-----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, RfSELQWXinamQm4Gdz2W17ft+25Asxp+G9rgSONSnDEcQPsaUE2RCpVUChkuDSt+ 9dCBhu0YQ0sjosvstXd40Q== 0000898430-99-003313.txt : 19990817 0000898430-99-003313.hdr.sgml : 19990817 ACCESSION NUMBER: 0000898430-99-003313 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOTAL RENAL CARE HOLDINGS INC CENTRAL INDEX KEY: 0000927066 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 510354549 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04034 FILM NUMBER: 99693636 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-Q 1 FORM 10-Q DATED JUNE 30, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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) FOR THE QUARTER ENDED JUNE 30, 1999 Delaware 51-0354549 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 21250 Hawthorne Blvd., Suite 800 Torrance, California 90503-5517 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 792-2600 Not Applicable (Former name or former address, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [_] No [_] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
Outstanding at Class August 1, 1999 ----- ----------------- Common Stock, Par Value $0.001.......................... 81,182,310 shares
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TOTAL RENAL CARE HOLDINGS, INC. Unless otherwise indicated in this Form 10-Q, "we," "us," "our" and similar terms refer to Total Renal Care Holdings, Inc. and its subsidiaries. INDEX
Page No. ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998................................................... 1 Condensed Consolidated Statements of Income and Comprehensive Income for the three months and six months ended June 30, 1999 and June 30, 1998 ............................................................... 2 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and June 30, 1998............................... 3 Notes to Condensed Consolidated Financial Statements................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21 Risk Factors............................................................ 23 PART II. OTHER INFORMATION Item 1. Legal Procedings............................................... 30 Item 6. Exhibits and Reports on Form 8-K............................... 30 Signatures.............................................................. 31
- --------------------- Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not applicable. i TOTAL RENAL CARE HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 -------------- -------------- ASSETS ------ Current assets: Cash and cash equivalents.................... $ 24,673,000 $ 41,487,000 Patient accounts receivable, less allowance for doubtful accounts of $103,578,000 and $61,848,000, respectively................... 444,239,000 416,472,000 Deferred income taxes........................ 54,102,000 31,917,000 Other current assets......................... 69,499,000 50,395,000 -------------- -------------- Total current assets....................... 592,513,000 540,271,000 Property and equipment, net.................... 273,785,000 233,337,000 Notes receivable and other long-term assets.... 79,530,000 57,578,000 Intangible assets, net of accumulated amortization of $147,350,000 and $114,982,000, respectively.................................. 1,160,573,000 1,084,395,000 -------------- -------------- Total assets............................... $2,106,401,000 $1,915,581,000 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term obligations..... $ 23,633,000 $ 21,847,000 Other current liabilities.................... 155,486,000 152,617,000 -------------- -------------- Total current liabilities.................. 179,119,000 174,464,000 Long term debt and other....................... 1,409,077,000 1,227,671,000 Deferred income taxes.......................... 14,022,000 8,212,000 Minority interests............................. 24,697,000 23,422,000 Stockholders' equity: Preferred stock, ($0.001 par value; 5,000,000 shares authorized; none outstanding)........ Common stock, voting, ($0.001 par value; 195,000,000 shares authorized; 81,182,000 and 81,030,000 shares issued and outstanding, respectively).................. 81,000 81,000 Additional paid-in capital................... 415,884,000 413,095,000 Notes receivable from stockholders........... (371,000) (356,000) Accumulated other comprehensive income....... (4,059,000) Retained earnings............................ 67,951,000 68,992,000 -------------- -------------- Total stockholders' equity................. 479,486,000 481,812,000 -------------- -------------- Total liabilities and stockholders' equity.................................... $2,106,401,000 $1,915,581,000 ============== ==============
See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 1 TOTAL RENAL CARE HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Three months and six months ended June 30, 1999 and 1998
Three months Six months -------------------------- -------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ STATEMENTS OF INCOME Net operating revenues.. $352,993,000 $288,350,000 $705,237,000 $547,099,000 Operating expenses: Facilities............ 248,530,000 183,324,000 483,763,000 350,319,000 General and administrative....... 30,541,000 17,605,000 53,278,000 34,515,000 Provision for doubtful accounts............. 35,707,000 7,779,000 46,185,000 14,542,000 Depreciation and amortization......... 27,392,000 22,805,000 54,417,000 42,399,000 Write-off of investments and loans................ 16,600,000 16,600,000 Merger and related costs................ 79,435,000 ------------ ------------ ------------ ------------ Total operating expenses............ 358,770,000 231,513,000 654,243,000 521,210,000 Operating income (loss)............... (5,777,000) 56,837,000 50,994,000 25,889,000 Interest expense, net of capitalized interest... (24,370,000) (16,544,000) (47,137,000) (31,061,000) Interest rate swap-- early termination costs.................. (9,823,000) (9,823,000) Interest income and other.................. 1,934,000 1,022,000 3,264,000 2,664,000 ------------ ------------ ------------ ------------ Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of change in accounting principle............ (28,213,000) 31,492,000 7,121,000 (12,331,000) Income taxes (benefit).. (9,699,000) 12,088,000 3,323,000 12,960,000 ------------ ------------ ------------ ------------ Income (loss) before minority interests, extraordinary item and cumulative effect of change in accounting principle............ (18,514,000) 19,404,000 3,798,000 (25,291,000) Minority interests in income of consolidated subsidiaries........... 2,521,000 1,565,000 4,839,000 2,958,000 ------------ ------------ ------------ ------------ Income (loss) before extraordinary item and cumulative effect of change in accounting principle............ (21,035,000) 17,839,000 (1,041,000) (28,249,000) Extraordinary loss, net of tax of $6,087,000 and $7,688,000, respectively........... 9,932,000 12,744,000 Cumulative effect of change in accounting principle, net of tax of $4,300,000.......... 6,896,000 ------------ ------------ ------------ ------------ Net income (loss)....... $(21,035,000) $ 7,907,000 $ (1,041,000) $(47,889,000) ============ ============ ============ ============ Earnings (loss) per common share: Income (loss) before extraordinary item and cumulative effect of change in accounting principle............ $ (0.26) $ 0.22 $ (0.01) $ (0.35) Extraordinary loss, net of tax........... (0.12) (0.16) Cumulative effect of change in accounting principle, net of tax.................. (0.09) ------------ ------------ ------------ ------------ Net income (loss)..... $ (0.26) $ 0.10 $ (0.01) $ (0.60) ============ ============ ============ ============ Weighted average number of common shares outstanding............ 81,149,000 80,714,000 81,125,000 79,692,000 ============ ============ ============ ============ Earnings (loss) per common share--assuming dilution: Income (loss) before extraordinary item and cumulative effect of change in accounting principle............ $ (0.26) $ 0.22 $ (0.01) $ (0.35) Extraordinary loss, net of tax........... (0.12) (0.16) Cumulative effect of change in accounting principle, net of tax.................. (0.09) ------------ ------------ ------------ ------------ Net income (loss)..... $ (0.26) $ 0.10 $ (0.01) $ (0.60) ============ ============ ============ ============ Weighted average number of common shares and equivalents outstanding--assuming dilution............... 81,149,000 87,263,000 81,125,000 79,692,000 ============ ============ ============ ============ STATEMENTS OF COMPREHENSIVE INCOME Net income (loss)..... $(21,035,000) 7,907,000 (1,041,000) (47,889,000) Other comprehensive income: Foreign currency translation......... (3,723,000) (4,059,000) ------------ ------------ ------------ ------------ Comprehensive income (loss)............... $(24,758,000) $ 7,907,000 $ (5,100,000) $(47,889,000) ============ ============ ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 2 TOTAL RENAL CARE HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 1999 and 1998
Six months ----------------------------- 1999 1998 ------------ --------------- Cash flows from operating activities: Net loss...................................... $ (1,041,000) $ (47,889,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............... 54,417,000 42,399,000 Extraordinary item, net of tax.............. 12,744,000 Provision for doubtful accounts............. 46,185,000 14,542,000 Write-off of investments and loans.......... 16,600,000 Change in accounting principle, net of tax.. 6,896,000 Compensation expense from stock option exercise................................... 16,000,000 Changes in working capital.................. (85,210,000) (70,903,000) ------------ --------------- Total adjustments......................... 31,992,000 21,678,000 ------------ --------------- Net cash provided by (used in) operating activities............................. 30,951,000 (26,211,000) ------------ --------------- Cash flows from investing activities: Purchases of property and equipment........... (61,799,000) (35,842,000) Cash paid for acquisitions, net of cash acquired..................................... (127,627,000) (216,669,000) Other......................................... (37,725,000) (34,268,000) ------------ --------------- Net cash used in investing activities... (227,151,000) (286,779,000) ------------ --------------- Cash flows from financing activities: Borrowings from bank credit facility.......... 181,875,000 1,397,000,000 Principal payments on long-term obligations... (7,237,000) (1,114,070,000) Net proceeds from sale of common stock........ 2,033,000 19,615,000 Other......................................... 2,715,000 5,395,000 ------------ --------------- Net cash provided by financing activities............................. 179,386,000 307,940,000 ------------ --------------- Net decrease in cash............................ (16,814,000) (5,050,000) Cash at beginning of period..................... 41,487,000 6,143,000 ------------ --------------- Cash at end of period........................... $ 24,673,000 $ 1,093,000 ============ ===============
See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 3 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. In our opinion the interim financial information reflects all normal recurring adjustments which are necessary to state fairly our consolidated financial position, results of operations, and cash flows as of and for the periods indicated. We presume that users of the interim financial information have read or have access to our audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies or recent significant events, may be determined in that context. Accordingly, we have omitted footnote and other disclosures which would substantially duplicate the disclosures contained in our Form 10-K for the year ended December 31, 1998. We have made certain reclassifications of prior period amounts to conform to current period classifications. The interim financial information herein is not necessarily representative of a full year's operations. The information related to the activity for the three months and six months ended June 30, 1998 has been restated for certain reclassifications and adjustments. The accrued merger and related costs initially reported by us in the first six months of 1998 amounted to $92,835,000. We have revised our financial reporting relating to certain costs initially included in our merger and related costs and accrual resulting in a decrease in merger and related costs of $13,400,000, partially offset by an increase to facilities operating costs of $1,700,000 and an increase to depreciation and amortization of $590,000 for a net decrease to our first quarter 1998 operating expenses of $11,110,000 and a net increase to our second quarter 1998 operating expenses of $2,870,000. These reclassifications and adjustments are more fully described in our Form 10-K for the year ended December 31, 1998. Our Form 10-Q for the three months ended March 31, 1999 will be restated for adjustments to correct for previously unrecorded amounts due to suppliers. Our operating expenses and other current liabilities for the three months ended March 31, 1999 increased by $13,150,000 and net income for the same period is reduced by $7,890,000, net of tax of $5,260,000. The additional expenses are reflected in the interim financial information for the six months ended June 30, 1999 in this report. 2. On February 27, 1998, we acquired Renal Treatment Centers, Inc., or RTC, in a merger transaction. The merger was accounted for as a pooling of interests. As a result, we restated our condensed consolidated financial statements to include RTC for all periods presented. We had no transactions with RTC prior to the combination and no adjustments were necessary to conform RTC's accounting policies to ours. Merger and related costs recorded during the first six months of 1998 in connection with our merger with RTC included costs associated with certain of the integration activities, transaction costs and costs of employee severance and amounts due under employment agreements and other compensation programs. A summary of merger and related costs and accrual activity through June 30, 1999 is as follows:
Severance Direct and Costs to Transaction Employment Integrate Costs Costs Operations Total ------------ ------------ ------------ ------------ Initial expense......... $ 21,580,000 $ 41,960,000 $ 15,895,000 $ 79,435,000 Amounts utilized in 1998................... (22,885,000) (37,401,000) (13,137,000) (73,423,000) Adjustment of estimates.............. 1,305,000 (959,000) (1,593,000) (1,247,000) ------------ ------------ ------------ ------------ Accrual, December 31, 1998................... $ 3,600,000 1,165,000 4,765,000 ============ Amounts utilized--1st quarter 1999........... (600,000) (90,000) (690,000) ------------ ------------ ------------ Accrual, March 31, 1999................... 3,000,000 1,075,000 4,075,000 Amounts utilized--2nd quarter 1999........... (90,000) (90,000) ------------ ------------ ------------ Accrual, June 30, 1999.. $ 3,000,000 $ 985,000 $ 3,985,000 ============ ============ ============
4 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The remaining balance of severance and employment costs represents tax gross- up payments expected to be paid by the end of 1999. The remaining balance of costs to integrate operations represents remaining lease payments on RTC's vacant laboratory lease space. 3. During the six months ended June 30, 1999, we purchased 35 centers and additional interests from minority partners in certain of our partnerships. Total cash consideration for these transactions was approximately $127.6 million. We accounted for these transactions under the purchase method. The cost of these acquisitions has been allocated primarily to intangible assets such as patient charts, noncompete agreements and goodwill to the extent the purchase price exceeds the value of the tangible assets, primarily capital equipment. The results of operations on a pro forma basis, as though the above acquisitions had been combined with us at the beginning of each period presented for the six months ended June 30, are as follows:
1999 1998 ------------ ------------ Pro forma net operating revenues................ $718,380,000 $576,705,000 Pro forma loss before extraordinary item and cumulative effect of change in accounting principle...................................... $ (364,000) $(27,036,000) Pro forma net loss.............................. $ (364,000) $(46,676,000) Pro forma loss per share before extraordinary item and cumulative effect of change in accounting principle: Basic......................................... $ 0.00 $ (0.59) Assuming dilution............................. $ 0.00 $ (0.59)
4. In March 1998, Statement of Position No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, or SOP 98-1, was issued. We adopted SOP 98-1 in the first quarter of 1999, effective January 1, 1999. SOP 98-1 defines internal-use software and identifies whether internal- use software costs that we incur must be expensed or capitalized. Costs that should be capitalized include external direct costs of materials and services, payroll and payroll related costs for employees directly associated with the internal-use software projects and certain interest costs incurred in the application development stage. All other internal-use software costs are expensed as incurred. The impact of the adoption of SOP 98-1 was not material to our operations. In April 1998, Statement of Position No. 98-5, Reporting on the Costs of Start-up Activities, or SOP 98-5, was issued. We adopted SOP 98-5 effective January 1, 1998. SOP 98-5 requires that pre-opening and organization costs, incurred in conjunction with facility pre-opening activities, which previously had been treated as deferred costs and amortized over five years, should be expensed as incurred. As a result of the adoption of SOP 98-5, all remaining unamortized pre-opening, development and organizational costs existing prior to January 1, 1998 of $11,196,000 were recognized, net of tax of $4,300,000, as the cumulative effect of a change in accounting principle in the first quarter of 1998. 5 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. The reconciliation of the numerators and denominators used to calculate earnings (loss) per common share for all periods presented is as follows:
