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Slide 1: UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K For the Fiscal Year Ended December 31, 2003 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-4034 DAVITA INC. 601 Hawaii Street El Segundo, California 90245 Telephone number (310) 536-2400 Delaware (State of incorporation) 51-0354549 (I.R.S. Employer Identification No.) Securities registered pursuant to Section 12(b) of the Act: Class of Security: Registered on: Common Stock, $0.001 par value Common Stock Purchase Rights New York Stock Exchange New York Stock Exchange The Registrant 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 and has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will be in the Registrant’s definitive proxy statement, which is incorporated by reference in Part III of this Form 10-K. The Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). As of June 30, 2003, the number of shares of the Registrant’s common stock outstanding was 61,604,379 shares and the aggregate market value of the common stock outstanding held by non-affiliates based upon the closing price of these shares on the New York Stock Exchange was approximately $1.6 billion. As of February 13, 2004, the number of shares of the Registrant’s common stock outstanding was 65,434,531 shares and the aggregate market value of the common stock outstanding held by non-affiliates based upon the closing price of these shares on the New York Stock Exchange was approximately $2.9 billion. Documents incorporated by reference Portions of the Registrant’s proxy statement for its 2004 annual meeting of stockholders are incorporated by reference in Part III of this Form 10-K.
Slide 2: PART I Item 1. Business. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are made available free of charge through the Company’s website, located at http://www.davita.com, as soon as reasonably practicable after the reports have been filed with the Securities and Exchange Commission, or SEC. The SEC also maintains an Internet site at http://www.sec.gov where these reports and other information about the Company can be obtained. Overview DaVita Inc. is the second largest provider of dialysis services in the United States for patients suffering from chronic kidney failure, also known as end stage renal disease, or ESRD. We currently operate or provide administrative services to approximately 570 outpatient dialysis centers located in 34 states and the District of Columbia, serving approximately 48,500 patients. We also provide acute inpatient dialysis services in approximately 300 hospitals. All other activities, which account for less than 4% of consolidated revenues, relate to our core business of providing renal care services. Prior to mid-1999, the company had an aggressive growth strategy of acquiring other dialysis businesses. This rapid growth through acquisitions had a significant impact on administrative functions and operating efficiencies. In the second half of 1999, a new management team initiated a turnaround plan focused on improving our financial and operational infrastructure. During 2000 and 2001, we divested substantially all of our operations outside the continental United States, made significant improvements in our billing and collecting operations, reduced our debt and restructured our credit facilities. During 2002 and 2003, we made significant investments in new systems and processes, and took advantage of further capital restructuring opportunities. The dialysis industry The loss of kidney function is normally not reversible. ESRD is the stage of advanced kidney impairment that requires routine dialysis treatments or a kidney transplant to sustain life. Dialysis is the removal of toxins, fluids and salt from the blood of ESRD patients by artificial means. Patients suffering from ESRD generally require dialysis at least three times per week for the rest of their lives. Since 1972, the federal government has provided universal reimbursement for dialysis under the Medicare ESRD program regardless of age or financial circumstances. Under this system, Congress establishes Medicare reimbursement rates for dialysis treatments and related supplies, tests and medications. Approximately 70% of our patients are under the Medicare reimbursement programs. Medicare reimbursements account for approximately 50% of our total revenues. ESRD patient base There are more than 300,000 ESRD dialysis patients in the United States. The recent historical compound annual growth rate in the number of ESRD patients has been approximately 4% to 5%. We do not anticipate any significant change in the general growth rate in the future, which is affected by the continued aging of the population, longer life expectancies of patients with diseases often associated with ESRD such as diabetes and hypertension, improved medical and dialysis technology, and the growth of minority populations that have a high incidence rate of ESRD. Treatment options for ESRD Treatment options for ESRD are hemodialysis, peritoneal dialysis and kidney transplantation. In 2003, outpatient hemodialysis treatments, peritoneal dialysis treatments and inpatient or acute hemodialysis treatments accounted for approximately 88%, 8% and 4% of our total dialysis treatments, respectively. 2
Slide 3: • Hemodialysis Hemodialysis, the most common form of ESRD treatment, is usually performed either in a freestanding or hospital-based outpatient center. A patient can also perform hemodialysis at home with assistance. The hemodialysis machine uses an artificial kidney, called a dialyzer, to remove toxins, fluids and salt from the patient’s blood. The dialysis process occurs across a semi-permeable membrane that divides the dialyzer into two distinct chambers. While blood is circulated through one chamber, a pre-mixed fluid is circulated through the other chamber. The toxins, salt and excess fluids from the blood selectively cross the membrane into the fluid, allowing cleansed blood to return into the patient’s body. Each hemodialysis treatment typically lasts approximately three and one-half hours. Hemodialysis is usually performed three times per week. • Peritoneal dialysis A patient generally performs peritoneal dialysis at home. The most common methods of peritoneal dialysis are continuous ambulatory peritoneal dialysis, or CAPD, and continuous cycling peritoneal dialysis, or CCPD. All forms of peritoneal dialysis use the patient’s peritoneal, or abdominal, cavity to eliminate fluid and toxins. Because it does not involve going to a center three times a week for treatment, peritoneal dialysis is an attractive alternative to hemodialysis for patients who desire more freedom in their lifestyle. However, peritoneal dialysis is not a suitable method of treatment for many patients, including patients who are not able to perform the necessary procedures and those at greater risk of peritoneal infection. CAPD introduces dialysis solution into the patient’s peritoneal cavity through a surgically placed catheter. Toxins in the blood continuously cross the peritoneal membrane into the dialysis solution. After several hours, the patient drains the used dialysis solution and replaces it with fresh solution. This procedure is usually repeated four times per day. CCPD is performed in a manner similar to CAPD, but uses a mechanical device to cycle dialysis solution through the patient’s peritoneal cavity while the patient is sleeping or at rest. • Transplantation Although transplantation, when successful, is generally the most desirable form of therapeutic intervention, the shortage of suitable donors, side effects of immunosuppressive drugs given to transplant recipients and dangers associated with transplant surgery for some patient populations limit the use of this treatment option. Services we provide Outpatient dialysis services We currently operate or provide administrative services to approximately 570 outpatient dialysis centers that are designed specifically for outpatient hemodialysis. Throughout our network of outpatient dialysis centers, we also provide training, supplies and on-call support services to our home dialysis patients. As required by law, we contract with a nephrologist or a group of affiliated nephrologists to provide medical director services at each of our centers. In addition, other nephrologists may apply for practice privileges to treat their patients at our centers. Each center also has an administrator, typically a registered nurse, who supervises the day-to-day operations of the center and its staff. The staff of each center typically consists of registered nurses, licensed practical or vocational nurses, patient care technicians, a social worker, a registered dietician, biomedical technician support, and other administrative and support personnel. In addition, many of our centers offer services for home dialysis patients, primarily CAPD and CCPD. Home dialysis services consist of providing equipment and supplies, training, patient monitoring and follow-up assistance to patients who prefer and are able to receive peritoneal dialysis treatments in their homes. Registered nurses train patients and their families or other patient assistants to perform either CAPD or CCPD at home. Our 3
Slide 4: training programs for home dialysis generally last two to three weeks. In 2003, peritoneal dialysis accounted for approximately 8% of our total dialysis treatments. Hospital inpatient dialysis services We provide inpatient dialysis services, excluding physician professional services, to patients in approximately 300 hospitals. We render these services for a per-treatment fee individually negotiated with each hospital. When a hospital requests our services, we typically administer the dialysis treatment at the patient’s bedside or in a dedicated treatment room in the hospital. Inpatient dialysis services are required for patients with acute kidney failure resulting from trauma, patients in the early stages of ESRD, and ESRD patients who require hospitalization for other reasons. In 2003, acute inpatient dialysis services accounted for approximately 4% of our total dialysis treatments. Ancillary services Ancillary services, which account for less than 4% of our total revenues, consist of the following: • ESRD laboratory services. We own a licensed clinical laboratory, located in Florida, specializing in ESRD patient testing. This specialized laboratory provides both routine laboratory tests covered by the Medicare composite reimbursement rate for dialysis and other physician-prescribed laboratory tests for ESRD patients. Our laboratory provides these tests primarily for our own ESRD patients throughout the United States. These tests are performed to monitor a patient’s ESRD condition, including the adequacy of dialysis, as well as other diseases a patient may have. Our laboratory utilizes a proprietary information system which provides information to our dialysis centers regarding critical outcome indicators. We also operated another laboratory in Minnesota until November 2001, when it was combined with the operations of the Florida laboratory. • Management fee income. We currently operate or provide administrative services to less than 30 dialysis centers which are wholly-owned or majority-owned by third parties. Management fees are established by contract and are typically based on a percentage of revenues generated from the centers. Through an acquisition in July 2003, we began providing management at 14 third-party outpatient vascular access clinics that provide surgical and interventional radiology services for dialysis patients. • Disease management services. Through an acquisition in August 2003, we began providing specialized renal case management and other disease management services to third party payors. • ESRD clinical research programs. Our subsidiary DaVita Clinical Research conducts renal and renalrelated research trials of new drugs and devices designed to improve outcomes, enhance the quality of life and reduce costs for pre-ESRD and ESRD patients. These trials are conducted primarily under contracts with the pharmaceutical companies and medical device manufacturers. Quality care We believe our reputation for providing quality care is a key factor in attracting patients and physicians and in securing relationships with managed care payors. We engage in organized and systematic efforts through our quality management programs to monitor and improve the quality of services we deliver. These efforts include the development and implementation of patient care policies and procedures, clinical education and training programs, clinical guidelines and protocols, and audits of the quality of services rendered at each of our centers. Our quality management programs are under the guidance of our Chief Medical Officer and Director of Quality Management. Approximately 40 regional quality management coordinators implement these programs in our centers. The corporate and regional teams work with each center’s multi-disciplinary quality management team, including the medical director, to implement the programs. 4
Slide 5: We have a national physician council of twelve physicians to advise our senior management on all clinical issues impacting our operations across the country. In addition, we have an eight-physician laboratory advisory committee which acts as a medical advisory board for our clinical laboratory. Our Chief Medical Officer participates in the national physician council and laboratory advisory committee meetings. Sources of revenue—concentrations and risks Direct dialysis services including the administration of pharmaceuticals during dialysis treatments represent more than 96% of our total revenues, with lab services, management fees, disease management services and research programs accounting for the balance. Sources of revenue for direct dialysis services have been as follows: Year ended December 31, 2003 2002 2001 Percent of total dialysis revenues: Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medicaid and other government-based programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial payors (HMOs and health insurance carriers) . . . . . . . . . . . . . . . . . . . . . . 50% 8 58 42 51% 8 59 41 52% 8 60 40 100% 100% 100% Medicare reimbursements Under the Medicare ESRD program, reimbursement rates for dialysis are established by Congress. The Medicare composite rate set by the Centers for Medicare and Medicaid Services, or CMS, determines the Medicare reimbursement available for a designated group of dialysis services, including the dialysis treatment, supplies used for that treatment, some laboratory tests and some medications. The Medicare composite rate is subject to regional differences based upon several factors, including regional differences in wage levels. Other services and items are eligible for separate reimbursement under Medicare and are not part of the composite rate, including erythropoietin, or EPO, vitamin D analogs, and iron supplements. Medicare reimburses dialysis providers for the treatment of ESRD patients who are eligible for participation in the Medicare ESRD program. ESRD patients receiving dialysis become eligible for primary Medicare coverage at various times, depending on their age or disability status, as well as whether they are covered by an employer group health plan. Generally, for a patient not covered by an employer group health plan, Medicare becomes the primary payor either immediately or after a three-month waiting period. For a patient covered by an employer group health plan, Medicare generally becomes the primary payor after 33 months, or earlier if the patient’s employer group health plan coverage terminates. When Medicare becomes the primary payor, the payment rate we receive for that patient shifts from the employer group health plan rate to the Medicare reimbursement rate. For each covered treatment, Medicare pays 80% of the amount set by the Medicare reimbursement system. The patient is responsible for the remaining 20%, and in most cases a secondary payor, such as Medicare supplemental insurance, a state Medicaid program or a private payor, covers all or part of these balances. Some patients who do not qualify for Medicaid but otherwise cannot afford secondary insurance can apply for premium payment assistance from charitable organizations, normally through a program offered by the American Kidney Fund. We and other dialysis providers support the American Kidney Fund and similar programs through voluntary contributions. If a patient does not qualify for state Medicaid assistance based on financial need and does not purchase secondary insurance through a private insurer, the dialysis provider may not be reimbursed for the 20% portion of the ESRD composite rate that Medicare does not pay. 5
Slide 6: The Medicare composite rates set by Congress for the dialysis treatment are currently between $121 and $144 per treatment, with an average rate of $131 per treatment. Historically, there have been very few changes to the Medicare composite reimbursement rates. Since 1972, the rate has declined over 70% in terms of inflation adjusted dollars. The rate did not change from commencement of the program in 1972 until 1983. From 1983 through December 1990, Congressional actions resulted in a net reduction of the average reimbursement rate from $138 per treatment in 1983 to approximately $125 per treatment in 1990. The Medicare composite reimbursement rate was increased by $1.00 in 1991, by 1.2% in 2000 and by 2.4% in 2001. The next scheduled increase is for 1.6% in 2005. Medicare reimburses for home dialysis services provided by dialysis centers that are designated as the supplier of home supplies and services, and provides all dialysis treatment-related services, including equipment and supplies. The center is reimbursed using a methodology based on the Medicare composite rate. The reimbursement rates for home dialysis are determined prospectively and are subject to adjustment by Congress. Most of our centers are approved to provide home dialysis services. In 1996 CMS launched an ESRD Managed Care Demonstration Project involving the enrollment of Medicare ESRD patients in managed care organizations. The intent of the demonstration project was to see whether a capitated system of care for ESRD beneficiaries was operationally feasible, efficient, and able to produce health outcomes as good as the current fee-for-service (FFS) system. The results of this three-year demonstration project were released in 2003 and indicated that quality of care and patient outcomes were similar to FFS comparison groups. In the fall of 2003 CMS announced two new ESRD disease management demonstration projects. The goal of the demonstration projects is to use evidence-based best practices and experienced care managers to oversee ESRD patient care. The program includes two different risk and payment options, full capitation and a fee-forservice outpatient bundled payment. Both options include incentive payments for quality. DaVita has submitted a proposal for the full capitation demonstration. At this time we are uncertain if our proposal will be accepted or if we will choose to continue in the proposed demonstration. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) required the Secretary of Health and Human Services to expand the bundle of services included in the composite rate to include separately billable items routinely used in furnishing dialysis services “to the maximum extent feasible”. Phase I research conducted by the Kidney Epidemiology and Cost Center of the University of Michigan concluded that current data sources are adequate for proceeding with the development of a bundled ESRD PPS, however no specific payment recommendation was determined. The second phase of the University of Michigan’s research will address issues such as case mix and other factors that impact a dialysis facilities cost structure when treating more costly resource intensive patients. Further, the 2003 Medicare Prescription Drug Improvement and Modernization Act requires CMS to establish a new demonstration project for ESRD. The purpose of this new three year demonstration study, to be conducted beginning January 1, 2006, is again to determine the feasibility of an expanded payment outpatient bundle. Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), beginning in 2005 rates of payment for drugs and biologicals provided to ESRD patients in dialysis centers will be reimbursed at an acquisition cost determined by either the Inspector General of the Department of Health and Human Services (“IG”) or the Centers for Medicare and Medicaid Services (“CMS”). The difference between the acquisition cost and the amount previously reimbursed will be added to the dialysis composite rate. The intent of the MMA is for reimbursement to dialysis centers neither to increase or to decrease as a result of this change. In 2006 and in succeeding years, CMS will set the reimbursement rate for drugs and biologicals, and will continue to add back to the composite rate the difference between the CMS-determined rates and the rates that would have been paid for such drugs and biologicals had the MMA not been passed. Again, this formula is not intended to increase or decrease the total reimbursement to dialysis centers. If the IG or CMS incorrectly performs the work required by the MMA, or does not take into account differences in outcomes of drug utilization among providers, it could affect Medicare reimbursement adversely or positively. We cannot predict the results of this process. 6
Slide 7: Medicaid reimbursements Medicaid programs are state-administered programs partially funded by the federal government. These programs are intended to provide health coverage for patients whose income and assets fall below state-defined levels and who are otherwise uninsured. In some states, these programs also serve as supplemental insurance programs for the Medicare co-insurance portion of the ESRD composite rate and provide reimbursement for additional services, including some oral medications, that are not covered by Medicare. State regulations generally follow Medicare schedules with respect to reimbursement levels and coverages. Some states, however, require beneficiaries to pay a monthly share of the cost based upon levels of income or assets. We are an authorized Medicaid provider in the states in which we conduct our business. Commercial (nongovernment) payors Before Medicare becomes the primary payor, a patient’s employer group health plan or private insurance plan, if any, is responsible for payment. Commercial reimbursement rates vary significantly, and can be at negotiated rates for contracted payors or based on the patient’s insurance plan’s formal or informal coverage terms related to our “usual and customary” fee schedule. The patient is responsible for any deductibles and co-payments under the terms of his or her employer group health plan or other insurance. The rates paid by nongovernment payors are typically significantly higher than Medicare reimbursement rates, and on average are more than double the Medicare rates. Also, traditional indemnity plans and preferred provider organization (PPO) plans typically pay at higher rates than health maintenance organization (HMO) plans. After Medicare becomes the primary payor, the original nongovernment payor, if any, becomes the secondary payor, responsible for the 20% of the Medicare reimbursement rates that Medicare does not pay. Secondary payors are not required to reimburse us for the difference between the rates they previously paid and Medicare rates. Reimbursement for EPO and other drugs Approximately one third of our total dialysis revenue is associated with the administration of physicianprescribed pharmaceuticals, including erythropoietin, or EPO, vitamin D analogs, and iron supplements. EPO is a genetically engineered form of a naturally occurring protein that stimulates the production of red blood cells. EPO is used in connection with all forms of dialysis to treat anemia, a medical complication most ESRD patients experience. The administration of EPO, which is separately billable under the Medicare reimbursement program, accounts for approximately one-fourth of our dialysis revenues. Changes in the levels of physician-prescribed EPO, and government reimbursement policies related to EPO, significantly influence our revenues and operating earnings. Furthermore, EPO is produced by a single manufacturer, Amgen, and any interruption of supply or product cost increases could adversely affect our operations. Amgen has also developed a new product, darbepoetin alfa, also known as Aranesp®, that could potentially replace EPO or reduce its use with dialysis patients. The FDA has approved this new product for use with dialysis patients. We cannot predict when, or whether, Amgen will seek to market this product for the dialysis market, how Medicare or other payors will reimburse dialysis providers for its use, whether physicians will prescribe it instead of EPO or how it will impact our revenues and earnings. Other pharmaceuticals that we administer upon physician prescription include vitamin D analogs, calcium and iron supplements, various antibiotics and other medications. Medicare currently reimburses us separately for most of these drugs at a rate of 95% of the average wholesale price of each drug. Physician relationships An ESRD patient generally seeks treatment at a dialysis center near his or her home and at which his or her treating nephrologist has practice privileges. Our relationships with local nephrologists and our ability to meet 7
Slide 8: their needs and the needs of their patients are key factors in the success of a dialysis center. Over 2,000 nephrologists currently refer patients to our centers. As is typical in the dialysis industry, one or a few physicians, including the center’s medical director, usually account for all or a significant portion of a dialysis center’s patient referral base. Our medical directors provide a substantial majority of our patient referrals. The loss of the medical director or other key referring physicians at a particular center could therefore materially reduce the revenue of that center. Participation in the Medicare ESRD program requires that treatment at a dialysis center be “under the general supervision of a director who is a physician.” Generally, the medical director must be board eligible or board certified in internal medicine or nephrology and have had at least 12 months of experience or training in the care of patients at dialysis centers. We have engaged physicians or groups of physicians to serve as medical directors for each of our centers. At some centers, we also separately contract with one or more physicians to serve as assistant or associate medical directors or to direct specific programs, such as home dialysis training programs. We have contracts with approximately 380 individual physicians and physician groups to provide medical director services. Medical directors enter into written contracts that specify their duties and fix their compensation for periods of one or more years. The compensation of our medical directors is the result of arm’s length negotiations and generally depends upon competitive factors in the local market, the physician’s professional qualifications and the specific duties and responsibilities of the physician. Our medical director agreements generally include covenants not to compete. Also, when we acquire a center from one or more physicians, or where one or more physicians own interests in centers as co-owners with us, these physicians have agreed to refrain from owning interests in competing centers within a defined geographic area for various periods. These noncompetition agreements restrict the physicians from owning, or providing medical director services to, other dialysis centers, but do not restrict the physicians from referring patients to competing centers. Many of these noncompetition agreements expire at the same time as the corresponding medical director agreements. We have from time to time experienced competition from a new dialysis center established by a former medical director following the termination of his or her relationship with us. Government regulation Our dialysis operations are subject to extensive federal, state and local governmental regulations. These regulations require us to meet various standards relating to, among other things, government reimbursement programs, dialysis facilities and equipment, management of centers, personnel qualifications, maintenance of proper records, quality assurance programs, and patient care. All of our dialysis centers are certified by CMS, as is required for the receipt of Medicare reimbursement. In some states our dialysis centers also are required to secure additional state health licenses. Governmental authorities, primarily state departments of health, periodically survey our centers to determine if we satisfy applicable federal and state standards and requirements, including the conditions of participation in the Medicare ESRD program. Consistent with recommendations of the OIG, the frequency and intensity of this survey activity increased industry-wide beginning in 2000. We expect this level of survey activity to continue for the foreseeable future. Our business could be adversely impacted by: • Loss or suspension of federal certifications; • Loss or suspension of authorization to participate in the Medicare or Medicaid programs; • Loss or suspension of licenses under the laws of any state or governmental authority from which we generate substantial revenues; 8
