covered by his Stock Right until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. Term and Amendment of Plan. This Plan was originally adopted by the -------------------------- Board and approved by the stockholders on September 28, 1990. The Plan shall expire at the end of the day on December 17, 1999 (except as to Options outstanding on that date). Subject to the provisions of paragraph 5 above, Stock Rights may be granted under the Plan prior to the date of stockholder approval of the Plan or any amendment thereto for which stockholder approval is 8 required under this paragraph 15. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within twelve months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan may not be increased (except by adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3 regarding eligibility for grants of IS0s may not be modified; (c) the provisions of paragraph 6(B) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); (d) the expiration date of the Plan may not be extended; (e) the benefits accruing to participants under the Plan may not be materially increased; and (f) the requirements as to eligibility for participation in the Plan may not be materially modified. In no event may action of the Board or stockholders alter or impair the rights of a grantee, without his consent, under any Stock Right previously granted to him. 16. Conversion of ISOs into Non-Qualified Options; Termination. The ---------------------------------------------------------- Committee, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. The Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such termination. 17. Application of Funds. The proceeds received by the Company from the -------------------- sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes. 18. Governmental Regulation. The Company's obligation to sell and deliver ----------------------- shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. 19. Withholding of Additional Income Taxes. Upon the exercise of a Non- -------------------------------------- Qualified Option, the grant of an Award, the making of a Purchase of Common Stock for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 20) or the vesting of restricted Common Stock acquired on the exercise of a Stock Right hereunder, the Company, in accordance with Section 3402(a) of the Code, may require the optionee, Award recipient or purchaser to pay additional withholding taxes in respect of the amount that is 9 considered compensation includible in such person's gross income. The Committee in its discretion may condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the making of a Purchase of Common Stock for less than its fair market value, or (iv) the vesting of restricted Common Stock acquired by exercising a Stock Right, on the grantee's payment of such additional withholding taxes. 20. Notice to Company of Disqualifying Disposition. Each employee who ---------------------------------------------- receives an ISO must agree to notify the Company in writing immediately after the employee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any sale) of such Common Stock before the later of (a) two years after the date the employee was granted the ISO, or (b) one year after the date the employee acquired Common Stock by exercising the ISO. If the employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 21. Governing Law; Construction. The validity and construction of the --------------------------- Plan and the instruments evidencing Stock Rights shall be governed by the laws of the State of Delaware, or the laws of any jurisdiction in which the Company or its successors in interest may be organized. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. 22. Compliance with Rule 16b-3. The provisions of the Plan are intended -------------------------- to comply in all respects with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934 and any amendments thereto, and, if the Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. 