Three months ended Six months ended June 30, June 30, ------------------------- ------------------------- 1999 1998 1999 1998 ------------ ----------- ----------- ------------ Income (loss) before extraordinary item and cumulative effect of change in accounting principle............... $(21,035,000) $17,839,000 $(1,041,000) $(28,249,000) Interest, net of tax resulting from dilutive effect of convertible debt.................... 1,055,000 ------------ ----------- ----------- ------------ Adjusted income (loss)... (21,035,000) 18,894,000 (1,041,000) (28,249,000) Extraordinary loss, net of tax.................. 9,932,000 12,744,000 Cumulative effect of change in accounting principle, net of tax... 6,896,000 ------------ ----------- ----------- ------------ Income (loss)--assuming dilution................ $(21,035,000) $ 8,962,000 $(1,041,000) $(47,889,000) ============ =========== =========== ============ Applicable common shares Average outstanding during the period..... 81,176,000 80,724,000 81,149,000 79,703,000 Reduction in shares in connection with notes receivable from employees............... (27,000) (10,000) (24,000) (11,000) ------------ ----------- ----------- ------------ Weighted average number of shares outstanding for use in computing earnings per share...... 81,149,000 80,714,000 81,125,000 79,692,000 Dilutive effect of outstanding stock options................. 1,670,000 Dilutive effect of convertible debt........ 4,879,000 ------------ ----------- ----------- ------------ Weighted average number of shares and equivalents outstanding for use in computing earnings per share-- assuming dilution....... 81,149,000 87,263,000 81,125,000 79,692,000 ============ =========== =========== ============ Earnings (loss) per common share: Income (loss) per common share before extraordinary item and cumulative effect of change in accounting principle............. $ (0.26) $ 0.22 $ (0.01) $ (0.35) Extraordinary loss, net of tax................ (0.12) (0.16) Cumulative effect of change in accounting principle, net of tax................... (.09) ------------ ----------- ----------- ------------ Net income (loss) per common share............ $ (0.26) $ 0.10 $ (0.01) $ (0.60) ============ =========== =========== ============ Earnings (loss) per common share--assuming dilution: Income (loss) before extraordinary item and cumulative effect of change in accounting principle............. $ (0.26) $ 0.22 $ (0.01) $ (0.35) Extraordinary loss, net of tax................ (0.12) (0.16) Cumulative effect of change in accounting principle, net of tax................... (0.09) ------------ ----------- ----------- ------------ Net income (loss) per common share--assuming dilution................ $ (0.26) $ 0.10 $ (0.01) $ (0.60) ============ =========== =========== ============
Included in the above calculation for the three months ended June 30, 1998, is the effect of RTC's 5 5/8% convertible subordinated notes due 2006 treated on an "as converted" basis; however, the effect is not included for all other periods presented because it was anti-dilutive. Our 7% convertible notes due 2009 were also anti-dilutive for all periods presented. 6 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. In conjunction with the refinancing of our credit facilities, our two existing forward interest rate swap agreements with notional amounts of $100,000,000 and $200,000,000 were canceled in April 1998. The loss associated with the early cancellation of these swaps was approximately $9,823,000. During the quarter ended June 30, 1998, we entered into forward interest rate cancelable swap agreements, with a combined notional amount of $800,000,000. The lengths of the agreements are between three and ten years with cancellation clauses at the swap holders' option from one to seven years. The underlying blended rate is fixed at approximately 5.65% plus an applicable margin based upon our current leverage ratio. At June 30, 1999, the effective interest rate for borrowings under the swap agreements was 8.53%. During the second quarter of 1999, we received notification from two of our swap agreement counterparties that they had exercised their right to cancel agreements in the aggregate notional amount of $100,000,000. The remaining $700,000,000 of swap agreements with maturities from the years 2003 through 2008 and cancellation option dates from the years 2001 through 2005 are still in effect. 7. In June 1996, RTC issued $125,000,000 of 5 5/8% convertible subordinated notes due 2006. These notes are convertible, at the option of the holder, at any time after August 12, 1996 through maturity, unless previously redeemed or repurchased, into our common stock at a conversion price of $25.62 principal amount per share, subject to certain adjustments. All or any part of these notes are redeemable at our option on at least 15 and not more than 60 days' notice as a whole or, from time to time, in part at redemption prices ranging from 103.94% to 100% of the principal amount thereof, depending on the year of redemption, together with accrued interest to, but excluding, the date fixed for redemption. TRCH has guaranteed these notes. 7 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following is summarized financial information of RTC:
June 30, December 31, 1999 1998 ------------ ------------ Cash and cash equivalents......................... $ 746,000 $ 5,396,000 Accounts receivable, net.......................... 131,912,000 130,129,000 Other current assets.............................. 20,348,000 19,106,000 ------------ ------------ Total current assets............................ 153,006,000 154,631,000 Property and equipment, net....................... 92,990,000 75,641,000 Intangible assets, net............................ 416,791,000 406,562,000 Other assets...................................... 8,241,000 9,249,000 ------------ ------------ Total assets.................................... $671,028,000 $646,083,000 ============ ============ Current liabilities (includes intercompany payable to TRCH of $278,452,000 and $306,628,000, respectively).................................... $366,883,000 $352,753,000 Long-term debt.................................... 128,495,000 125,199,000 Stockholder's equity.............................. 175,650,000 168,131,000 ------------ ------------ Total liabilities and stockholder's equity...... $671,028,000 $646,083,000 ============ ============
Three months ended Six months ended June 30, June 30, ------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net operating revenues... $125,900,000 $123,990,000 $246,302,000 $238,651,000 Total operating expenses................ 112,137,000 99,874,000 226,395,000 236,281,000 ------------ ------------ ------------ ------------ Operating income......... 13,763,000 24,116,000 19,907,000 2,370,000 Interest expense, net.... 1,745,000 1,201,000 3,547,000 4,789,000 ------------ ------------ ------------ ------------ Income before income taxes................... 12,018,000 22,915,000 16,360,000 (2,419,000) Income taxes............. 4,807,000 5,121,000 8,841,000 7,102,000 ------------ ------------ ------------ ------------ Income (loss) before extraordinary item and cumulative effect of change in accounting principle............. $ 7,211,000 $ 17,794,000 $ 7,519,000 $ (9,521,000) ============ ============ ============ ============
8. In November 1998, we issued $345,000,000 of 7% convertible subordinated notes due 2009, or the 7% notes, in a private placement offering. The 7% notes are convertible, at the option of the holder, at any time into our common stock at a conversion price of $32.81 per share. We may redeem the 7% notes on or after November 15, 2001. The 7% notes are general, unsecured obligations junior to all of our existing and future senior debt and, effectively, all existing and future liabilities of us and our subsidiaries. 8 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We subsequently filed a registration statement covering the resale of the 7% notes which has not yet been declared effective by the SEC. As further described in the registration statement, commencing May 18, 1999, we are accruing certain monetary penalties on a weekly basis until the registration statement is declared effective, as follows:
Days following Weekly Cumulative 180 days after closing Penalty Penalty ---------------------- ------- ---------- 0-90..................... $17,250 $ 207,000 91-180................... 34,500 656,000 181-270.................. 51,750 1,328,000 271-360.................. 69,000 2,225,000 Thereafter............... 86,250
Payment of these accrued penalties is due upon the next interest due date. The accrued penalty as of June 30, 1999 was $103,500. 9. Contingencies Our Florida-based laboratory subsidiary is the subject of a third-party carrier review relating to certain claims submitted by us for Medicare reimbursement. We understand that similar reviews have been undertaken with respect to other providers' laboratory activities in Florida and elsewhere. The carrier has alleged that approximately 97% of the tests performed by this laboratory for the review periods the carrier has identified, from January 1995 to April 1996, and 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 also has suspended all payments of claims related to this laboratory, regardless of when the laboratory performed the tests. The carrier has withheld approximately $23 million as of June 30, 1999. In addition the carrier has informed the local offices of the Department of Justice, or DOJ, and the Department of Health and Human Services, or HHS, of this matter, and we are cooperating with DOJ and HHS. We have consulted with outside counsel, reviewed our records, are disputing the overpayment determinations vigorously and have provided extensive 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. The hearing regarding the initial review period from January 1995 to April 1996 was held in late July 1999. We expect the hearing officer to render a decision by mid-November 1999. We have received minimal responses from the carrier to our repeated requests for clarification and information regarding the continuing payment suspension. 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. We initiated this action only after serious consideration and the unanimous approval of our board of directors, and we believed it was necessary to bring a prompt resolution to this payment dispute. The court dismissed our complaint because we did not exhaust all administrative remedies. We are unable to determine at this time: . When this matter will be resolved or when this laboratory's payment suspension will be lifted; . What, if any, of this laboratory's claims will be disallowed; 9 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) . What action the carrier, DOJ or HHS may take with respect to this matter; . Whether additional periods may be reviewed by the carrier; or . Any other outcome of this investigation. Any determination adverse to us could have an adverse impact on our business, results of operations, financial condition, or cash flows. Following the announcement on February 18, 1999 of our preliminary results for the fourth quarter of fiscal 1998 and the full year then ended, several class action lawsuits were filed against us and certain of our officers in the U.S. District Court for the Central District of California. The complaints are similar and allege violations of federal securities laws arising from alleged false and misleading statements primarily regarding our accounting for the integration of RTC into TRCH and request unspecified monetary damages. The lawsuits have been consolidated into a single action. We believe that all of the claims are without merit and we intend to defend ourselves vigorously. We anticipate that the attorneys' fees and related costs of defending these lawsuits should be covered primarily by our directors and officers insurance policies and we believe that any additional costs will not have a material impact on our financial condition, results of operations or cash flows. In addition, we are subject to claims and suits in the ordinary course of business for which we believe most will be covered by insurance. We do not believe that the ultimate resolution of these additional pending proceedings, whether the underlying claims are covered by insurance or not, will have a material adverse effect on our financial condition, results of operations or cash flows. 10. Subsequent to June 30, 1999 the lenders under our credit facilities have waived compliance with a financial covenant that requires us to maintain a specified leverage ratio. This waiver expires March 15, 2000. The lenders also have waived our violation of a covenant that placed a limit on our aggregate borrowings for international acquisitions, which we had exceeded. The terms of the waiver: . Reduce our permitted borrowings under the revolving credit facility from $950,000,000 to $650,000,000 during the waiver period; . Commencing after July 1, 1999, limit the amount of additional borrowings that we may use for acquisitions, de novo developments and expansion or relocation of existing dialysis centers; . Accelerated the maturity dates on the term loan and revolving credit facilities by two years, to March 31, 2006 and March 31, 2003, respectively; and . Increased the applicable margins used to determine the interest rates for our borrowings under the credit facilities. Other than the issues specifically addressed in the waiver agreement, all other covenants and conditions of the credit facilities remain unchanged. The outstanding balances on our term loan and revolving credit facilities at June 30, 1999 were $396,000,000 and $533,500,000, respectively. As modified by the waiver agreement, borrowings under the credit facilities generally bear interest at one of two floating rates selected by us: . The Alternate Base Rate, defined as the higher of The Bank of New York's prime rate or the federal funds rate plus 0.5%, plus a margin ranging from 0% to 1.5% for borrowings under the revolving credit facility and 1.0% to 1.75% for borrowings under the term loan facility; or . Adjusted LIBOR, defined as the 30-, 60-, 90- or 180-day London Interbank Offered Rate, adjusted for statutory reserves, plus a margin ranging from 1.25% to 2.75% for borrowings under the revolving credit facility and 2.25% to 3.00% for borrowings under the term loan facility. 10 TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The applicable margin used in determining the interest rate is based on our leverage ratio. Currently, the applicable margin is at the top of the ranges listed above. 11. On July 1, 1999, we completed an acquisition of seven dialysis facilities for consideration of approximately $17,500,000. 12. During the second quarter of 1999, we provided an allowance of $16,600,000 against loans to, and investments in, several dialysis related businesses which we are unlikely to recover as a result of recent deterioration in the financial condition of these businesses. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. As described in Note 2 to our condensed consolidated financial statements, we acquired Renal Treatment Centers, Inc., or RTC, on February 27, 1998 in a merger accounted for as a pooling of interests. Accordingly, our condensed consolidated financial statements have been restated to include RTC for all periods presented. The information related to the activity for the three months and six months ended June 30, 1998 has been restated for certain reclassifications and adjustments. The accrued merger and related costs initially reported by us in the first and second quarters of 1998 amounted to $92,835,000. We have revised our financial reporting relating to certain costs initially included in our merger and related costs and accrual resulting in a decrease in merger and related costs of $13,400,000, partially offset by an increase to facilities operating costs of $1,700,000 and an increase to depreciation and amortization of $590,000 for a net decrease to our first quarter 1998 operating expenses of $11,110,000 and a net increase to our second quarter 1998 operating expenses of $2,870,000. These reclassifications and adjustments are more fully described in our Form 10-K for the year ended December 31, 1998. Our Form 10-Q for the three months ended March 31, 1999 will be restated for adjustments to correct for previously unrecorded amounts due to suppliers. Our operating expenses and other current liabilities for the three months ended March 31, 1999 increased by $13,150,000 and net income for the same period is reduced by $7,890,000, net of tax of $5,260,000. The additional expenses are reflected in the interim financial information for the six months ended June 30, 1999 in this report. Net operating revenues Net operating revenues are derived primarily from five sources: (a) outpatient facility hemodialysis services; (b) ancillary services, including the administration of erythropoetin, or EPO, and other intravenous pharmaceuticals, clinical laboratory services, oral pharmaceutical products and other ancillary services; (c) home dialysis services and related products; (d) inpatient hemodialysis services provided to hospitalized patients pursuant to arrangements with hospitals; and (e) international operations. Additional revenues are derived from the provision of dialysis facility management services to certain subsidiaries and affiliated and unaffiliated dialysis centers. Our dialysis and ancillary services are reimbursed primarily under the Medicare ESRD program in accordance with rates established by HCFA. Payments are also provided by other third party payors, generally at rates higher than those reimbursed by Medicare for up to the first 33 months of treatment as mandated by law. Rates paid for services provided to hospitalized patients are negotiated with individual hospitals. We maintain a usual and customary fee schedule for our dialysis treatment and other patient services. We often do not realize our usual and customary rates, however, because of negotiated limitations on the amounts we can bill to or collect from the payors for our services. We generally bill the Medicare and Medicaid programs at net realizable rates determined by applicable fee schedules for these programs, which are established by statute or regulation. We bill most non-governmental payors, including managed care payors with which we have contracted, at our usual and customary rates. Since we bill most non- governmental payors at our usual and customary rates, but often expect to receive payments at the lower contracted rates, we also record a contractual allowance in order to record expected net realizable revenue for services provided. This process involves estimates and we record revisions to these estimates in subsequent periods as they are determined to be necessary. Results of operations Three months ended June 30, 1999 compared to the three months ended June 30, 1998 Net operating revenues. Net operating revenues increased $64,643,000 to $352,993,000 in the second quarter of 1999 from $288,350,000 in the second quarter of 1998, representing a 22% increase. Of this increase, $68,087,000 was due to increased treatments, of which $51,840,000 was from acquisitions 12 consummated after the second quarter of 1998, $20,354,000 was from de novo developments commencing operations after the second quarter of 1998 and the remainder was from existing facilities as of June 30, 1998. The difference between the $68,087,000 described above and the total change of $64,643,000 resulted from an overall decrease in net operating revenues per treatment which decreased from $243.01 in the second quarter of 1998 to $240.66 in the second quarter of 1999. This decrease in net operating revenue per treatment primarily was attributable to a $17,843,000 overall decline in the rates we receive for our dialysis services. The decline in rates is the result of increasing our contractual allowances, primarily related to billings from our Tacoma office, to reflect recent trends in collection experience. This decline was partially offset by an increase in ancillary services intensity and pricing of $11,390,000, primarily in the administration of EPO of $11,160,000, an increase of $634,000 in corporate and ancillary program fees, primarily from the expansion of laboratory services to former RTC facilities of $443,000; and an increase in non-patient services revenue of $2,375,000 from the increase in dialysis facility management services to facilities that we do not own or control. Facility operating expenses. Facility operating expenses consist of costs and expenses specifically attributable to the operation of dialysis facilities, including operating and maintenance costs of such facilities, equipment, direct labor, and supply and service costs relating to patient care. Facility operating expenses increased $65,206,000 to $248,530,000 in the second quarter of 1999 from $183,324,000 in the second quarter of 1998 and as a percentage of net operating revenues, facility operating expenses increased to 70.4% in the second quarter of 1999 from 63.6% in the second quarter of 1998. This increase was primarily attributable to increased usage in EPO and other medical supplies and the impact of a lower net revenue per treatment. Additionally, during the second quarter of 1999, a provision of $4,500,000 was recorded for the resolution of claims made by vendors during the quarter for goods and services provided in earlier periods. General and administrative expenses. General and administrative expenses include headquarters expense and administrative, legal, quality assurance, information systems and centralized accounting support functions. General and administrative expenses increased $12,936,000 to $30,541,000 in the second quarter of 1999 from $17,605,000 in the second quarter of 1998 and as a percentage of net operating revenues, general and administrative expenses increased to 8.7% in the second quarter of 1999 from 6.1% in the second quarter of 1998. This increase was primarily attributable to increased staff at both our business and corporate offices and the impact of a lower net revenue per treatment. Additionally, general and administrative expense for the second quarter of 1999 includes approximately $2,500,000 of expenses related to costs of business purchase transactions we will not consummate and operating costs associated with a corporate jet we are no longer using. Provision for doubtful accounts. The provision for doubtful accounts is influenced by the amount of net operating revenues generated from all payor sources in addition to the relative percentage of accounts receivable by aging category and collection trends. The provision for doubtful accounts increased $27,928,000 to $35,707,000 in the second quarter of 1999 from $7,779,000 in the second quarter of 1998. As a percentage of net operating revenues, the provision for doubtful accounts increased to 10.1% in the second quarter of 1999 from 2.7% in the second quarter of 1998. This is primarily a result of a $24,000,000 increase in the provision for doubtful accounts relating to patient accounts receivable billed from our Tacoma business office. Our Tacoma office collection practices have not kept pace with the growth of our business and receivables have aged, causing them to be more difficult to collect. Depreciation and amortization. Depreciation and amortization increased $4,587,000 to $27,392,000 in the second quarter of 1999 from $22,805,000 in the second quarter of 1998. As a percentage of net operating revenues, depreciation and amortization decreased slightly to 7.8% in the second quarter of 1999 from 7.9% in the second quarter of 1998. Write-off of investments. Write-off of investments and loans recorded in the second quarter of 1999 of $16,600,000 represents allowances provided for loans to, and investments in, several dialysis related businesses, which we are unlikely to recover as a result of recent deterioration in the financial condition of these businesses. 13 Operating income (loss). Operating results decreased $62,614,000 to an operating loss of $5,777,000 in the second quarter of 1999 from an operating income of $56,837,000 in the second quarter of 1998. As a percentage of net operating revenues, operating results decreased to an operating loss of 1.6% in the second quarter of 1999 from an operating income of 19.7% in the second quarter of 1998 primarily due to the increases in both facility operating and general and administrative expenses and the additions to the valuation allowances for patient accounts receivables and the write-off of loans to, and investments in, dialysis related businesses as described above. Interest expense. Interest expense increased $7,826,000 to $24,370,000 in the second quarter of 1999 from $16,544,000 in the second quarter of 1998. The increase in interest expense primarily was due to an increase in borrowings made under our credit facilities to fund acquisitions. Interest rate swap-early termination costs. In conjunction with the refinancing of our credit facilities, two existing forward interest swap agreements were canceled in April 1998. The early termination costs associated with the cancellation of those swaps was $9,823,000. Interest income and other. Interest income is generated as a result of the short-term investment of surplus cash from operations and excess proceeds from borrowings under our credit facilities. Other income is income generated by unconsolidated partnerships. Interest income and other increased by $912,000 to $1,934,000 in the second quarter of 1999 from $1,022,000 in the second quarter of 1998. Provision for income taxes. Provision for income taxes decreased $21,787,000 to a benefit of $9,699,000 for the second quarter of 1999 from an expense of $12,088,000 in the second quarter of 1998. The effective tax rate was a benefit of 31.5% for the second quarter of 1999 compared to 40.4% in the second quarter of 1998, after minority interest. The change in the effective tax rate primarily was due to $3.8 million from the non-deductible amortization of intangible assets spread over a smaller pre-tax base. Before consideration of these permanent tax differences, the consolidated effective tax rate benefit was 36.0%, after minority interests. Minority interests. Minority interests represent the pretax income earned by minority partners who directly or indirectly own minority interests in our partnership affiliates and the net income in certain of our corporate subsidiaries. Minority interests increased $956,000 to $2,521,000 from $1,565,000 in the second quarter of 1998. As a percentage of net operating revenues, minority interest increased slightly to 0.7% in the second quarter of 1999 from 0.5% in the second quarter of 1998. Extraordinary loss. In the second quarter of 1998 in conjunction with refinancing our credit facilities, we recorded all of the remaining related unamortized deferred financing costs as an extraordinary loss of $9,932,000, net of income tax effect. Six months ended June 30, 1999 compared to the six months ended June 30, 1998 Net operating revenues. Net operating revenues increased $158,138,000 to $705,237,000 in the six months ended June 30, 1999 from $547,099,000 in the six months ended June 30, 1998, representing a 29% increase. Of this increase, $136,865,000 was due to increased treatments, of which $85,845,000 was from acquisitions consummated after the six months ended June 30, 1998, $35,698,000 was from de novo developments commencing operations after the six months ended June 30, 1998 and $15,322,000 was from existing facilities as of June 30, 1998. The remaining increase of $21,273,000 resulted from an increase in net operating revenues per treatment which increased from $239.30 in the six months ended June 30, 1998 to $246.75 in the six months ended June 30, 1999. The increase in net operating revenue per treatment was mainly attributable to an increase in ancillary services intensity and pricing of $28,999,000, primarily in the administration of EPO of $26,203,000, an increase in corporate and ancillary program fees of $4,285,000, 14 primarily from the expansion of laboratory services to former RTC facilities of $3,680,000, an increase in non-patient services revenue of $3,381,000 from the increase in dialysis facility management services to facilities that we do not own or control, and an offsetting decrease in our net operating revenue per treatment of $15,392,000, as a result of increasing our contractual allowances primarily related to billings from our Tacoma office to reflect recent trends in collection experience. Facility operating expenses. Facility operating expenses increased $133,444,000 to $483,763,000 in the six months ended June 30, 1999 from $350,319,000 in the six months ended June 30, 1998 and as a percentage of net operating revenues, facility operating expenses increased to 68.6% in the six months ended June 30, 1999 from 64.0% in the six months ended June 30, 1998. This increase was primarily attributable to increased usage in EPO and other medical supplies and the impact of a lower net revenue per treatment. Additionally, during the second quarter of 1999, a provision of $4,500,000 was recorded for the resolution of claims made by vendors during the quarter for goods and services provided in earlier periods. General and administrative expenses. General and administrative expenses increased $18,763,000 to $53,278,000 in the six months ended June 30, 1999 from $34,515,000 in the six months ended June 30, 1998 and as a percentage of net operating revenues, general and administrative expenses increased to 7.6% in the six months ended June 30, 1999 from 6.3% in the six months ended June 30, 1998. This increase was primarily attributable to increased staff at both our business and corporate offices and the impact of a lower net revenue per treatment. Additionally, general and administrative expense for the six months ended June 30, 1999 includes approximately $2,500,000 of expenses related to costs of business purchase transactions which we will not consummate and operating costs associated with a corporate jet we are no longer using. Provision for doubtful accounts. The provision for doubtful accounts increased $31,643,000 to $46,185,000 in the six months ended June 30, 1999 from $14,542,000 in the six months ended June 30, 1998. As a percentage of net operating revenues, the provision for doubtful accounts increased to 6.5% in the six months ended June 30, 1999 from 2.7% in the six months ended June 30, 1998. This is primarily a result of the $24,000,000 increase in the provision for doubtful accounts relating to collectibility problems of patient accounts receivable billed from our Tacoma business office. Our Tacoma office collection practices have not kept pace with the growth of our business and receivables have aged, causing them to be more difficult to collect. Depreciation and amortization. Depreciation and amortization increased $12,018,000 to $54,417,000 in the six months ended June 30, 1999 from $42,399,000 in the six months ended June 30, 1998. As a percentage of net operating revenues, depreciation and amortization was 7.7% in both six month periods. Write-off of investments. Write-off of investments and loans recorded in the six months ended June 30, 1999 of $16,600,000 represents allowances provided for loans to, and investments in, several dialysis related businesses, which we are unlikely to recover as a result of recent deterioration in the financial condition of these businesses. Merger and related costs. Merger and related costs recorded during the six months ended June 30, 1998 include costs associated with certain integration activities, transaction costs and costs of employee severance and amounts due under employment agreements and other compensation programs, in connection with our merger with RTC. 15 A summary of merger and related costs and accrual activity through June 30, 1999 is as follows:
Direct Transaction Severance and Costs to Integrate Costs Employment Costs Operations Total ------------------ ---------------- ------------------ ------------ Initial expense......... $ 21,580,000 $ 41,960,000 $ 15,895,000 $ 79,435,000 Amounts utilized in 1998................... (22,885,000) (37,401,000) (13,137,000) (73,423,000) Adjustment of estimates.............. 1,305,000 (959,000) (1,593,000) (1,247,000) ------------ ------------ ------------ ------------ Accrual, December 31, 1998................... $ 3,600,000 1,165,000 4,765,000 ============ Amounts utilized--1st quarter 1999........... (600,000) (90,000) (690,000) ------------ ------------ ------------ Accrual, March 31, 1999................... 3,000,000 1,075,000 4,075,000 Amounts utilized--2nd quarter 1999........... (90,000) (90,000) ------------ ------------ ------------ Accrual, June 30, 1999................... $ 3,000,000 $ 985,000 $ 3,985,000 ============ ============ ============