Slide 9: • Refunds of reimbursement received because of any failures to meet applicable reimbursement requirements; • Significant reductions in reimbursement or reduction of coverage for dialysis and ancillary services; or • Fines and penalties for noncompliance. To date, we have not had significant unanticipated difficulty in maintaining our licenses or our Medicare and Medicaid authorizations. However, we expect that our industry will continue to be subject to significant government regulation and scrutiny, the scope and application of which are difficult to predict. This regulation and scrutiny could adversely impact us in a material way. Fraud and abuse under federal law The “anti-kickback” statute contained in the Social Security Act imposes criminal and civil sanctions on persons who receive or make payments in return for: • The referral of a patient for treatment; or • The ordering or purchasing of items or services that are paid for in whole or in part by Medicare, Medicaid or similar state programs. Federal penalties for the violation of these laws include imprisonment, fines and exclusion of the provider from future participation in the Medicare and Medicaid programs. Civil penalties for violation of these laws include up to $50,000 civil monetary penalties per violation, assessments of up to three times the total payments between the parties and suspension from future participation in Medicare and Medicaid. Some state antikickback statutes also include criminal penalties. The federal statute expressly prohibits traditionally criminal transactions, such as kickbacks, rebates or bribes for patient referrals. Court decisions have also held that, under certain circumstances, the statute is violated whenever a purpose of a payment is to induce referrals. In July 1991, November 1992 and November 1999 the Secretary of HHS published regulations that create exceptions or “safe harbors” for some business transactions and arrangements. Transactions and arrangements structured within these safe harbors do not violate the anti-kickback statute. A business transaction or arrangement must satisfy each and every element of a safe harbor to be protected by that safe harbor. Transactions and arrangements that do not satisfy all elements of a relevant safe harbor are not necessarily inappropriate, but may be subjected to greater scrutiny by enforcement agencies. Our medical directors refer patients to our centers and these arrangements must be in compliance with the federal anti-kickback statute. Among the available safe harbors is one for personal services, which is relevant to our arrangements with our medical directors. However, most of our agreements with our medical directors do not satisfy all seven of the requirements of the personal services safe harbor. We believe that, except in cases where a center is in transition from one medical director to another or where the term of an agreement with a physician has expired and a new agreement is in negotiation, our agreements with our medical directors satisfy most of the elements of this safe harbor. One of the requirements not satisfied is a requirement that if the services provided under the agreement are on a part-time basis, as they are with our medical directors, the agreement must specify the schedule of intervals of service, their precise length and the exact charge for such intervals. Because of the nature of our medical directors’ duties, we believe it is impossible to meet this safe-harbor requirement. Also, one of the safe-harbor requirements is that the compensation be at fair market value for the services rendered. There is little guidance available as to what constitutes fair market value for medical director services. Although our medical director agreements are the result of arm’s length negotiations, an enforcement agency could potentially challenge the level of compensation that we pay our medical directors. Accordingly, we could in the future be required to change our practices, pay substantial fines or otherwise experience a material adverse effect as a result of a challenge to these arrangements. One of the areas that the United States Attorney’s inquiry described below covers is our financial relationships with physicians. 9
Slide 10: At 51 of our dialysis centers, physicians who refer patients to the centers hold interests in partnerships or limited liability companies owning the centers and these arrangements must be in compliance with the antikickback statute. Among the available safe harbors with respect to these arrangements is one for small entity investment interests. Although none of our arrangements satisfy all of the elements of this small-entityinvestment-interests safe harbor, we believe that each of these partnerships and limited liability companies satisfies a majority of the safe harbor’s elements, as well as the intent of the regulations. We lease approximately 82 of our centers from entities in which physicians hold ownership interests and we also sublease space to referring physicians at approximately 69 of our dialysis centers. These arrangements must be in compliance with the anti-kickback statute. Among the available safe harbors with respect to these arrangements is one for space rentals. We believe that the leases and subleases we have entered into are in material compliance with the safe harbor provisions. Because we are purchasing and selling items and services in the operation of our centers that may be paid for in whole, or in part, by Medicare or a state healthcare program and because these items and services might be purchased or sold at a discount, we must ensure compliance with the federal anti-kickback statute. Among the available safe harbors is one for discounts, which is relevant to our discount arrangements. We believe that the discount arrangements that we have entered into are in compliance with the anti-kickback statute and that these arrangements satisfy, in all material respects, each of the elements of the discounts safe harbor applicable to these arrangements. Fraud and abuse under state law Several states, including California, Florida, Georgia, Kansas, Louisiana, Maryland, New York, Utah and Virginia, in which we operate dialysis centers jointly owned with referring physicians, have statutes prohibiting physicians from holding financial interests in various types of medical facilities to which they refer patients. Some states also have laws similar to the federal anti-kickback statute that may affect our ability to receive referrals from physicians with whom we have financial relationships, such as our medical directors. Some of these statutes include exemptions applicable to our medical directors and other physician relationships. Some, however, include no explicit exemption for medical director services or other services for which we contract with and compensate referring physicians or for joint ownership interests of the type held by some of our referring physicians. If these statutes are interpreted to apply to referring physicians with whom we contract for medical director and similar services or to referring physicians with whom we hold joint ownership interests, we may be required to restructure some or all of our relationships with these referring physicians and could be subject to financial penalties. Stark I/Stark II The Omnibus Budget Reconciliation Act of 1989 includes provisions, known as Stark I, that restrict physician referrals for clinical laboratory services to entities with which a physician or an immediate family member has a “financial relationship.” Federal regulatory agencies may interpret Stark I to apply to our operations. Regulations interpreting Stark I, however, have created an exception to its applicability regarding services furnished in a dialysis center if payment for those services is included in the ESRD composite rate. The Omnibus Budget Reconciliation Act of 1993 contains provisions, known as Stark II, that restrict physician referrals for “designated health services” to entities with which a physician or immediate family member has a “financial relationship.” The entity is prohibited under Stark II, as is the case for entities restricted by Stark I, from claiming reimbursement for such services under the Medicare or Medicaid programs, is liable for the refund of amounts received pursuant to prohibited claims, is subject to civil penalties of up to $15,000 per service and can be excluded from future participation in the Medicare and Medicaid programs. Stark II includes certain exceptions. Stark II provisions that may be relevant to us became effective in January 1995. Phase I of federal regulations interpreting Stark II were issued in January 2001 and became effective, in relevant part, in the first quarter of 2002. CMS has yet to propose Phase II of these regulations. 10
Slide 11: A “financial relationship” with an entity under Stark II is defined as an ownership or investment interest in, or a compensation arrangement with, the entity. We have entered into compensation agreements with our medical directors. Some of our medical directors own equity interests in entities that operate our dialysis centers. Some of our dialysis centers are leased from entities in which referring physicians hold interests and we sublease space to referring physicians at some of our dialysis centers. In addition, while nearly all of our stock option arrangements with referring physicians were terminated in 2000, a few medical directors still own options to acquire our common stock because we did not have the contractual right to terminate their options. Under the Stark II regulations, these stock options constitute compensation arrangements that must meet an applicable exception. Also, some medical directors and other physicians own our common stock, which they either purchased in the open market or received from us as consideration in an acquisition of dialysis centers from them. Although we believe that the ownership of our stock and the other ownership interests and lease arrangements for our centers are in material compliance with Stark II, it is possible that CMS could view them as prohibited arrangements that must be restructured or for which we could be subject to other applicable penalties. We believe that our compensation arrangements with medical directors and other contract physicians materially satisfy the personal services compensation arrangement exception to the Stark II prohibitions. Payments made by a lessor to a lessee for the use of premises are also excepted from Stark II prohibitions if specific requirements are met. We believe that our leases and subleases with referring physicians materially satisfy this exception to the Stark II prohibitions. The Stark II exception applicable to physician ownership interests in entities to which they make referrals does not encompass the kinds of ownership arrangements that referring physicians hold in several of our subsidiaries that operate dialysis centers. Accordingly, it is possible that CMS could require us to restructure some of these arrangements or seek to impose substantial fines or additional penalties on us. For purposes of Stark II, “designated health services” include clinical laboratory services, equipment and supplies, home health services, outpatient prescription drugs and inpatient and outpatient hospital services. We believe that the language and legislative history of Stark II and Phase I of the final Stark II regulations indicate that Congress did not intend to include dialysis services and the services and items provided incident to dialysis services as a part of designated health services. For example, the final Stark II regulations exempt from the referral prohibition referrals for clinical laboratory services furnished in an ESRD center if payment for those services is included in the ESRD composite rate and for EPO and other dialysis-related outpatient prescription drugs furnished in or by an ESRD center. However, our provision of, or arrangement and assumption of financial responsibility for, certain other outpatient prescription drugs, center dialysis services and supplies, home dialysis supplies and equipment and services to hospital inpatients under our dialysis services agreements with hospitals, include services and items that still could be construed as designated health services within the meaning of Stark II. Although we bill the hospital and not Medicare or Medicaid for hospital inpatient services, our medical directors may request or establish a plan of care that includes dialysis services for hospital inpatients that may be considered a referral to us within the meaning of Stark II. Because the Stark II regulations do not expressly address all of our operations, it is possible that CMS could interpret Stark II to apply to parts of our operations. Consequently, it is possible that CMS could determine that Stark II requires us to restructure existing compensation agreements with our medical directors and to repurchase or to request the sale of ownership interests in subsidiaries and partnerships held by referring physicians or, alternatively, to refuse to accept referrals for designated health services from these physicians. We would be materially impacted if CMS interprets Stark II to apply to us and we either could not achieve material compliance with Stark II or the cost of achieving that compliance was substantial. The False Claims Act The federal False Claims Act, or FCA, is a means of policing false bills or false requests for payment in the healthcare delivery system. In part, the FCA imposes a civil penalty on any person who: • Knowingly presents, or causes to be presented, to the federal government a false or fraudulent claim for payment or approval; 11
Slide 12: • Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the federal government; • Conspires to defraud the federal government by getting a false or fraudulent claim allowed or paid; or • Knowingly makes, uses or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit, money or property to the federal government. The penalties for a violation of the FCA range from $5,500 to $11,000 for each false claim plus three times the amount of damages caused by each such claim. The federal government has used the FCA to prosecute a wide variety of issues such as Medicare fraud, including coding errors, billing for services not rendered, the submission of false cost reports, billing services at a higher reimbursement rate than appropriate, billing under a comprehensive code as well as under one or more component codes included in the comprehensive code and billing for care that is not medically necessary. Although subject to some dispute, at least two federal district courts have also determined that an alleged violation of the federal anti-kickback statute or Stark I and Stark II are sufficient to state a claim for relief under the FCA. In addition to the civil provisions of the FCA, the federal government can use several other criminal statutes to prosecute persons who submit false or fraudulent claims for payment to the federal government. The Health Insurance Portability and Accountability Act of 1996 The Health Insurance Portability and Accountability Act of 1996, or HIPAA, among other things, allows individuals who lose or change jobs to transfer their insurance, limits exclusions for preexisting conditions and establishes a pilot program for medical savings accounts. In addition, HIPAA also expanded federal attempts to combat healthcare fraud and abuse by making amendments to the Social Security Act and the federal criminal code. Among other things, HIPAA created a new “Health Care Fraud Abuse Control Account,” under which advisory opinions are issued by the OIG regarding the application of the anti-kickback statute, criminal penalties for Medicare and Medicaid fraud were extended to other federal healthcare programs, the exclusion authority of the OIG was expanded, Medicare and Medicaid civil monetary penalty provisions were extended to other federal healthcare programs, the amounts of civil monetary penalties were increased and a criminal healthcare fraud statute was established. HIPAA also includes provisions relating to the privacy of medical information. HHS published HIPAA privacy regulations in December 2000 and modified these regulations in August 2002. Compliance has required the development of extensive policies and procedures, and the implementation of administrative safeguards with respect to private health information in our possession. Compliance with the privacy regulations was required beginning April 2003. HIPAA also includes provisions relating to standards for electronic transactions and electronic signatures. Under HIPAA, compliance with the standards for electronic transactions was required beginning October 2003. We believe we are in compliance with these new requirements. Other regulations Our operations are subject to various state hazardous waste and non-hazardous medical waste disposal laws. These laws do not classify as hazardous most of the waste produced from dialysis services. Occupational Safety and Health Administration regulations require employers to provide workers who are occupationally subject to blood or other potentially infectious materials with prescribed protections. These regulatory requirements apply to all healthcare facilities, including dialysis centers, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide or employ hepatitis B vaccinations, personal protective equipment and other safety devices, infection control training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, and engineering and work practice controls. Employers are also required to comply with various record-keeping requirements. We believe that we are in material compliance with these laws and regulations. 12
Slide 13: A New York statute prohibits publicly-held companies from owning the health facility license required to operate a dialysis center in New York. Although we own substantially all of the assets, including the fixed assets, of our New York dialysis centers, the licenses are held by privately-owned companies with which we have agreements to provide a broad range of administrative services, including billing and collecting. The New York State Department of Health has approved these types of arrangements; however, we cannot guarantee that they will not be challenged as prohibited under the relevant statute. We have a similar management relationship with physician practices in several states which prohibit the corporate practice of medicine, and with a privatelyowned company in New Jersey for some, but not all, of our New Jersey dialysis centers. We have had difficulty securing licenses for new centers in New Jersey in our own name because the New Jersey Department of Aging and Senior Services refuses to grant new licenses to companies that have more than a small number of outstanding survey issues throughout all of their facilities in the entire United States, regardless of the respective size of the companies’ operations. A few states have certificate of need programs regulating the establishment or expansion of healthcare facilities, including dialysis centers. We believe that we are in compliance with all applicable state certificate of need laws. Although we have implemented an aggressive corporate compliance program, as discussed below, and believe we are in material compliance with current applicable laws and regulations, our industry will continue to be subject to substantial regulation, the scope and effect of which are difficult to predict. Our activities could be reviewed or challenged by regulatory authorities at any time in the future. United States Attorney’s inquiry In February 2001 the Civil Division of the United States Attorney’s Office for the Eastern District of Pennsylvania in Philadelphia contacted us and requested our cooperation in a review of some of our historical practices, including billing and other operating procedures and our financial relationships with physicians. We have cooperated in this review and provided the requested records to the United States Attorney’s Office. In May 2002, we received a subpoena from the Philadelphia office of the OIG. The subpoena requires an update to the information we provided in our response to the February 2001 request, and also seeks a wide range of documents relating to pharmaceutical and other ancillary services provided to patients, including laboratory and other diagnostic testing services, as well as documents relating to our financial relationships with physicians and pharmaceutical companies. The subpoena covers the period from May 1996 to May 2002. We have provided the documents requested. As this review proceeds, the government could expand its areas of concern. If a court determines that there has been wrongdoing, the penalties under applicable statutes could be substantial. At this time, we are unable to determine: • When this matter will be resolved; • What position the Civil Division will take regarding any of our practices and any potential liability on the Company’s part; • Whether any additional areas of inquiry will be opened; and • Any outcome of this inquiry, financial or otherwise. An adverse determination could have a material adverse impact on our business, results of operation and financial condition. As described above under the subheading “Government regulation,” the penalties under the federal anti-kickback law, Stark laws and False Claims Act and other federal and state statutes can be substantial. Laboratory payment reviews Our Florida-based laboratory subsidiary has been the subject of a third-party carrier review of its Medicare reimbursement claims. The carrier has reviewed claims for six separate review periods. In 1998 the carrier issued a formal overpayment determination in the amount of $5.6 million for the first review period (January 1995 to April 13
Slide 14: 1996). The carrier also suspended all payments of Medicare claims from the laboratory beginning in May 1998. In 1999, the carrier issued a formal overpayment determination in the amount of $15.0 million for the second review period (May 1996 to March 1998). Subsequently, the carrier informed us that $16.1 million of the suspended claims for the third review period (April 1998 to August 1999), $11.6 million of the suspended claims for the fourth review period (August 1999 to May 2000), $2.9 million of the suspended claims for the fifth review period (June 2000 to December 2000) and $0.9 million of the suspended claims for the sixth review period (December 2000 to May 2001) were not properly supported by the prescribing physicians’ medical justification. We disputed the carrier’s determinations and have provided supporting documentation of our claims. In addition to the formal appeal processes with the carrier and a federal administrative law judge, we also pursued resolution of this matter through meetings with representatives of CMS and the Department of Justice, or DOJ. We initially met with the DOJ in February 2001, at which time the DOJ requested additional information, which we provided in September 2001. In June 2002, an administrative law judge ruled that the sampling procedures and extrapolations that the carrier used as the basis of its overpayment determinations for the first two review periods were invalid. This decision invalidated the carrier’s overpayment determinations for the first two review periods. Recently, the carrier’s hearing officer rendered partially favorable decisions on appeal for the third and fourth review periods. We have filed requests for appeal to an administrative law judge on the unfavorable portions of the decisions on the third and fourth review periods, which involve approximately $7 million in disputed claims. We have also filed a notice of appeal to the carrier for the fifth and sixth review periods, which involves approximately $4 million in disputed claims. During 2000 we stopped accruing Medicare revenue from this laboratory because of the uncertainties regarding both the timing of resolution and the ultimate revenue valuations. Following the favorable ruling by the administrative law judge in 2002 related to the first two review periods covering January 1995 to March 1998, the carrier lifted the payment suspension and began making payments in July 2002 for lab services provided subsequent to May 2001. After making its determination with respect to the fifth and sixth review periods in December 2002, the carrier paid the additional amounts that it is not disputing for the second through sixth review periods. As of December 31, 2002, we had received $69 million, which represented approximately 70% of the total outstanding Medicare lab billings for the period from January 1995 through June 2002. Approximately $10 million of these collections related to 2002 lab services provided through June 2002. In addition to processing prior period claims, the carrier also began processing and paying billings for current period services on a timely basis in the third quarter of 2002. Based on these developments, we began recognizing estimated current period Medicare lab revenue in the third quarter of 2002. In the fourth quarter of 2003, we recognized additional recoveries of $24 million, principally for review periods three and four, based on the hearing officer’s most recent findings. The Medicare carrier for our former Minnesota laboratory is conducting a post-payment review of Medicare reimbursement claims for the period January 1996 through December 1999. The scope of the review is similar to the review conducted at our Florida laboratory. At this time, we are unable to determine how long it will take the carrier to complete this review. There is currently no overpayment determination or payment suspension with respect to the Minnesota laboratory. The DOJ also requested information with respect to this laboratory, which we have provided. Medicare revenues at the Minnesota laboratory, which were much smaller than the Florida laboratory, were approximately $15 million for the period under review. In November 2001, we closed the operations of this laboratory and combined them with our Florida laboratory. 14
Slide 15: Corporate compliance program We have implemented a company-wide corporate compliance program as part of our commitment to comply fully with all applicable laws and regulations and to maintain the high standards of conduct we expect from all of our employees. We continuously review this program and enhance it as necessary. The primary purposes of the program include: • Increasing through training and education, the awareness of our employees and affiliated professionals of the necessity of complying with all applicable laws and regulations in an increasingly complicated regulatory environment; • Auditing our dialysis centers, laboratories and billing offices on a regular basis to identify any potential instances of noncompliance in a timely manner; and • Ensuring that we take steps to resolve instances of noncompliance or to address areas of potential noncompliance as promptly as we become aware of them. We have a code of conduct that each of our employees and affiliated professionals must follow and we have a confidential toll-free hotline (888-272-7272) for employees to report potential instances of noncompliance. Our chief compliance officer administers the compliance program. The chief compliance officer reports directly to our chief executive officer and chief operating officer and to the compliance committee of our board of directors. Insurance We carry property and general liability insurance, professional liability insurance, directors’ and officers’ liability insurance, workers compensation, and other insurance coverage in amounts and on terms deemed adequate by management, based on our claims experience and expectations for future claims. Future claims could, however, exceed our applicable insurance coverage. Physicians practicing at our dialysis centers are required to maintain their own malpractice insurance and our medical directors maintain coverage for their individual private medical practices. Our liability policies also cover our medical directors for the performance of their duties as medical directors. Location and capacity of our centers As of December 31, 2003, we operated or provided administrative services to 566 outpatient dialysis centers, of which 537 are consolidated in our financial statements. Of the remaining 29 centers, we own minority interests in five centers, which are accounted for as equity investments, and provide administrative services to 24 centers in which we have no ownership interest. The locations of the 537 centers included in our consolidated financial statements were as follows: State Number of Centers State Number of Centers State Number of Centers California . . . . . . . . . . . . Texas . . . . . . . . . . . . . . . . Florida . . . . . . . . . . . . . . . North Carolina . . . . . . . . Georgia . . . . . . . . . . . . . . Minnesota . . . . . . . . . . . . New York . . . . . . . . . . . . Virginia . . . . . . . . . . . . . . Oklahoma . . . . . . . . . . . . Maryland . . . . . . . . . . . . . Michigan . . . . . . . . . . . . . Colorado . . . . . . . . . . . . . 89 45 44 34 33 27 26 23 22 21 21 19 Pennsylvania . . . . . . . Illinois . . . . . . . . . . . . Louisiana . . . . . . . . . . Indiana . . . . . . . . . . . Kansas . . . . . . . . . . . . Arizona . . . . . . . . . . . Washington . . . . . . . . Missouri . . . . . . . . . . New Jersey . . . . . . . . Nevada . . . . . . . . . . . District of Columbia . Nebraska . . . . . . . . . . 15 19 16 12 11 10 9 8 7 7 6 4 4 Kentucky . . . . . . . . . . South Dakota . . . . . . . Iowa . . . . . . . . . . . . . New Mexico . . . . . . . Ohio . . . . . . . . . . . . . South Carolina . . . . . Utah . . . . . . . . . . . . . . Alabama . . . . . . . . . . Delaware . . . . . . . . . . Oregon . . . . . . . . . . . Wisconsin . . . . . . . . . 3 3 2 2 2 2 2 1 1 1 1
Slide 16: As our business has grown, we have increased capacity at our existing centers, developed new centers, acquired centers or entered into agreements to manage centers. We expand capacity at our existing centers by increasing hours and/or days of operation or, if additional space is available within a center, through the addition of dialysis stations. The development of a typical outpatient center generally requires $1 million to $1.5 million for initial construction and equipment and approximately $350,000 for working capital in the first year. Based on our experience, a new center typically opens nine to thirteen months after the property lease is signed, normally achieves operating profitability by the ninth to eighteenth month of operation and normally reaches maturity within three to five years. Acquiring an existing center requires a substantially greater initial investment, but profitability and cash flow are initially more predictable. In addition to acquiring centers, we enter into agreements to provide administrative services to third-party-owned centers in return for management fees, typically based on a percentage of revenues. The table below shows the growth of our company by number of dialysis centers. In February 1998, we completed a merger with Renal Treatment Centers, then the fourth largest provider of dialysis services in the United States, approximately doubling the size of our operations. The pace of our acquisitions slowed significantly during the second half of 1999 and we sold substantially all our operations outside the continental United States in 2000. 2003 2002 2001 2000 1999 1998 1997 1996 1995 Number of centers at beginning of year . . . . . . . . . . . . Acquired centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Developed centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Centers with services agreements . . . . . . . . . . . . . . . . . Divestitures, closures and terminations . . . . . . . . . . . . . Number of centers at end of year . . . . . . . . . . . . . . . . . . 515 27 30 3 9 566 495 11 19 2 12 515 490 21 7 3 26 495 572 10 11 8 111 490 508 45 13 18 12 572 197 263 24 32 8 508 134 52 12 1 197 68 57 9 42 23 3 134 68 We believe we have adequate capacity within our existing network to accommodate greater patient volume. In addition, we are currently expanding capacity at some of our centers by adding dialysis stations or relocating to larger facilities, and we intend to open and acquire additional centers in 2004. Competition The dialysis industry is highly competitive, particularly in terms of acquiring existing dialysis centers. Competition for qualified physicians to act as medical directors and for inpatient dialysis services agreements with hospitals is also vigorous. We have also, from time to time, experienced competition from former medical directors or referring physicians who have opened their own dialysis centers. The market share of the large multi-center providers has increased significantly over the last several years and the four largest dialysis chains, including us, now comprise approximately 65% to 70% of the market, compared to approximately 30% in 1992. We expect consolidation by these large chain providers to continue. Approximately half of the independent centers are owned or controlled by hospitals or non-profit organizations. Hospital-based and non-profit dialysis units typically are more difficult to acquire than independent, physicianowned centers. Large chain dialysis providers with whom we compete include Fresenius Medical Care, Gambro and Renal Care Group. Our competitors have substantial financial resources and often compete with us for acquisitions and the development of new centers in our markets. Our two largest competitors, Fresenius and Gambro, manufacture a full line of dialysis supplies and equipment in addition to owning and operating dialysis centers. This may give them cost advantages over us because of their ability to manufacture their own products. In addition, Fresenius is our largest supplier of dialysis products and is also our largest competitor in the dialysis services market. Our purchases of products in the categories generally offered by Fresenius and/or Gambro, represent less than 5% of our total patient care costs. 16