10 EX-10.32 8 AMENDMENT NO. 5 AND CONSENT Exhibit 10.32 AMENDMENT NO. 5 AND CONSENT TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT AMENDMENT NO. 5 AND CONSENT (this "Amendment"), dated as of February 18, --------- 2000, to and under the Amended and Restated Revolving Credit Agreement, as amended by Amendment No. 1 and Consent No. 1, dated as of August 5, 1998, Amendment No. 2, dated as of November 12, 1998, Amendment No. 3 and Waiver, dated as of August 9, 1999, and Amendment No. 4 and Waiver ("Amendment No. 4"), --------------- dated as of November 8, 1999 (as so amended, (the "Revolving Credit Agreement"), -------------------------- dated as of April 30, 1998, by and among TOTAL RENAL CARE HOLDINGS, INC., a Delaware corporation (the "Borrower"), the lenders party thereto (the -------- "Lenders"), DLJ CAPITAL FUNDING, INC., as Syndication Agent, FIRST UNION ------- NATIONAL BANK, as Documentation Agent, and THE BANK OF NEW YORK, as administrative agent (in such capacity, the "Administrative Agent"). -------------------- RECITALS -------- I. Capitalized terms used herein which are not otherwise defined herein shall have the respective meanings ascribed thereto in the Revolving Credit Agreement. II. The Borrower has requested that the Administrative Agent and the Required Lenders consent to the sale of (i) three certain renal treatment centers listed on Schedule 1 attached hereto, the consideration of which equals approximately $10,100,000 in cash plus the forgiveness of $3,000,000 in deferred purchase obligations (the "Forgiven Deferred Purchase Obligations") (the "Renal -------------------------------------- ----- Asset Sale"), (ii) the Borrower's pharmacy operations, the consideration of - ----- ---- which approximately $3,400,000 (the "Pharmacy Asset Sale"), and (iii) certain ------------------- other assets, the consideration of which shall not exceed $10,000,000 (the "Future Asset Sales"), and together with the Renal Asset Sale and the Pharmacy ------------------ Asset Sale, (the "Permitted Asset Sales") upon the terms and conditions --------------------- contained herein, and the Administrative Agent and the Required Lenders are willing so to do. III. Pursuant to Amendment No. 4, the total consideration for all Permitted Acquisitions made after July 1, 1999 through and including March 15, 2000 was limited to an amount not to exceed $10,000,000. During such period but prior to the date hereof, the Borrower has made Permitted Acquisitions in an aggregate amount equal to $8,600,000. The Borrower has requested that the Administrative Agent and the Required Lenders consent to the making of Domestic Acquisitions on or prior to March 31, 2000 of renal treatment centers that the Borrower or any of its wholly-owned Subsidiaries is contractually obligated on the date hereof to make as described on Schedule 2 attached hereto in an aggregate amount not to exceed $1,400,000 (the "Remaining Permitted ------------------- Acquisitions") upon the terms and conditions contained herein, and the - ------------ Administrative Agent and the Required Lenders are willing so to do. IV. The Borrower acknowledges that one or more Defaults or Events of Default have occurred and are continuing under the Revolving Credit Agreement. Accordingly, in consideration of the Recitals and the covenants and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Notwithstanding anything to the contrary contained in Sections 2.6(d), 2.7(f) and 8.7 of the Revolving Credit Agreement, the Administrative Agent and the Required Lenders hereby consent to the consummation of the Permitted Asset Sales, provided that each of the following conditions is satisfied: (a) (i) the consummation of each Permitted Asset Sale shall be deemed to be an Asset Sale made pursuant to Section 8.7 of the Revolving Credit Agreement for purposes of the $31,590,000 amount contained in Section 8.7(i) of the Revolving Credit Agreement (after giving effect to this Amendment), and (ii) on and after the effective date of this Amendment, the definition of "Threshold Amount" contained in Section 1.1 of the Revolving Credit Agreement shall equal zero; (b) the consideration received or to be received by the Borrower or any of its Subsidiaries with respect to each Permitted Asset Sale shall (i) not be less than the fair market value thereof as reasonably determined by the Board of Directors of the Borrower, (ii) be payable on or before the closing thereof, and (iii) be payable (A) with respect to the Renal Asset Sale and the Pharmacy Asset Sale, 100% in cash (other than the Forgiven Deferred Purchase Obligations), and (B) with respect to each Future Asset Sale, at least 75% in cash and any non-cash consideration shall be limited to the forgiveness of Indebtedness of the Borrower or any of its Subsidiaries in connection with such Future Asset Sale (the "Forgiven Indebtedness"); --------------------- (c) the consideration received or to be received for all Future Asset Sales shall not exceed $10,000,000 in the aggregate, and the Net Cash Proceeds of any Future Asset Sale plus any Forgiven Indebtedness in connection therewith shall exceed the amount equal to the EBITDA attributable to the assets of such Future Asset Sale for the twelve month period most recently preceding the date of such Future Asset Sale multiplied by 5.5 (the "Minimum Sale