The remaining balance of severance and employment costs represents tax gross- up payments expected to be paid by the end of the year. The remaining balance of costs to integrate operations represents remaining lease payments on RTC's vacant laboratory lease space. Operating income. Operating income decreased $54,330,000 to $50,994,000 in the six months ended June 30, 1999 from $105,324,000, before merger and related costs, in the six months ended June 30, 1998. As a percentage of net operating revenues, operating income before merger and related costs decreased to 7.2% in the six months ended June 30, 1999 from 19.3% in the six months ended June 30, 1998. This decrease was primarily attributable to increases in both facility operating and general and administrative expenses and the additions to valuation allowances for patient accounts receivable and the write-off of loans and investments in dialysis related businesses. Interest expense. Interest expense increased $16,076,000 to $47,137,000 in the six months ended June 30, 1999 from $31,061,000 in the six months ended June 30, 1998. The increase in interest expense primarily was due to an increase in borrowings made under our credit facilities to fund acquisitions. Interest rate swap-early termination costs. In conjunction with the refinancing of our credit facilities, two existing forward interest swap agreements were canceled in April 1998. The early termination costs associated with the cancellation of those swaps was $9,823,000. Interest income and other. Interest income and other increased $600,000 to $3,264,000 in the six months ended June 30, 1999 from $2,664,000 in the six months ended June 30, 1998 and as a percentage of net operating revenues, interest income and other was 0.5% for both periods. Provision for income taxes. Provision for income taxes decreased $9,637,000 to $3,323,000 for the six months ended June 30, 1999 from $12,960,000 in the six months ended June 30, 1998. The effective tax rate was 145.6% for the six months ended June 30, 1999 compared to 40.4% in the six months ended June 30, 1998, after minority interest but before merger and related costs. The change in the effective tax rate primarily was due to $5.8 million from the non- deductible amortization of intangible assets spread over a smaller pre-tax income base. Before consideration of these permanent tax differences, the consolidated effective tax rate was 41.0%, after minority interests. Minority interests. Minority interests increased $1,881,000 to $4,839,000 in the six months ended June 30, 1999 from $2,958,000 in the six months ended June 30, 1998. As a percentage of net operating revenues, minority interest increased slightly to 0.7% in the six months ended June 30, 1999 from 0.5% in the six months ended June 30, 1998. Extraordinary loss. In February 1998, in conjunction with our merger with RTC, we terminated the RTC revolving credit agreement, and recorded all of the remaining related unamortized deferred financing costs as 16 an extraordinary loss of $2,812,000, net of income tax effect. In April 1998, in conjunction with refinancing our credit facilities, we also recorded all of the remaining related unamortized deferred financing costs as an extraordinary loss of $9,932,000, net of income tax effect. Cumulative effect of change in accounting principle. Effective January 1, 1998, we adopted Statement of Position No. 98-5, Reporting on the Costs of Start-up Activities, or SOP 98-5. SOP 98-5 requires that pre-opening and organizational costs, incurred in conjunction with our pre-opening activities on our de novo facilities, which previously had been treated as deferred costs and amortized over five years, should be expensed as incurred. In connection with the adoption of SOP 98-5, we recorded a charge of $6,896,000, net of income tax effect as a cumulative effect of a change in accounting principle. Liquidity and capital resources Sources and uses of cash Our primary capital requirements have been the funding of our growth through acquisitions and de novo developments, and equipment purchases. Net cash provided by operating activities was $31.0 million for the first six months of 1999 and net cash used in operating activities was $26.2 million for the first six months of 1998. Net cash provided by operating activities consists of our net income (loss), increased by non-cash expenses such as depreciation, amortization, non-cash interest and the provision for doubtful accounts, and adjusted by changes in components of working capital, primarily accounts receivable. Accounts receivable, net of allowance for doubtful accounts, increased during the first six months of 1999 by $27.8 million, of which approximately $12.0 million was due to a payment suspension imposed on our Florida-based laboratory by its Medicare carrier, which has caused additional working capital needs. The remaining $15.8 million primarily was due to the increase in our net operating revenues. Net cash used in investing activities was $227.2 million for the first six months of 1999 and $286.8 million for the first six months of 1998. Our principal uses of cash in investing activities have been related to acquisitions, purchases of new equipment and leasehold improvements for our facilities, as well as the development of new facilities. Net cash provided by financing activities was $179.4 million for the first six months of 1999 and $307.9 million for the first six months of 1998 primarily consisting of borrowings from our credit facilities. The decreases in net cash used in investing activities and in net cash provided by financing activities were due to our completing fewer acquisitions in the first six months of 1999 as compared to the first six months of 1998. As of June 30, 1999, we had working capital of $413.4 million, including cash of $24.7 million. We believe that we will have sufficient liquidity to fund our debt service obligations over at least the next twelve months. Expansion In the six months ended June 30, 1999, we developed ten new facilities, four of which we do not own but we manage, and we expect to develop approximately 18 additional de novo facilities in the remainder of 1999. We anticipate that our capital requirements for purchases of equipment and leasehold improvements for facilities, including de novo facilities, will be approximately $60 to $70 million in aggregate for the remaining six months of 1999. During the six months ended June 30, 1999, we paid cash of approximately $127.6 million to acquire 35 facilities and additional interests from minority partners in certain of our partnerships. On July 1, 1999, we completed an acquisition of seven dialysis facilities for consideration of approximately $17.5 million. 17 Credit facilities Subsequent to June 30, 1999, the lenders under our credit facilities have waived compliance with a financial covenant that requires us to maintain a specified leverage ratio. This waiver expires March 15, 2000. The lenders also have waived our violation of a covenant that placed a limit on our aggregate borrowings for international acquisitions, which we had exceeded. The terms of the waiver: . Reduce our permitted borrowings under the revolving credit facility from $950.0 million to $650.0 million during the waiver period; . Commencing after July 1, 1999, limit the amount of additional borrowings that we may use for acquisitions, de novo developments and expansion or relocation of existing dialysis centers; . Accelerated the maturity dates on the term loan and revolving credit facilities by two years, to March 31, 2006 and March 31, 2003, respectively; and . Increased the applicable margins used to determine the interest rates for our borrowings under the credit facilities. Other than the issues specifically addressed in the waiver agreement, all other covenants and conditions of the credit facilities remain unchanged. As of June 30, 1999 the principal amount outstanding under our revolving facility was $534.0 million and under our term facility was $396.0 million. The term facility requires annual principal payments of $4.0 million, with the $368.0 million balance due on maturity. As of June 30, 1999, we had $116.0 million available for borrowing under the revolving facility. The credit facilities contain financial and operating covenants including, among other things, requirements that we maintain certain financial ratios and satisfy certain financial tests, and impose limitations on our ability to make capital expenditures, to incur other indebtedness and to pay dividends. As of the date of this filing, including violations waived by the lenders as described, we are in compliance with all such covenants. Interest rate swaps During the quarter ended June 30, 1998, we entered into forward interest rate cancelable swap agreements with a combined notional amount of $800.0 million. The lengths of the agreements are between three and ten years with cancellation clauses at the swap holder's option from one to seven years. The underlying blended interest rate is fixed at approximately 5.65% plus an applicable margin based upon our current leverage ratio. Currently, the effective interest rate for these swaps is 8.53%. During the second quarter of 1999, we received notification from two of our swap agreement counterparties that they had exercised their right to cancel agreements in the aggregate notional amount of $100.0 million. The remaining $700.0 million of swap agreements with maturities from the years 2003 through 2008 and cancellation option dates from the years 2001 through 2005 are still in effect. 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, for us, SFAS 133 will become 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, in which we are hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The 18 gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. We have not yet determined the impact that the adoption of SFAS 133 will have on our earnings or statement of financial position. Subordinated notes The $125.0 million outstanding 5 5/8% convertible subordinated notes due 2006 issued by RTC bear interest at the rate of 5 5/8%, payable semi-annually and require no principal payments until 2006. The 5 5/8% notes are convertible into shares of our common stock at an effective conversion price of $25.62 per share and are redeemable by us beginning in July 1999. In November 1998 we issued 7% convertible subordinated notes due 2009 in the aggregate principal amount of $345.0 million. The 7% notes are convertible at any time, in whole or in part, into shares of our common stock at a conversion price of $32.81 and will be redeemable after November 16, 2001. We used the net proceeds from the sale of the 7% notes to pay down debt under the revolving facility, which may be reborrowed, subject to the modified terms of our credit facilities. Year 2000 considerations Since the summer of 1998, all of our departments have been meeting with our information systems department to determine the extent of our Year 2000, or Y2K, exposure. Project teams have been assembled to work on correcting Y2K problems and to perform contingency planning to reduce our total exposure. Our goal is to have all corrective action and contingency plans in place by the end of the third quarter of 1999. Software applications and hardware. Each component of our software application portfolio, or SAP, must be examined with respect to its ability to properly handle dates in the next millennium. As part of our software assessment plan, key users will test each component of our SAP. These tests will be constructed to make sure each component operates properly with the system date advanced to the next millennium. The major phases of our software assessment plan are as follows: . Complete SAP inventory; . Implement Y2K compliant software as necessary; . Analyze which computers have Y2K problems and the cost to repair; . Test all vendors' representations; and . Fix any computer-specific problems. Our billing and accounts receivable software is known to have a significant Y2K problem. We have already addressed this issue by obtaining a new, Y2K compliant version of this software. We expect to complete conversion to this Y2K compliant version by the end of the third quarter of 1999. Operating systems. We are also reviewing our operating systems to assess possible Y2K exposure. We use several different network operating systems, or NOS, for multi-user access to the software that resides on the respective servers. Each NOS must be examined with respect to its ability to properly handle dates in the next millennium. Key users will test each component of our SAP with a compliant version of the NOS. One level beneath the NOS is a special piece of software that comes into play when the computer is "booted" that potentially has a Y2K problem and that is the basic input output system software, or BIOS. The BIOS takes the date from the system clock and uses it in passing the date to the NOS which in turn passes the date to the desktop operating system. The system clock poses another problem in that some system clocks were only 19 capable of storing a two-digit year while other computer clocks stored a four- digit year. This issue affects each and every computer we have purchased. To remedy these problems, we plan to inventory all computer hardware using a Y2K utility program to determine whether we have a BIOS or a system clock problem. We then intend to perform a BIOS upgrade or perform a processor upgrade to a Y2K compliant processor. Dialysis centers, equipment and suppliers. The operations of our dialysis centers can be affected by the Y2K problem so a contingency plan must be in place to prevent the shutdown of these centers. Each center will be responsible for completing a survey of the possible consequences of a failure of the information systems of our vendors and formulating a contingency plan by the end of the third quarter of 1999. Divisional vice presidents will then review these plans to assure compliance. All of our biomedical devices, including dialysis machines that have a computer chip in them, will be checked for Y2K compliance. We have contacted or will contact each of the vendors of the equipment we use and ask them to provide us with documentation regarding Y2K compliance. Where it is technically and financially feasible without jeopardizing any warranties, we will test our equipment by advancing the clock to a date in the next millennium. In general, we expect to have all of our biomedical devices Y2K compliant by the end of the third quarter of 1999. We have not yet been able to estimate the costs of upgrading or replacing certain of our biomedical devices as we do not yet know which of these machines, if any, are not currently Y2K compliant. In addition to factors noted above which are directly within our control, factors beyond our direct control may disrupt our operations. If our suppliers are not Y2K complaint, we may experience inventory shortages and run short of critical supplies. If the utilities companies, transportation carriers and telecommunications companies which service us experience Y2K difficulties, our operations will also be adversely affected and some of our facilities may need to be closed. We are in the process of taking steps to reduce the impact on our operations in such instances and implementing contingency plans to address any possible unavoidable effect which these difficulties would have on our operations. To address the possibility of a physical plant failure, we are contacting the landlords of each of our facilities to insure that they will provide access to our staff and any other key service providers. We are also providing written notification to our utilities companies of the locations, schedules and emergency services required of each of our dialysis facilities. In case a physical plant failure should result in an emergency closure of any of our facilities, we are currently: . Confirming that backup hospital affiliation agreements are up-to-date and complete; . Reviewing appropriate elements of our disaster preparedness plan with our staff and patients; . Adopting/modifying emergency treatment orders and rationing plans with our medical directors to provide patient safety; and . Conducting patient meetings with social workers and dieticians. To minimize the affect of any Y2K non-compliance on the part of suppliers, we are currently taking steps to: . Identify our critical suppliers and survey each of them to assess their Y2K compliance status; . Identify alternative supply sources where necessary; . Identify Y2K compliant transportation/shipping companies and establish agreements with them to cover situations where our current suppliers' delivery systems go down; . Include language in contracts with new suppliers addressing Y2K performance obligations, requirements and failures; . Stock our dialysis facilities with one week of additional inventory; 20 . Require critical distributors to carry additional inventory earmarked for us; and . Prepare a critical supplier contact/pager list for Y2K emergency supply problems and ensure that contact persons will be on call 24 hours a day. Our financial exposure from all sources of SAP and operating system Y2K issues as well as from dialysis center, equipment and supplier Y2K issues known to date ranges from approximately $500,000 to $1,200,000, the majority of which has not been expended. General. The extent and magnitude of the Y2K problem as it will affect us, both before, and for some period after, January 1, 2000, are difficult to predict or quantify for a number of reasons. Among the most important are our lack of control over systems that are used by the third parties who are critical to our operations, such as telecommunications and utilities companies, the complexity of testing interconnected networks and applications that depend on third-party networks and the uncertainty surrounding how others will deal with liability issues raised by Y2K-related failures. Moreover, the estimated costs of implementing our plans for fixing Y2K problems do not take into account the costs, if any, that might be incurred as a result of Y2K-related failures that occur despite our implementation of these plans. With respect to third-party non-governmental payors, we are in the process of determining where our exposure is and developing contingency plans to prevent the interruption of cash flow. With respect to Medicare payments, both the Health Care Financing Administration, or HCFA, and the two primary fiscal intermediaries we utilize have contingency plans in place. The HCFA mandated contingency plans have been tested by HCFA to ensure that no interruption of Medicare payments results from Y2K-related failures of their systems. With respect to MediCal, the largest of our third-party state payors, we are already submitting our claims with a four-digit numerical year in accordance with the current system. We are currently working with our other state payors individually to determine the extent of their Y2K compliance. Although we currently are not aware of any material operational issues associated with preparing our internal computer systems, facilities and equipment for Y2K, we cannot assure you, due to the overall complexity of the Y2K issues and the uncertainty surrounding third party responses to Y2K issues, that we will not experience material unanticipated negative consequences and/or material costs caused by undetected errors or defects in our or third party systems or by our failure to adequately prepare for the results of such errors or defects, including costs of related litigation, if any. The impact of such consequences could have a material adverse effect on our business, financial condition or results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Interest rate sensitivity Due to the acceleration of the maturity of our credit facilities, our repayment requirements have been modified. The table below has been revised from the one disclosed in our Form 10-K for the fiscal year ended December 31, 1998, to reflect the modified principal repayments on our debt obligations and the related variable weighted average interest rates by expected maturity dates. 21 The table also reflects the cancellation of $100,000,000 of interest rate swaps. For our interest rate swap agreements, the table presents the repayment 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.