Slide 17: A portion of our business also consists of monitoring and providing supplies for ESRD treatments in patients’ homes. Other companies provide similar services. One company, Aksys, has developed a hemodialysis system designed to enable patients to perform hemodialysis on a daily basis in their homes. In March 2002, Aksys received FDA clearance to market its Personal Hemodialysis (PHD) system. To date there has not been significant adoption of the PHD system by our patients or physicians. We are unable to determine how this system will affect our business over the longer term. Employees As of December 31, 2003, we had approximately 13,800 teammates: • • • Licensed professional staff (nurses, dieticians and social workers) Other patient care and center support staff and laboratory personnel Corporate, billing and regional administrative staff 5,300 6,900 1,600 Our dialysis business requires nurses with specialized training for patients with complex care needs. Recruitment and retention of nurses are continuing concerns for health care providers generally because of the disparity between the supply and demand for nurses, which has led to a nursing shortage. We have an active program of investing in our professional healthcare teammates to help ensure we meet our recruitment and retention targets, including expanded training opportunities, tuition reimbursements, and other incentives. Item 2. Properties. We own the land and building for only two of our dialysis facilities. Our other dialysis centers are located on premises that we lease. Our leases generally cover periods from five to ten years and typically contain renewal options of five to ten years at the fair rental value at the time of renewal or at rates subject to periodic consumer price index increases. Our outpatient dialysis centers range in size from 500 to 30,000 square feet, with an average size of approximately 6,500 square feet. We maintain our corporate headquarters in approximately 50,000 square feet of office space in El Segundo, California, which we currently lease for a term expiring in 2013. Our business office in Tacoma, Washington is in a 127,000-square foot facility leased for a term expiring in 2009. We maintain a 57,000-square foot facility in Berwyn, Pennsylvania, which we currently lease for a term expiring in 2006, principally for additional billing and collections staff. Our Florida-based laboratory is located in a 30,000-square foot facility owned by us, with a long-term ground lease, and we lease 15,000 square feet of additional space for laboratory administrative staff for a term expiring in 2007. We also have 40,000 square feet of office space in Torrance, California, formerly our corporate headquarters, under lease until 2008. Currently 13,000 square feet of this office space is subleased. Some of our dialysis centers are operating at or near capacity. However, we believe that we have adequate capacity within most of our existing dialysis centers to accommodate additional patient volume through increased hours and/or days of operation, or, if additional space is available within an existing facility, by adding dialysis stations. In addition, we often can build new centers if existing centers reach capacity. With respect to relocating centers or building new centers, we believe that we can generally lease space at economically reasonable rates in the area planned for each of these centers. Expansion or relocation of our dialysis centers is subject to review for compliance with conditions relating to participation in the Medicare ESRD program. In states that require a certificate of need or center license, additional approvals would generally be necessary for expansion or relocation. Item 3. Legal Proceedings. See the heading “United States Attorney’s inquiry” in “Item 1. Business” of this report for information on our cooperation with the Civil Division of the United States Attorney’s Office for the Eastern District of Pennsylvania in a review of some of our historical practices, including billing and other operating procedures and our financial relationships with physicians. 17
Slide 18: See the heading “Laboratory payment reviews” in “Item 1. Business” of this report for information on the payment dispute with our Florida laboratory’s Medicare carrier. In addition, we are subject to claims and suits in the ordinary course of business. We do not believe that the ultimate resolution of these additional pending or threatened proceedings, whether the underlying claims are covered by insurance or not, will have a material adverse effect on our results of operations or financial condition. Item 4. Submission of Matters to a Vote of Securities Holders. No matters were submitted to a vote of security holders during the fourth quarter of 2003. 18
Slide 19: PART II Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters. Our common stock is traded on the New York Stock Exchange under the symbol “DVA”. The following table sets forth, for the periods indicated, the high and low closing prices for our common stock as reported by the New York Stock Exchange. High Low Year ended December 31, 2003: 1st quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2nd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4th quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, 2002: 1st quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2nd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4th quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.59 26.94 32.50 40.00 $26.00 26.13 23.91 25.87 $19.55 19.52 26.83 32.95 $21.50 20.40 19.46 22.80 The closing price of our common stock on February 13, 2004 was $44.89 per share. According to The Bank of New York, our registrar and transfer agent, as of February 13, 2004, there were 2,710 holders of record of our common stock. Since our recapitalization in 1994, we have not declared or paid cash dividends to holders of our common stock. We have no current plans to pay cash dividends. Also, see the heading “Liquidity and capital resources” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our consolidated financial statements. 19
Slide 20: Item 6. Selected Financial Data. The following table presents selected consolidated financial and operating data for the periods indicated. The following financial and operating data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements filed as part of this report. 2003 Year ended December 31, 2002 2001 2000 (in thousands, except share data) 1999 Income statement data: Net operating revenues(1) . . . . . . . . . . . . . $2,016,418 Operating expenses(2) . . . . . . . . . . . . . . . . 1,637,883 Operating income (loss) . . . . . . . . . . . . . . . Debt expense . . . . . . . . . . . . . . . . . . . . . . . Refinancing charges (gains)(3) . . . . . . . . . Other income (loss), net . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . Income tax expense (benefit) . . . . . . . . . . . Basic earnings (loss) per common share . . $ Diluted earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of earnings to fixed charges(4)(5) . . $ 378,535 66,828 26,501 3,060 288,266 112,475 2.79 2.49 4.43:1 $1,854,632 1,470,806 383,826 71,636 48,930 3,997 267,257 109,928 $ 157,329 $ $ 2.19 1.96 4.35:1 $ 251,925 1,775,693 1,311,252 70,264 $1,650,753 1,339,895 310,858 72,438 (1,629) 2,518 242,567 105,252 $ 137,315 $ $ 1.64 1.52 3.63:1 $ 175,983 1,662,683 811,190 503,637 $1,486,302 1,318,460 167,842 115,445 7,009 (6,270) 39,118 25,633 $ $ $ 13,485 0.17 0.16 1.32:1 $ 148,348 1,596,632 974,006 349,368 $ 1,445,351 1,513,121 (67,770) 109,196 1,601 (3,259) (181,826) (34,570) $ (147,256) $ $ (1.81) (1.81) See (5) $(1,043,796) 2,056,718 5,696 326,404 Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 175,791 Balance sheet data: Working capital(6) . . . . . . . . . . . . . . . . . . . $ 242,238 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,945,530 Long-term debt(7) . . . . . . . . . . . . . . . . . . . 1,117,002 Shareholders’ equity(8) . . . . . . . . . . . . . . . 306,871 (1) Net operating revenues include $24,000 in 2003 and $58,778 in 2002 of prior years’ services revenue relating to Medicare lab recoveries, and $22,000 in 2001 of prior years’ dialysis services revenue relating to cash settlements and collections in excess of prior estimates. (2) Total operating expenses include recoveries of $5,192 in 2002 and $35,220 in 2001 of accounts receivable reserved in 1999, net impairment losses of $4,556 in 2000 and impairment and valuation losses of $139,805 in 1999 principally associated with the disposition of the Company’s non-continental U.S. operations. (3) Refinancing charges (gains) were $26,501 in 2003, representing the consideration paid to redeem the $125,000 5 5⁄8% Convertible Subordinated Notes due 2006 and the $345,000 7% Convertible Subordinated Notes due 2009 in excess of book value, the write off of related deferred financing costs and other financing fees associated with amending the bank credit agreement, $48,930 in 2002 representing the write-off of deferred financing costs associated with the retirement of the $225,000 outstanding 9 1⁄4% Senior Subordinated Notes due 2011, a net gain of $1,629 in 2001 relating to the write-off of deferred financing costs and the accelerated swap liquidation gains resulting from debt refinancing. (4) The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. Earnings for this purpose is defined as pretax income from operations adjusted by adding back fixed charges expensed during the period and debt refinancing charges. Fixed charges include debt expense (interest expense and amortization of financing costs), the estimated interest component of rental expense on operating leases, and capitalized interest. (5) Due to our loss in 1999, the ratio coverage in 1999 was less than 1:1. We would have had to generate additional earnings of $182,535 to achieve a coverage of 1:1. 20
Slide 21: (6) The working capital calculation as of December 31, 1999 includes long-term debt of $1,425,610 that was potentially callable under covenant provisions. (7) Long-term debt as of December 31, 1999 excludes $1,425,610 that was potentially callable under covenant provisions. (8) We repurchased 3,441,900 shares of common stock for $107,162 in 2003, 27,327,477 shares of common stock for $642,171 in 2002 and 888,700 shares of common stock for $20,360 in 2001. Debt of $124,700 and $526 was also converted into 4,868,352 and 16,030 shares of common stock in 2003. 21
Slide 22: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward looking statements This Form 10-K contains statements that are forward-looking statements within the meaning of the federal securities laws, including statements about our expectations, beliefs, intentions or strategies for the future. These statements involve known and unknown risks and uncertainties, including risks resulting from the regulatory environment in which we operate, economic and market conditions, competitive activities, other business conditions, accounting estimates, and the risk factors set forth in this Form 10-K. These risks, among others, include those relating to the concentration of profits generated from PPO and private indemnity patients and from the administration of pharmaceuticals, possible reductions in private and government reimbursement rates, changes in pharmaceutical practice patterns or reimbursement policies, the Company’s ability to maintain contracts with physician medical directors, and legal compliance risks such as the ongoing review by the US Attorney’s Office and the HHS Office of Inspector General in Philadelphia. Our actual results may differ materially from results anticipated in our forward-looking statements. We base our forward-looking statements on information currently available to us, and we have no current intention to update these statements, whether as a result of changes in underlying factors, new information, future events or other developments. The following should be read in conjunction with our consolidated financial statements and “Item 1. Business.” Overview Our stated mission is to be the provider, employer and partner of choice. We believe our attention to these three areas—our patients, our teammates, and our business partners—represent the major drivers of our longterm success, aside from external factors such as government policy and physician practice patterns. Accordingly, two principal non-financial metrics we track are quality clinical outcomes and teammate turnover. We have developed our own composite index for measuring improvements in our clinical outcomes, which we refer to as the DaVita Quality Index (DQI). Our clinical outcomes have improved over each of the past three years, and we ended 2003 with the best clinical outcomes that we have ever achieved. Although it is difficult to reliably measure clinical performance across our industry, we believe our clinical outcomes compare favorably with other dialysis providers in the United States. Over the past three years we have achieved significant reductions in teammate turnover, which has been a major contributor to our performance improvements. We will continue to focus on these fundamental long-term value drivers. We are pleased with the overall clinical, operating and financial performance levels achieved over the past three years, and we expect to be able to generally maintain our current levels of performance over the foreseeable future, absent significant adverse shifts in government policy, physician practice patterns, or mix of commercialplan patients. Although our business has areas of significant potential exposure, as delineated in the risk factors following this discussion and analysis, our operating results over the past three years have not been significantly adversely affected by these risk factors. Our operations represent a single reporting segment, with more than 96% of our revenues currently derived directly from providing dialysis services, of which 88% represents on-site dialysis services in approximately 540 centers that are wholly-owned or majority-owned. Our other direct dialysis services, which operationally are integrated with our center operations, relate to patient-performed peritoneal dialysis and acute treatments in hospitals. The principal drivers to our revenue are a) the number of treatments, which is primarily a function of the number of chronic patients requiring three treatments per week, and b) average treatment revenue. The total patient base is a relatively stable factor, influenced by a demographically growing need for dialysis, our relationships with referring physicians together with the quality of our clinical care, and our pace of opening and acquiring new centers. 22
Slide 23: Our year-over-year treatment volume growth for 2003 was 6.7%, compared with 5.0% and 6.3% for 2002 and 2001. Approximately 40% of our 2003 growth was associated with new centers, and approximately 60% was attributable to increased treatments. Average revenue per treatment is principally driven by our mix of commercial and government (principally Medicare and Medicaid) treatments, the mix and intensity of physician-prescribed pharmaceuticals, commercial and government reimbursement rates, and our charge capture, billing and collecting operations performance. On average, reimbursement rates from commercial payors are more than double Medicare and Medicaid reimbursement rates, and therefore the percentage of commercial patients to total patients represents a major driver of our total average revenue per treatment. The percent of patients under government reimbursement programs to total dialysis center patients increased approximately 1% during 2003, and is currently approximately 79%. In terms of revenue dollars, approximately 58% of our total dialysis revenue is from government programs. Government reimbursement rates are principally determined by federal (Medicare) and state (Medicaid) policy, have limited potential for rate increases and are sometimes at risk of reductions. Medicare reimbursements represent approximately 50% of our dialysis revenue, and cumulative increases since 1990 have only totaled 4.6%. There were no Medicare rate increases for 2002 and 2003, and the next increase is scheduled for 2005 at 1.6%. Medicaid rates in some states have been under severe budget pressures, and some reductions are anticipated in certain states. Commercial rates can vary significantly and a major portion of our commercial rates are contracted amounts with major payors and are subject to intense negotiation pressure. Over the past three years we have been successful in maintaining a relatively stable average reimbursement rate in the aggregate for patients with commercial plans, in addition to obtaining periodic fee schedule increases. Approximately 40% of our dialysis revenue is associated with physician-prescribed pharmaceuticals, and therefore changes in physician practice patterns, pharmaceutical protocols, and pharmaceutical intensities significantly influence our revenue levels. Such changes, driven by physician practice patterns and protocols focused on improving clinical outcomes, have accounted for a significant portion of the increase in average revenue per treatment over the past three years. Our operating performance with respect to services charge capture billing and collecting can also be a significant factor in how much average revenue per treatment is actually realized. Over the past two years we have invested heavily in new systems and processes to ensure reliable performance, as well as compliance with federal and state regulations. Because of the inherent uncertainties associated with predicting third-party reimbursements in the healthcare industry, our revenue recognition involves significant estimation risks. Our estimates are developed based on the best information available to us and our best judgement as to the reasonably assured collectibility of our billings as of the reporting date. Changes in estimates are reflected in the financial statements based upon on-going actual experience trends, or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies. In 2001 we separately reported cash recoveries of $22 million associated with prior years’ dialysis services as a result of improvements in our billing and collecting operations. Our annual average revenue per treatment increased from $278 in 2001 to $291 in 2002 and to $303 in 2003. These increases were principally due to increases in our standard fee schedules (impacting non-contracted commercial revenue), changes in mix and intensity of physician-prescribed pharmaceuticals, commercial contract negotiations, and continued improvements in revenue capture, billing and collecting operations, while maintaining a relatively stable mix of commercial patients and commercial rates. The principal drivers for our patient care costs are clinical hours per treatment, labor rates, vendor pricing of pharmaceuticals, and business infrastructure and compliance costs. However, other cost categories can also 23
Slide 24: represent significant cost changes such as increased insurance costs experienced in 2003. Our average clinical hours per treatment has improved over the past two years primarily because of reduced teammate turnover and improved training and processes. There is limited opportunity for productivity improvements beyond the levels achieved in 2003, and federal and state policies can adversely impact our ability to achieve optimal productivity levels. Labor rates have increased consistent with general industry trends. For the past three years we have been able to negotiate relatively stable pharmaceutical pricing with our vendors, and expect relatively stable pricing through 2004. General and administrative expenses have remained relatively constant as a percent of total revenue over the past three years, however this reflects substantial increases in spending related to strengthening our business and regulatory compliance processes, legal and other professional fees, and expanding support functions. We expect that these higher levels of general and administrative expenses will be generally maintained to support our longterm initiatives and to ensure the highest levels of regulatory compliance. Although other revenues represented only approximately 3% of total revenues for 2003 and 2002, changes in the status of disputed Medicare billings at our Florida lab resulted in increased current period revenue and operating income of $21 million in 2002 compared to 2001. The carrier began making payments on Medicare lab billings in the third quarter of 2002 after four years of withholding all payments, and therefore we were able to begin recognizing this revenue which was entirely incremental income because the associated lab revenue costs had always been ongoing. Medicare lab revenues for 2003 current year services amounted to $26 million. In addition to the incremental current period revenue and income, we had Medicare lab recoveries totaling $83 million in 2002 and 2003 associated with lab services provided from 1995 through 2001, representing nearly 90% of the previously disputed Medicare claims. Outlook for 2004 and beyond. We are targeting operating income to be between $360 and $385 million for 2004, compared with $355 for 2003. This is consistent with our current longer-term three-year outlook of an average annual increase in operating income of three to eight percent for the next three years on a cumulative average basis. However, we believe the potential downside risks for this three-year outlook are greater than the upside potentials outside this range. These projections and the underlying assumptions involve significant risks and uncertainties, and actual results may vary significantly from these current projections. These risks, among others, include those relating to the concentration of profits generated from PPO and private indemnity patients and from the administration of pharmaceuticals, possible reductions in private and government reimbursement rates, changes in pharmaceutical practice patterns or reimbursement policies, our ability to maintain contracts with our physician medical directors, and legal compliance risks such as the ongoing review by the United States Attorney’s Office and HHS Office of Inspector General in Philadelphia. We undertake no duty to update these projections, whether due to changes in current or expected trends, underlying market conditions, decisions of the United States Attorney’s Office, the DOJ or the OIG in any pending or future review of our business, or otherwise. 24
Slide 25: Results of operations The following is a summary of operating revenues and operating expenses. The divestiture of our dialysis operations outside the continental United States was substantially completed during 2000, and the sale of our remaining non-continental centers was completed during the second quarter of 2002. The non-continental U.S. operating results are excluded from the revenue and cost trends discussed below. Year ended December 31, 2003 2002 2001 (dollar amounts rounded to nearest million) Net operating revenues: Continental: Current period services . . . . . . . . . . . . . . . . . . . . Prior years’ services—laboratory . . . . . . . . . . . Prior years’ services—dialysis . . . . . . . . . . . . . . Non-continental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses and charges: Continental: Patient care costs . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . Goodwill amortization . . . . . . . . . . . . . . . . . . . . Provision for uncollectible accounts . . . . . . . . . Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest and equity income, net . . . . . . Non-continental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses and charges . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income—excluding non-continental operations, prior years’ recoveries, and goodwill amortization in 2001 (i.e., excluding amounts in italics) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dialysis treatments . . . . . . . . . . . . . . . . . . . . . . . . . . . Average dialysis treatments per treatment day . . . . . . Average dialysis revenue per treatment (excluding prior years’ services revenue in 2001) . . . . . . . . . . Net operating revenues $1,992 24 100% $1,790 59 6 100% $1,614 22 15 1,651 100% 2,016 1,855 1,361 160 75 36 7 1,638 $ 379 68% 8% 4% 2% 1,212 155 64 32 (5) 8 5 1,471 $ 384 68% 9% 4% 2% 1,087 128 62 42 32 (35) 7 17 1,340 $ 311 67% 8% 4% 2% $ 355 6,373,894 20,377 $303 18% $ 319 5,975,280 19,090 $291 18% $ 298 5,690,199 18,185 $278 18% Net operating revenues. Net operating revenues for current period services for continental U.S. operations increased 11% in both 2003 and 2002. Approximately 4% and 5% of the increases in revenue for 2003 and 2002 were attributable to increases in the average reimbursement rate per treatment and approximately 7% and 5% were due to increases in the number of dialysis treatments. The balance of the increase in 2002 was due to approximately $21 million of additional current year Medicare laboratory revenue. As discussed below, we had not recognized any Medicare laboratory revenue during 2001 due to the ongoing dispute with the third-party carrier. Dialysis services revenue. Dialysis services revenue, excluding prior period services revenue, represented approximately 97%, 97% and 98% of current operating revenues in 2003, 2002 and 2001, respectively. Lab, other and management fee income account for the balance of revenues. 25
Slide 26: Dialysis services include outpatient center hemodialysis, which accounts for approximately 88% of total dialysis treatments, home dialysis, and inpatient hemodialysis with contracted hospitals. Major components of dialysis revenue include the administration of EPO and other drugs as part of the dialysis treatment, which represents approximately one third of operating revenues. Dialysis services are paid for primarily by Medicare and state Medicaid programs in accordance with rates established by CMS, and by other third-party payors such as HMOs and health insurance carriers. Services provided to patients covered by third-party insurance companies are on average more than double the Medicare or Medicaid rates. Patients covered by employer group health plans convert to Medicare after a maximum of 33 months. As of year-end 2003, the Medicare ESRD dialysis treatment rates were between $121 and $144 per treatment, or an overall average of $131 per treatment, excluding the administration of drugs. The majority of our net earnings from dialysis services are derived from commercial payors, some of which pay at negotiated reimbursement rates and others which pay based on our usual and customary fee schedule. The commercial reimbursement rates are under continual pressure as we negotiate contract rates with large HMOs and insurance carriers. Additionally, as a patient transitions from commercial coverage to Medicare or Medicaid coverage, the reimbursement rates generally decline substantially. Dialysis services revenues by payor type were as follows: Year ended December 31, 2003 2002 2001 Percent of total dialysis revenue: Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medicaid and other government-based programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial payors (HMOs, and health insurance carriers) . . . . . . . . . . . . . . . . . . . . . . . . 50% 8 58 42 100% 51% 8 59 41 100% 52% 8 60 40 100% The average dialysis revenue recognized per treatment was $303, $291 and $278 for 2003, 2002 and 2001, respectively. The increase in average dialysis revenue per treatment in 2003 was principally due to commercial rate increases and changes in intensity of physician-prescribed pharmaceuticals. The increase in 2002 was principally due to commercial rate increases, changes in mix and intensity of physician-prescribed pharmaceuticals, continued improvements in revenue capture, billing and collecting operations, and payor contracting. The average dialysis revenue per treatment for the fourth quarter of 2003 was $306. Our mix of commercial patients and commercial rates, which is a major profitability factor, remained relatively stable during 2003. The number of dialysis treatments increased 6.7% in 2003 and 5.0% in 2002, principally attributable to nonacquired annual growth rates of approximately 4.0% plus growth through acquisitions. We expect the nonacquired growth rate to remain in the range of 3.0% to 5.0% through 2004. The prior years’ services revenue of $22 million in 2001 related to cash recoveries associated with prior years’ services and resulted from improvements in the Company’s billing and collecting operations. Lab and other services. As discussed in Note 16 to the consolidated financial statements (Contingencies), our Florida-based laboratory subsidiary has been under an ongoing third-party carrier review for Medicare reimbursement claims since 1998. Prior to the third quarter 2002, no Medicare payments had been received since May 1998. Following a favorable ruling by an administrative law judge in June 2002 relating to review periods from January 1995 to March 1998, the carrier began releasing funds for lab services provided subsequent to May 2001. During the fourth quarter of 2002, the carrier also released funds for certain claims in review periods from 26