Price"); ------------------ (d) on the date of each such Permitted Asset Sale, the Administrative Agent and the Lenders shall have received a certificate with respect thereto signed by the chief financial officer of the Borrower and either the chairman of the board (if an officer) or any vice president of the Borrower identifying the Property sold pursuant to such Permitted Asset Sale and (i) stating the total consideration to be paid in respect of such Permitted Asset Sale, (ii) certifying that the consideration received by the Borrower or such Subsidiary for such Property has been determined by the Board of Directors of the Borrower to be not less than the fair market value of such Property, and (iii) certifying to and attaching a true and correct calculation of (A) the Net Cash Proceeds of such Permitted Asset Sale and (B) with respect to a Future Asset Sale, the Minimum Sale Price, such calculations to be reasonably acceptable to the Administrative Agent and the Syndication Agent; (e) on the date of the consummation of each Permitted Asset Sale, the Borrower shall prepay the Revolving Credit Loans in an amount equal to the Revolver -2- Prepayment Fraction multiplied by the Total Prepayment Amount (as defined in Paragraph 3 of this Amendment) of such Permitted Asset Sale (the "Revolver -------- Prepayment Amount"), provided, however, that the Borrower shall not elect to - ----------------- give the Lenders under and as defined in the Term Loan Facility the option to waive their rights to receive any prepayments with respect to the Permitted Asset Sales pursuant to the provisions of Section 2.4(d)(iii) of the Term Loan Facility; (f) on the date of the consummation of each Permitted Asset Sale, the Aggregate Revolving Credit Commitments shall be automatically and permanently reduced in an amount equal to the Revolver Prepayment Amount of such Permitted Asset Sale (assuming for purposes of this Paragraph 1(f) that the then outstanding amount of Revolving Credit Loans equals or exceeds the amount of such prepayment); (g) (i) the Renal Asset Sale shall be consummated on or before February 29, 2000, (ii) the Pharmacy Asset Sale shall be consummated on or before March 31, 2000, and (iii) any Future Asset Sale shall be consummated on or before March 31, 2000; and (h) during the period from and including the effective date of this Amendment through and including March 15, 2000, the Aggregate Credit Exposure of all Lenders shall not exceed $650,000,000, which amount shall be reduced on the date of the consummation of each Permitted Asset Sale by the Revolver Prepayment Amount of such Permitted Asset Sale (assuming for purposes of this Paragraph 1(h) that the then outstanding amount of Revolving Credit Loans equals or exceeds the amount of such prepayment). 2. Section 8.7(i) of the Revolving Credit Agreement is amended by replacing the amount "$25,000,000" contained therein with the amount "$31,590,000". 3. The "Total Prepayment Amount" of each Permitted Asset Sale shall, for purposes hereof and the Revolving Credit Agreement, be the amount of the Net Cash Proceeds of such Permitted Asset Sale. 4. The Administrative Agent and the Required Lenders hereby consent to the making of the Remaining Permitted Acquisitions by the Borrower or any wholly-owned Subsidiary of the Borrower, provided that (i) the total consideration paid for all such Remaining Permitted Acquisitions shall not exceed $1,400,000 in the aggregate, (ii) the Remaining Permitted Acquisitions shall be made on or before March 31, 2000, (iii) the terms, conditions and restrictions of Section 8.5(f) of Revolving Credit Agreement (other than Sections 8.5(f)(a) and 8.5(f)(E) thereof) shall have been satisfied, and (iv) on the date of each such Remaining Permitted Acquisition, the Administrative Agent and the Lenders shall have received a certificate with respect thereto signed by the chief financial officer of the Borrower and either the chairman of the board (if an officer) or any vice president of the Borrower certifying that there has been no material adverse change in the information listed on or provided pursuant to Schedule 2 attached hereto with respect to such Remaining Permitted Acquisition. 