Expected Maturity Date ---------------------------------------- Fair 1999 2000 2001 2002 2003 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- (in millions) Liabilities Long-term debt Fixed rate.............. $470 $470 $469 Average interest rate................. 6.6% 6.6% Variable rate........... $ 20 $ 11 $ 95 $154 $300 $377 $957 $957 Average interest rate................. 6.88% 6.88% 6.88% 6.88% 6.88% 6.88% 6.88% Expected Maturity Date ---------------------------------------- Fair 1999 2000 2001 2002 2003 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- (in millions) Interest rate derivatives Interest rate swaps Variable to fixed....... $100 $600 $700 $(29) Average pay rate...... 5.51% 5.69% 5.75% Average receive rate.. 5.03% 5.01% 5.01%
Our swaps have a one-time call provision for our counterparty at varying times based upon the maturity of the underlying swaps as follows:
Notional Swap Maturity Call Provision Amount ------------- -------------- -------- Ten-year swaps: Seven-year $200 Five-year 200 Seven-year swaps: Four-year 100 Three-year 100 Five-year swaps: Two-year 100 ---- $700 ====
Other than as described above, there have been no material changes in our market risk exposure from that reported in our Form 10-K for the fiscal year ended December 31, 1998. 22 RISK FACTORS In addition to the other information set forth in this Form 10-Q, you should note the following risks related to our business. If we fail to build adequate internal systems and controls then our revenue and net income may be adversely affected. We have experienced rapid growth in the last five years, and especially in 1998, as a result of our business strategy to acquire, develop and manage a large number of dialysis centers. We also intend to continue to acquire, develop and manage additional dialysis centers, both in the U.S. and internationally. This historical growth and business strategy subjects us to the following risks: . Our billing and collection structures, systems and personnel may prove inadequate to collect all amounts owed to us for services we have rendered, resulting in a lack of sufficient cash flow; . We may require additional management, administrative and clinical personnel to manage and support our expanded operations, and we may not be able to attract and retain sufficient personnel; . Our assessment of the requirements of our growth on our information systems may prove inaccurate, and we may have to spend substantial amounts to enhance or replace our information systems; . Our expanded operations may require cash expenditures in excess of the cash available to us after paying our debt service obligations; . We may inaccurately assess the historical and projected results of operations of acquisition candidates, which may cause us to overpay for acquisitions; . We may inaccurately assess the historical and projected results of operations of existing and recently acquired facilities, which may cause us not to achieve the results of operations expected for these facilities; and . We may not be able to integrate acquired facilities as quickly or smoothly as we expect, which may cause us not to achieve the results of operations expected for these acquired facilities. These risks are enhanced when we acquire entire regional networks or other national dialysis providers, such as RTC, or enter into multi-facility management agreements. Future declines, or the lack of an increase, in Medicare reimbursement rates could substantially decrease our net income. We are reimbursed for dialysis services primarily at fixed rates established in advance under the Medicare end stage renal disease, or ESRD, program. Unlike many other Medicare programs, which receive periodic cost of living increases, these rates have not increased since 1991. Increases in operating costs that are subject to inflation, such as labor and supply costs, have occurred and 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 whether future rate changes will be made. Approximately 50% of our net operating revenues in the first six months of 1999 was generated from patients who had Medicare as the primary payor. The Department of Health and Human Services, or HHS, has recommended, and the Clinton administration has included in its fiscal year 2000 budget proposal to the Congress, a 10% reduction in Medicare reimbursement for erythropoietin, or EPO. We cannot predict whether this proposal or other future rate or reimbursement method changes will be made. Approximately 14% of our net operating revenues in the first six months of 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 and net income. 23 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 2000 budget proposal to the Congress a reduction in the reimbursement rate for outpatient prescription drugs to 83% of average wholesale price. We cannot predict whether Congress will approve this rate change, 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 and net income. Many Medicaid programs base their reimbursement rates for the services we provide on the Medicare reimbursement rates. Any reductions in the Medicare rates could also result in reductions in the Medicaid reimbursement rates. Approximately 5% of our net operating revenues in the first six months of 1999 was generated from patients who had Medicaid or comparable state programs as the primary payer. If Medicare changes its ESRD program to a capitated reimbursement system, our revenues and profits could be materially reduced. HCFA has initiated a pilot demonstration project, expected to end in 2001, to test the feasibility of allowing managed care plans to participate in the Medicare ESRD program on a capitated basis. 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 certain fluctuations in the number of services provided in that period or the number of patients treated. Under the current demonstration project, Medicare is paying managed care plans a capitated rate equal to 95% of Medicare's current average cost of treating dialysis patients. If HCFA considers this pilot program successful, HCFA or Congress could lower the average Medicare reimbursement for dialysis. If we charge private payors at rates less than our current rates, then our revenues and net income could be substantially reduced. Approximately 35% of our net operating revenues in the first six months of 1999 was generated from patients who had domestic private payors as the primary payor. 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 and could have a material impact on our revenues and net income. 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 47% of our assets and 203% of our stockholders' equity at June 30, 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 34 years for our goodwill and 21 years for all of our intangible assets that relate to business combinations. 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. We and our independent accountants continuously review the appropriateness of the amortization periods we are using and change them as necessary to reflect current expectations. 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. 24 Interruption in the supply of, or cost increases in, EPO could materially reduce our net income and affect our ability to care for our patients. A single manufacturer, Amgen Corporation, produces EPO. In the future, Amgen may be unwilling or unable to supply us with EPO. Additionally, shortages in the raw materials or other resources necessary to manufacture EPO, or simply an arbitrary decision on the part of this sole supplier, may increase the wholesale price of EPO. Interruptions of the supply of EPO or 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. If we fail to identify, assess and respond successfully to the unique attributes of each of our foreign operations, our net income could be adversely affected. We only recently commenced operations outside the U.S., and expect to enter additional foreign markets in the next few years. Our failure to identify, understand and respond to the unique attributes of any of the foreign markets that we enter could cause us to: . Overpay for acquisitions of foreign dialysis centers; . Fail to integrate foreign acquisitions into our operations successfully; and . Assess the performance of our foreign operations incorrectly. The unique attributes of our foreign operations include: . Differences in payment and reimbursement rules and procedures, including unanticipated slowdowns in payments from large payors in Argentina; . Differences in accepted clinical standards and practices; . Differences in management styles and practices; . The unfamiliarity of foreign companies with U.S. financial reporting standards; and . Local laws that restrict or limit employee discharges and disciplinary actions. 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 in the U.S. and to extensive government regulation in every foreign country in which we operate. Any of the following could adversely impact our revenues: . 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; . Suspension of payments from government programs; . Loss of licenses required to operate health care facilities in some of the states in which we operate; and . Any challenge to the relationships we have structured in some foreign countries to comply with barriers to direct foreign ownership of healthcare businesses. The regulatory scrutiny of healthcare 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. 25 . 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. For the review periods the carrier has identified, January 1995 to April 1996, and May 1996 to March 1998, the carrier has alleged that the prescribing physician's medical justification did not properly support approximately 97% of the tests this laboratory performed. The carrier has determined that it overpaid this laboratory $5.6 million for the period from January 1995 to April 1996, and $14.2 million for the period from May 1996 to March 1998. The suspension of payments relates to all payments due after the suspension started, regardless of when this laboratory performed the tests. The carrier has withheld approximately $23 million as of June 30, 1999, which has adversely affected our cash flow. We may never recover the amounts withheld. . 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. We may not have sufficient cash flow from our business to service our debt. The amount of our outstanding debt is large compared to the net book value of our assets, and we have substantial repayment obligations under our outstanding debt. As of June 30, 1999 we had: . Total consolidated debt of approximately $1.4 billion; . Stockholders' equity of approximately $479 million; and . A ratio of earnings to fixed charges of 1.04. 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. Under interest swap agreements covering $700 million of debt, the interest rate under our credit facilities varies based on the amount of debt we incur relative to our assets and equity. Accordingly, the amount of these interest payments could fluctuate in the future.
Interest Principal Payments Payments ------------ ------------ For the year ending December 31: 1999.......................................... $110,023,000 $ 19,561,000 2000.......................................... 108,927,000 10,534,000 2001.......................................... 100,860,000 94,580,000 2002.......................................... 87,782,000 153,567,000 2003.......................................... 72,391,000 300,059,000
26 Due to the large amount of these principal and interest payments, we may not have enough cash to pay the interest on our debt as it becomes due. 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 and disposing of our assets. These covenants require that we meet interest coverage, net worth and leverage tests. Additionally, as we are highly leveraged and if 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 net income. Currently, as a result of the waivers granted by our lenders, we are in compliance with our credit facility covenants. Our level of debt and the limitations our credit facilities impose on us could have other important consequences to you, including: . We will have to use a portion of our cash flow from operations, approximately $129.6 million in 1999 and $119.5 million in 2000, for debt service rather than for our operations; . We may not be able to obtain additional debt financing for future working capital, capital expenditures, acquisitions or other corporate purposes; . We could be less able to take advantage of significant business opportunities, including acquisitions, and react to changes in market or industry conditions. If a change of control occurs, we may not have sufficient funds to repurchase our outstanding notes. Upon a change of control, generally the sale or transfer of a majority of our voting stock or almost all of our assets, our noteholders may require us to repurchase all or a portion of their notes. If a change of control occurs, we may not be able to pay the repurchase price for all of the notes submitted for repurchase. In addition, the terms of our credit facilities generally prohibit us from purchasing any notes until we have repaid all debt outstanding under these credit facilities. Future credit agreements or other agreements relating to debt may contain similar provisions. We may not be able to secure the consent of our lenders to repurchase our outstanding notes or refinance the borrowings that prohibit us from repurchasing our outstanding notes. If we do not obtain a consent or repay the borrowings, we could not repurchase these notes. We may experience material unanticipated negative consequences beginning in the year 2000 due to undetected computer defects. The Y2K issue concerns the potential exposures related to the automated generation of incorrect information from the use of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. Due to the overall complexity of the Y2K issues and the uncertainty surrounding third party responses to Y2K issues, we cannot assure you that undetected errors or defects in our or third party systems or our failure to prepare adequately for the results of those errors or defects will not cause us material unanticipated problems or costs. The extent and magnitude of the Y2K problem as it will affect us, both before, and for some period after, January 1, 2000, are difficult to predict or quantify for a number of reasons. Among the most important are: . Our lack of control over third party systems that are critical to our operations, including those of telecommunications and utilities companies and governmental and non-governmental payors; . The complexity of testing interconnected internal and external computer networks, software applications and dialysis equipment; and . The uncertainty surrounding how others will deal with liability issues raised by Y2K-related failures. 27 Moreover, the estimated costs of implementing our plans for fixing Y2K problems do not take into account the costs, if any, that we might incur as a result of Y2K-related failures that occur despite our implementation of these plans. While we are developing contingency plans to address possible computer failure scenarios, we recognize that there are "worst case" scenarios which may occur. We may experience the extended failure of external and internal computer networks and equipment that control . Medicare, Medicaid and other third party payors' ability to reimburse us; . Regional infrastructures, such as power, water and telecommunications systems; . Equipment and machines that are essential for the delivery of patient care; and . Computer software necessary to support our billing process. If any one of these events occurs, our cash flow could be materially reduced. Even in the absence of a failure of these networks and equipment, we will likely continue to incur costs related to remediation efforts, the replacement or upgrade of equipment, continued efforts regarding contingency planning, increased staffing for the periods immediately preceding and after January 1, 2000 and the possible implementation of alternative payment schemes with our payors. Provisions in our charter documents may deter a change of control which our stockholders may otherwise determine to be in their best interests. Our certificate of incorporation and bylaws and the Delaware General Corporation Law include provisions which may deter hostile takeovers, delay or prevent changes in control or changes in our management, or limit the ability of our stockholders to approve transactions that they may otherwise determine to be in their best interests. These provisions include: . A provision requiring that our stockholders may take action only at a duly called annual or special meeting of our stockholders and not by written consent; . A provision requiring a stockholder to give at least 60 days' advance notice of a proposal or director nomination that the stockholder desires to present at any annual or special meeting of stockholders; and . A provision granting our board of directors the authority to issue up to five million shares of preferred stock and to determine the rights and preferences of the preferred stock without the need for further stockholder approval. The existence of this "blank-check" preferred stock could discourage an attempt to obtain control of us by means of a tender offer, merger, proxy contest or otherwise. Furthermore, this "blank- check" preferred stock may have other rights, including economic rights, senior to our common stock. Therefore, issuance of the preferred stock could have an adverse effect on the market price of our common stock. We may, in the future, adopt other measures that may have the effect of delaying, deferring or preventing an unsolicited takeover, even if such a change in control were at a premium price or favored by a majority of unaffiliated stockholders. We may adopt certain of these measures without any further vote or action by our stockholders. 28 Forward-looking statements We believe that this Form 10-Q 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-Q. 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. 29 PART II OTHER INFORMATION Item 1. Legal Procedings The information in Note 9 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report is incorporated by this reference in response to this item. Items 2, 3, 4 and 5 are not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Employment Agreement, dated as of May, 6 1999, by and between TRCH and George DeHuff.* 10.2 Amendment No. 3 and Waiver, dated as of August 9, 1999, to and under the Revolving Credit Agreement. 10.3 Limited Waiver and Second Amendment, dated as of August 9, 1999, to the Term Loan Agreement. 27.1 Financial Data Schedule--three months ended June 30, 1999 and three months ended June 30, 1998. 27.2 Financial Data Schedule--six months ended June 30, 1999 and six months ended June 30, 1998.
- --------------------- * Management contract or executive compensation plan or arrangement. (b) Reports on Form 8-K None. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOTAL RENAL CARE HOLDINGS, INC. /s/ John J. McDonough By: _________________________________ John J. McDonough Vice President and Chief Accounting Officer Date: August 16, 1999 John J. McDonough is signing in the dual capacities as the registrant's principal accounting officer and a duly authorized officer of the registrant. 31 INDEX TO EXHIBITS
Exhibit Number Description ------- ----------- 10.1 Employment Agreement, dated as of May, 6 1999, by and between TRCH and George DeHuff.* 10.2 Amendment No. 3 and Waiver, dated as of August 9, 1999, to and under the Revolving Credit Agreement. 10.3 Limited Waiver and Second Amendment, dated as of August 9, 1999, to the Term Loan Agreement. 27.1 Financial Data Schedule--three months ended June 30, 1999 and three months ended June 30, 1998. 27.2 Financial Data Schedule--six months ended June 30, 1999 and six months ended June 30, 1998.