Slide 27: April 1998 through May 2001. During the second half of 2002, the carrier paid us a total of $69 million, representing approximately 70% of the total outstanding prior Medicare lab billings for the period from January 1995 through June 2002. Approximately $10 million of these collections related to 2002 lab services provided through June 2002, and the balance of $59 million related to prior years’ services. In addition to the prior-period claims, the carrier also began processing billings for current period services in the third quarter of 2002, at which time we began recognizing current period Medicare lab revenue. The carrier’s hearing officer recently rendered partially favorable decisions relating to review periods from April 1998 to May 2000, which resulted in our recognition of additional recoveries of $24 million, of which approximately $19 million remains to be paid in the first quarter of 2004. We have filed requests for appeal to an administrative law judge for the remaining unpaid claims of approximately $11 million for review periods from April 1998 through May 2001, but cannot be assured of any further recoveries. Management fee income. Management fee income represented less than 1% of total revenues for 2003 and 2002. Our fees are typically based on a percentage of revenue of the center that we administrate and are established in the management contract. We operated or provided administrative services to 29 and 30 third-party or minority-owned dialysis centers as of December 31, 2003 and 2002. During the third quarter of 2003 we acquired an outpatient vascular access management business that currently manages the vascular access component at fourteen independent third-party physician practices. Operating expenses and charges Patient care costs. Patient care costs are those costs directly associated with operating and supporting our dialysis centers and ancillary operations and consist principally of labor, pharmaceuticals, medical supplies and facility costs. As a percentage of net operating revenue, patient care costs were 68% for 2003 and 2002, and 67% for 2001. On a per-treatment basis, patient care costs increased approximately $11 and $12 in 2003 and 2002. The increase in both years was principally due to higher labor and insurance costs, and increases in new center openings, as well as increases in the levels of physician-prescribed pharmaceuticals. Increases in revenue per treatment more than offset these cost increases. General and administrative expenses. General and administrative expenses consist of those costs not specifically attributable to the dialysis centers and ancillary operations, and include expenses for corporate and regional administration, including centralized accounting, billing and cash collection functions, and regulatory compliance oversight. General and administrative expenses as a percentage of net operating revenues (excluding prior period services revenue) were approximately 8.0%, 8.7% and 8.0% in 2003, 2002 and 2001, respectively. In absolute dollars, general and administrative expenses increased by approximately $25 million in 2002 and an additional $6 million in 2003. The increase in 2003 principally consisted of higher labor costs. The increase in 2002 was principally due to higher labor and legal costs. The substantial increases in labor costs for 2002 and 2003 principally related to strengthening our business and regulatory compliance processes, as well as expanding support functions. Depreciation and amortization. The increase in depreciation and amortization from $64 million in 2002 to $75 million in 2003 was principally due to new center developments, acquisitions and our new operating and billing systems. Provision for uncollectible accounts receivable. The provisions for uncollectible accounts receivable (excluding prior period services revenue) were approximately 1.8% of current operating revenues in 2003 and 2002, and 2.0% in 2001. During 2002 and 2001, we realized recoveries of $5 million and $35 million associated with aged accounts receivables that had been reserved in 1999. The recoveries and lower provisions in 2003 and 2002 resulted from continued improvements that we have made in our billing and collecting processes. Impairments and valuation adjustments. We perform impairment or valuation reviews for our property and equipment, amortizable intangibles, and investments in and advances to third-party dialysis businesses 27
Slide 28: whenever a change in condition indicates that a review is warranted. Such changes include shifts in our business strategy or plans, the quality or structure of our relationships with our partners, or when an owned or third-party dialysis business experiences deteriorating operating performance or liquidity problems. Goodwill is routinely assessed for possible valuation impairment using fair value methodologies. There were no significant impairments or valuation adjustments during the periods presented. Other income The net of other income items were income of approximately $3 million for 2003, $4 million for 2002, and $3 million for 2001. These amounts included interest income of approximately $3 million for each year. Debt expense and refinancing charges Debt expense for 2003, 2002 and 2001 consisted of interest expense of approximately $64 million, $69 million and $70 million respectively, and amortization of deferred financing costs of approximately $3 million for each year. The reduction in interest expense in 2003 was primarily due to lower average interest rates and lower average debt balances. Reclassification of previously reported extraordinary losses. In accordance with SFAS No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 14, and Technical Corrections, which became effective as of January 1, 2003, an after-tax loss of $29.4 million in 2002 and an after-tax gain of $1 million in 2001 resulting from the extinguishment of debt previously classified as extraordinary items have been reclassified to a pre-tax refinancing charge of $49 million for 2002 and a pre-tax gain of $2 million for 2001. In 2003, the refinancing charges of $27 million related to the consideration paid in excess of book value to redeem our Convertible Subordinated Notes and the write-off of deferred financing costs and financing fees associated with amending our bank credit agreement. In 2002, the refinancing charges of $49 million, related to debt restructuring, which included retiring $225 million 9¼% Senior Subordinated Notes due 2011 and extinguishing our then existing senior credit facilities. In 2001, the net refinancing gain of $2 million related to the write-off of deferred financing costs being more than offset by the accelerated recognition of deferred interest rate swap liquidation gains as a result of debt refinancing. Provision for income taxes The provision for income taxes for 2003 represented an effective tax rate of 39.0%, compared with 41.0% in 2002 and 43.4% in 2001. The reduction in the effective tax rate in 2003 compared to 2002 was primarily due to a lower provision for state income taxes and utilization of previously unrecognized tax losses. The reduction in 2002 was primarily due to a lower provision for state income tax rates, the elimination of book amortization not deductible for tax purposes and changes in tax valuation estimates. Liquidity and capital resources Cash flow from operations during 2003 amounted to $294 million, compared with $278 million for 2002 not including $64 million in Medicare lab and uncollectible account recoveries related to prior years’ services. Nonoperating cash outflows in 2003 included $100 million for capital asset expenditures including $58 million for new center developments, $97 million for acquisitions (net of divestitures), and $107 million in stock repurchases. Non-operating cash outflows for 2002 included $103 million for capital asset expenditures, $19 million for acquisitions, and $642 million in stock repurchases. During 2003 we acquired 27 dialysis centers, including controlling ownership interests in two centers in which we previously had minority ownership, for $84 million and opened 30 new dialysis centers. Other 2003 acquisitions related to ancillary operations. During 2002 we acquired 11 dialysis centers for $20 million and opened 19 new dialysis centers. The accounts receivable balance at December 31, 2003 and 2002 represented approximately 69 and 70 days of net revenue, net of bad debt provision. 28
Slide 29: We believe that we will have sufficient liquidity and operating cash flows to fund our scheduled debt service and other obligations over the next twelve months. Our stated long-term general target range for our debt leverage ratio is 3.0 to 3.5, although we expect that it may be outside this range for periods of time. As of year-end 2003, our ratio was 2.3. For this purpose, debt leverage ratio is defined as total debt net of cash to annualized operating income excluding depreciation, amortization, and minority interests and equity income, net. 2003 capital structure changes. In the first quarter of 2003, we borrowed $150 million that was available under the Term Loan A of our credit facility. The Term Loan A bears interest at LIBOR plus 2.00% for an overall effective rate of 3.19% at December 31, 2003, with provision to potentially further reduce the interest rate to LIBOR plus 1.50% under certain circumstances. The Term Loan A matures in March 2007 and requires annual principal payments of $33.9 million in years 2004 and 2005, $40.1 million in 2006 and $10.6 million in 2007. In July 2003, we completed a call for redemption of all of our outstanding $125 million 5 5⁄8% Convertible Subordinated Notes due 2006. Holders of the 5 5⁄8% Notes had the option to convert their Notes into shares of DaVita common stock at a price of $25.62 per share or receive cash at 1.0169 times the principal amount of the 5 5⁄8% Notes, plus accrued interest. In July 2003, we issued 4,868,352 shares of common stock from treasury stock for the conversion of nearly all the 5 5⁄8% Notes, and redeemed the balance for cash and accrued interest. In July 2003, we also entered into an amended credit agreement in order to, among other things, lower the overall interest rate. We also acquired an additional $200 million of borrowings under the replacement Term Loan B, which amounted to $1.042 billion. In November 2003, we entered into a second amended and restated credit agreement in order to again lower the interest rate on the Term Loan B and to modify certain covenants. The Term Loan B currently bears interest at LIBOR plus 2.25% for an overall effective rate of 3.42%, with a provision to potentially further reduce the interest rate to LIBOR plus 2.00% under certain circumstances. The aggregate annual principal payments for the Term Loan B are approximately $11 million in the first four years of the agreement, $255 million in the fifth year and $741 million in the sixth year, due no later than March 2009. In August 2003, we completed a call for redemption of $200 million of our outstanding $345 million 7% Convertible Subordinated Notes due 2009. Holders of the 7% Notes had the option to convert their Notes into shares of DaVita common stock at a price of $32.81 per share or receive cash at 1.042 times the principal amount of the 7% Notes, plus accrued interest. All $200 million of the Notes were redeemed for $208 million in cash plus accrued interest. In October 2003, we completed a call for redemption of the remaining $145 million of our 7% Convertible Subordinated Notes due 2009. These 7% Notes were redeemed for $155 million in cash, including accrued interest, and 16,030 shares of treasury stock. In November 2003, we entered into an interest rate swap agreement to effectively fix the LIBOR benchmark interest rate at 3.39% on an amortizing notional amount of $135 million of our Term Loan B outstanding debt that had the economic effect of fixing the interest rate at 5.64% based upon the margin in effect on December 31, 2003. The agreement expires in November 2008 and requires quarterly interest payments. As of December 31, 2003, the notional amount of the swap was approximately $135 million and its fair value was a $2 million liability, resulting in a charge to other comprehensive income of approximately $1 million, net of tax. As a result of the swap agreement, the effective interest rate on the entire credit facility was 3.69% based upon the margin in effect on December 31, 2003. In January 2004, we entered into another interest rate swap agreement to effectively fix the LIBOR benchmark interest rate at 3.08% on an additional amortizing notional amount of $135 million of our Term Loan B outstanding debt that had the economic effect of fixing the interest rate at 5.33% based upon the margin in effect on January 15, 2004. The agreement expires in January 2009 and requires quarterly interest payments. As a 29
Slide 30: result of these two interest rate swap agreements, as of January 15, 2004, approximately 25% of our outstanding variable rate debt is effectively fixed at a weighted average interest rate of 5.49% and our overall credit facility effective weighted average interest rate was 3.89%, based upon current margins. During 2003, we repurchased a total of 3,441,900 shares of our common stock for approximately $107 million, or an average of $31.13 per share, pursuant to Board of Directors’ authorizations. As of December 31, 2003, we had $146 million remaining to repurchase shares of our common stock in the open market pursuant to a $200 million Board of Directors’ authorization. 2002 capital structure changes. In the first quarter of 2002, we initiated a recapitalization plan to restructure our debt and repurchase common stock. In the initial phase of the recapitalization plan we retired all of our $225 million outstanding 9¼% Senior Subordinated Notes due 2011 for $266 million. Concurrent with the retirement of this debt, we secured a new senior credit facility agreement in the amount of $1.115 billion. The excess of the consideration paid over the book value of the Senior Subordinated Notes and write-off of deferred financing costs associated with extinguishing the existing senior credit facilities and the notes resulted in refinancing charges of $49 million. We completed the next phase of the recapitalization plan with the repurchase of 16,682,337 shares of our common stock for approximately $402 million, or $24.10 per share, through a modified dutch auction tender offer. From May through December 2002 we also purchased 7,699,440 shares in the open market for approximately $172 million pursuant to a $225 million Board of Directors’ authorization. For the year ended December 31, 2002, stock repurchases, including 2,945,700 shares acquired prior to initiating the recapitalization plan, amounted to $642 million for 27,327,477 shares, for a composite average of $23.50 per share. Off-balance sheet arrangements and aggregate contractual obligations In addition to the debt obligations reflected on our balance sheet, we have commitments associated with operating leases, letters of credit and our investments in third-party dialysis businesses. Nearly all of our facilities are leased. We have potential acquisition obligations for several jointly-owned centers, in the form of put options exercisable at the third-party owners’ discretion. These put obligations require us to purchase the third-party owners’ interests at either the appraised fair market value or a predetermined multiple of earnings or cash flow. The following is a summary of these contractual obligations and commitments as of December 31, 2003 ($ in millions): Within One Year 2-3 Years 4-5 Years After 5 Years Total Scheduled payments under contractual obligations: Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potential cash requirements under existing commitments: Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of dialysis centers . . . . . . . . . . . . . . . . . . . . . . Working capital advances to third-parties under administrative services agreements . . . . . . . . . . . . . . . . $ 50 1 62 $113 $ 15 38 15 $ 68 $ 97 1 115 $213 $766 3 93 $862 $247 3 153 $403 $1,160 8 423 $1,591 $ 15 60 15 $ 9 $ 13 $— $ 9 $ 13 $ 90 Contingencies Health care provider revenues may be subject to adjustment as a result of (1) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (2) differing interpretations of government regulations by different fiscal intermediaries or regulatory 30
Slide 31: authorities; (3) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; (4) retroactive applications or interpretations of governmental requirements; and (5) claims for refunds from private payors. As discussed in Note 16 to the consolidated financial statements (Contingencies), our Florida-based laboratory subsidiary has been under an ongoing third-party carrier review for Medicare reimbursement claims since 1998. Prior to the third quarter 2002, no Medicare payments had been received since May 1998. Following a favorable ruling by an administrative law judge in June 2002 relating to review periods from January 1995 to March 1998, the carrier began releasing funds for lab services provided subsequent to May 2001. During the fourth quarter of 2002, the carrier also released funds related to review periods from April 1998 through May 2001. During the second half of 2002, the carrier paid us a total of $69 million, of which $59 million related to prior years’ services. The carrier’s hearing officer recently rendered partially favorable decisions relating to review periods from April 1998 to May 2000, which resulted in our recognition of additional recoveries of $24 million, of which approximately $19 million remains to be paid in the first quarter of 2004. We have filed requests for appeal to an administrative law judge for the remaining unpaid claims of approximately $11 million for review periods from April 1998 through May 2001, but cannot be assured of any further recoveries. In February 2001 the Civil Division of the United States Attorney’s Office for the Eastern District of Pennsylvania in Philadelphia contacted us and requested our cooperation in a review of some of our historical practices, including billing and other operating procedures and our financial relationships with physicians. We cooperated in this review and provided the requested records to the United States Attorney’s Office. In May 2002, we received a subpoena from the Philadelphia office of the Office of Inspector General of the Department of Health and Human Services, or OIG. The subpoena requires an update to the information we provided in our response to the February 2001 request, and also seeks a wide range of documents relating to pharmaceutical and other ancillary services provided to patients, including laboratory and other diagnostic testing services, as well as documents relating to our financial relationships with physicians and pharmaceutical companies. The subpoena covers the period from May 1996 to May 2002. We have provided the documents requested. This inquiry remains at an early stage. As it proceeds, the government could expand its areas of concern. If a court determines that there has been wrongdoing, the penalties under applicable statutes could be substantial. In addition to the foregoing, we are subject to claims and suits in the ordinary course of business. Management believes that the ultimate resolution of these additional pending proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on our financial condition, results of operations or cash flows. Critical accounting estimates and judgements Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make estimates, judgements and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and contingencies. All significant estimates, judgements and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and updated when necessary. Actual results will generally differ from these estimates. Changes in estimates are reflected in our financial statements in the period of change based upon on-going actual experience trends, or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies. Interim changes in estimates are applied prospectively within annual periods. Certain accounting estimates, including those concerning revenue recognition and provision for uncollectible accounts, impairments and valuation adjustments, and accounting for income taxes, are considered to be critical in evaluating and understanding our financial results because they involve inherently uncertain matters and their application requires the most difficult and complex judgements and estimates. 31
Slide 32: Revenue recognition and provision for uncollectible accounts. Revenue recognition uncertainties inherent in the Company’s operations are addressed in AICPA Statement of Position (SOP) No. 00-1 Auditing Health Care Third-Party Revenues and Related Receivables. As addressed in SOP No. 00-1, net revenue recognition and allowances for uncollectible billings require the use of estimates of the amounts that will actually be realized considering, among other items, retroactive adjustments that may be associated with regulatory reviews, audits, billing reviews and other matters. Revenues are recognized as services are provided to patients. Operating revenues consist primarily of reimbursement for dialysis and ancillary services to patients. A usual and customary fee schedule is maintained for our dialysis treatment and other patient services; however, actual collectible revenue is normally at a discount to the fee schedule. Medicare and Medicaid programs are billed at pre-determined net realizable rates per treatment that are established by statute or regulation. Most nongovernmental payors, including contracted managed care payors, are billed at our usual and customary rates, but a contractual allowance is recorded to adjust to the expected net realizable revenue for services provided. Contractual allowances along with provisions for uncollectible accounts are estimated based upon credit risks of third-party payors, contractual terms, inefficiencies in our billing and collection processes, regulatory compliance issues and historical collection experience. Our range of dialysis revenue estimating risk is generally expected to be within 1% of total revenue, which can represent as much as 5% of operating income. Changes in estimates are reflected in the financial statements based on on-going actual experience trends, or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies. Changes in revenue estimates for prior periods are separately disclosed and reported if material to the current reporting period and longer term trend analyses. For example, we recognized $22 million of prior period dialysis revenue in 2001 related to cash recoveries in excess of previous estimates made possible by improvements in our billing and collecting operations. Lab service revenues for current period dates of services are recognized at the estimated net realizable amounts to be received after considering possible retroactive adjustments that may be made as a result of the ongoing third-party carrier review. Impairments of long-lived assets. We account for impairment of long-lived assets, which include property and equipment, investments, amortizable intangible assets and goodwill, in accordance with the provisions of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets or SFAS No. 142 Goodwill and Other Intangible Assets, as applicable. An impairment review is performed annually or whenever a change in condition occurs which indicates that the carrying amounts of assets may not be recoverable. Such changes include changes in our business strategies and plans, changes in the quality or structure of our relationships with our partners and deteriorating operating performance of individual dialysis centers. We use a variety of factors to assess the realizable value of assets depending on their nature and use. Such assessments are primarily based upon the sum of expected future undiscounted net cash flows over the expected period the asset will be utilized, as well as market values and conditions. The computation of expected future undiscounted net cash flows can be complex and involves a number of subjective assumptions. Any changes in these factors or assumptions could impact the assessed value of an asset and result in an impairment charge equal to the amount by which its carrying value exceeds its actual or estimated fair value. Accounting for income taxes. We estimate our income tax provision to recognize our tax expense for the current year and our deferred tax liabilities and assets for future tax consequences of events that have been recognized in our financial statements, measured using enacted tax rates and laws expected to apply in the periods when the deferred tax liabilities or assets are expected to be realized. Deferred tax assets are assessed based upon the likelihood of recoverability from future taxable income and to the extent that recovery is not likely, a valuation allowance is established. The allowance is regularly reviewed and updated for changes in circumstances that would cause a change in judgement about the realizability of the related deferred tax assets. These calculations and assessments involve complex estimates and judgements because the ultimate tax outcome can be uncertain or future events unpredictable. 32
Slide 33: Variable compensation accruals. We estimate variable compensation accruals monthly based upon the annual amounts expected to be earned and paid out resulting from the achievement of certain teammate-specific and/or corporate financial and operating goals. Our estimates, which include compensation incentives for bonuses, awards and benefit plan contributions, are updated periodically due to changes in our economic condition or cash flows that could ultimately impact the actual final award. Actual results may vary due to the subjective nature of fulfilling employee specific and/or corporate goals, as well as the final determination and approval of amounts by the Company’s Board of Directors. Significant new accounting standards for 2003 In January 2003 the FASB issued Interpretation (FIN) No. 46 Consolidation of Variable Interest Entities, which addresses the consolidation of certain entities (“variable interest entities”) in which an enterprise has a controlling financial interest through other than voting interests. FIN No. 46 requires that a variable interest entity be consolidated by the holder of the majority of the expected risks and rewards associated with the activities of the variable interest entity. Adoption of this standard did not have a material effect on our consolidated financial statements. SFAS No. 150 Accounting for certain financial instruments with characteristics of both liabilities and equity was issued in May 2003. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It also requires certain mandatorily redeemable instruments such as the liability for other owners’ interests in limited-life entities to be measured based upon the fair values of the limited-life entities assets, with changes in the liability reported as interest costs. At the October 29, 2003 FASB Board meeting, the Board decided to defer indefinitely the effective date of Statement 150 related to classification and measurement requirements, but not the disclosure requirements, for mandatorily redeemable financial instruments that become subject to Statement 150 solely as a result of consolidation. Our consolidated partnerships include interests in limited-life companies for which third-party interests are reflected in “minority interests” in the financial statements. See Note 18 of our consolidated financial statements. 33
Slide 34: RISK FACTORS This Form 10-K contains statements that are forward-looking statements within the meaning of the federal securities laws, including statements about our expectations, beliefs, intentions or strategies for the future. These forward-looking statements include statements regarding our expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for uncollectible accounts receivable, operating income, cash flow, and capital expenditures. We base our forward-looking statements on information currently available to us, and we do not intend to update these statements, whether as a result of changes in underlying factors, new information, future events or other developments. These statements involve known and unknown risks and uncertainties, including risks resulting from economic and market conditions, the regulatory and reimbursement environment in which we operate, competitive activities and other business conditions. Our actual results may differ materially from results anticipated in these forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include those set forth below. The risks discussed below are not the only ones facing our business. If the average rates that private payors pay us decline, then our revenues, cash flows and earnings would be substantially reduced. Approximately 42% of our dialysis revenues are generated from patients who have private payors as the primary payor. The majority of these patients have insurance policies that reimburse us at rates materially higher than Medicare rates. Based on our recent experience in negotiating with private payors, we believe that pressure from private payors to decrease the rates they pay us may increase. If the average rates that private payors pay us decline significantly, it would have a material adverse effect on our revenues, cash flows and earnings. If the number of patients with higher paying commercial insurance declines, then our revenues, cash flows and earnings would be substantially reduced. Our revenue levels are sensitive to the percentage of our reimbursements from higher-paying commercial plans. A patient’s insurance coverage may change for a number of reasons, including as a result of changes in the patient’s or a family member’s employment status. If there is a significant change in the number of patients under higher-paying commercial plans relative to plans that pay at lower rates, for example a reduction in the average number of patients under indemnity and PPO plans compared with the average number of patients under HMO plans and government programs, it would negatively impact our revenues, cash flows and earnings. Changes in clinical practices and reimbursement rates or rules for EPO and other drugs could substantially reduce our revenue and earnings. The administration of EPO and other drugs accounts for approximately one third of our net operating revenues. Changes in physician practice patterns and accepted clinical practices, changes in private and governmental reimbursement criteria, the introduction of new drugs and the conversion to alternate types of administration, (for example from intravenous administration to subcutaneous or oral administration, that may in turn result in lower or less frequent dosages) could materially reduce our revenues and earnings from the administration of EPO and other drugs. For example, some Medicare fiscal intermediaries are seeking to implement local medical review policies for EPO and vitamin D analogs that would effectively limit utilization of and reimbursement for these drugs. CMS had indicated that it may issue a new national coverage decision that will direct all fiscal intermediaries with respect to reimbursement coverage for EPO. We do not know if or when CMS will issue such decision, or what it will provide. In addition, reductions in current private and government reimbursement rates for EPO or other pharmaceutical drugs would also reduce our net earnings and cash flows. For example, both CMS and members of Congress have proposed changes in the Medicare reimbursement rates for many of the outpatient prescription drugs that we administer to dialysis patients. 34