5. Paragraphs 1 through 4 of this Amendment shall not become effective until the satisfaction of all of the following conditions precedent: -3- (a) The Administrative Agent shall have received this Amendment, duly executed by a duly authorized officer or officers of the Borrower, the Guarantors, the Pledgors, the Administrative Agent and the Required Lenders. (b) The Administrative Agent shall have received a certificate, dated the effective date of this Amendment, of the Secretary or Assistant Secretary of the Borrower (i) attaching a true and complete copy of the resolutions of its Board of Directors and of all documents evidencing other necessary corporate action (in form and substance satisfactory to the Administrative Agent) taken by it to authorize this Amendment and the transactions contemplated hereby, and (ii) setting forth the incumbency of its officer or officers (including therein the signature specimen of such officer or officers) who may sign this Amendment, any Loan Document or any other document, notice or certificate executed and delivered in connection with any Loan Document. (c) The Administrative Agent shall have received an opinion of the general counsel of the Borrower, the Guarantors and the Pledgors, dated the effective date of this Amendment and addressed to the Administrative Agent, the Collateral Agent, the Documentation Agent, the Syndication Agent and the Lenders, in form and substance reasonably satisfactory to the Administrative Agent and the Syndication Agent. (d) All costs, fees and expenses incurred by or payable to the Administrative Agent and the Syndication Agent in connection with the negotiation, execution and closing of this Amendment, including, without limitation, the reasonable fees and expenses of Special Counsel for which an invoice has been presented to the Borrower, shall have been paid. 6. The Borrower hereby acknowledges and agrees that (i) one or more Defaults or Events of Default have occurred and are continuing under the Revolving Credit Agreement, (ii) no failure to exercise and no delay in exercising, on the part of the Administrative Agent, the Collateral Agent, the Letter of Credit Issuer or any Lender, any right, remedy, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege, and (iii) no Default or Event of Default may be waived except upon the execution and delivery of a written instrument pursuant to the terms and conditions of Section 11.1 of the Revolving Credit Agreement. 7. On the date hereof, each Credit Party hereby (a) reaffirms and admits the validity and enforceability of the Loan Documents (after giving effect to this Amendment) and all of its obligations thereunder and (b) agrees and admits that it has no defenses to or offsets against any such obligation. 8. In all other respects, the Loan Documents shall remain in full force and effect, and no amendment in respect of any term or condition of any Loan Document contained herein shall be deemed to be an amendment in respect of any other term or condition contained in any Loan Document. -4- 9. This Amendment may be executed in any number of counterparts all of which, taken together, shall constitute one agreement. In making proof of this Amendment, it shall only be necessary to produce the counterpart executed and delivered by the party to be charged. 10. THIS AMENDMENT IS BEING EXECUTED AND DELIVERED IN, AND IS INTENDED TO BE PERFORMED IN, THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCEABLE IN ACCORDANCE WITH, AND BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. [Remainder of page intentionally left blank] -5- AMENDMENT NO. 5 AND CONSENT TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT AS EVIDENCE of the agreement by the parties hereto to the terms and conditions herein contained, each such party has caused this Amendment to be executed on its behalf. TOTAL RENAL CARE HOLDINGS, INC. By: ------------------ Name: ----------------- Title: ---------------- THE BANK OF NEW YORK, Individually, as the Letter of Credit Issuer, as the Swing Line Lender and as Administrative Agent By: ------------------- Name: ----------------- Title: ---------------- DLJ CAPITAL FUNDING, INC., Individually and as Syndication Agent By: ------------------- Name: ----------------- Title: ---------------- FIRST UNION NATIONAL BANK, Individually and as Documentation Agent By: ------------------- Name: ---------------- Title: ---------------- ABN AMRO BANK N.V. By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- ALLIED IRISH BANKS, P.L.C., CAYMAN ISLANDS BRANCH By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA, NASSAU BRANCH By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- BANK LEUMI USA By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- THE BANK OF NOVA SCOTIA By: ------------------- Name: ----------------- Title: ---------------- BANQUE NATIONALE DE PARIS By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- BHF (USA) CAPITAL CORPORATION By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- CITY NATIONAL BANK By: ------------------- Name: ---------------- Title: ---------------- BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- CREDIT LYONNAIS