- --------------------- *Management contact or executive compensation plan or arrangement. EX-10.1 2 EMPLOYMENT AGREEMENT DATED MAY 6, 1999 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into effective as of May 6, 1999 (the "Effective Date") by and between Total Renal Care Holdings, Inc. (the "Company") and George DeHuff ("Executive"). NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt of which the parties hereby acknowledge, the parties hereto, intending to be legally bound hereby, agree as follows: Section 1. Employment and Duties. The Company shall employ Executive, and Executive accepts such employment, for the Term set forth in Section 3 hereof on the terms and conditions set forth in this Agreement. During the Term, Executive shall serve as President and Chief Operating Officer of the Company and shall perform the duties of such office, as well as such other duties as may be assigned to Executive from time to time during the Term by the Chief Executive Officer of the Company or his designee. Executive shall devote Executive's best efforts and skills to the business and interests of the Company on a full-time basis. Executive shall not engage in any other business activity during the Term; provided, however, that Executive may manage personal investments and participate in charitable and civic affairs to the extent that such activities do not adversely affect the performance of Executive's responsibilities to the Company hereunder. Executive 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 Executive hereunder, Executive shall receive: 2.1 Base Salary. A salary at the rate of $310,000 per year (the "Base Salary"), effective as of the Effective Date. The Base Salary shall be payable in installments consistent with the Company's payroll schedule. The Base Salary shall be subject to adjustment annually by the Board for increases, if any, in the Consumer Price Index for the most proximate geographic area in which Executive 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. Executive shall be provided employee benefits (including life, health, accident and disability insurance, stock options and an auto allowance) on the same basis as such benefits are generally made available to other senior executives of the Company. Executive will be entitled to four (4) weeks paid vacation for each twelve (12) month period following the Effective Date. 2.3 Bonuses. (a) Executive shall be eligible to receive such bonuses as are approved by the Compensation Committee of the Board of Directors of the Company; provided that Executive shall be eligible to receive a bonus of up to 100% 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. During the first year of the term (defined below) hereof, Executive shall be guaranteed a bonus equal to $155,000. (b) Except as set forth below, the Company EPS target for determination of Executive's EPS Bonus shall be determined in the sole discretion of the Committee, provided that the EPS target used to determine Executive's EPS Bonus shall be identical to the EPS target used to determine the EPS Bonuses for the other executive officers of the Company. 1 (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. Executive 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 Executive is not employed by the Company (or an affiliate) on the date any Bonus is paid for any reason whatsoever, Executive shall not be entitled to receive such Bonus; provided, however, that in the event Executive (i) dies, (ii) is terminated by the Company by reason of Disability (as defined below), (iii) is terminated without Material Cause (as defined below) following a Change of Control (as defined below), or (iv) resigns following Constructive Discharge (as defined below) following a Change of Control, Executive 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 Executive 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. Term. 3.1 Commencement. The term (the "Term") of Executive's employment hereunder shall commence on the Effective Date and, unless sooner terminated as provided herein, shall continue thereafter until May 16, 2001; provided, however, that the Term shall automatically renew for additional periods of one (1) year each unless either party shall deliver written notice to the other of its intention not to renew the Term not later than ninety (90) days prior to the applicable renewal date. 3.2 Termination for Material Cause. The Company may terminate Executive's employment for Material Cause (as defined below) upon at least thirty (30) days' advance written notice specifying in detail the cause for termination and the intended termination date. Prior to the effective date of any termination for Material Cause, Employee shall have been offered an opportunity to meet and confer in person with the Chairman of the Board and at least two (2) additional Board members regarding the grounds for such intended termination. Upon termination for Material Cause, Executive (i) shall be entitled to receive the Base Salary and benefits as set forth in Section 2.1 and Section 2.2, respectively, through the effective date of such termination and (ii) shall not be entitled to receive any other 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. 3.3 Other Termination. If the Company terminates the employment of Executive for any reason other than Material Cause or Disability, or if Executive resigns following Constructive Discharge following a Change of Control, Executive shall (i) be entitled to receive the Base Salary and benefits as set forth in Section 2.1 and Section 2.2, respectively, through the effective date of such termination, and, to the extent applicable, the bonus provided for in Section 2.3(c), (ii) be obligated to provide consulting services to the Company as provided in Section 4 and for which services Executive shall be entitled to receive, within two business days of the effective date of such termination, a lump sum amount equal to one (1) times Executive's then current Base Salary and (iii) not be entitled to receive any other 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. 3.4 Death. In the event of Executive's death, Executive's estate shall (i) be entitled to receive the Base Salary and benefits as set forth in Sections 2.1 and 2.2, respectively, through the effective date of Executive's death, (ii) be entitled to receive a pro rated bonus as set forth in Section 2.3 and (iii) not be entitled to receive any other 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. 3.5 Disability. Upon thirty (30) days' notice (which notice may be given prior to the completion of the periods described herein), the Company may terminate Executive's employment for Disability, provided that either (i) immediately upon the effective date of such termination, Executive shall be eligible to receive full disability benefits under the disability insurance, if any, provided to Executive by the Company, or (ii) the 2 Company shall continue to pay the Base Salary to Executive until the first to occur of (A) full disability benefits are received or (B) one (1) year. 3.6 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) "Constructive Discharge" shall mean the occurrence of any of the following events after the date of a Change of Control without Employee's express written consent: (i) the scope of Employee's authority, duties and responsibilities are materially diminished or are not (A) in the same area of operations, (B) in the same corporate and reporting capacity (and standing in the same relationship to the ultimate parent entity, e.g., reporting to the chief executive officer of a subsidiary will not be deemed to constitute the same corporate and reporting capacity as reporting to the chief executive officer of the ultimate parent entity) or (C) of the same general nature as Employee's authority, duties and responsibilities with the Company immediately prior to such Change of Control; (ii) the failure by the Company to provide Employee office accommodations and assistance substantially equivalent to the accommodations and assistance provided to Employee immediately prior to such Change of Control; (iii) the principal office to which Employee is required to report is changed to a location which is more than twenty (20) miles from the principal office to which Employee is required to report immediately prior to such Change of Control; or (iv) a reduction by the Company in Employee's Base Salary, bonus arrangement or other material benefits as in effect on the date of such Change of Control or as the same may be increased thereafter. (c) "Disability" shall mean the inability, for a period of six (6) months to adequately perform Executive's regular duties due to a physical or mental illness, condition or disability. (d) "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. 3.7 Notice of Termination. Any purported termination of Executive's employment by the Company or by Executive shall be communicated by a written Notice of Termination to the other party hereto in accordance with Section 7.5 hereof. A "Notice of Termination" shall mean a written notice that indicates the specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment. 3.8 Rights and Obligations Upon Termination. The termination of Executive's employment shall not modify or affect the rights and obligations of the parties, if any, under Section 2.3(c), Section 3, Section 4, Section 5, Section 6 and Section 7. 3 Section 4. Consulting Services. If Executive is entitled to receive a lump sum payment upon the termination of employment pursuant to Section 3.3 and receives such payment, acceptance of such payment shall be deemed to constitute an agreement by Executive to provide consulting services to the Company for a period of two years 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 Executive's responsibilities while employed by the Company and such other consulting services as may be mutually agreed upon by the Company and Executive. The times and locations at which such consulting services will be provided will be mutually agreed upon by Executive and the Company. During the Consulting Period, Executive 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) Executive acknowledges and agrees that: (i) in the course of Executive's employment or continued employment by the Company, it will or may be necessary for Executive 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 Company's affairs (collectively, "Confidential Information") and (B) information and materials that concern the Company's business that come into Executive'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 Executive not disclose any Confidential Information or Business Related Information to others or use any Confidential Information or Business Related Information to Executive's own advantage or the advantage of others. (b) In recognition of the acknowledgments contained in Section 5.1(a) above, Executive agrees that, during the Term and thereafter until the Confidential Information and Business Related Information becomes publicly available (otherwise than through breach by Executive), Executive 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 Executive, except as required in the performance of Executive'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 Executive's control, to any person, firm or corporation, or use directly or indirectly, for Executive's own benefit or the benefit of others, any Confidential Information or Business Related Information. 5.2 Competition. (a) Executive agrees that, during the Term and for a period of two (2) years from the date Executive's employment terminates for any reason, Executive shall not: (i) directly or indirectly, on Executive'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 4 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 business during Executive'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. Executive 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) Executive agrees that, during the Term and for a period of five (5) years from the date Executive's employment terminates for any reason, Executive 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 Executive 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. Executive agrees that any violation by Executive of any covenant in this Section 5 may cause such damage to the Company as will be serious and irreparable and the exact amount of which will be difficult to ascertain, and for that reason, Executive 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 Executive. 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 Executive's employment with the Company for any reason, Executive 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. 5 Section 6. Change of Control. 6.1 Excess Parachute Payment. In the event that any payment or benefit received or to be received by Executive in connection with a Change of Control, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement by the Company, any predecessor or successor to the Company or any corporation affiliated with the Company or which becomes so affiliated pursuant to the transactions resulting in a Change of Control, both within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code") (collectively all such payments are hereinafter referred to as the "Total Payments") is deemed to be an "Excess Parachute Payment" (in whole or in part) to Executive as a result of Section 280G and/or 4999 of the Code, as in effect at such time, no change shall be made to the Total Payments to be made in connection with the Change of Control, except that, in addition to all other amounts to be paid to Executive by the Company hereunder, the Company shall, within thirty (30) days of the date on which any Excess Parachute Payment is made, pay to Executive, in addition to any other payment, coverage or benefit due and owing hereunder, an amount determined by (i) multiplying the rate of excise tax then imposed by Code Section 4999 by the amount of the "Excess Parachute Payment" received by Executive (determined without regard to any payments made to Executive pursuant to this Section 6.2) and (ii) dividing the product so obtained by the amount obtained by subtracting (A) the aggregate local, state and Federal income tax rates (including the value of the loss of itemized deductions under Section 68 of the Internal Revenue Code) applicable to the receipt by Executive of the "Excess Parachute Payment" (taking into account the deductibility for Federal income tax purposes of the payment of state and local income taxes thereon) from (B) the amount obtained by subtracting from 1.00 the rate of excise tax then imposed by Section 4999 of the Code. It is the Company's intention that Executive's net after-tax position be identical to that which would have obtained had Sections 280G and 4999 not been part of the Code. For purposes of implementing this Section 6.2, (i) no portion, if any, of the Total Payments, the receipt or enjoyment of which Executive shall have effectively waived in writing prior to the date of payment of the Total Payments, shall be taken into account, and (ii) the value of any non-cash benefit or any deferred cash payment included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. 6.2 Expense Reimbursement. In the event that any person, other than Executive, asserts the invalidity of all or any part of this Agreement and Executive incurs legal fees or out-of-pocket expenses in connection with defending the validity of all or a portion of this Agreement, the Company shall reimburse Executive for all legal fees and out-of-pocket expenses Executive so incurs. Section 7. Miscellaneous. 7.1 Mediation of Disputes Concerning Employment. In the event of any dispute concerning Executive's employment by the Company, whether or not relating to this Agreement, Executive 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 Executive'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 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 6 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 Executive. 7.2 Entire Agreement; Amendment. This Agreement represents the entire understanding of the parties hereto with respect to the employment of Executive and supersedes all prior agreements with respect thereto; provided, however, that except as set forth in Section 6.1, this Agreement shall not affect any stock option agreement or similar agreement relating to equity incentives between the Company and Executive. 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 Executive. 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 Executive at Executive'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 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 6th day of May, 1999. TOTAL RENAL CARE HOLDINGS, INC. GEORGE DEHUFF By: Barry C. Cosgrove ________________________________________ ________________________________________ Signature Its: Sr. Vice President and General Counsel ________________________________________ ________________________________________ George DeHuff