Slide 35: Adverse developments with respect to EPO could materially reduce our net earnings and cash flows and affect our ability to care for our patients. Amgen is the sole supplier of EPO and often unilaterally increases its price for EPO. For example, Amgen unilaterally increased its base price for EPO by 3.9% in each of 2002, 2001 and 2000. Although we have contracted coverage for EPO pricing for a fixed time period that includes discount variables depending on certain clinical criteria, we cannot predict whether we will continue to receive the same discount structure for EPO that we currently receive, or whether we will continue to achieve the same levels of discounts within that structure as we have historically achieved. In addition, Amgen has developed a new product, Aranesp®, that may replace EPO or reduce its use with dialysis patients. We cannot predict if or when Aranesp® will be introduced to the U.S. dialysis market, what its cost and reimbursement structure will be, or how it may impact our revenues from EPO. Increases in the cost of EPO and the introduction of Aranesp® could have a material adverse effect on our net earnings and cash flows. Future declines, or the lack of further increases, in Medicare reimbursement rates would reduce our net earnings and cash flows. Approximately 50% of our dialysis revenues are generated from patients who have Medicare as their primary payor. The Medicare ESRD program reimburses us for dialysis and ancillary services at fixed rates. Unlike most other Medicare programs, the Medicare ESRD program does not provide for periodic inflation increases in reimbursement rates. Increases of 1.2% in 2000 and 2.4% in 2001 were the first increases in the composite rate since 1991, and were significantly less than the cumulative rate of inflation since 1991. For 2002 through 2004 there has been no increase in the composite rate. In 2005 an increase of only 1.6% has been scheduled. Increases in operating costs that are subject to inflation, such as labor and supply costs, have occurred and are expected to continue to occur with or without a compensating increase in reimbursement rates. We cannot predict with certainty the nature or extent of future rate changes, if any. To the extent these rates are not adjusted to keep pace with inflation, our net earnings and cash flows would be adversely affected. Future changes in the structure of, and reimbursement rates under, the Medicare ESRD program could substantially reduce our operating earnings and cash flows. CMS is studying changes to the ESRD program, including whether the Medicare composite rate for dialysis should be modified to include additional services that are now separately billable, such as laboratory and other diagnostic tests and the administration of EPO and other pharmaceuticals, in the composite rate. If Medicare began 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. In particular, Medicare revenue from EPO is approximately 28% of our total Medicare revenue. If EPO were included in the composite rate, and if the rate were not increased sufficiently, our operating earnings and cash flow could decrease substantially. Future declines in Medicaid reimbursement rates would reduce our net earnings and cash flows. Approximately 5% of our dialysis revenues are generated from patients who have Medicaid as their primary coverage. In addition approximately 3% of our dialysis revenues are from Medicaid secondary coverage. Approximately 45% of our Medicaid revenue is derived from patients in California. If state governments change Medicaid programs or the rates paid by those programs for our services, then our revenue and earnings may decline. Some of the states’ Medicaid programs have reduced rates for dialysis services, and others have proposed such reductions or other changes to eligibility for Medicaid coverage. Any actions to limit Medicaid coverage or further reduce reimbursement rates for dialysis and related services would adversely affect our revenue and earnings. The pending federal reviews of some of our historical practices could result in substantial penalties against us. We are voluntarily cooperating with the Civil Division of the United States Attorney’s Office and OIG in Philadelphia in a review of some of our practices, including billing and other operating procedures, financial relationships with physicians and pharmaceutical companies, and the provision of pharmaceutical and other 35
Slide 36: ancillary services. The DOJ has also requested and received information regarding our laboratories. We are unable to determine when these matters will be resolved, whether any additional areas of inquiry will be opened or any outcome of these matters, financial or otherwise. Any negative findings could result in substantial financial penalties against us and exclusion from future participation in the Medicare and Medicaid programs. If we fail to adhere to all of the complex government regulations that apply to our business, we could suffer severe consequences that would substantially reduce our revenue and earnings. Our dialysis operations are subject to extensive federal, state and local government regulations, including Medicare and Medicaid reimbursement rules and regulations, federal and state anti-kickback laws, and federal and state laws regarding the collection, use and disclosure of patient health information. The regulatory scrutiny of healthcare providers, including dialysis providers, has increased significantly in recent years. In addition, the frequency and intensity of Medicare certification surveys and inspections of dialysis centers have increased markedly since 2000. We endeavor to comply with all of the requirements for receiving Medicare and Medicaid reimbursement and to structure all of our relationships with referring physicians to comply with the anti-kickback laws; however, the laws and regulations in this area are complex and subject to varying interpretations. In addition, our historical dependence on manual processes that vary widely across our network of dialysis centers exposes us to greater risk of errors in billing and other business processes. Due to regulatory considerations unique to each of these states, all of our dialysis operations in New York and some of our dialysis operations in New Jersey are conducted by privately-owned companies to which we provide a broad range of administrative services. These operations account for approximately 7% of our dialysis revenues. We believe that we have structured these operations to comply with the laws and regulations of these states, but we can give no assurances that they will not be challenged. If any of our operations are found to violate these or other government regulations, we could suffer severe consequences, including: • Mandated practice changes that significantly increase operating expenses; • Suspension of payments from government reimbursement programs; • Refunds of amounts received in violation of law or applicable reimbursement program requirements; • Loss of required government certifications or exclusion from government reimbursement programs; • Loss of licenses required to operate healthcare facilities in some of the states in which we operate, including the loss of revenues from operations in New York and New Jersey conducted by privatelyowned companies as described above; • Fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements and patient privacy law violations; and • Claims for monetary damages from patients who believe their protected health information has been used or disclosed in violation of federal or state patient privacy laws. If businesses we acquire failed to adhere to regulations that apply to our business, we could suffer severe consequences that would substantially reduce our revenues and earnings. Businesses we acquire may have unknown or contingent liabilities, including for failure to adhere to laws and regulations governing dialysis operations. We generally seek indemnification from the sellers of businesses we acquire, but such liabilities may not be covered or may be greater than contractual limits or the financial resources of the indemnifying party. 36
Slide 37: If a significant number of physicians were to cease referring patients to our dialysis centers, whether due to regulatory or other reasons, our revenue and earnings would decline. If a significant number of physicians stop referring patients to our centers, it could have a material adverse effect on our revenue and earnings. Many physicians prefer to have their patients treated at dialysis centers where they or other members of their practice supervise the overall care provided as medical directors of the centers. As a result, the primary referral source for most of our centers is often the physician or physician group providing medical director services to the center. If a medical director agreement terminates, whether before or at the end of its term, and a new medical director is appointed, it may negatively impact the former medical director’s decision to treat his or her patients at our center. Additionally, both current and former medical directors have no obligation to refer their patients to our centers. Also, if quality or service levels at our centers deteriorate if may negatively impact patient referrals and treatment volumes. Our medical director contracts are for fixed periods, generally five to ten years. Medical directors have no obligation to extend their agreements with us. As of December 31, 2003, there were 25 centers, accounting for nearly 5% of our treatment volume, at which the medical director agreements required renewal on or before December 31, 2004. We also may take actions to restructure existing relationships or take positions in negotiating extensions of relationships in order to assure compliance with the safe harbor provisions of the anti-kickback statute and other similar laws. These actions could negatively impact physicians’ decisions to extend their medical director agreements with us or to refer their patients to us. In addition, if the terms of an existing agreement were found to violate applicable laws, we may not be successful in restructuring the relationship, which could lead to the early termination of the agreement, or force the physician to stop referring patients to the centers. If the current shortage of skilled clinical personnel continues, we may experience disruptions in our business operations and increases in operating expenses. We are experiencing increased labor costs and difficulties in hiring nurses due to a nationwide shortage of skilled clinical personnel. We compete for nurses with hospitals and other health care providers. This nursing shortage may limit our ability to expand our operations. If we are unable to hire skilled clinical personnel when needed, our operations and treatment growth will be negatively impacted. Provisions in our charter documents and compensation programs we have adopted may deter a change of control that our stockholders would otherwise determine to be in their best interests. Our charter documents include provisions that may deter hostile takeovers, delay or prevent changes of 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 include provisions prohibiting our stockholders from acting by written consent, requiring 60 days advance notice of stockholder proposals or nominations to our Board of Directors and 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, and a poison pill that would substantially dilute the interest sought by an acquirer that our board of directors does not approve. In addition, most of our outstanding employee stock options include a provision accelerating the vesting of the options in the event of a change of control. We have also adopted a change of control protection program for our employees who do not have a significant number of stock options, which provides for cash bonuses to the employees in the event of a change of control. Based on the shares of our common stock outstanding and the market price of our stock on December 31, 2003, these cash bonuses would total approximately $94 million if a control transaction occurred at that price and our Board of Directors did not modify the program. These compensation programs may affect the price an acquirer would be willing to pay. These provisions could also discourage bids for our common stock at a premium and cause the market price of our common stock to decline. 37
Slide 38: Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest rate sensitivity The table below provides information about our financial instruments that are sensitive to changes in interest rates. For our debt obligations, the table presents principal repayments and current weighted average interest rates on these obligations as of December 31, 2003. For our debt obligations with variable interest rates, the rates presented reflect the current rates in effect at the end of 2003. These rates are based on LIBOR plus margins based upon performance and leverage criteria. The margins currently in effect are between 2.00% to 2.25%. Expected maturity date 2005 2006 2007 2008 (dollars in millions) Fair Value Average interest rate 2004 Thereafter Total Long-term debt: Fixed rate . . . . . . . . . . . . . . . . . Variable rate . . . . . . . . . . . . . . . $6 45 $1 45 $1 52 $2 22 $ $744 3 247 $13 1,155 $13 1,155 5.08% 3.69% Our senior credit facility is based on a floating LIBOR interest rate plus a margin, which is reset periodically and can be locked in for a maximum of six months. As a result, our interest expense is subject to fluctuations as LIBOR interest rates change. In November 2003, we entered into an interest rate swap agreement to effectively fix the LIBOR benchmark interest rate at 3.39% on an amortizing notional amount of $135 million of our Term Loan B outstanding debt that had the economic effect of fixing the interest rate at 5.64% based upon the margin in effect on December 31, 2003. The agreement expires in November 2008 and requires quarterly interest payments. As of December 31, 2003, the notional amount of the swap was approximately $135 million and its fair value was a $2 million liability. As a result of the swap agreement our overall effective interest rate on the entire credit facility was 3.69% based upon the margin in effect on December 31, 2003. In January 2004, we entered into another interest rate swap agreement to effectively fix the LIBOR benchmark interest rate at 3.08% on an additional amortizing notional amount of $135 million of our Term Loan B outstanding debt that had the economic effect of fixing the interest rate at 5.33% based upon the margin in effect on January 15, 2004. The agreement expires in January 2009 and requires quarterly interest payments. As a result of these two interest rate swap agreements, as of January 15, 2004, approximately 25% of our outstanding variable rate debt is effectively fixed at a weighted average interest rate of 5.49% and our overall credit facility effective weighted average interest rate was 3.89%, based upon the current margins. One means of assessing exposure to interest rate changes is duration-based analysis that measures the potential loss in net income resulting from a hypothetical increase in interest rates of 100 basis points across all variable rate maturities (referred to as a “parallel shift in the yield curve”). Under this model, with all else constant, it is estimated that such an increase would have reduced net income by approximately $6.5 million, $3.5 million and $1.6 million, net of tax, for the years ended December 31, 2003, 2002 and 2001, respectively. Exchange rate sensitivity We are currently not exposed to any foreign currency exchange rate risk. Item 8. Financial Statements and Supplementary Data. See the Index included at “Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.” 38
Slide 39: Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Management maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed by the Company pursuant to the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and regulations, and that such information is accumulated and communicated to the Company’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow for timely decisions regarding required disclosures. Management recognizes that these controls and procedures can provide only reasonable assurance of desired outcomes, and that estimates and judgements are still inherent in the process of maintaining effective controls and procedures. At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures provide reasonable assurance for timely identification and review of material information required to be included in the Company’s Exchange Act reports, including this report on Form 10-K. We have established and maintain a system of internal controls designed to provide reasonable assurance that transactions are executed with proper authorization and are properly recorded in the Company’s records, and that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period. Internal controls are periodically reviewed and revised if necessary, and are augmented by appropriate oversight and audit functions. There has not been any change in the Company’s internal control over financial reporting during the fiscal period covered by this report on Form 10-K that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 39
Slide 40: PART III Item 10. Directors and Executive Officers of the Registrant. In 2002, we adopted a Corporate Governance Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and to all of our financial accounting and reporting professionals, who are directly or indirectly involved in the preparation, reporting and fair presentation of our financial statements and Exchange Act Reports. The Code of Ethics is posted on the Company’s website, located at http://www.davita.com, and is included as an Exhibit to this Form 10-K. The other information required to be disclosed by this item will appear in, and is incorporated by reference from, the section entitled “Proposal No. 1. Election of Directors” under the subheading “Information concerning nominees to our board of directors” and the section entitled “Executive Officers, Compensation and Other Information” under the subheadings “Information concerning our executive officers” and “Section 16(a) beneficial ownership reporting compliance” and the section entitled “the Audit Committee Financial Expert” included in our definitive proxy statement relating to our 2004 annual stockholder meeting. Item 11. Executive Compensation. The information required by this item will appear in, and is incorporated by reference from, the section entitled “Proposal No. 1. Election of Directors” under the subheading “Compensation of directors” and the section entitled “Executive Officers, Compensation and Other Information” under the subheadings “Executive compensation,” “Employment agreements” and “Compensation committee interlocks and insider participation” included in our definitive proxy statement relating to our 2004 annual stockholder meeting. The compensation committee report and performance graph required by Items 402(k) and (l) of Regulation S-K are not incorporated herein. Item 12. Equity Compensation Plan Information. The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans and arrangements as of December 31, 2003, including the 1994 Equity Compensation Plan, the 1995 Equity Compensation Plan, the 1997 Equity Compensation Plan, the 1999 Equity Compensation Plan, the 1999 Non-Executive Officer and Non-Director Equity Compensation Plan, the Special Purpose Option Plan (RTC Plan), the 2002 Equity Compensation Plan, the Employee Stock Purchase Plan and the deferred stock unit arrangements. The material terms of each of these plans and arrangements are described in the notes to the December 31, 2003 consolidated financial statements. The 1999 Non-Executive Officer and Non-Director Equity Compensation Plan and the deferred stock unit arrangements were not required to be approved by our shareholders. Number of shares remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Total of shares reflected in columns (a) and (c) (d) Plan category Number of shares to be issued upon exercise of outstanding options, warrants and rights (a) Weighted average exercise price of outstanding options, warrants and rights (b) Equity compensation plans approved by shareholders . . . Equity compensation plans not requiring shareholder approval . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . 6,076,461 $15.91 10,071,496 16,147,957 3,351,412 9,427,873 $16.25 $16.03 92,451 10,163,947 3,443,863 19,591,820 Other information required to be disclosed by item 12 will appear in, and is incorporated by reference from, the section entitled “Security Ownership of Principal Stockholders, Directors and Officers” included in our definitive proxy statement relating to our 2004 annual stockholder meeting. 40
Slide 41: Item 13. Certain Relationships and Related Transactions. The information required by this item will appear in, and is incorporated by reference from, the section entitled “Certain Relationships and Related Transactions” included in our definitive proxy statement relating to our 2004 annual stockholder meeting. Item 14. Principal Accounting Fees and Services. The information required by this item will appear in, and is incorporated by reference from, the section entitled “Independent Auditors” under the subheadings “Audit Fees”, “Audit-Related Fees”, “Tax Fees”, and “All Other Fees” included in our definitive proxy statement relating to our 2004 annual stockholder meeting. 41
Slide 42: PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as part of this Report: (1) Index to Financial Statements: Page Report of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 . . . . . . . . . Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Index to Financial Statement Schedules: Independent Auditors’ Report on Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Exhibits: 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 4.5 10.1 F-1 F-2 F-3 F-4 F-5 F-6 F-7 S-1 S-2 Amended and Restated Certificate of Incorporation of Total Renal Care Holdings, Inc., or TRCH, dated December 4, 1995.(1) Certificate of Amendment of Certificate of Incorporation of TRCH, dated February 26, 1998.(2) Certificate of Amendment of Certificate of Incorporation of DaVita Inc. (formerly Total Renal Care Holdings, Inc.), dated October 5, 2000.(10) Bylaws of TRCH, dated October 6, 1995.(3) Indenture, dated June 12, 1996 by Renal Treatment Centers, Inc., or RTC, to PNC Bank including form of RTC Note.(4) First Supplemental Indenture, dated as of February 27, 1998, among RTC, TRCH and PNC Bank under the 1996 Indenture.(2) Second Supplemental Indenture, dated as of March 31, 1998, among RTC, TRCH and PNC Bank under the 1996 Indenture.(2) Indenture, dated as of November 18, 1998, between TRCH and United States Trust Company of New York, as trustee, and form of Note.(5) Rights Agreement, dated as of November 14, 2002, between DaVita Inc. and the Bank of New York, as Rights Agent. (6) Employment Agreement, dated as of October 18, 1999, by and between TRCH and Kent J. Thiry.(7)* 42
Slide 43: 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 Amendment to Mr. Thiry’s Employment Agreement, dated May 20, 2000.(8)* Second Amendment to Mr. Thiry’s Employment Agreement, dated November 28, 2000.(9)* Employment Agreement, dated as of November 29, 1999, by and between TRCH and Gary W. Beil.(9)* Employment Agreement, dated as of July 19, 2000, by and between TRCH and Charles J. McAllister.(9)* Employment Agreement, effective as of April 19, 2000, by and between TRCH and Steven J. Udicious.(10)* Employment Agreement, dated as of June 15, 2000, by and between DaVita Inc. and Joseph Mello.(11)* Employment Agreement, dated as of April 1, 2001, by and between DaVita Inc. and Richard K. Whitney.(12)* Employment Agreement, dated as of October 15, 2002, by and between DaVita Inc. and Lori S. Richardson-Pellicioni.* Second Amended and Restated 1994 Equity Compensation Plan.(13)* First Amended and Restated 1995 Equity Compensation Plan.(13)* First Amended and Restated 1997 Equity Compensation Plan.(13)* First Amended and Restated Special Purpose Option Plan.(13)* 1999 Equity Compensation Plan.(14)* Amended and Restated 1999 Equity Compensation Plan.(16)* First Amended and Restated Total Renal Care Holdings, Inc. 1999 Non-Executive Officer and Non-Director Equity Compensation Plan. 2002 Equity Compensation Plan.(17)* Credit Agreement, dated as of May 3, 2001, by and among DaVita Inc., the lenders party thereto, Bank of America, N.A., as the Administrative Agent, Banc of America Securities LLC, as Joint Book Manager and Credit Suisse First Boston Corporation, as Joint Book Manager and Syndication Agent (the “Credit Agreement”).(18) Amendment No. 1, dated as of December 4, 2001, to the Credit Agreement by and among DaVita Inc., the lenders party thereto, Bank of America, N.A., as the Administrative Agent, Banc of America Securities LLC, as Joint Book Manager and Credit Suisse First Boston Corporation, as Joint Book Manager and Syndication Agent.(10) Security Agreement, dated as of May 3, 2001, made by DaVita Inc. and the subsidiaries of DaVita Inc. named therein to Bank of America, N.A., as the Collateral Agent for the lenders party to the Credit Agreement.(18) Subsidiary Guaranty, dated as of May 3, 2001, made by the subsidiaries of DaVita Inc. named therein in favor of the lenders party to the Credit Agreement.(18) Guaranty, entered into as of March 31, 1998, by TRCH in favor of and for the benefit of PNC Bank.(2) Credit Agreement, dated as of April 26, 2002, by and among DaVita Inc., the lenders party thereto, Credit Suisse First Boston Corporation as Administrative Agent and Joint Book Manager, Banc of America Securities LLC as Joint Book Manager and Bank of America, N.A., as Syndication Agent (“the Credit Agreement”).(12)** Amendment No. 1, dated as of May 9, 2002, to the Credit Agreement by and among DaVita Inc., the lenders party thereto, Credit Suisse First Boston Corporation as Administrative Agent and Joint Book Manager, Banc of America Securities LLC as Joint Book Manager and Bank of America, N.A., as Syndication Agent.(12) 43 10.19 10.20 10.21 10.22 10.23 10.24
Slide 44: 10.25 Security Agreement, dated as of April 26, 2002, made by and among DaVita Inc. and the subsidiaries of DaVita Inc. named therein to Credit Suisse First Boston, Cayman Islands Branch, as the Collateral Agent for the lenders party to the Credit Agreement.(12) Subsidiary Guarantee, dated as of April 26, 2002, made by the subsidiaries of DaVita Inc. named therein in favor of the lenders party to the Credit Agreement.(12) Amendment #4, dated November 16, 2001, to Agreement No. 19990110 between Amgen Inc. and Total Renal Care, Inc. (10)** Agreement No. 20010259, dated November 16, 2001 between Amgen USA Inc. and Total Renal Care, Inc.(10)** Amendment #1, dated December 31, 2002, to Agreement No. 20010259 between Amgen USA Inc. and Total Renal Care, Inc.** Amended and Restated Credit Agreement, dated July 15, 2003, by and among DaVita Inc., the lenders party thereto, Credit Suisse First Boston Corporation as Joint Book Manager, Administrative Agent and Syndication Agent, Banc of America Securities LLC as Joint Book Manager and Bank of America, N.A., as Syndication Agent.(15) Guarantee Supplement, dated July 15, 2003, made by the subsidiaries of DaVita Inc. named therein in favor of the lenders party to the Amended and Restated Credit Agreement.(15) Employment Agreement dated as of May 1, 2003, by and between DaVita Inc. and Patrick A. Broderick.(15)* Second Amended and Restated Credit Agreement, dated November 18, 2003, by and among DaVita Inc., the lenders party thereto, Credit Suisse First Boston, Cayman Islands Branch as Joint Book Manager, and Administrative Agent, Banc of America Securities LLC as Joint Book Manager and Bank of America N.A., as Syndication Agent.✓ Agreement dated December 24, 2003, between Amgen USA Inc. and DaVita Inc.**✓ Statement re: Computation of Ratios of Earnings to Fixed Charges. ✓ DaVita Inc. Corporate Governance Code of Ethics.✓ List of our subsidiaries. ✓ Consent of KPMG LLP.✓ Powers of Attorney with respect to DaVita.✓(Included on Page II-1) Certification of the Chief Executive Officer, dated February 27, 2004, pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.✓ Certification of the Chief Financial Officer, dated February 27, 2004, pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.✓ Certification of the Chief Executive Officer, dated February 27, 2004, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.✓ Certification of the Chief Financial Officer, dated February 27, 2004, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.✓ 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 12.1 14.1 21.1 23.1 24.1 31.1 31.2 32.1 32.2 ✓ * ** Included in this filing. Management contract or executive compensation plan or arrangement. Portions of this exhibit are subject to a request for confidential treatment and have been redacted and filed separately with the SEC. (1) Filed on March 18, 1996 as an exhibit to our Transitional Report on Form 10-K for the transition period from June 1, 1995 to December 31, 1995. (2) Filed on March 31, 1998 as an exhibit to our Form 10-K for the year ended December 31, 1997. 44
Slide 45: (3) Filed on October 24, 1995 as an exhibit to Amendment No. 2 to our Registration Statement on Form S-1 (Registration Statement No. 33-97618). (4) Filed on August 5, 1996 as an exhibit to RTC’s Form 10-Q for the quarter ended June 30, 1996. (5) Filed on December 18, 1998 as an exhibit to our Registration Statement on Form S-3 (Registration Statement No. 333-69227). (6) Filed on November 19, 2002 as an exhibit to our Form 8-K reporting the adoption of the Rights Agreement. (7) Filed on November 15, 1999 as an exhibit to our Form 10-Q for the quarter ended September 30, 1999. (8) Filed on August 14, 2000 as an exhibit to our Form 10-Q for the quarter ended June 30, 2000. (9) Filed on March 20, 2001 as an exhibit to our Form 10-K for the year ended December 31, 2000. (10) Filed on March 1, 2002 as an exhibit to our Form 10-K for the year ended December 31, 2001. (11) Filed on August 15, 2001 as an exhibit to our Form 10-Q for the quarter ended June 30, 2001. (12) Filed on May 14, 2002 as an exhibit to our Form 10-Q for the quarter ended March 31, 2002. (13) Filed on March 29, 2000 as an exhibit to our Form 10-K for the year ended December 31, 1999. (14) Filed on February 18, 2000 as an exhibit to our Registration Statement on Form S-8 (Registration Statement No. 333-30736). (15) Filed on August 6, 2003 as an exhibit to our Form 10-Q for the quarter ended June 30, 2003. (16) Filed on April 27, 2001 as an exhibit to the Definitive Proxy Statement for our 2001 Annual Meeting of Stockholders. (17) Filed on March 14, 2002 as an exhibit to the Definitive Proxy Statement for our 2002 Annual Meeting of Stockholders. (18) Filed on June 8, 2001 as an exhibit to our Registration Statement on Form S-4 (Registration Statement No. 333-62552). (b) Reports on Form 8-K: Current report on Form 8-K dated February 11, 2004, furnished under Item 9, “Regulation FD Disclosure” and Item 12, “Disclosure of Results of Operations and Financial Condition”, announcing the Company’s financial results for the quarter ended December 31, 2003. A copy of the press release announcing the Company’s financial results for the quarter and year ended December 31, 2003 was attached to Form 8-K as Exhibit 99.1. 45