NEW YORK BRANCH By: ------------------- Name: ----------------- Title: ---------------- DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG--NEW YORK By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- FLEET NATIONAL BANK By: ------------------- Name: ----------------- Title: ---------------- THE FUJI BANK, LIMITED By: ------------------- Name: ----------------- Title: ---------------- HIBERNIA NATIONAL BANK By: ------------------- Name: ----------------- Title: ---------------- THE INDUSTRIAL BANK OF JAPAN, LIMITED By: ------------------- Name: ----------------- Title: ---------------- KBC BANK By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- GENERAL ELECTRIC CAPITAL CORPORATION By: ------------------- Name: ----------------- Title: ---------------- MELLON BANK, N.A. By: ------------------- Name: ----------------- Title: ---------------- MICHIGAN NATIONAL BANK By: ------------------- Name: ----------------- Title: ---------------- THE MITSUBISHI TRUST AND BANKING CORPORATION By: ------------------- Name: ----------------- Title: ---------------- NATIONAL CITY BANK OF KENTUCKY By: ------------------- Name: ----------------- Title: ---------------- PARIBAS By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- COOPERATIEVE CENTRALE RAIFFEISEN - BOERENLEENBANK B.A, "RABOBANK NEDERLAND", NEW YORK BRANCH By: ------------------- Name: ----------------- Title: ---------------- By: ------------------- Name: ----------------- Title: ---------------- ROYAL BANK OF CANADA By: ------------------- Name: ----------------- Title: ---------------- THE ROYAL BANK OF SCOTLAND PLC By: ------------------- Name: ----------------- Title: ---------------- ROYALTON COMPANY By: Pacific Investment Management Company, as its Investment Advisor By: PIMCO Management Inc., a general partner By: ------------------- Name: ----------------- Title: ---------------- THE SANWA BANK, LIMITED By: ------------------- Name: ----------------- Title: ---------------- SOCIETE GENERALE By: ------------------- Name: ----------------- Title: ---------------- STB DELAWARE FUNDING TRUST I By: ------------------- Name: ----------------- Title: ---------------- SUNTRUST BANK, NASHVILLE, N.A. By: ------------------- Name: ----------------- Title: ---------------- THE TOKAI BANK, LIMITED By: ------------------- Name: ----------------- Title: ---------------- THE TOYO TRUST & BANKING CO., LTD., New York Branch By: ------------------- Name: ----------------- Title: ---------------- UNION BANK OF CALIFORNIA, N.A. By: ------------------- Name: ----------------- Title: --------------- U.S. BANK NATIONAL ASSOCIATION By: ------------------- Name: ----------------- Title: ---------------- GOLDMAN SACHS CREDIT PARTNERS L.P. By: ------------------- Name: ----------------- Title: ---------------- ROTHSCHILD RECOVERY FUND, L.P. By: ------------------- Name: ----------------- Title: ---------------- AGREED AND CONSENTED TO: TOTAL RENAL CARE, INC. TOTAL RENAL CARE ACQUISITION CORP. RENAL TREATMENT CENTERS, INC. RENAL TREATMENT CENTERS-MID-ATLANTIC, INC. RENAL TREATMENT CENTERS-NORTHEAST, INC. RENAL TREATMENT CENTERS-CALIFORNIA, INC. RENAL TREATMENT CENTERS-WEST, INC. RENAL TREATMENT CENTERS-SOUTHEAST, INC. Each by: ---------------- Name: ------------------- Title: ------------------ TRC WEST, INC. By: --------------------- Name: ------------------- Title: ------------------ AMENDMENT NO. 5 AND CONSENT TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT SCHEDULE 1 LIST OF RENAL TREATMENT CENTERS ------------------------------- 1. Rogosin - Manhattan 2. Rogosin - Queens 3. Rogosin - Brooklyn AMENDMENT NO. 5 AND CONSENT TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT SCHEDULE 2 LIST OF REMAINING PERMITTED ACQUISITIONS ---------------------------------------- Lanai Dialysis Center, Hawaii - Asset acquisition of one managed (non- - ----------------------------- consolidated) center for approximately $200,000. The Borrower must acquire this center so that it can be sold to Fresenius A.G. as part of the sale of the Borrower's non-continental U.S. assets. IHS facilities, NY - First payment of approximately $530,000, due by March 31, - ------------------ 2000, for asset acquisition of seven managed (non-consolidated) centers. The Borrower is contractually obligated to enter into certain additional agreements pursuant to previously granted rights. At this time, the Borrower is unable to determined whether and when such rights will be exercised. The Borrower will not be assuming any contingent liabilities in connection with any of the Remaining Permitted Acquisitions. EX-12.1 9 STATEMENT RE COMPUTATIONS OF RATIOS 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.