7 EX-10.2 3 AMEND. #3 AND WAIVER, REVOLVING CREDIT AGMT. EXHIBIT 10.2 AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT AMENDMENT NO. 3 AND WAIVER (this "Amendment"), dated as of August 9, 1999, 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, and Amendment No. 2, dated as of November 12, 1998 (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 Lenders agree to amend and waive certain provisions under the Revolving Credit Agreement upon the terms and conditions contained herein, and the Administrative Agent and the Required Lenders are willing to so agree. 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. The Administrative Agent and the Required Lenders hereby waive compliance with Section 7.15 of the Revolving Credit Agreement from March 31, 1999 through and including March 15, 2000 (the "Waiver Period"), provided that each of the following conditions (the "Waiver Conditions") shall be, and shall at all times remain, satisfied: (a) the Leverage Ratio (calculated so as to exclude, to the extent included therein, certain one-time charges related to the fiscal quarters of the Borrower ended on March 31, 1999 and June 30, 1999, as disclosed in the July 18, 1999 press release of the Borrower, in an aggregate amount not to exceed $60,000,000 on a pre-tax basis (the "One-Time Charges")) during the Waiver Period shall not exceed 4.40:1.00 at any time, (b) the Aggregate Credit Exposure of all Lenders during the Waiver Period shall not exceed $650,000,000 at any time, (c) in addition to the terms, conditions and restrictions contained in the Revolving Credit Agreement, the use by the Borrower and any of its Subsidiaries of cash (including, without limitation, the proceeds of all Loans) during the period from July 1, 1999 through and including March 15, 2000 shall be solely for: (i) the ordinary working capital purposes of the Borrower and its Subsidiaries, (ii) Permitted Acquisitions, and (iii) other capital expenditures and corporate purposes of the Borrower and its Subsidiaries in amounts that do not materially exceed those outlined in the cash flow forecast of the Borrower distributed to the Lenders on July 30, 1999, (d) the total consideration for (i) all Permitted Acquisitions made after July 1, 1999 through and including March 15, 2000 shall not exceed in the aggregate $30,000,000, and (ii) all Foreign Acquisitions made after July 1, 1999 through and including March 15, 2000 shall not exceed in the aggregate $10,000,000, 1 (e) for purposes of determining the Applicable Margin (including, without limitation, for purposes of calculating the LC Rate) and the Commitment Fee during the Waiver Period, the Leverage Ratio shall be calculated without excluding the One-Time Charges, and (f) during the period from July 1, 1999 through and including March 15, 2000 capital expenditures of the Borrower and its Subsidiaries (on a Consolidated basis determined in accordance with GAAP) attributable to the creation of new renal treatment centers or the relocation or expansion of existing renal treatment centers shall not exceed in the aggregate $60,000,000. 2. Provided that (i) each of the Waiver Conditions shall be, and shall at all times remain, satisfied during the Waiver Period, and (ii) the total consideration paid in connection with all Foreign Acquisitions made after October 24, 1997 through August 9, 1999 (other than the merger of RTC into the Borrower pursuant to the RTC Merger Agreement as permitted by Amendment No. 1 and Consent No. 1, dated as of December 1, 1997, to the Existing Credit Agreement) does not exceed $73,000,000, the Administrative Agent and the Required Lenders hereby (A) waive any Default or Event of Default that occurred under Section 8.5(f)(C) through and including August 9, 1999, (B) amend Section 8.5(f)(C) by replacing the amount "$60,000,000" contained therein with the amount "$83,000,000", and (C) amend Section 8.5(f)(C) by inserting immediately after the date "October 24, 1997" contained therein the phrase "(other than the merger of RTC into the Borrower pursuant to the RTC Merger Agreement as permitted by Amendment No. 1 and Consent No. 1, dated as of December 1, 1997, to the Existing Credit Agreement)". 3. Provided that each of the Waiver Conditions shall be, and shall at all times remain, satisfied, the Administrative Agent and the Required Lenders hereby waive any Default or Event of Default that may have occurred prior to the effectiveness of this Amendment (a) under or in connection with Section 4.21, 7.1(b) or 7.2(a), (b) due to any misrepresentation or miscertification made in (i) any Borrowing Request, Notice of Conversion/Continuation or Letter of Credit Request delivered to the Administrative Agent during the period from March 31, 1999 to but excluding the effective date of this Amendment or (ii) the Compliance Certificate delivered on May 17, 1999, in each case, with regard to clauses (a) and (b) above, due solely to the failure of the Borrower to incorporate the effects of the One-Time Charges in the financial statements delivered on May 17, 1999 in respect of the fiscal quarter of the Borrower ended on March 31, 1999, or (c) under or in connection with Section 9.1(g)(iii) or 9.1(k)(ii) as a result of any defaults that may have arisen under the Term Loan Facility that will be and remain waived pursuant to the Term Loan Waiver (as defined below). 4. Effective at all times on and after August 9, 1999, clause (a) of the definition of "Applicable Margin" contained in Section 1.1 of the Revolving Credit Agreement is hereby amended and restated as follows: (a) at all times during the applicable periods set forth below and based on the most recently delivered Compliance Certificate of the Borrower: (i) with respect to the unpaid principal amount of Eurodollar Advances and Alternate Currency Advances, the percentage set forth below under the heading "Eurodollar Margin" and adjacent to such period, and (ii) with respect to the unpaid principal amount of ABR Advances, the percentage set forth below under the heading "ABR Margin" and adjacent to such period:
Eurodollar ABR Period Margin Margin ------ ---------- ------ When the Leverage Ratio is greater than 4.00:1.00........ 2.75% 1.50% When the Leverage Ratio is less than or equal to 4.00:1.00 but greater than 3.50:1.00.................... 2.50% 1.25% When the Leverage Ratio is less than or equal to 3.50:1.00 but greater than 3.00:1.00.................... 2.25% 1.00% When the Leverage Ratio is less than or equal to 3.00:1.00 but greater than 2.50:1.00.................... 2.00% 0.75% When the Leverage Ratio is less than or equal to 2.50:1.00 but greater than 2.00:1.00.................... 1.75% 0.50%
2
Eurodollar ABR Period Margin Margin ------ ---------- ------ When the Leverage Ratio is less than or equal to 2.00:1.00 but greater than 1.50:1.00................... 1.50% 0.25% When the Leverage Ratio is less than or equal to 1.50:1.00.............................................. 1.25% 0.00%
5. The definitions of "Maturity Date" and "Special Counsel" contained in Section 1.1 of the Revolving Credit Agreement are hereby amended and restated in their entirety as follows: "Maturity Date": March 31, 2003, or such earlier date on which the Notes shall become due and payable, whether by acceleration or otherwise. "Special Counsel": Bryan Cave LLP, special counsel to the Administrative Agent. 6. Section 2.6(b) of the Revolving Credit Agreement is hereby amended and restated as follows: (b) Mandatory Periodic Reductions. The Aggregate Revolving Credit Commitments shall be reduced on each of the following dates by the amount set forth next to such date:
Aggregate Revolving Credit Commitments Dates Reductions ----- ------------------- September 30, 2001................................... $ 89,100,000 September 30, 2002................................... $148,400,000
7. Section 2.10 of the Revolving Credit Agreement is hereby amended by (i) deleting the phrase "Alternate Base Rate" each time it appears in clause (a) thereof under the heading "RATE" and replacing it with the phrase "Alternate Base Rate plus the Applicable Margin" in each such instance, and (ii) deleting the phrase "Alternate Base Rate plus 2%" each time it appears in clause (b) thereof and replacing it with the phrase "Alternate Base Rate plus the Applicable Margin plus 2%" in each such instance. 8. Effective at all times on and after August 9, 1999, Section 3.1(a) of the Revolving Credit Agreement is hereby amended by replacing the table contained therein with the following:
Commitment Fee Pricing Level Percentage ------------- -------------- When the Leverage Ratio is equal to or greater than 3.75:1.00.................................................. 0.500% When the Leverage Ratio is less than 3.75:1.00 but equal to or greater than 3.50:1.00.................................. 0.350% When the Leverage Ratio is less than 3.50:1.00 but equal to or greater than 3.00:1.00.................................. 0.300% When the Leverage Ratio is less than 3.00:1.00 but equal to or greater than 2.00:1.00.................................. 0.250% When the Leverage Ratio is less than 2.00:1.00 but equal to or greater than 1.50:1.00.................................. 0.200% When the Leverage Ratio is less than 1.50:1.00.............. 0.175%
9. Section 7.2 of the Revolving Credit Agreement is hereby amended by adding to the end thereof the following new clauses (j) and (k): (j) A certificate no later than five Business Days prior to the consummation of any Permitted Acquisition made after July 1, 1999 through and including March 15, 2000: (i) identifying such Permitted Acquisition, (ii) specifying the total consideration to be paid with respect to such Permitted Acquisition, the 3 aggregate total consideration paid with respect to all Permitted Acquisitions (including such proposed Permitted Acquisition) made after July 1, 1999 through and including March 15, 2000 and such other information as the Administrative Agent shall reasonably require, and (iii) certifying that immediately before and after giving effect thereto no Default or Event of Default shall exist. (k) On August 16, 1999 and thereafter within ten days after the end of each calendar month through March 15, 2000, a report specifying (in a format reasonably acceptable to the Administrative Agent): (i) Permitted Acquisitions made (A) during such immediately preceding calendar month and (B) made after July 1, 1999 through the end of the immediately preceding calendar month, (ii) capital expenditures of the Borrower and its Subsidiaries (on a Consolidated basis determined in accordance with GAAP) attributable to the creation of new renal treatment centers or the relocation or expansion of existing renal treatment centers made (A) during such immediately preceding calendar month and (B) made from July 1, 1999 through the end of the immediately preceding calendar month, and (iii) an accounts receivable aging summary by account debtor group. 10. On or before August 16, 1999, the Borrower shall deliver to the Administrative Agent a revised Compliance Certificate for the fiscal quarter of the Borrower ended on March 31, 1999, which shall recalculate the Leverage Ratio to reflect the One-Time Charges. The Applicable Margin and the Commitment Fee for the period from May 17, 1999 (the date the Borrower delivered the original Compliance Certificate for the fiscal quarter of the Borrower ended on March 31, 1999), to and including the date the next Compliance Certificate is delivered or is required to be delivered shall be based on such revised Leverage Ratio. On or before August 20, 1999, the Borrower shall pay to the Administrative Agent, for distribution to the Lenders, any additional interest, Commitment Fees and Letter of Credit Fees that accrued under the Revolving Credit Agreement and the Revolving Credit Notes during the period from and including May 17, 1999, to and including August 19, 1999, as a result of any increase in the Applicable Margin or Commitment Fee caused by the One-Time Charges, to the extent that any such accrued additional interest, Commitment Fees or Letter of Credit Fees would have been payable on any Interest Payment Date or other applicable payment date during such period. All such additional interest, Commitment Fees and Letter of Credit Fees that have accrued under the Revolving Credit Agreement and the Revolving Credit Notes on and after May 17, 1999 but that have not been paid on or before August 19, 1999, shall continue to be owed under the Revolving Credit Agreement and the Revolving Credit Notes, and shall be paid in accordance with the Revolving Credit Agreement on the next applicable Interest Payment Date or other applicable payment date. Section 3.1(a) of the Revolving Credit Agreement and the definition of "Applicable Margin" in Section 1.1 of the Revolving Credit Agreement, each as in effect immediately prior to August 9, 1999, shall continue to govern the calculation of interest, Commitment Fees and Letter of Credit Fees payable thereunder for periods prior to such date. 11. The Administrative Agent and the Required Lenders hereby consent to the Term Loan Waiver. 12. Exhibit D to the Credit Agreement is hereby amended and restated in the form of Exhibit D attached hereto. 13. Paragraphs 1--12 of this Amendment shall not become effective until the satisfaction of all of the following conditions precedent: (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) Receipt by the Administrative Agent, for the account of each Lender that shall have executed and delivered this Amendment (without any reservation or condition) to the Administrative Agent before 5:00 p.m. (New York City time) on August 9, 1999, of a non-refundable fee in an amount equal to 0.25% of the Revolving Credit Commitment of such Lender. 4 (c) The Limited Waiver and Second Amendment to Amended and Restated Term Loan Agreement, dated as of the date hereof and substantially in the form of Annex I hereto (the "Term Loan Waiver"), shall have become effective prior to or simultaneously herewith, and the Administrative Agent shall have received an executed copy thereof. (d) 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. (e) The Administrative Agent shall have received an opinion of 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. 14. Without limiting the generality of the provisions of Section 11.1 of the Revolving Credit Agreement, the waivers set forth in this Amendment shall be limited precisely as written and nothing in this Amendment shall be deemed to: (a) constitute a waiver of any Defaults or Events of Default arising in any other instance or a waiver of any other term, provision or condition of the Revolving Credit Agreement or any other instrument or agreement referred to therein; or (b) prejudice any right or remedy that the Administrative Agent, the Collateral Agent, the Swing Line Lender, the Letter of Credit Issuer or any Lender may now have (except to the extent such right or remedy was based upon any existing defaults that will not exist after giving effect to this Amendment) or may have in the future under or in connection with the Revolving Credit Agreement or any other instrument or agreement referred to therein. 15. The Borrower hereby acknowledges and agrees that all costs, fees and expenses as described in Section 11.5 of the Revolving Credit Agreement incurred by the Administrative Agent, the Syndication Agent, the Co-Arrangers, and Special Counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrower and shall be promptly paid by the Borrower following the submission of an invoice therefor. 16. On the date hereof, each Credit Party hereby (a) reaffirms and admits the validity and enforceability of the Loan Documents (as amended by this Amendment) and all of its obligations thereunder, (b) agrees and admits that it has no defenses to or offsets against any such obligation, and (c) represents and warrants that, after giving effect to the effectiveness of this Amendment, no Default or Event of Default has occurred and is continuing, and that each of the representations and warranties made by it in the Loan Documents (as amended by this Amendment) to which it is a party is true and correct with the same effect as though such representation and warranty had been made on the date hereof. 17. 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. 18. This Amendment may be executed in any number of counterparts all of which, taken together, shall constitute one Amendment. In making proof of this Amendment, it shall only be necessary to produce the counterpart executed and delivered by the party to be charged. 5 19. 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] 6 AMENDMENT NO. 3 AND WAIVER 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: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE BANK OF NEW YORK, Individually, as the Letter of Credit Issuer, as the Swing Line Lender and as Administrative Agent By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT DLJ CAPITAL FUNDING, INC., Individually and as Syndication Agent By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT FIRST UNION NATIONAL BANK, Individually and as Documentation Agent By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ABN AMRO BANK N.V. By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ALLIED IRISH BANKS, P.L.C., CAYMAN ISLANDS BRANCH By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA, NASSAU BRANCH By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT BANK LEUMI TRUST COMPANY OF NEW YORK By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE BANK OF NOVA SCOTIA By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT BANQUE NATIONALE DE PARIS By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT BHF (USA) CAPITAL CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT CITY NATIONAL BANK By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT BANK OF AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT CREDIT LYONNAIS NEW YORK BRANCH By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT FLEET NATIONAL BANK By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE FUJI BANK, LIMITED By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT HIBERNIA NATIONAL BANK By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE INDUSTRIAL BANK OF JAPAN, LTD., LOS ANGELES AGENCY By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT KBC BANK By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT GE CAPITAL CORP. By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT MELLON BANK, N.A. By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT MICHIGAN NATIONAL BANK By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE MITSUBISHI TRUST AND BANKING CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT NATIONAL CITY BANK OF KENTUCKY By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT PARIBAS By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A, "RABOBANK NEDERLAND", NEW YORK BRANCH By: _________________________________ Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ROYAL BANK OF CANADA By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE ROYAL BANK OF SCOTLAND PLC By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE SANWA BANK, LIMITED By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT SOCIETE GENERALE By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT STB DELAWARE FUNDING TRUST I By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT SUNTRUST BANK, NASHVILLE, N.A. By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE TOKAI BANK, LIMITED By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THE TOYO TRUST & BANKING CO., LTD., Los Angeles Agency By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT UNION BANK OF CALIFORNIA, N.A. By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT U.S. BANK NATIONAL ASSOCIATION By: _________________________________ Name: _______________________________ Title: ______________________________ AMENDMENT NO. 3 AND WAIVER TO AND UNDER AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT 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: ______________________________ EX-10.3 4 LIMITED WAIVER AND 2ND AMEND. TERM LOAN EXHIBIT 10.3 TOTAL RENAL CARE HOLDINGS, INC. LIMITED WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED TERM LOAN AGREEMENT This LIMITED WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED TERM LOAN AGREEMENT (this "Amendment") is dated as of August 9, 1999, and entered into by and among TOTAL RENAL CARE HOLDINGS, INC., a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages hereof (the "Lenders", each a "Lender"), DLJ CAPITAL FUNDING, INC., as Syndication Agent (the "Syndication Agent"), THE BANK OF NEW YORK, as collateral agent and as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), and, for purposes of Section 5 hereof, the Credit Support Parties (as defined in Section 5 hereof) listed on the signature pages hereof, and is made with reference to that certain Amended and Restated Term Loan Agreement dated as of April 30, 1998, as amended to the date hereof (as so amended, the "Term Loan Agreement"), by and among the Borrower, Lenders, Syndication Agent and Administrative Agent. Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Term Loan Agreement. RECITALS WHEREAS, the Borrower, the undersigned Lenders, constituting Required Lenders, the Administrative Agent, and the Syndication Agent desire to amend the Term Loan Agreement for the purpose of increasing the interest rates payable on the Loans and shortening the maturity from March 31, 2008 to March 31, 2006; WHEREAS, the Borrower may need to adjust its financial statements for the fiscal period ending on March 31, 1999, in order to increase certain charges and decrease its net income reported for such period (the "Prior Period Adjustments"), and the Borrower has requested Lenders to waive any Defaults or Events of Default that may have arisen under the Term Loan Agreement as a direct or indirect result of the failure of the financial statements, Compliance Certificates and other documents delivered by the Borrower under the Term Loan Agreement and the Revolving Credit Facility to reflect the Prior Period Adjustments or to incorporate the effects of such Prior Period Adjustments in calculations based on Borrower's financial position and results of operations for such period, and Lenders are willing to waive any such Defaults and Events of Default, subject to the terms and conditions hereof; WHEREAS, Borrower has requested the lenders that are parties to the Revolving Credit Facility to enter into an Amendment No. 3 and Waiver to and Under Amended and Restated Revolving Credit Agreement substantially in the form of Annex I hereto (the "Revolving Credit Facility Waiver"), pursuant to which such lenders would waive certain defaults that may have arisen under the Revolving Credit Facility resulting from, among other things, the Borrower's failure to comply with subsection 7.15 thereof; WHEREAS, the Borrower has requested Lenders to waive any Defaults or Events of Default that may have arisen under subsection 9.1(g) of the Term Loan Agreement as a result of any defaults that may have arisen under the Revolving Credit Facility that will be waived pursuant to the Revolving Credit Facility Waiver, and Lenders are willing to waive any such Defaults and Events of Default, subject to the terms and conditions hereof; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: 1 Section 1. AMENDMENTS TO THE TERM LOAN AGREEMENT 1.1 Amendments to Section 1: Definitions and Principals of Construction A. Section 1.1 of the Term Loan Agreement is hereby amended effective as of August 9, 1999, by deleting clause (a) of the definition of "Applicable Margin" in its entirety and substituting the following therefor: "(a) at all times, with respect to the unpaid principal amount of Eurodollar Advances and ABR Advances, and based on the most recently delivered Compliance Certificate of the Borrower, the percentage set forth below under the heading "Applicable Margin for Eurodollar Advances" or "Applicable Margin for ABR Advances", as applicable, next to the applicable period:
Applicable Applicable Margin for Margin for Eurodollar ABR Period Advances Advances ------ ---------- ---------- When the Leverage Ratio is greater than 4.00:1.00.... 3.00% 1.75% When the Leverage Ratio is equal to or less than 4.00:1.00 but greater than 3.50:1.00................ 2.75% 1.50% When the Leverage Ratio is equal to or less than 3.50:1.00 but greater than 3.00:1.00................ 2.50% 1.25% When the Leverage Ratio is equal to or less than 3.00:1.00........................................... 2.25% 1.00%"
B. Section 1.1 of the Term Loan Agreement is hereby further amended by deleting the reference to the date "March 31, 2008" in the definition of "Maturity Date" contained therein and substituting "March 31, 2006" therefor. 1.2 Amendment to Section 2: Amount and Terms of Loans A. Section 2.4(b) of the Term Loan Agreement is hereby amended by (i) deleting the reference to "$4,000,000" opposite the reference to "September 30, 2006" contained therein and substituting "$368,000,000" therefor; (ii) deleting the last two lines in the table of Scheduled Repayments of Term Loans contained therein; and (iii) deleting the final reference to the date "March 31, 2008" contained in the proviso therein and substituting "the Maturity Date" therefor. Section 2. LIMITED WAIVER TO TERM LOAN AGREEMENT A. Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of the Borrower herein contained, Lenders hereby waive any Defaults and Events of Default that may have arisen under the Term Loan Agreement as a direct or indirect result of the failure of the financial statements, Compliance Certificates and other documents delivered by the Borrower under the Term Loan Agreement and the Revolving Credit Facility to reflect the Prior Period Adjustments or to incorporate the effects of such Prior Period Adjustments in calculations based on Borrower's financial position and results of operations for the fiscal period ending on March 31, 1999. B. Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of the Borrower herein contained, simultaneously with the effectiveness of the Revolving Credit Facility Waiver, Lenders hereby waive any Defaults and Events of Default that may have arisen under subsection 9.1(g) of the Term Loan Agreement as a result of any defaults that may have arisen under the Revolving Credit Facility that will be and remain waived pursuant to the Revolving Credit Facility Waiver. Without limiting the generality of the provisions of subsection 11.1 of the Term Loan Agreement, the waivers set forth above shall be limited precisely as written and nothing in this Amendment shall be deemed to: (a) constitute a waiver of any Defaults or Events of Default arising as a result of any inaccuracy in financial statements of the Borrower other than the failure of such statements to reflect the Prior Period 2 Adjustments, or arising under subsection 9.1(g) of the Term Loan Agreement in any other instance, or a waiver any other term, provision or condition of the Term Loan Agreement or any other instrument or agreement referred to therein; or (b) prejudice any right or remedy that Agents or any Lender may now have (except to the extent such right or remedy was based upon any existing defaults that will not exist after giving effect to this Waiver) or may have in the future under or in connection with the Term Loan Agreement or any other instrument or agreement referred to therein. Section 3. CONDITIONS TO EFFECTIVENESS Sections 1 and 2 of this Amendment shall become effective only upon the satisfaction of all of the following conditions precedent (the date of satisfaction of such conditions being referred to herein as the "Second Amendment Effective Date"): A. Required Lenders (as such term is defined in the Revolving Credit Agreement) shall have entered into the Revolving Credit Facility Waiver, Administrative Agent and Syndication Agent shall have received an executed copy thereof, and such Revolving Credit Facility Waiver shall have become effective simultaneously with the effectiveness hereof. B. Borrower shall have executed and delivered to Administrative Agent Allonges to Promissory Notes substantially in the form of Annex II hereto (each, an "Allonge"), duly completed for each outstanding Term Loan Note. C. Borrower shall have paid to Administrative Agent, for distribution to each Approving Lender (as defined in Section 7C hereof), the fees set forth in Section 7C hereof. D. The Administrative Agent shall have received a certificate, dated the Second Amendment Effective Date, 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 and the Syndication 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.. E. The Administrative Agent shall have received the opinion of the general counsel of the Borrower, the Guarantors and the Pledgors, dated the Second Amendment Effective Date 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. Section 4. BORROWER'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Amendment and to amend the Term Loan Agreement in the manner provided herein, Borrower represents and warrants to each Lender that the following statements are true, correct and complete: A. Corporate Power and Authority. Each Credit Party has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Term Loan Agreement as amended by this Amendment (the "Amended Agreement") and, in the case of Borrower, the Term Loan Notes as amended by the Allonges (the "Amended Notes"). B. Authorization of Agreements. The execution and delivery of this Amendment have been duly authorized by all necessary corporate action on the part of each Credit Party and the execution and delivery of 3 the Allonges have been duly authorized by all necessary corporate action on the part of Borrower. The performance of the Amended Agreement has been duly authorized by all necessary corporate action on the part of each Credit Party and the performance and payment of the Amended Notes has been duly authorized by all necessary corporate action on the part of Borrower. C. No Conflict. The execution and delivery by each Credit Party of this Amendment, the execution and delivery by Borrower of the Allonges, the performance by each Credit Party of the Amended Agreement, and the performance and payment by Borrower of the Amended Notes do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Borrower or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Borrower or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any contractual obligation of Borrower or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Borrower or any of its Subsidiaries (other than Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any contractual obligation of Borrower or any of its Subsidiaries. D. Governmental Consents. The execution and delivery by each Credit Party of this Amendment, the execution and delivery by Borrower of the Allonges, the performance by each Credit Party of the Amended Agreement, and the performance and payment by Borrower of the Amended Notes do not and will not do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. E. Binding Obligation. This Amendment and the Amended Agreement have been duly executed and delivered by each Credit Party and are the legally valid and binding obligations of each Credit Party, enforceable against each Credit Party in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. The Allonges have been duly executed and delivered by Borrower and the Allonges and the Amended Notes are the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. F. Incorporation of Representations and Warranties From Term Loan Agreement. The representations and warranties contained in Section 4 of the Term Loan Agreement (after giving effect to this Amendment) are and will be true, correct and complete in all material respects on and as of the Second Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. G. Absence of Default. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default, other than any Events of Default that will be cured or waived upon the effectiveness of this Amendment. Section 5. ACKNOWLEDGEMENT AND CONSENT Borrower is a party to the Borrower Pledge Agreement pursuant to which Borrower has pledged certain Collateral to Administrative Agent to secure the Obligations. TRC is a party to the Subsidiary Guaranty and the Subsidiary Pledge Agreement pursuant to which TRC has (i) guarantied the Obligations and (ii) pledged certain Collateral to Administrative Agent to secure the Obligations and to secure the obligations of TRC under the Subsidiary Guaranty. Each of the other Guarantors listed on the signature pages hereof is a party to the Subsidiary Guaranty pursuant to which such Guarantor has guarantied the Obligations. Borrower and the 4 Guarantors are collectively referred to herein as the "Credit Support Parties", and the Borrower Pledge Agreement, the Subsidiary Pledge Agreement and the Subsidiary Guaranty are collectively referred to herein as the "Credit Support Documents". Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Term Loan Agreement and this Amendment and consents to the amendment of the Term Loan Agreement effected pursuant to this Amendment. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, to the fullest extent possible the payment and performance of all "Guarantied Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Guarantied Obligations" and "Secured Obligations," as the case may be, in respect of the Obligations of Borrower now or hereafter existing under or in respect of the Amended Agreement and the Notes defined therein. Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the Amended Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the Second Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. Each Credit Support Party acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Credit Support Party is not required by the terms of the Term Loan Agreement or any other Loan Document to consent to the amendments to the Term Loan Agreement effected pursuant to this Amendment and (ii) nothing in the Term Loan Agreement, this Amendment or any other Loan Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Term Loan Agreement. Section 6. PAYMENT OF ADDITIONAL INTEREST On or before August 16, 1999, the Borrower shall deliver to Administrative Agent a revised Compliance Certificate for the fiscal quarter of Borrower ended on March 31, 1999, which shall recalculate the Leverage Ratio to reflect the Prior Period Adjustments. The Applicable Margin for the period from May 17, 1999 (the date the Borrower delivered the original Compliance Certificate for the fiscal quarter of Borrower ended on March 31, 1999), to and including the date the next Compliance Certificate is delivered or is required to be delivered shall be based on such revised Leverage Ratio. On or before August 20, 1999, the Borrower shall pay to Administrative Agent, for distribution to Lenders (including assignors of Notes to Lenders, as applicable) any additional interest that accrued under the Term Loan Agreement and Notes during the period from and including May 17, 1999, to and including August 19, 1999, as a result of any increase in the Applicable Margin caused by the Prior Period Adjustments, to the extent that such accrued interest would have been payable on any Interest Payment Date during such period. All such additional interest that accrued under the Term Loan Agreement and the Notes on and after May 17, 1999, that is not paid on August 19, 1999, shall continue to be owed under the Term Loan Agreement and the Notes, and shall be paid in accordance with the Term Loan Agreement on the next applicable Interest Payment Date. Section 7. MISCELLANEOUS A. Reference to and Effect on the Term Loan Agreement and the Other Loan Documents. (i) On and after the Second Amendment Effective Date, each reference in the Term Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Term Loan 5 Agreement, and each reference in the other Loan Documents to the "Term Loan Agreement", "thereunder", "thereof" or words of like import referring to the Term Loan Agreement shall mean and be a reference to the Amended Agreement. (ii) Except as specifically amended by this Amendment and the Allonges, the Term Loan Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (iii) The definition of "Applicable Margin" in the Term Loan Agreement as in effect immediately prior to August 9, 1999, shall continue to govern the calculation of interest payable thereunder for periods prior to such date. (iv) The execution, delivery and performance of this Amendment shall and the Allonges not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of Administrative Agent or any Lender under, the Term Loan Agreement or any of the other Loan Documents. B. Fees and Expenses. Borrower acknowledges that all costs, fees and expenses as described in Section 11.5 of the Term Loan Agreement incurred by Administrative Agent, Syndication Agent, Co-Arrangers, and Special Counsel, with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of Borrower and shall be promptly paid by Borrower following the submission of an invoice therefor. C. Consent Fee. Borrower shall pay to Administrative Agent, for distribution to each Lender that shall have executed and delivered (without any reservation or condition) a counterpart of this Amendment to Administrative Agent before 5:00 p.m. (New York City time) on August 9, 1999 (each, an "Approving Lender"), non-refundable fees in the amount of 1/8 of 1% of the aggregate amount of the Loans of each such Approving Lender (immediately prior to the effectiveness hereof). D. Consent to Revolving Credit Facility Waiver. The Lenders hereby consent to the Revolving Credit Facility Waiver. E. Headings. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. F. Applicable Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. G. Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Amendment (other than the provisions of Sections 1 and 2 hereof, the effectiveness of which is governed by Section 3 hereof) shall become effective upon the execution of a counterpart hereof by Borrower, Required Lenders, Administrative Agent, and each of the Credit Support Parties and receipt by Borrower and Administrative Agent of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank] 6 ANNEX I REVOLVING CREDIT FACILITY WAIVER ANNEX II [FORM OF ALLONGE] ALLONGE TO PROMISSORY NOTE By this Allonge to Promissory Note (this "Allonge"), the undersigned, Total Renal Care Holdings, Inc. ("Borrower"), hereby acknowledges that pursuant to that certain Limited Waiver and Second Amendment to Amended and Restated Term Loan Agreement dated as of August 9, 1999, by and among Borrower, the financial institutions listed on the signature pages thereof as lenders, DLJ Capital Funding, Inc., as Syndication Agent, The Bank of New York, as Administrative Agent, and the Credit Support Parties named therein, the final scheduled maturity date of all amounts owed under Borrower's Promissory Note to which this Allonge is attached has been amended to March 31, 2006, and that each reference in such Promissory Note to "March 31, 2008" is hereby amended to be a reference to "March 31, 2006". Date: August , 1999 TOTAL RENAL CARE HOLDINGS, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. BORROWER: TOTAL RENAL CARE HOLDINGS, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ S-1 CREDIT SUPPORT PARTIES: 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. (for purposes of Section 5 only) each as a Credit Support Party Each by: ____________________________ Name: _______________________________ Title: ______________________________ TRC WEST, INC., (for purposes of Section 5 only) as a Credit Support Party By: _________________________________ Name: _______________________________ Title: ______________________________ AGENTS: THE BANK OF NEW YORK, Individually and as Administrative Agent and Collateral Agent By: _________________________________ Name: _______________________________ Title: ______________________________ DLJ CAPITAL FUNDING, INC., Individually and as Syndication Agent By: _________________________________ Name: _______________________________ Title: ______________________________ LENDERS: [omitted] S-2 EX-27.1 5 FDS - 3 MOS. ENDED 6/30/99 & 3 MOS. ENDED 6/30/98
5 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 APR-01-1999 APR-01-1998 JUN-30-1999 JUN-30-1998 24,673,000 0 0 0 547,817,000 0 103,578,000 0 25,506,000 0 592,513,000 0 273,785,000 0 0 0 2,106,401,000 0 179,119,000 0 0 0 0 0 0 0 81,000 0 479,486,000 0 2,106,401,000 0 352,993,000 228,350,000 352,993,000 228,350,000 0 0 358,770,000 231,513,000 0 0 35,707,000 7,779,000 24,370,000 16,544,000 (30,734,000) 29,927,000 (9,699,000) 12,088,000 (21,035,000) 17,839,000 0 0 0 9,932,000 0 0 (21,035,000) 7,907,000 (0.26) 0.10 (0.26) 0.10
EX-27.2 6 FDS - 6 MOS. ENDED 6/30/99 & 6 MOS. ENDED 6/30/98
5 6-MOS 6-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 JUN-30-1998 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 705,237,000 547,099,000 705,237,000 547,099,000 0 0 654,243,000 521,210,000 0 0 46,185,000 14,542,000 47,137,000 31,061,000 2,282,000 (15,289,000) 3,323,000 12,960,000 (1,041,000) (28,249,000) 0 0 0 12,744,000 0 6,896,000 (1,041,000) (47,889,000) (0.01) (0.60) (0.01) (0.60)
-----END PRIVACY-ENHANCED MESSAGE-----