Slide 46: DAVITA INC. REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and fair presentation of the accompanying consolidated financial statements of DaVita Inc. and its subsidiaries. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s best estimates and judgements. Financial information included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2003 is consistent with that in the financial statements. Management has established and maintains a system of internal controls over financial reporting designed to provide reasonable assurance as to the integrity, reliability and accuracy of the financial statements. Management also maintains disclosure controls and procedures designed to accumulate, process and report materially accurate information within the time periods specified in the Securities and Exchange Commission’s rules and regulations. Internal controls over financial reporting and disclosure controls are periodically reviewed and revised if necessary, and are augmented by appropriate oversight and audit functions, as well as an active Code of Conduct requiring adherence to the highest levels of personal and professional integrity. Management however, recognizes that these controls and procedures can provide only reasonable assurance of desired outcomes. The consolidated financial statements have been audited and reported on by our independent auditors, KPMG LLP, who report directly to the Audit Committee of the Board of Directors. The Audit Committee, which is comprised solely of independent directors, monitors the integrity of the Company’s financial reporting process and systems of internal controls over financial reporting and disclosure controls, monitors the independence and performance of the Company’s independent auditors, ensures the effectiveness of an anonymous compliance hotline available to all employees, and holds regular meetings without the presence of management. The Company has carried out an evaluation of the effectiveness of the design and operations of the Company’s internal controls over financial reporting and disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, management has concluded that the Company’s internal controls over financial reporting are adequate to provide reasonable assurance that transactions are fairly presented in the consolidated financial statements, and that disclosure controls and procedures are effective for timely identification and review of material information required to be included in the Company’s Exchange Act reports, including this Annual Report. Kent J. Thiry Chief Executive Officer Gary W. Beil Acting Chief Financial Officer, Vice President and Controller F-1
Slide 47: INDEPENDENT AUDITORS’ REPORT The Board of Directors and Shareholders DaVita Inc. We have audited the accompanying consolidated balance sheets of DaVita Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DaVita Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and certain provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001. In 2002, the Company changed its method of accounting for goodwill and other intangible assets for all other business combinations. /s/ KPMG LLP Seattle, Washington February 20, 2004 F-2
Slide 48: DAVITA INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (dollars in thousands, except per share data) 2003 Year ended December 31, 2002 2001 Net operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses and charges: Patient care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . Provision for uncollectible accounts . . . . . . . . . . . . . . . . . . . . . Minority interests and equity income, net . . . . . . . . . . . . . . . . . Total operating expenses and charges . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Refinancing charges (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,016,418 1,360,556 159,628 74,687 35,700 7,312 1,637,883 378,535 66,828 26,501 3,060 288,266 112,475 $ 175,791 $ 1,854,632 1,217,685 154,073 64,665 26,877 7,506 1,470,806 383,826 71,636 48,930 3,997 267,257 109,928 $ 157,329 $ 1,650,753 1,100,652 129,194 105,209 (2,294) 7,134 1,339,895 310,858 72,438 (1,629) 2,518 242,567 105,252 $ 137,315 Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares for earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.79 2.49 $ $ 2.19 1.96 $ $ 1.64 1.52 62,897,000 75,840,000 71,831,000 90,480,000 83,768,000 103,454,000 STATEMENTS OF COMPREHENSIVE INCOME Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on securities, net of tax of $590 . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 175,791 $ (924) 174,867 $ 157,329 157,329 $ $ 137,315 137,315 See notes to consolidated financial statements. F-3
Slide 49: DAVITA INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) December 31, 2003 2002 ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,657 $ 96,475 Accounts receivable, less allowance of $52,554 and $48,927 . . . . . . . . . . . . . . . . . . . . 387,933 344,292 Medicare lab recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,000 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,853 34,929 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,875 28,667 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,740 40,163 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortizable intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in third-party dialysis businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND SHAREHOLDERS’ EQUITY 605,058 342,447 49,971 3,095 10,771 934,188 $1,945,530 544,526 298,475 63,159 3,227 1,520 864,786 $1,775,693 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,868 $ 77,890 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,654 101,389 Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,909 95,435 Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,557 7,978 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,832 9,909 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Shareholders’ equity: Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued) Common stock ($0.001 par value, 195,000,000 shares authorized; 89,870,803 and 88,874,896 shares issued) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, at cost (25,368,019 and 28,216,177 shares) . . . . . . . . . . . . . . . . . Accumulated comprehensive income valuations . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362,820 1,117,002 19,310 106,240 33,287 292,601 1,311,252 9,417 65,930 26,229 90 539,575 389,128 (620,998) (924) 306,871 $1,945,530 89 519,369 213,337 (662,531) 70,264 $1,775,693 See notes to consolidated financial statements. F-4
Slide 50: DAVITA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) 2003 Year ended December 31, 2002 2001 Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Refinancing charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (gain) on divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock option expense and tax benefits . . . . . . . . . . . . . . . . . Equity investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests in income of consolidated subsidiaries . . Distributions to minority interests . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medicare lab recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . Cash flows from investing activities: Additions of property and equipment, net . . . . . . . . . . . . . . . . . . . Acquisitions and divestitures, net . . . . . . . . . . . . . . . . . . . . . . . . . Investments in and advances to affiliates, net . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . Cash flows from financing activities: Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt redemption premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net proceeds from issuance of common stock . . . . . . . . . . . . . . . Purchase of treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 175,791 $ 157,329 $ 137,315 74,687 26,501 2,130 20,914 3,124 20,180 (1,596) 8,908 (7,663) 64,665 48,930 (1,151) 62,172 3,217 22,212 (1,791) 9,299 (6,165) 105,209 (1,629) (71) 10,093 2,396 17,754 (2,126) 9,260 (7,942) (41,369) (19,000) 3,159 (13,297) 4,692 (6,875) 5,821 9,958 17,810 9,773 293,648 (100,272) (97,370) 4,456 (790) (193,976) 4,766,276 (4,797,994) (14,473) (4,193) 23,056 (107,162) (134,490) (34,818) 96,475 61,657 $ (17,699) (342) (19,089) 527 10,822 6,837 2,585 (4,821) 4,458 341,995 (102,712) (18,511) 5,064 (342) (116,501) 2,354,105 (1,855,199) (40,910) (10,812) 29,257 (642,171) (165,730) 59,764 36,711 96,475 $ (37,167) (13,575) 3,321 227 (3,906) 17,990 9,728 17,757 157 264,791 (51,233) (66,939) 25,217 (11) (92,966) 1,709,996 (1,866,232) (9,285) 19,560 (20,360) (166,321) 5,504 31,207 36,711 See notes to consolidated financial statements. F-5
Slide 51: DAVITA INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands) Notes Accumulated Common Stock Additional receivable Retained Treasury Stock comprehensive paid-in from earnings income Shares Amount Capital shareholders (deficit) Shares Amount valuations Balance at December 31, 2000 . . 82,136 Shares issued to employees and others . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . Repayment of notes receivable, net of interest accrued . . . . . . . Income tax benefit on stock options exercised . . . . . . . . . . . Stock option expense . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . Treasury stock purchases . . . . . . 132 3,141 $82 $430,676 602 18,872 83 17,087 667 137,315 (889) $ (20,360) 85 467,904 798 28,455 22,150 62 157,329 (27,327) (642,171) 89 519,369 14,076 42 873 (220) (14,703) 20,204 (24) 175,791 (3,442) (107,162) $(924) $90 $539,575 $— $389,128 (25,368) $(620,998) $(924) 33 1,373 770 33,225 — 213,337 (28,216) (662,531) 4,884 114,700 — 56,008 (889) (20,360) $ (83) $ (81,307) Total $349,368 602 18,875 83 17,087 667 137,315 (20,360) 503,637 798 28,459 22,150 62 157,329 (642,171) 70,264 128,776 873 550 18,523 20,204 (24) 175,791 (107,162) (924) $306,871 3 Balance at December 31, 2001 . . 85,409 Shares issued to employees and others . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . Income tax benefit on stock options exercised . . . . . . . . . . . Stock option expense . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . Treasury stock purchases . . . . . . 45 3,421 4 Balance at December 31, 2002 . . 88,875 Shares issued upon conversion of debt . . . . . . . . . . . . . . . . . . . . . Shares issued to employees and others . . . . . . . . . . . . . . . . . . . . Deferred stock unit shares issued . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . Income tax benefit on stock options exercised . . . . . . . . . . . Stock option expense . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . Treasury stock purchases . . . . . . Unrealized loss on securities . . . . 954 1 Balance at December 31, 2003 . . 89,871 See notes to consolidated financial statements. F-6
Slide 52: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 1. Organization and summary of significant accounting policies Organization DaVita Inc. operates kidney dialysis centers and provides related medical services primarily in dialysis centers and in contracted hospitals across the United States. These operations represent a single business segment. Basis of presentation These consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. The financial statements include the Company’s subsidiaries and partnerships that are wholly-owned, majority-owned, or in which the Company maintains a controlling financial interest. All significant intercompany transactions and balances have been eliminated. Nonconsolidated equity investments are recorded under the equity or cost method of accounting as appropriate. Prior year balances and amounts have been classified to conform to the current year presentation. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities and contingencies. Although actual results in subsequent periods will differ from these estimates, such estimates are developed based on the best information available to management and management’s best judgements at the time made. All significant assumptions and estimates underlying the reported amounts in the financial statements and accompanying notes are regularly reviewed and updated. Changes in estimates are reflected in the financial statements based upon on-going actual experience trends, or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies. Interim changes in estimates related to annual operating costs are applied prospectively within annual periods. The most significant assumptions and estimates underlying these financial statements and accompanying notes involve revenue recognition and provisions for uncollectible accounts, impairments and valuation adjustments, accounting for income taxes and variable compensation accruals. Specific estimating risks and contingencies are further addressed in these notes to the consolidated financial statements. Net operating revenues Revenue recognition uncertainties inherent in the Company’s operations are addressed in AICPA Statement of Position (SOP) No. 00-1 Auditing Health Care Third-Party Revenues and Related Receivables. As addressed in SOP No. 00-1, net revenue recognition and allowances for uncollectible billings require the use of estimates of the amounts that will actually be realized considering, among other items, retroactive adjustments that may be associated with regulatory reviews, audits, billing reviews and other matters. Revenues are recognized as services are provided to patients. Operating revenues consist primarily of reimbursement for dialysis and ancillary services to patients. A usual and customary fee schedule is maintained for dialysis treatments and other patient services; however, actual collectible revenue is at a discount to the fee schedule. Medicare and Medicaid program reimbursement rates are established by statute or regulation. Most nongovernmental payors, including contracted managed care payors, are billed at our usual and customary rates, but a contractual allowance is recorded to adjust to the expected net realizable revenue for services provided. F-7
Slide 53: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) Contractual allowances along with provisions for uncollectible accounts are estimated based upon credit risks of third-party payors, contractual terms, inefficiencies in our billing and collection processes, regulatory compliance issues and historical collection experience. Management and administrative support services are provided to dialysis centers and physician practices not owned by the Company. The management fees are principally determined as a percentage of the managed operations’ revenues or cash collections, and are included in net operating revenues as earned. Other income Other income includes interest income on cash investments and other non-operating gains and losses. Cash and cash equivalents Cash equivalents are highly liquid investments with maturities of three months or less at date of purchase. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist principally of drugs and dialysis related supplies. Property and equipment Property and equipment are stated at cost reduced by any impairments. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expenses are computed using the straight-line method over the useful lives of the assets estimated as follows: buildings, 20 to 40 years; leasehold improvements, the shorter of their estimated useful life or the lease term; and equipment and software, principally 3 to 8 years. Disposition gains and losses are included in current earnings. Amortizable intangibles Amortizable intangible assets include noncompetition agreements and deferred debt issuance costs, each of which have determinate useful lives. Noncompetition agreements are amortized over the terms of the agreements, typically three to twelve years, using the straight-line method. Deferred debt issuance costs are amortized to debt expense over the term of the related debt using the effective interest method. Goodwill Goodwill represents the difference between the purchase cost of acquired businesses and the fair value of the identifiable tangible and intangible net assets acquired. Under Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets goodwill is not amortized after December 31, 2001 but is assessed for valuation impairment as circumstances warrant and at least annually. An impairment charge would be recorded to the extent the book value of goodwill exceeds its fair value. The Company operates as one reporting unit for goodwill impairment assessments. If this standard had been effective as of January 1, 2001, net income and diluted net income per share would have been $162,350 or $1.76 per share for 2001. F-8
Slide 54: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) Impairment of long-lived assets Long-lived assets, including property and equipment, investments, and amortizable intangible assets, are reviewed for possible impairment whenever significant events or changes in circumstances indicate that an impairment may have occurred, including changes in our business strategy and plans. An impairment is indicated when the sum of the expected future undiscounted net cash flows identifiable to that asset or asset group is less than its carrying value. Impairment losses are determined from actual or estimated fair values, which are based on market values, net realizable values or projections of discounted net cash flows, as appropriate. Interest is not accrued on impaired loans unless the estimated recovery amounts justify such accruals. Income taxes Federal and state income taxes are computed at current enacted tax rates, less tax credits. Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, as well as changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, which are measured using enacted tax rates and laws expected to apply in the periods when the deferred tax liability or asset is expected to be realized, and any changes in the valuation allowance caused by a change in judgement about the realizability of the related deferred tax assets. Minority interests Consolidated income is reduced by the proportionate amount of income accruing to minority interests. Minority interests represent the equity interests of third-party owners in consolidated entities which are not wholly-owned. As of December 31, 2003, there were 30 consolidated entities with third-party minority ownership interests. Stock-based compensation Stock-based compensation for employees is determined in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, as allowed under SFAS No. 123 Accounting for Stock-Based Compensation. Stock option grants to employees do not result in an expense if the exercise price is at least equal to the market price at the date of grant. Stock option expense is also measured and recorded for certain modifications to stock options as required under FASB Interpretation No. 44 Accounting for Certain Transactions Involving Stock Compensation. Stock options issued to non-employees and restricted stock units are valued using the Black-Scholes model and amortized over the respective vesting periods. F-9
Slide 55: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) Pro forma net income and earnings per share. If the Company had adopted the fair value-based compensation expense provisions of SFAS No. 123 upon the issuance of that standard, net income and net income per share would have been adjusted to the pro forma amounts indicated below: Pro forma—As if all stock options were expensed Year ended December 31, 2003 2002 2001 Net income: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,791 $157,329 $137,315 Add: Stock-based employee compensation expense included in reported net income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,036 753 1,119 Deduct: Total stock-based employee compensation expense under the fair value-based method, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,554) (10,182) (18,350) Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma basic earnings per share: Pro forma net income for basic earnings per share calculation . . . . . . . . . . . . . Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares for basic earnings per share calculation . . . . . . . . . . Basic net income per share—Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic net income per share—As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $167,273 $167,273 62,835 62 62,897 2.66 $ 2.79 $ $147,900 $147,900 71,787 44 71,831 2.06 $ 2.19 $ $120,084 $120,084 83,768 83,768 1.43 1.64 Pro forma diluted earnings per share: Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $167,273 $147,900 $120,084 Debt expense savings, net of tax, from assumed conversion of convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,011 19,661 4,222 Pro forma net income for diluted earnings per share calculations . . . . . . . . . . . Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed incremental shares from stock plans . . . . . . . . . . . . . . . . . . . . . . . . . Assumed incremental shares from convertible debt . . . . . . . . . . . . . . . . . . . . . Weighted average shares for diluted earnings per share calculations . . . . . . . . Diluted net income per share—Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per share—As reported . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $180,284 62,835 62 2,838 9,951 75,686 2.38 $ 2.49 $ $167,561 71,787 44 4,184 15,394 91,409 1.83 $ 1.96 $ $124,306 83,768 2,708 4,879 91,355 1.36 1.52 The fair values of stock option grants were estimated as of the date of grant using the Black-Scholes optionpricing model with the following assumptions for grants in 2003, 2002 and 2001, respectively: dividend yield of 0% and weighted average expected volatility of 40% for all periods; risk-free interest rates of 2.07%, 3.99% and 4.44% and weighted average expected lives of 3.5, 3.5 and 3.8 years. Interest rate swap agreements The Company has from time to time entered into interest rate swap agreements as a means of managing interest rate exposure. These agreements were not for trading or speculative purposes, and had the effect of converting a portion of our variable rate debt to a fixed rate. Net amounts paid or received have been reflected as adjustments to interest expense. F-10
Slide 56: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) New accounting standards In January 2003 the FASB issued Interpretation (FIN) No. 46 Consolidation of Variable Interest Entities, which addresses the consolidation of certain entities (“variable interest entities”) in which an enterprise has a controlling financial interest through other than voting interests. FIN No. 46 requires that a variable interest entity be consolidated by the holder of the majority of the expected risks and rewards associated with the activities of the variable interest entity. Adoption of this standard did not have a material effect on our consolidated financial statements. SFAS No. 150 Accounting for certain financial instruments with characteristics of both liabilities and equity was issued in May 2003. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It also requires certain mandatorily redeemable instruments such as the liability for other owners’ interests in limited-life entities to be measured based upon the fair values of the limited-life entities assets, with changes in the liability reported as interest costs. At the October 29, 2003 FASB Board meeting, the Board decided to defer indefinitely the effective date of Statement 150 related to classification and measurement requirements, but not the disclosure requirements, for mandatorily redeemable financial instruments that become subject to Statement 150 solely as a result of consolidation. Our consolidated partnerships include interests in limited-life companies for which third-party interests are reflected in “minority interests” in the financial statements. See note 18. Reclassification of previously reported extraordinary losses: In accordance with SFAS No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 14, and Technical Corrections, which became effective as of January 1, 2003, an after-tax loss of $29,358 in 2002 and an after-tax gain of $977 in 2001, resulting from the extinguishment of debt previously classified as extraordinary items, have been reclassified to a pre-tax refinancing charge of $48,930 for 2002 and a pre-tax gain of $1,629 for 2001. The classification change had no impact on net earnings. In 2002, the refinancing charges of $48,930 related to debt restructuring, which included retiring $225,000 9¼% Senior Subordinated Notes due 2011 and extinguishing our then existing senior credit facilities. In 2001, the refinancing gain of $1,629 related to the write-off of deferred financing costs offset by the accelerated recognition of deferred interest rate swap liquidation gains as a result of debt refinancing. FASB Interpretation (FIN) No. 45 Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others was issued in November 2002. Under FIN No. 45 the recognition and initial measurement provisions became effective to prospective guarantees issued or modified after December 31, 2002. The Interpretation clarifies the requirements for a guarantor’s disclosures in its interim and annual financial statements about its obligations under certain guarantees that it has issued and which remain outstanding and also clarifies that guarantees are required to be recognized in the financial statements and measured initially at fair value including the guarantors’ ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. 2. Earnings per share Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share includes the dilutive effect of convertible debt (under the if-converted method), and stock options and unvested restricted stock units (under the treasury stock method). F-11
Slide 57: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) The reconciliations of the numerators and denominators used to calculate basic and diluted net income per share are as follows: Year ended December 31, 2003 2002 2001 (in thousands, except per share) Basic: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares outstanding during the year . . . . . . . . . . . . . . . . . . . . Vested restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares for basic earnings per share calculations . . . . . . . . . . Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,791 62,835 62 62,897 $ 2.79 $157,329 71,787 44 71,831 $ 2.19 $137,315 83,768 83,768 $ 1.64 Diluted: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,791 $157,329 $137,315 Debt expense savings, net of tax, from assumed conversion of convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,011 19,661 19,449 Net income for diluted earnings per share calculations . . . . . . . . . . . . . . . . . . . Weighted average shares outstanding during the year . . . . . . . . . . . . . . . . . . . . Vested restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed incremental shares from stock plans . . . . . . . . . . . . . . . . . . . . . . . . . Assumed incremental shares from convertible debt . . . . . . . . . . . . . . . . . . . . . Weighted average shares for diluted earnings per share calculations . . . . . . . . Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $188,802 62,835 62 2,992 9,951 75,840 2.49 $ $176,990 71,787 44 3,255 15,394 90,480 1.96 $ $156,764 83,768 4,292 15,394 103,454 1.52 Options to purchase 174,535 shares at $28.10 to $39.35 per share, 881,350 shares at $23.63 to $33.00 per share and 630,668 shares at $19.04 to $33.00 per share were excluded from the diluted earnings per share calculations for 2003, 2002 and 2001, respectively, because they were anti-dilutive. The calculation of diluted earnings per share assumes conversion of both the 5 5⁄8% and 7% convertible subordinated notes for 2001, 2002 and the pro-rata periods such notes were outstanding in 2003. 3. Accounts receivable The provisions for uncollectible accounts receivable, prior to offsetting recoveries in 2003, 2002 and 2001 were $35,700, $32,069 and $32,926, respectively. The provisions before cash recoveries in 2003, 2002 and 2001 were approximately 1.8%, 1.8% and 2.0% of current operating revenues, respectively. During 2002 and 2001, substantial improvements were made in the Company’s billing and collection processes, and cash recoveries of $5,192 and $35,220 were realized during 2002 and 2001 on accounts receivable reserved in 1999. F-12
Slide 58: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) 4. Other current assets Other current assets were comprised of the following: December 31, 2003 2002 Supplier rebates and other non-trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . Operating advances under administrative services agreements . . . . . . . . . . . . . . Prepaid expenses and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,745 10,416 3,714 $43,875 $16,567 3,284 8,816 $28,667 Operating advances under administrative services agreements are unsecured. 5. Property and equipment Property and equipment were comprised of the following: December 31, 2003 2002 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . $ 820 5,494 261,437 361,365 19,349 $ 932 5,084 204,778 301,285 49,466 561,545 (263,070) 648,465 (306,018) $ 342,447 $ 298,475 Depreciation and amortization expense on property and equipment was $64,398, $54,701 and $53,182 for 2003, 2002 and 2001, respectively. Applicable interest charges incurred during significant facility expansion and construction are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives. Interest capitalized was $1,523, $1,888 and $751 for 2003, 2002 and 2001, respectively. 6. Amortizable intangibles Amortizable intangible assets were comprised of the following: December 31, 2003 2002 Noncompetition agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,407 9,851 122,258 (72,287) $ 49,971 $104,479 24,666 129,145 (65,986) $ 63,159 F-13
Slide 59: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) Amortization expense from noncompetition agreements was $10,289, $9,964 and $10,162 for 2003, 2002 and 2001, respectively. Deferred debt issuance costs are amortized to debt expense as described in Note 11. Scheduled amortization charges from amortizable intangible assets as of December 31, 2003 were as follows: Noncompetition agreements Deferred debt issuance costs 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Investments in third-party dialysis businesses 10,302 9,550 8,239 6,350 3,668 5,077 1,836 1,576 1,303 1,042 895 133 Investments in third-party dialysis businesses and related advances were $3,095 and $3,227 at December 31, 2003 and 2002. During 2003, 2002 and 2001, the Company recognized income of $1,596, $1,791 and $2,126, respectively, relating to investments in non-consolidated businesses under the equity method. These amounts are included as a reduction to minority interests in the consolidated statement of income. 8. Goodwill Changes in the book value of goodwill were as follows: Year ended December 31, 2003 2002 Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $864,786 70,700 (1,298) $934,188 $855,760 15,260 (6,234) $864,786 Amortization expense applicable to goodwill was $0 for 2003 and 2002, and $41,865 for 2001. The book value of goodwill was reduced from its original cost by $169,383 in amortization accumulated through December 31, 2000. F-14
Slide 60: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) A reconciliation of the Company’s results previously reported to results excluding goodwill amortization is as follows: Year ended December 31, 2003 2002 2001 Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,791 Add back: Goodwill amortization, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,791 2.79 2.79 2.49 2.49 Basic earnings per common share: Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Add back: Goodwill amortization, net of tax . . . . . . . . . . . . . . . . . . . . . . . Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted earnings per common share: Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Add back: Goodwill amortization, net of tax . . . . . . . . . . . . . . . . . . . . . . . Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $157,329 $157,329 $ $ $ $ 2.19 2.19 1.96 1.96 $137,315 25,035 $162,350 $ $ $ $ $ $ 1.64 0.30 1.94 1.52 0.24 1.76 9. Other liabilities Other accrued liabilities were comprised of the following: December 31, 2003 2002 Payor deferrals and refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposition accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,235 8,727 878 6,229 2,539 18,046 $112,654 $ 70,406 12,476 6,389 3,829 8,289 $101,389 10. Income taxes Income tax expense consisted of the following: 2003 Year ended December 31, 2002 2001 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,817 15,151 17,966 3,541 $112,475 $ 40,094 7,366 50,012 12,456 $109,928 $ 76,084 19,076 6,931 3,161 $105,252 F-15