Year ended December 31, ---------------------------------------------- 1999 1998 1997 1996 1995 --------- -------- -------- ------- ------- (in thousands, except for ratio data) Income before income taxes, extraordinary items and cumulative effect of a change in accounting principle........ $(181,826) $ 48,641 $ 81,178 $54,563 $37,141 --------- -------- -------- ------- ------- Fixed charges: Interest expense and amortization of debt issuance costs and discounts on all indebtedness................. 110,797 84,003 29,082 13,670 12,921 Interest portion of rental expense...................... 17,501 12,992 8,196 5,301 3,346 --------- -------- -------- ------- ------- Total fixed charges......... 128,298 96,995 37,278 18,971 16,267 --------- -------- -------- ------- ------- Earnings before income taxes, extraordinary items, cumulative effect of a change in accounting principle and fixed charges........................ $ (53,528) $145,636 $118,456 $73,534 $53,408 ========= ======== ======== ======= ======= Ratio of earnings to fixed charges........................ (a) 1.50 3.18 3.88 3.28 ========= ======== ======== ======= =======
- -------- (a) Due to the Company's loss in 1999, the ratio coverage was less than 1:1. The Company would have had to generate additional earnings of $182 million to achieve a coverage of 1:1. EX-21.1 10 LIST OF SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY As of January 13, 2000
NAME STRUCTURE JURISDICTION OF INCORPORATION Assisi S.r.l. Sociedad de responsibilidad limitada (6) Astro, Hobby, West Mt., Renal Care Ltd. Partnership Limited Partnership DE Bay Area Dialysis Partnership Partnership CA Beta Dial S.r.l. Sociedad de responsibilidad limitada (6) Beverly Hills Dialysis Partnership Partnership+ CA Burbank Dialysis Partnership Partnership CA Capital Dialysis Partnership Partnership CA Carroll County Dialysis Facility, Inc. Corporation MD Carroll County Dialysis Facility Limited Partnership Partnership MD Centro De Tratamiento Medico Renal S.A. Sociedad Anonima (3) Cercos S.r.l. Sociedad de responsibilidad limitada (6) Continental Dialysis Center, Inc. Corporation VA Continental Dialysis Center of Springfield-Fairfax, Inc. Corporation VA Crescent City Dialysis Partnership Partnership LA Crystal River Dialysis, LLC Limited Liability Company FL DialTorre S.r.l. Sociedad de responsibilidad limitada (6) Dialysis Specialists of Dallas, Inc. Corporation TX Dialysis Treatment Centers of Macon, LLC Limited Liability Company GA Due Torri S.r.l. Sociedad de responsibilidad limitada (6) East End Dialysis Center, Inc. Corporation VA Eastmont Partnership Partnership CA Eaton Canyon Dialysis Partnership Partnership CA Elberton Dialysis Center, Inc. Corporation GA Elmbrook Kidney Center, Inc. Corporation TX Enfermedades Renales - Centro de Dialisis S.A. Sociedad Anonima* (2) Enne S.r.l. Sociedad de responsibilidad limitada (6) Fanus S.r.l. Sociedad de responsibilidad limitada (6) Flamingo Park Kidney Center, Inc. Corporation FL Flaminia S.r.l. Sociedad de responsibilidad limitada (6) Flavia S.r.l. Sociedad de responsibilidad limitada (6) Garey Dialysis Center Partnership Partnership CA Guam Renal Care Partnership Partnership GU Guam Renal Management Partnership Partnership GU Houston Kidney