Slide 61: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) Temporary differences which gave rise to deferred tax assets and liabilities were as follows: December 31, 2003 2002 Asset impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables, primarily allowance for doubtful accounts . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,817 16,882 44,861 11,683 109,243 (37,200) 72,043 (42,614) (73,268) (2,661) (118,543) $ (46,500) $ 38,844 18,583 23,510 10,124 91,061 (38,669) 52,392 (25,739) (49,838) (2,582) (78,159) $(25,767) At December 31, 2003, the Company had state net operating loss carryforwards of approximately $26,000 that expire through 2023. The Company has also incurred losses on certain operations that are not included in its consolidated tax return. The utilization of these losses may be limited in future years based on the profitability of certain corporations. In prior years, the Company recognized capital losses for impairments and sales of certain of its assets of which realization of a tax benefit is not certain. The Company has recorded a valuation allowance of $37,200 against these deferred tax assets. The valuation allowance decreased by $1,469 in 2003, primarily reflecting the tax benefit of losses that are expected to be utilized based on the profitability of certain consolidated entities. The reconciliation between our effective tax rate and the U.S. federal income tax rate is as follows: Year ended December 31, 2003 2002 2001 Federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nondeductible amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . Changes in deferred tax valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0% 4.3 4.9 5.8 0.4 (0.4) 0.1 0.3 0.1 1.0 1.9 39.0% 41.0% 43.4% F-16
Slide 62: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) 11. Long-term debt Long-term debt was comprised of the following: December 31, 2003 2002 Senior secured credit facility, Term Loan A . . . . . . . . . . . . . . . . . . . . . . . . Senior secured credit facility, Term Loan B . . . . . . . . . . . . . . . . . . . . . . . . Convertible subordinated notes, 7%, due 2009 . . . . . . . . . . . . . . . . . . . . . . Convertible subordinated notes, 5 5⁄8%, due 2006 . . . . . . . . . . . . . . . . . . . . Acquisition obligations and other notes payable . . . . . . . . . . . . . . . . . . . . Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 118,310 1,035,889 5,416 7,944 1,167,559 (50,557) $1,117,002 $ 841,825 345,000 125,000 585 6,820 1,319,230 (7,978) $1,311,252 Scheduled maturities of long-term debt at December 31, 2003 were as follows: 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,557 46,094 52,482 24,316 744,303 249,807 Included in debt expense was interest, net of capitalized interest, of $63,705, $68,420 and $69,978 for 2003, 2002 and 2001, respectively. Also included in debt expense were amortization and write-off of deferred financing costs of $3,123, $3,216 and $2,460 for 2003, 2002 and 2001, respectively. In the first quarter of 2003, the Company borrowed $150,000 that was available under the Term Loan A of its credit facility. The Term Loan A bears interest at LIBOR plus 2.00%, for an overall effective rate of 3.19% at December 31, 2003, with provision to potentially further reduce the interest rate to LIBOR plus 1.50% under certain circumstances. The Term Loan A matures in March 2007 and requires annual principal payments of $33,800 in years 2004 and 2005, $40,100 in 2006 and $10,600 in 2007. In the third quarter of 2003, the Company completed a call for redemption of all of its outstanding $125,000 5 5⁄8% Convertible Subordinated Notes due 2006. Holders of the 5 5⁄8% Notes had the option to convert their Notes into shares of DaVita common stock at a price of $25.62 per share or receive cash at 1.0169 times the principal amount of the 5 5⁄8% Notes, plus accrued interest. In July 2003, the Company issued 4,868,352 shares of common stock from treasury stock for the conversion of $124,700 of the 5 5⁄8% Notes, and redeemed the balance for cash and accrued interest. In the third quarter of 2003, the Company also entered into an amended credit agreement in order to, among other things, lower the overall interest rate. The Company also acquired an additional $200,000 of borrowings under the replacement Term Loan B, which amounted to $1,042,000. In November 2003, the Company entered into a second amended and restated credit agreement in order to again lower the interest rate on the Term Loan B and to modify certain covenants. The Term Loan B currently bears interest at LIBOR plus 2.25% for an overall F-17
Slide 63: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) effective rate of 3.42% at December 31, 2003, with a provision to potentially further reduce the interest rate to LIBOR plus 2.00% under certain circumstances. The aggregate annual principal payments for the Term Loan B are approximately $11,000 in the first four years of the agreement, $255,000 in the fifth year and $741,000 in the sixth year, due no later than March 2009. As of December 31, 2003 the Company had a $115,000 undrawn revolving credit facility of which $15,138 was committed for outstanding letters of credit. In the second half of 2003, the Company completed two calls for redemption of all of its outstanding $345,000 7% Convertible Subordinated Notes due 2009. Holders of the 7% Notes had the option to convert their Notes into shares of DaVita common stock at a price of $32.81 per share or receive cash at 1.042 times the principal amount of the 7% Notes, plus accrued interest. $344,500 of the Notes were redeemed for $359,000 in cash plus accrued interest, and the balance was converted into 16,030 shares of common stock. In 2003, the excess consideration paid over the book value to redeem the Convertible Subordinated Notes and the write-off of deferred financing costs and financing fees associated with amending our bank credit agreement resulted in refinancing charges of $26,501. In the first quarter of 2002, the Company initiated a recapitalization plan to restructure the Company’s debt and repurchase common stock. In the initial phase of the recapitalization plan the Company retired all of its $225,000 outstanding 9¼% Senior Subordinated Notes due 2011 for $266,000. Concurrent with the retirement of this debt, the Company secured a new senior credit facility agreement in the amount of $1,115,000. The excess of the consideration paid over the book value of the Senior Subordinated Notes and related write-off of the deferred financing costs associated with extinguishing the existing senior credit facility and the notes resulted in refinancing charges of $48,930. The senior credit facility consisted of a Term Loan A for $150,000, a Term Loan B for $850,000 and a $115,000 undrawn revolving credit facility, which includes up to $50,000 available for letters of credit. During the second quarter of 2002, the Company borrowed all $850,000 of the Term Loan B, and $841,825 of the Term Loan B remained outstanding as of December 31, 2002. Interest rate swap agreements In November 2003, the Company entered into an interest rate swap agreement to effectively fix the LIBOR benchmark interest rate at 3.39% on an amortizing notional amount of $135,000 of the Term Loan B outstanding debt that had the economic effect of fixing the interest rate at 5.64% based upon the margin in effect on December 31, 2003. The agreement expires in November 2008 and requires quarterly interest payments. As of December 31, 2003, the notional amount of the swap was approximately $135,000 and its fair value was a $2,000 liability, resulting in a charge to other comprehensive income of approximately $1,000, net of tax. As a result of the swap agreement, the Company’s effective interest rate on its entire credit facility was 3.69% based upon the margin in effect on December 31, 2003. In January 2004, the Company entered into another interest rate swap agreement to effectively fix the LIBOR benchmark interest rate at 3.08% on an additional amortizing notional amount of $135,000 of the Term Loan B outstanding debt that had the economic effect of fixing the interest rate at 5.33% based upon the current margin. The agreement expires in January 2009 and requires quarterly interest payments. As a result of these two swap agreements, the Company’s effective interest rate on its entire credit facility was 3.89% based upon the margin in effect on January 15, 2004. 12. Leases The majority of the Company’s facilities are leased under noncancelable operating leases. Most lease agreements cover periods from five to ten years and contain renewal options of five to ten years at the fair rental value at the time of renewal or at rates subject to periodic consumer price index increases. Capital leases are for equipment. F-18
Slide 64: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) Future minimum lease payments under noncancelable operating leases and under capital leases are as follows: Operating leases Capital leases 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less portion representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital lease obligation, including current portion . . . . . . . . . . . . . . . . . . $ 62,064 59,448 55,796 50,114 43,180 152,300 $422,902 $ 1,460 1,358 1,335 2,896 685 3,764 11,498 (3,554) $ 7,944 Rental expense under all operating leases for 2003, 2002 and 2001 was $71,432, $61,008 and $54,347, respectively. The net book value of property and equipment under capital lease was $7,811 and $7,017 at December 31, 2003 and 2002, respectively. Capital lease obligations are included in long-term debt (see Note 11). 13. Shareholders’ equity During 2003, the Company repurchased a total of 3,441,900 shares of common stock for $107,162 or an average of $31.13 per share, pursuant to Board of Directors’ authorizations. As of December 31, 2003, the Company had approximately $146,000 remaining to repurchase shares of its common stock in the open market pursuant to a $200,000 Board of Directors’ authorization. In March 2002, the Company initiated a recapitalization plan consisting of restructuring debt as discussed in Note 11 and repurchasing common stock. Under this plan, the Company repurchased 16,682,337 shares of its common stock for approximately $402,100, or $24.10 per share through a modified dutch auction tender offer in June 2002. From May through December 2002, the Company also purchased 7,699,440 shares in the open market for $172,200 under a $225,000 Board of Directors’ authorization. For the year ended December 31, 2002, stock repurchases, including 2,945,700 shares acquired prior to initiating the recapitalization plan, amounted to 27,327,477 shares for $642,200, at a composite average cost of $23.50 per share. Stock-based compensation plans The Company’s stock-based compensation plans are described below. 2002 Plan. On April 11, 2002, the Company’s shareholders approved the DaVita Inc. 2002 Equity Compensation Plan. This plan provides for grants of stock awards to employees, directors and other individuals providing services to the Company, except that incentive stock options may only be awarded to employees. The plan requires that stock option grants are issued with exercise prices not less than the market price of the stock on the date of grant and requires a maximum award term of five years. Stock options granted under this plan are generally non-qualified awards that vest over four years from the date of grant. Shares available under the 2002 Plan may also be replenished by shares repurchased by the Company from the cash proceeds and actual tax savings from award exercises under the 2002 or predecessor plans. F-19
Slide 65: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) On May 21, 2003 the shareholders approved an amendment to reduce shares authorized to the 2002 Plan by 1,661,000 and to authorize plan awards in the form of restricted stock, restricted stock units, stock issuances (“full share awards”), stock appreciation rights and other equity-based awards. Full share awards will reduce total shares available under the plan at a rate of 2.75:1. At December 31, 2003, there were 989,231 awards outstanding and 9,463,642 shares available for future grants under the 2002 Plan, including 985,627 shares reserved to the 2002 Plan under its replenishment provision. Predecessor plans. Upon shareholder approval of the 2002 Plan, the following predecessor plans were terminated, except with respect to options then outstanding: the 1994 Equity Compensation Plan, the 1995 Equity Compensation Plan, the 1997 Equity Compensation Plan, and the 1999 Equity Compensation Plan. Shares available for future grants under these predecessor plans were transferred to the 2002 Plan upon its approval, and all predecessor plan options cancelled become available for new awards under the 2002 Plan. Options granted under these plans were generally issued with exercise prices equal to the market price of the stock on the date of grant, vested over four years from the date of grant, and bore maximum terms of five to 10 years. The RTC plan, a special purpose option plan related to the RTC merger, was also terminated in 1999. At December 31, 2003 there were 5,087,230 stock options outstanding under these terminated plans. 1999 Plan. The 1999 Non-Executive Officer and Non-Director Equity Compensation Plan provides for grants of stock options to employees and other individuals providing services other than executive officers and members of the board of directors. There are 6,000,000 common shares reserved for issuance under this plan. Options granted under this plan generally vest over four years from the date of grant. Grants are generally issued with exercise prices equal to the market price of the stock on the date of grant and maximum terms of five years. At December 31, 2003 there were 3,108,875 options outstanding and 92,451 shares available for future grants under this plan. A combined summary of the status of these stock-based compensation plans is as follows: 2003 Weighted average exercise Awards price Year ended December 31, 2002 Weighted average exercise Awards price 2001 Weighted average exercise price Awards Outstanding at beginning of year . . . . . . . . . . . . 9,891,975 $13.61 11,280,730 $ 9.36 14,668,579 $ 8.96 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,009,251 20.29 2,769,500 23.33 1,609,000 17.44 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,327,208) 7.96 (3,420,950) 8.32 (3,141,326) 6.01 Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (388,682) 14.90 (737,305) 9.59 (1,855,523) 18.88 Outstanding at end of year . . . . . . . . . . . . . . . . . 9,185,336 $16.45 Awards exercisable at year end . . . . . . . . . . . . . 3,439,354 Weighted-average fair value of awards granted during the year . . . . . . . . . . . . . . . . . . . . . . . . $ 7.51 9,891,975 $13.61 11,280,730 $ 9.36 3,651,702 $ 7.99 4,331,910 $ 6.31 Awards granted in 2003 include 86,751 full share awards. During 2001, 1,170,000 options with exercise prices over $15.00 were voluntarily relinquished and no replacement options were issued. F-20
Slide 66: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) The following table summarizes information about stock plan awards outstanding at December 31, 2003: Weighted average remaining contractual life Weighted average exercise price Weighted average exercise price Range of exercise prices Awards Outstanding Awards exercisable $ 0.00–$ 5.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.01–$10.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.01–$15.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.01–$20.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.01–$25.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.01–$30.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30.01–$35.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35.01–$40.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474,535 2,412,754 234,853 1,313,598 4,394,928 194,056 155,612 5,000 9,185,336 1.8 3.0 2.0 2.5 3.6 3.9 3.8 4.9 3.2 $ 2.20 6.89 11.02 17.30 22.26 26.51 31.98 39.35 $16.45 391,345 1,869,337 159,978 651,349 153,803 70,930 142,612 0 3,439,354 $ 2.67 6.86 11.05 17.48 22.03 26.55 32.12 0 $10.72 Deferred stock unit arrangements. The Company also made awards of restricted stock units to members of the Board of Directors and certain key executive officers in 2003, 2002 and 2001. These awards vest over one to four years and will be settled in cash or stock, as they vest or at a later date at the election of the recipient. Awards of 55,923, 91,474 and 128,913 shares, at grant-date fair values of $1,152, $2,159 and $2,000, were made in 2003, 2002 and 2001, respectively. Compensation expense associated with the above stock-based compensation plans and arrangements of $1,695, $1,246 and $1,865 was recognized in 2003, 2002 and 2001, respectively. Employee stock purchase plan. The Employee Stock Purchase Plan entitles qualifying employees to purchase up to $25 of the Company’s common stock during each calendar year. The amounts used to purchase stock are accumulated through payroll withholdings or through an optional lump sum payment made in advance of the first day of the purchase right period. The plan allows employees to purchase stock for the lesser of 100% of the fair market value on the first day of the purchase right period or 85% of the fair market value on the last day of the purchase right period. Each purchase right period begins on January 1 or July 1, as elected by the employee, and ends on December 31. Payroll withholdings related to the plan, included in accrued employee compensation and benefits, were $968, $882 and $820 at December 31, 2003, 2002 and 2001. Subsequent to December 31, 2003, 2002 and 2001, 37,386, 41,638 and 44,909 shares, respectively, were issued to satisfy obligations under the plan. The fair value of the employees’ purchase rights was estimated on the beginning dates of the purchase right periods using the Black-Scholes model with the following assumptions for grants on July 1, 2003, January 1, 2003, July 1, 2002, January 1, 2002, July 1, 2001, and January 1, 2001, respectively: dividend yield of 0% and expected volatility of 40% for all periods; risk-free interest rates of 1.1%, 1.1%, 3.6%, 4.0%, 3.3% and 4.9%; and expected lives of 0.5 and 1.0 years. Using these assumptions, the weighted-average fair value of purchase rights granted were $7.18, $7.69, $2.53, $3.68, $2.44 and $3.08, respectively. Shareholder rights plan. The Company’s Board of Directors approved a shareholder rights plan on November 14, 2002. This plan is designed to assure that DaVita’s shareholders receive fair treatment in the event of any proposed takeover of DaVita. F-21
Slide 67: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) Pursuant to this plan, the Board approved the declaration of a dividend distribution of one common stock purchase right on each outstanding share of its common stock payable on December 10, 2002 to holders of record of DaVita common stock on November 29, 2002. This rights distribution was not taxable to DaVita shareholders. One purchase right is also attached to each of the Company’s new shares issued or shares reissued from treasury. These rights will become exercisable if a person or group acquires, or announces a tender offer for, 15% or more of DaVita’s outstanding common stock. The triggering person’s stock purchase rights will become void at that time and will not become exercisable. Each right initially entitles its holder to purchase one share of common stock from the Company at a price of $125.00. If the rights become exercisable, each purchase right will then entitle its holder to purchase $125.00 of common stock at a price per share equal to 50% of the average daily closing price of the Company’s common stock for the immediately preceding 30 consecutive trading days. If DaVita is acquired in a merger or other business combination transaction after the rights become exercisable, provisions will be made to allow the holder of each right to purchase $125.00 of common stock from the acquiring company at a price equal to 50% of the average daily closing price of that company’s common stock for the immediately preceding 30 consecutive trading days. The Board of Directors may elect to redeem the rights at $0.01 per purchase right at any time prior to, or exchange common stock for the rights at an exchange ratio of one share per right at any time after, a person or group acquires, or announces a tender offer for, 15% or more of DaVita’s outstanding common stock. The exercise price, number of shares, redemption price or exchange ratio associated with each right may be adjusted as appropriate upon the occurrence of certain events, including any stock split, stock dividend or similar transaction. These purchase rights will expire no later than November 14, 2012. 14. Transactions with related parties Richard K. Whitney, the Company’s former Chief Financial Officer, received a loan from the Company in the principal amount of $65 bearing interest at a rate of 7% per year in July 1997. Mr. Whitney used the proceeds of this loan in the purchase of his principal residence. In February 2001 Mr. Whitney prepaid this loan in full plus accrued interest. Joseph C. Mello, the Company’s Chief Operating Officer, received a loan from the Company in the principal amount of $275 bearing interest at a rate of 7% per year in December 2000. Mr. Mello used the proceeds of this loan in the purchase of his principal residence. In December 2002 Mr. Mello prepaid this loan in full plus accrued interest. Until March 2002, Peter Grauer, a member of the Company’s Board of Directors since 1994, was a managing director of Credit Suisse First Boston, or CSFB. In 2002 and 2001, CSFB assisted the Company in connection with the issuance of public debt and securing other financing. Fees for these transactions were approximately $6,000 and $3,000. Mr. Grauer is no longer affiliated with CSFB. 15. Employee benefit plans The Company has a savings plan for substantially all employees, which has been established pursuant to the provisions of Section 401(k) of the Internal Revenue Code, or IRC. The plan provides for employees to contribute up to 20% of their base annual salaries on a tax-deferred basis not to exceed IRC limitations. Effective January 1, 2002 the Company no longer provides any matching or profit sharing contributions. In 2001, the Company made a matching contribution totaling $62. F-22
Slide 68: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) During 2000, the Company established the DaVita Inc. Profit Sharing Plan. Contributions to this defined contribution benefit plan are made at the discretion of the Company as determined and approved by the Board of Directors. All contributions are deposited into an irrevocable trust. The profit sharing award for each eligible participant is based upon the achievement of employee-specific and/or corporate financial and operating goals. During 2003, 2002 and 2001, the Company recognized expense of $11,900, $17,440 and $14,935, respectively. 16. Contingencies Health care provider revenues may be subject to adjustment as a result of (1) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (2) differing interpretations of government regulations by different fiscal intermediaries or regulatory authorities; (3) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; (4) retroactive applications or interpretations of governmental requirements; and (5) claims for refunds from private payors. Florida laboratory The Company’s Florida-based laboratory subsidiary has been the subject of a third-party carrier review of its Medicare reimbursement claims. The carrier has reviewed claims for six separate review periods. In 1998 the carrier issued a formal overpayment determination in the amount of $5,600 for the first review period (January 1995 to April 1996). The carrier also suspended all payments of Medicare claims from the laboratory beginning in May 1998. In 1999, the carrier issued a formal overpayment determination in the amount of $15,000 for the second review period (May 1996 to March 1998). Subsequently, the carrier informed the Company that $16,100 of the suspended claims for the third review period (April 1998 to August 1999), $11,600 of the suspended claims for the fourth review period (August 1999 to May 2000), $2,900 of the suspended claims for the fifth review period (June 2000 through December 2000) and $900 of the suspended claims for the sixth review period (December 2000 through May 2001) were not properly supported by the prescribing physicians’ medical justification. The Company has disputed each of the carrier’s determinations and has provided supporting documentation of its claims. In addition to the formal appeal processes with the carrier and a federal administrative law judge, the Company also has pursued resolution of this matter through meetings with representatives of the Centers for Medicare and Medicaid Services, or CMS, and the Department of Justice, or DOJ. The Company initially met with the DOJ in February 2001, at which time the DOJ requested additional information, which the Company provided in September 2001. In June 2002, an administrative law judge ruled that the sampling procedures and extrapolations that the carrier used as the basis of its overpayment determinations for the first two review periods were invalid. This decision invalidated the carrier’s overpayment determinations for the first two review periods. Recently, the carrier’s hearing officer rendered partially favorable decisions on appeal for the third and fourth review periods. The Company also filed requests for appeal to an administrative law judge on the unfavorable portions of the decisions on the third and fourth review periods, which involves approximately $7,000 in disputed claims. The Company also filed a notice of appeal to the carrier for the fifth and sixth review periods, which involves approximately $4,000 in disputed claims. During 2000 the Company stopped accruing Medicare revenue from this laboratory because of the uncertainties regarding both the timing of resolution and the ultimate revenue valuations. Following the favorable F-23
Slide 69: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) ruling by the administrative law judge in 2002 related to the first two review periods covering January 1995 to March 1998, the carrier lifted the payment suspension and began making payments in July 2002 for lab services provided subsequent to May 2001. After making its determination with respect to the fifth and sixth review periods in December 2002, the carrier paid the additional amounts that it is not disputing for the second through sixth review periods. As of December 31, 2002, the Company had received $69,000, which represented approximately 70% of the total outstanding Medicare lab billings for the period from January 1995 through June 2002. Approximately $10,000 of these collections related to 2002 lab services provided through June 2002. In addition to processing prior period claims, the carrier also began processing and paying billings for current period services on a timely basis in the third quarter of 2002. Based on these developments, the Company began recognizing estimated current period Medicare lab revenue in the third quarter of 2002. In the fourth quarter of 2003, the Company recognized additional recoveries of $24,000, principally for review periods three and four, based on the hearing officer’s most recent findings. The carrier is also currently conducting a study of the utilization of dialysis-related laboratory services. During the study, the carrier has suspended all of its previously existing dialysis laboratory prepayment screens. The purpose of the study is to determine what ongoing program safeguards are appropriate. In its initial findings from the study, the carrier had determined that some of its prior prepayment screens were invalidating appropriate claims. The Company cannot determine what prepayment screens, post-payment review procedures, documentation requirements or other program safeguards the carrier may yet implement as a result of its study. The carrier has also informed the Company that any claims that it reimburses during the study period may also be subject to post-payment review and retraction if determined inappropriate. Minnesota laboratory The Medicare carrier for our Minnesota laboratory is conducting a post-payment review of Medicare reimbursement claims for the period January 1996 through December 1999. The scope of the review is similar to the review being conducted at our Florida laboratory. At this time, the Company is unable to determine how long it will take the carrier to complete this review. There is currently no overpayment determination with respect to the Minnesota laboratory. The DOJ has also requested information with respect to this laboratory, which the Company has provided. Medicare revenues at the Minnesota laboratory, which was much smaller than the Florida laboratory, were approximately $15,000 for the period under review. In November 2001, the Company closed the Minnesota laboratory and combined the operations of this laboratory with its Florida laboratory. United States Attorney’s inquiry In February 2001 the Civil Division of the United States Attorney’s Office for the Eastern District of Pennsylvania in Philadelphia contacted the Company and requested its cooperation in a review of some of the Company’s historical practices, including billing and other operating procedures and its financial relationships with physicians. The Company cooperated in this review and provided the requested records to the United States Attorney’s Office. In May 2002, the Company received a subpoena from the Philadelphia office of the Office of Inspector General of the Department of Health and Human Services, or OIG. The subpoena required an update to the information the Company provided in its response to the February 2001 request, and also sought a wide range of documents relating to pharmaceutical and other ancillary services provided to patients, including laboratory and other diagnostic testing services, as well as documents relating to the Company’s financial relationships with physicians and pharmaceutical companies. The subpoena covers the period from May 1996 to May 2002. The Company has provided the documents requested. This inquiry remains at an early stage. As it proceeds, the government could expand its areas of concern. If a court determines that there has been wrongdoing, the penalties under applicable statutes could be substantial. F-24