Center/Total Renal Care Integrated Svc. Partnership DE Hutchinson Dialysis, L.L.C. Limited Liability Company# KS IL Nefrologico S.r.l. Sociedad de responsibilidad limitada (6) Imera S.A. Sociedad Anonima (3) Integrated Services Network, LP Partnership DE Instituto Privado de Nefrologia S.A. Sociedad Anonima* (7) Instituto Renal Tucuman S.A. Sociedad Anonima (4) Ionica S.r.l. Sociedad de responsibilidad limitada (6) Irno Dial S.r.l. Sociedad de responsibilidad limitada (6) Kenner Regional Dialysis Partnership Partnership LA Lincoln Park Dialysis Services, Inc. Corporation IL
SUBSIDIARIES OF THE COMPANY
NAME STRUCTURE JURISDICTION OF INCORPORATION Los Angeles Dialysis Center Partnership CA Mason-Dixon Dialysis Facility, Inc. Corporation MD MD Investments, LLC Partnership VA Moncrief Dialysis Center/Total Renal Care, LP Partnership# DE Nedial S.r.l. Sociedad de responsibilidad limitada (6) Nedial Napoli, S.r.l. Sociedad de responsibilidad limitada (6) Nefrologia S.r.l. Sociedad de responsibilidad limitada (6) Nefrologia Escobar S.A. Sociedad Anonima (3) New Dial S.r.l. Sociedad de responsibilidad limitada (6) Omnia Dial S.r.l. Sociedad de responsibilidad limitada (6) Open Access Sonography Corporation FL Pacific Coast Dialysis Center Partnership CA Pacific Dialysis Partnership Partnership GU Peninsula Dialysis Center, Inc. Corporation VA Peralta Renal Center Partnership+ CA Piedmont Dialysis Center Partnership+ CA Renal Diagnostic Laboratories, Inc. Corporation DE Renal Treatment Centers, Inc. Corporation DE Renal Treatment Centers - California Corporation DE Renal Treatment Centers - Hawaii, Inc. Corporation DE Renal Treatment Centers - Illinois, Inc. Corporation DE Renal Treatment Centers - Management Acquisition, Inc. Corporation DE Renal Treatment Centers - Mid-Atlantic, Inc. Corporation DE Renal Treatment Centers - Northeast, Inc. Corporation DE Renal Treatment Centers - Southeast, Inc. Corporation DE Renal Treatment Centers - West, Inc. Corporation DE RTC Argentina S.A. Sociedad Anonima (3) RTC Holdings, Inc. Corporation DE RTC Holdings International, Inc. Corporation DE RTC Supply, Inc. Corporation DE RTC - Texas Acquisition, Inc. Corporation TX RTC TN, Inc. Corporation DE Rusdial S.r.l. Sociedad de responsibilidad limitada (6) Salaria S.r.l. Sociedad de responsibilidad limitada (6) San Cristobal - TRC Dialysis Center Partnership PR San Gabriel Valley Partnership Partnership CA Sunrise Dialysis Partnership Partnership+ CA Tiburtina S.r.l. Sociedad de responsibilidad limitada (6) Total Acute Kidney Care, Inc. Corporation FL Total Renal Care Acquisition Corp. Corporation DE Total Renal Care, Inc. Corporation CA Total Renal Care Colorado, Inc. Corporation CO Total Renal Care (Denham), Limited Corporation (5)
SUBSIDIARIES OF THE COMPANY
NAME STRUCTURE JURISDICTION OF INCORPORATION Total Renal Care Hollywood Partnership Partnership CA Total Renal Care International Limited Corporation (5) Total Renal Care Italia S.r.l. Sociedad de responsibilidad limitada (6) Total Renal Care New York, Inc. Corporation NY Total Renal Care North Carolina, LLC Limited Liability Company DE Total Renal Care Provo, L.L.C. Limited Liability Company DE Total Renal Care Puerto Rico, Inc. Corporation PR Total Renal Care Utah, LLC Limited Liability Company DE Total Renal Care (UK) Limited Corporation (5) Total Renal Care Texas Limited Partnership Limited Partnership DE Total Renal Care West, Inc. Corporation DE Total Renal Laboratories, Inc. Corporation FL Total Renal Research Institute, Inc. Corporation DE Total Renal Support Services, Inc. Corporation DE Total Renal Support Services of North Carolina, LLC Limited Liability Company DE TRC Dyker Heights, L.P. Limited Partnership NY TRC El Paso Limited Partnership Partnership DE TRC Four Corners Dialysis Clinics, LLC Partnership NM TRC - Georgetown Regional Dialysis LLC Limited Liability Company DC TRC Germany GmbH Gesellschaft mit beschrankter Haftung (1) TRC - Indiana LLC Limited Liability Company IN TRC - Richmond Renal Care, LLC Limited Liability Company VA TRC - Petersburg, LLC Limited Liability Company DE TRC - Rogosin Group, L.P. Limited Partnership NY Tri-City Dialysis Center, Inc. Corporation VA Unidad Nefrologica Bustamante S.A. Sociedad Anonima (3) University Park Dialysis Partnership Partnership CA Vega S.r.l. Sociedad de responsibilidad de limitada (6) Wilshire Dialysis Partnership Partnership CA - ------------------------
(1) Germany (2) Province of Mendoza, Argentina (3) City of Buenos Aires, Argentina (4) Province of Tucuman, Argentina (5) United Kingdom (6) Italy (7) Province of Santiago del Estero, Argentina * These entities were each originally a Sociedad de Responsibilidad Limitada (S.r.l.), but were each transformed into a Sociedad Anonima prior to acquisition by RTC Argentina S.A. The transformation in each case is still in the process of being registered before the applicable Public Register of Commerce. + Wholly owned by Total Renal Care, Inc. with an affiliated entity. # Minority subsidiaries not consolidated for accounting purposes EX-23.1 11 CONSENT OF PRICEWATERHOUSECOOPERS LLP 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, No. 333- 75361, No. 333-56149, No. 333-30734, and No. 333-30736) and Form S-3 (No. 333-69227) of Total Renal Care Holdings, Inc. of our report dated March 22, 2000, relating to the financial statements, which appears in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 22, 2000 relating to the Financial Statement Schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Seattle, Washington March 28, 2000 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 12-MOS 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 DEC-31-1997 JAN-01-1999 JAN-01-1998 JAN-01-1997 DEC-31-1999 DEC-31-1998 DEC-31-1997 107,981,000 41,487,000 0 0 0 0 457,644,000 478,670,000 0 67,315,000 61,848,000 0 32,916,000 23,470,000 0 654,748,000 566,514,000 0 427,109,000 341,446,000 0 141,660,000 108,109,000 0 2,056,718,000 1,911,619,000 0 1,698,554,000 178,450,000 0 470,000,000 470,000,000 0 0 0 0 0 0 0 81,000 81,000 0 326,323,000 473,783,000 0 2,056,718,000 1,911,619,000 0 0 0 0 1,445,351,000 1,203,738,000 758,403,000 0 0 0 1,509,333,000 1,068,825,000 646,816,000 0 0 0 133,253,000 44,858,000 28,899,000 110,797,000 84,003,000 29,082,000 (181,826,000) 48,641,000 81,178,000 (34,570,000) 38,449,000 35,654,000 (147,256,000) 10,192,000 45,524,000 0 0 0 0 12,744,000 0 0 6,896,000 0 (147,256,000) (9,448,000) 45,524,000 (1.81) (0.12) 0.59 (1.81) (0.12) 0.57
-----END PRIVACY-ENHANCED MESSAGE-----