Slide 70: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) Other In addition to the foregoing, DaVita is subject to claims and suits in the ordinary course of business. Management believes that the ultimate resolution of these additional pending proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. 17. Concentrations Revenues associated with patients whose primary coverage is under Medicare, Medicaid and other government-based programs accounted for approximately 58%, 59% and 60% of total dialysis revenues in the continental U.S. for 2003, 2002 and 2001, respectively. Accounts receivable from Medicare and Medicaid were approximately $115,000 as of December 31, 2003. No other single payor accounted for more than 5% of total accounts receivable. A significant physician-prescribed pharmaceutical administered during dialysis, erythropoietin (EPO), is provided by a sole supplier and accounts for approximately one fourth of net operating revenues. Although the Company currently receives discounted prices for EPO, the supplier has unilateral pricing discretion and in the future the Company may not be able to achieve the same price levels historically obtained. 18. Other commitments The Company has obligations to purchase the third-party interests in several of its joint ventures. These obligations are in the form of put options, exercisable at the third-party owners’ discretion, and require the Company to purchase the minority owners’ interests at either the appraised fair market value or a predetermined multiple of cash flow or earnings, which approximates fair value. As of December 31, 2003, the Company’s potential obligations under these put options totaled approximately $60,000 of which approximately $38,000 was exercisable within one year. Additionally, the Company has certain other potential working capital commitments relating to administrative services agreements and minority-owned centers of approximately $15,000. The Company has mandatorily redeemable instruments in connection with certain consolidated partnerships, consisting of future distributions for the minority partner’s interests in these limited-life entities which dissolve after terms of ten to fifty years. As of December 31, 2003, such distributions would be valued below the related minority interests balances in the consolidated financial statements. Other than operating leases disclosed in Note 12, and the letters of credit and the interest rate swap agreements, as disclosed in Note 11, the Company has no off balance sheet financing arrangements as of December 31, 2003. F-25
Slide 71: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) 19. Acquisitions and divestitures Acquisition amounts were as follows: Year ended December 31, 2003 2002 2001 Acquisitions Cash paid, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,645 $19,977 $36,330 Application of investments in and advances to previously managed businesses . . 25,320 Deferred purchase payments and acquisition obligations . . . . . . . . . . . . . . . . . . . . 5,146 100 6,300 Aggregate purchase cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,791 $20,077 $67,950 Number of chronic dialysis centers acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 11 21 Aggregate purchase costs of acquired dialysis centers . . . . . . . . . . . . . . . . . . . . . . $ 84,102 $20,077 $67,950 The assets and liabilities of the acquired operations were recorded at their estimated fair market values at the dates of acquisition. The results of operations of these centers have been included in the financial statements from their designated effective acquisition dates. The nearest month-end has been designated as the effective date for recording acquisitions that close during the month because there were no partial month accounting cutoffs and partial month results associated with these acquisitions would not have a material impact on consolidated operating results. Settlements with tax authorities relating to pre-acquisition income tax liabilities may result in an adjustment to goodwill attributable to that acquisition. The initial allocations of purchase cost at fair value are based upon available information for the acquired businesses and are finalized when any contingent purchase price amounts are resolved. The final allocations did not differ materially from the initial allocations. Aggregate purchase cost allocations were as follows: Year ended December 31, 2003 2002 2001 Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,678 $ 3,360 $19,886 Amortizable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,273 1,975 1,648 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,700 15,260 51,820 Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,777) (518) (5,404) Minority interests extinguished . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,917 Aggregate purchase cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,791 $20,077 $67,950 The following summary, prepared on a pro forma basis, combines the results of operations as if these acquisitions had been consummated as of the beginning of both of the periods presented, after including the impact of certain adjustments such as amortization of intangibles, interest expense on acquisition financing and income tax effects. Year ended December 31, 2003 2002 (unaudited) Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-26 $2,066,371 180,961 2.88 2.56 $1,962,295 165,527 2.30 2.05
Slide 72: DAVITA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (dollars in thousands, except per share data) These unaudited pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been completed as of the beginning of both of the periods presented. In addition, they are not intended to be a projection of future results and do not reflect all of the synergies, additional revenue-generating services or reductions in direct center operating expenses that might be achieved from combined operations. Divestitures During 2003, the Company divested of certain center operating assets, which amounted to $2,275. The Company divested of substantially all of its dialysis operations outside the continental United States during 2000 and completed the sale of its remaining non-continental centers during the second quarter of 2002. Revenues of the non-continental operations were $6,159 and $15,313 for 2002 and 2001, and the related pre tax earnings (losses) were $1,383 and $(2,509) respectively. 20. Fair values of financial instruments Financial instruments consist primarily of cash, accounts receivable, notes receivable, accounts payable, accrued compensation and benefits, and other accrued liabilities and debt. The balances of the non-debt financial instruments as presented in the financial statements at December 31, 2003 approximate their fair values. Borrowings under credit facilities, of which $1,154,199 was outstanding as of December 31, 2003, reflect fair value as they are subject to fees and adjustable rates, competitively determined in the marketplace. The interest rate swap had a fair value of approximately $2,000 liability as of December 31, 2003. 21. Supplemental cash flow information The table below provides supplemental cash flow information: Year ended December 31, 2003 2002 2001 Cash paid: Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,074 $30,217 $68,264 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,278 69,114 70,149 Non-cash investing and financing activities: Fixed assets acquired under capital lease obligations . . . . . . . . . . . . . . . . . . 2,283 2,356 Contributions to consolidated partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . 2,645 2,154 25 Deferred financing cost write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 721 Conversion of debt to equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,254 Liabilities assumed in conjunction with common stock acquisition . . . . . . . 357 22. Selected quarterly financial data (unaudited) 2003 December 31 September 30 Net operating revenues . . . . Operating income . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . Basic net income per common share . . . . . . . . . Diluted net income per common share . . . . . . . . . $ $ $553,446 121,190 100,498 62,798 0.98 0.92 $ $ $513,282 95,211 62,910 38,060 0.58 0.54 $ $ June 30 $489,883 82,800 64,195 38,520 0.63 0.55 $ $ 2002 March 31 December 31 September 30 $459,807 79,334 60,663 36,413 0.60 0.52 $ $ $503,096 118,377 99,411 58,811 0.97 0.81 $ $ $481,194 109,919 90,570 54,170 0.84 0.72 $ $ June 30 $442,677 78,747 15,298 8,370 0.10 0.13 $ $ March 31 $427,665 76,783 61,978 35,978 0.43 0.40 F-27
Slide 73: SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this Report on Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of El Segundo, State of California, on February 27, 2004. DAVITA INC. By: /s/ KENT J. THIRY Kent J. Thiry Chairman and Chief Executive Officer KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Kent J. Thiry, Gary W. Beil, and Patrick A. Broderick, and each of them his true and lawful attorneysin-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ KENT J. THIRY Kent J. Thiry GARY W. BEIL Gary W. Beil Chairman and Chief Executive Officer (Principal Executive Officer) Acting Chief Financial Officer, Vice President and Controller (Principal Financial and Accounting Officer) Director Director Director February 27, 2004 /s/ February 27, 2004 /s/ /s/ NANCY-ANN DEPARLE Nancy-Ann DeParle RICHARD B. FONTAINE Richard B. Fontaine /s/ PETER T. GRAUER Peter T. Grauer MICHELE J. HOOPER Michele J. Hooper February 27, 2004 February 27, 2004 February 27, 2004 /s/ /s/ Director Director Director Director February 27, 2004 February 27, 2004 February 27, 2004 February 27, 2004 C. RAYMOND LARKIN, JR. C. Raymond Larkin, Jr. /s/ /s/ JOHN M. NEHRA John M. Nehra WILLIAM L. ROPER William L. Roper II-1
Slide 74: INDEPENDENT AUDITORS’ REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Shareholders DaVita Inc. Under date of February 20, 2004, we reported on the consolidated balance sheets of DaVita Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003, which are included in the Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule for each of the years in the three-year period ended December 31, 2003 in the Form 10-K. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets resulting from business combinations. /s/ KPMG LLP Seattle, Washington February 20, 2004 S-1
Slide 75: DAVITA INC. SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS Balance at beginning of year Amounts charged to Amounts income written off (in thousands) Balance at end of year Description Allowance for uncollectible accounts: Year ended December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $61,619 52,475 48,927 $32,926 32,069 35,700 $42,070 35,617 32,073 $52,475 48,927 52,554 S-2
Slide 76: EXHIBIT INDEX Exhibit Number Description 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 4.5 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 Amended and Restated Certificate of Incorporation of Total Renal Care Holdings, Inc., or TRCH, dated December 4, 1995.(1) Certificate of Amendment of Certificate of Incorporation of TRCH, dated February 26, 1998.(2) Certificate of Amendment of Certificate of Incorporation of DaVita Inc. (formerly Total Renal Care Holdings, Inc.), dated October 5, 2000.(10) Bylaws of TRCH, dated October 6, 1995.(3) Indenture, dated June 12, 1996 by Renal Treatment Centers, Inc., or RTC, to PNC Bank including form of RTC Note.(4) First Supplemental Indenture, dated as of February 27, 1998, among RTC, TRCH and PNC Bank under the 1996 Indenture.(2) Second Supplemental Indenture, dated as of March 31, 1998, among RTC, TRCH and PNC Bank under the 1996 Indenture.(2) Indenture, dated as of November 18, 1998, between TRCH and United States Trust Company of New York, as trustee, and form of Note.(5) Rights Agreement, dated as of November 14, 2002, between DaVita Inc. and the Bank of New York, as Rights Agent. (6) Employment Agreement, dated as of October 18, 1999, by and between TRCH and Kent J. Thiry.(7)* Amendment to Mr. Thiry’s Employment Agreement, dated May 20, 2000.(8)* Second Amendment to Mr. Thiry’s Employment Agreement, dated November 28, 2000.(9)* Employment Agreement, dated as of November 29, 1999, by and between TRCH and Gary W. Beil.(9)* Employment Agreement, dated as of July 19, 2000, by and between TRCH and Charles J. McAllister.(9)* Employment Agreement, effective as of April 19, 2000, by and between TRCH and Steven J. Udicious.(10)* Employment Agreement, dated as of June 15, 2000, by and between DaVita Inc. and Joseph Mello.(11)* Employment Agreement, dated as of April 1, 2001, by and between DaVita Inc. and Richard K. Whitney.(12)* Employment Agreement, dated as of October 15, 2002, by and between DaVita Inc. and Lori S. Richardson-Pellicioni.* Second Amended and Restated 1994 Equity Compensation Plan.(13) * First Amended and Restated 1995 Equity Compensation Plan.(13)* First Amended and Restated 1997 Equity Compensation Plan.(13)* First Amended and Restated Special Purpose Option Plan.(13)* 1999 Equity Compensation Plan.(14)* Amended and Restated 1999 Equity Compensation Plan.(16)* First Amended and Restated Total Renal Care Holdings, Inc. 1999 Non-Executive Officer and NonDirector Equity Compensation Plan. 2002 Equity Compensation Plan.(17)*
Slide 77: Exhibit Number Description 10.18 Credit Agreement, dated as of May 3, 2001, by and among DaVita Inc., the lenders party thereto, Bank of America, N.A., as the Administrative Agent, Banc of America Securities LLC, as Joint Book Manager and Credit Suisse First Boston Corporation, as Joint Book Manager and Syndication Agent (the “Credit Agreement”).(18) Amendment No. 1, dated as of December 4, 2001, to the Credit Agreement by and among DaVita Inc., the lenders party thereto, Bank of America, N.A., as the Administrative Agent, Banc of America Securities LLC, as Joint Book Manager and Credit Suisse First Boston Corporation, as Joint Book Manager and Syndication Agent.(10) Security Agreement, dated as of May 3, 2001, made by DaVita Inc. and the subsidiaries of DaVita Inc. named therein to Bank of America, N.A., as the Collateral Agent for the lenders party to the Credit Agreement.(18) Subsidiary Guaranty, dated as of May 3, 2001, made by the subsidiaries of DaVita Inc. named therein in favor of the lenders party to the Credit Agreement.(18) Guaranty, entered into as of March 31, 1998, by TRCH in favor of and for the benefit of PNC Bank.(2) Credit Agreement, dated as of April 26, 2002, by and among DaVita Inc., the lenders party thereto, Credit Suisse First Boston Corporation as Administrative Agent and Joint Book Manager, Banc of America Securities LLC as Joint Book Manager and Bank of America, N.A., as Syndication Agent (“the Credit Agreement”).(12)** Amendment No. 1, dated as of May 9, 2002, to the Credit Agreement by and among DaVita Inc., the lenders party thereto, Credit Suisse First Boston Corporation as Administrative Agent and Joint Book Manager, Banc of America Securities LLC as Joint Book Manager and Bank of America, N.A., as Syndication Agent.(12) Security Agreement, dated as of April 26, 2002, made by and among DaVita Inc. and the subsidiaries of DaVita Inc. named therein to Credit Suisse First Boston, Cayman Islands Branch, as the Collateral Agent for the lenders party to the Credit Agreement.(12) Subsidiary Guarantee, dated as of April 26, 2002, made by the subsidiaries of DaVita Inc. named therein in favor of the lenders party to the Credit Agreement.(12) Amendment #4, dated November 16, 2001, to Agreement No. 19990110 between Amgen Inc. and Total Renal Care, Inc. (10)** Agreement No. 20010259, dated November 16, 2001 between Amgen USA Inc. and Total Renal Care, Inc.(10)** Amendment #1, dated December 31, 2002, to Agreement No. 20010259 between Amgen USA Inc. and Total Renal Care, Inc.** Amended and Restated Credit Agreement, dated July 15, 2003, by and among DaVita Inc., the lenders party thereto, Credit Suisse First Boston Corporation as Joint Book Manager, Administrative Agent and Syndication Agent, Banc of America Securities LLC as Joint Book Manager and Bank of America, N.A., as Syndication Agent.(15) Guarantee Supplement, dated July 15, 2003, made by the subsidiaries of DaVita Inc. named therein in favor of the lenders party to the Amended and Restated Credit Agreement.(15) Employment Agreement dated as of May 1, 2003, by and between DaVita Inc. and Patrick A. Broderick.(15)* Second Amended and Restated Credit Agreement, dated November 18, 2003, by and among DaVita Inc., the lenders party thereto, Credit Suisse First Boston, Cayman Islands Branch as Joint Book Manager, and Administrative Agent, Banc of America Securities LLC as Joint Book Manager and Bank of America N.A., as Syndication Agent.✓ 10.19 10.20 10.21 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33
Slide 78: Exhibit Number Description 10.34 12.1 14.1 21.1 23.1 24.1 31.1 31.2 32.1 32.2 ✓ * ** (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) Agreement dated December 24, 2003, between Amgen USA Inc. and DaVita Inc.**✓ Statement re: Computation of Ratios of Earnings to Fixed Charges. ✓ DaVita Inc. Corporate Governance Code of Ethics. ✓ List of our subsidiaries. ✓ Consent of KPMG LLP.✓ Powers of Attorney with respect to DaVita. ✓(Included on Page II-1) Certification of the Chief Executive Officer, dated February 27, 2004, pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.✓ Certification of the Chief Financial Officer, dated February 27, 2004, pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.✓ Certification of the Chief Executive Officer, dated February 27, 2004, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.✓ Certification of the Chief Financial Officer, dated February 27, 2004, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.✓ Included in this filing. Management contract or executive compensation plan or arrangement. Portions of this exhibit are subject to a request for confidential treatment and have been redacted and filed separately with the SEC. Filed on March 18, 1996 as an exhibit to our Transitional Report on Form 10-K for the transition period from June 1, 1995 to December 31, 1995. Filed on March 31, 1998 as an exhibit to our Form 10-K for the year ended December 31, 1997. Filed on October 24, 1995 as an exhibit to Amendment No. 2 to our Registration Statement on Form S-1 (Registration Statement No. 33-97618). Filed on August 5, 1996 as an exhibit to RTC’s Form 10-Q for the quarter ended June 30, 1996. Filed on December 18, 1998 as an exhibit to our Registration Statement on Form S-3 (Registration Statement No. 333-69227). Filed on November 19, 2002 as an exhibit to our Form 8-K reporting the adoption of the Rights Agreement. Filed on November 15, 1999 as an exhibit to our Form 10-Q for the quarter ended September 30, 1999. Filed on August 14, 2000 as an exhibit to our Form 10-Q for the quarter ended June 30, 2000. Filed on March 20, 2001 as an exhibit to our Form 10-K for the year ended December 31, 2000. Filed on March 1, 2002 as an exhibit to our Form 10-K for the year ended December 31, 2001. Filed on August 15, 2001 as an exhibit to our Form 10-Q for the quarter ended June 30, 2001. Filed on May 14, 2002 as an exhibit to our Form 10-Q for the quarter ended March 31, 2002. Filed on March 29, 2000 as an exhibit to our Form 10-K for the year ended December 31, 1999. Filed on February 18, 2000 as an exhibit to our Registration Statement on Form S-8 (Registration Statement No. 333-30736). Filed on August 6, 2003 as an exhibit to our Form 10-Q for the quarter ended June 30, 2003. Filed on April 27, 2001 as an exhibit to the Definitive Proxy Statement for our 2001 Annual Meeting of Stockholders. Filed on March 14, 2002 as an exhibit to the Definitive Proxy Statement for our 2002 Annual Meeting of Stockholders. Filed on June 8, 2001 as an exhibit to our Registration Statement on Form S-4 (Registration Statement No. 333-62552).
Slide 79: EXHIBIT 10.33 SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of November 18, 2003 Among DAVITA INC. as Borrower CREDIT SUISSE FIRST BOSTON, CAYMAN ISLANDS BRANCH as Administrative Agent BANK OF AMERICA, N.A. as Syndication Agent CREDIT SUISSE FIRST BOSTON, CAYMAN ISLANDS BRANCH and BANC OF AMERICA SECURITIES LLC in relation to the Revolving Credit Facility and Term A Facility as Joint Book Managers and Joint Lead Arrangers and BANC OF AMERICA SECURITIES LLC in relation to the Term B Facility as Sole Book Manager and Sole Lead Arranger and THE BANK OF NEW YORK, THE BANK OF NOVA SCOTIA and WACHOVIA BANK, NATIONAL ASSOCIATION in relation to the Revolving Credit Facility and the Term A Facility as Documentation Agents and THE LENDERS, ISSUING BANKS AND SWING LINE BANK party hereto
Slide 80: TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 1.02. Computation of Time Periods; Other Definitional Provisions . . . . . . . . . . . . . . . . . . . . . . . SECTION 1.03. Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES AND THE LETTERS OF CREDIT SECTION 2.01. The Advances and the Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.02. Making the Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of Credit . . . . . . . . . . . . . . . SECTION 2.04. Repayment of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.05. Termination or Reduction of the Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.06. Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.07. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.08. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.09. Conversion of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.10. Increased Costs, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.11. Evidence of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.12. Payments and Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.13. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.14. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.15. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2.16. Defaulting Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ARTICLE III CONDITIONS OF EFFECTIVENESS OF THIS AGREEMENT AND LENDING AND ISSUANCES OF LETTERS OF CREDIT SECTION 3.01. Conditions Precedent to Effectiveness of this Amended and Restated Agreement . . . . . . . SECTION 3.02. Conditions Precedent to Each Borrowing and Issuance and Renewal . . . . . . . . . . . . . . . . . SECTION 3.03. Determinations Under Section 3.01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 5.02. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 5.03. Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 5.04. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i 52 54 63 65 47 45 47 47 23 25 27 29 30 31 33 34 35 36 38 38 41 43 43 43 1 23 23
Slide 81: Section Page ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 6.02. Actions in Respect of the Letters of Credit upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . ARTICLE VII THE AGENTS SECTION 7.01. Appointment, Powers and Immunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.02. Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.03. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.04. CSFB and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.05. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.06. Non-Reliance on Agent and Other Lender Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.07. Resignation of Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.08. Release of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.09. Release of Guarantor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7.10. Actions in Respect of Intercreditor Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.04. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.05. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.06. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.07. Assignments and Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.08. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.09. No Liability of the Issuing Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.10. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.11. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.12. Governing Law, Jurisdiction, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.13. Designation as Designated Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8.14. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SCHEDULES Schedule I Schedule II Schedule 4.01(b) Schedule 4.01(d) Schedule 4.01(f) Schedule 4.01(o) Schedule 4.01(p) Schedule 4.01(q) Schedule 4.01(r) Schedule 4.01(s) Schedule 5.02(b) Commitments and Applicable Lending Offices Existing Letters of Credit Subsidiaries Authorizations Litigation Environmental Laws Open Years Liens Investments Exceptions to Medicare/Medicaid Participation Debt ii 74 75 76 76 77 77 78 81 81 82 82 82 83 83 70 71 71 71 72 73 73 73 74 74 67 69
Slide 82: EXHIBITS Exhibit A-1 Exhibit A-2 Exhibit A-3 Exhibit B-1 Exhibit B-2 Exhibit B-3 Exhibit C Exhibit D Exhibit E Exhibit F Exhibit G Exhibit H Exhibit I Exhibit J Form of Term A Note Form of Term B Note Form of Revolving Credit Note Form of Notice of Borrowing Form of Notice of Swing Line Borrowing Form of Notice of Conversion Form of Assignment and Assumption Form of Security Agreement Form of Subsidiary Guarantee Form of Opinion of Borrower’s General Counsel Form of Opinion of Bingham McCutchen Form of Notice of Covenant Reduction Entities that are not Subsidiaries Form of Consent and Ratification of Collateral Documents iii
Slide 83: SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 18, 2003 among DAVITA INC., a Delaware corporation (the “Borrower”), the banks, financial institutions and other institutional lenders listed on the signature pages hereof under the caption “Lenders,” the banks party hereto as Issuing Banks (as hereinafter defined), CREDIT SUISSE FIRST BOSTON, acting through its CAYMAN ISLANDS BRANCH (“CSFB”), as the provider of the Swing Line Facility (as hereinafter defined) (the “Swing Line Bank”), CSFB and BANC OF AMERICA SECURITIES LLC (“BAS”), as the joint book running managers and joint lead arrangers in respect of the Revolving Credit Facility and the Term A Facility and BAS as the sole book running manager and sole lead arranger in respect of the Term B Facility (CSFB and BAS, collectively, in such capacities, the “Book Managers”), CSFB as the administrative agent (together with any successor thereto appointed pursuant to Article VII, the “Administrative Agent”) for the Lender Parties (as hereinafter defined), THE BANK OF NEW YORK, THE BANK OF NOVA SCOTIA and WACHOVIA BANK, NATIONAL ASSOCIATION, as documentation agents in respect of the Revolving Credit Facility and the Term A Facility (the “Documentation Agents”) and BANK OF AMERICA, N.A. as syndication agent in respect of the Revolving Credit Facility, the Term A Facility and the Term B Facility (the “Syndication Agent”) AMENDS AND RESTATES IN FULL the Existing Credit Agreement (as hereinafter defined). PRELIMINARY STATEMENTS: (1) The Borrower entered into a Credit Agreement dated as of April 26, 2002, which was amended and restated pursuant to that certain Amended and Restated Credit Agreement, dated as of July 15, 2003 (the “Existing Credit Agreement”), with the banks, financial institutions and other institutional lenders party thereto as revolving credit lenders (the “Revolving Credit Lenders”), as term A lenders (the “Term A Lenders”), and as term B lenders (the “Term B Lenders”), and CSFB as the administrative agent. (2) The Borrower has requested to amend and restate the Existing Credit Agreement in its entirety in order, among other things, to amend the pricing of the Term B Facility and to modify certain covenants. (3) The Term B Lenders and, to the extent that the Term B Lenders do not comprise the Required Lenders under the terms of the Existing Credit Agreement, such Term A Lenders and Revolving Credit Lenders as are required to comprise, together with the Term B Lenders, the Required Lenders, have agreed to the amendment of the Credit Agreement as provided herein pursuant to a Consent dated as of even date herewith (the “Consent”). NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): “Accepting Lender” has the meaning specified in Section 2.06(d). “Administrative Agent” has the meaning specified in the recital of parties to this Agreement. “Administrative Agent’s Account” means the account of the Administrative Agent maintained by the Administrative Agent at The Bank of New York, ABA No. 021000018, Account Name: “CSFB Agency Cayman Account,” Account No. 8900492627, Reference: DaVita Inc., or such other account maintained by the Administrative Agent and designated by the Administrative Agent from time to time as such in a written notice to the Borrower and each of the Lender Parties.
Slide 84: “Administrative Questionnaire” means a questionnaire, in form and substance satisfactory to the Administrative Agent, delivered by an Eligible Assignee pursuant to Section 8.07(a)(ii)(D) which provides the administrative information relating to such Eligible Assignee. “Advance” means a Term A Advance, a Term B Advance, a Revolving Credit Advance, a Swing Line Advance or a Letter of Credit Advance, as the context may require. “Affiliate” means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term “control” (including the terms “controlling,” “controlled by” and “under common control with”) of a Person means the possession, direct or indirect, of the power to vote 10% or more of the Voting Interests in such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Interests, by contract or otherwise. “Agents” means, collectively, the Administrative Agent, the Book Managers, the Documentation Agents, the Syndication Agent and each co-agent or sub-agent appointed by the Administrative Agent from time to time pursuant to Section 7.01(b). “Agreement” means this Second Amended and Restated Credit Agreement, as the same may be amended, restated, supplemented or otherwise modified from time to time. “Agreement Value” means, for each Hedge Agreement, on any date of determination, an amount reasonably determined by the Administrative Agent equal to: (a) in the case of a Hedge Agreement documented pursuant to the Master Agreement (Multicurrency-Cross Border) published by the International Swap and Derivatives Association, Inc. (the “Master Agreement”), the amount, if any, that would be payable by any Loan Party to its counterparty in respect of such Hedge Agreement, as if (i) such Hedge Agreement was being terminated early on such date of determination, (ii) such Loan Party was the sole “Affected Party”, and (iii) the Administrative Agent was the sole party determining such payment amount (with the Administrative Agent making such determination pursuant to the provisions of that specific form of Master Agreement); or (b) in the case of a Hedge Agreement traded on an exchange, the mark-to-market value of such Hedge Agreement, which will be the unrealized gain or loss on such Hedge Agreement to the Loan Party to such Hedge Agreement reasonably determined by the Administrative Agent based on the settlement price of such Hedge Agreement on such date of determination, or (c) in all other cases, the markto-market value of such Hedge Agreement, which will be the unrealized gain or loss on such Hedge Agreement to the Loan Party to such Hedge Agreement reasonably determined by the Administrative Agent as the amount, if any, by which (i) the present value of the future cash flows to be paid by such Loan Party exceeds (ii) the present value of the future cash flows to be received by such Loan Party pursuant to such Hedge Agreement; capitalized terms used and not otherwise defined in this definition shall have the respective meanings set forth in the above described Master Agreement. “Applicable Lending Office” means (a) with respect to each of the Lenders, the Base Rate Lending Office of such Lender in the case of a Base Rate Advance and the Eurodollar Lending Office of such Lender in the case of a Eurodollar Rate Advance and (b) with respect to the Issuing Bank and the Swing Line Bank, the Base Rate Lending Office of the Issuing Bank and the Swing Line Bank, respectively, for all purposes of this Agreement. 2
Slide 85: “Applicable Margin” means, on any date of determination, a percentage per annum equal to the applicable percentage for the Performance Level set forth below as determined by reference to the Leverage Ratio for the most recently completed Measurement Period: Base Rate Advances Term A Facility/Revolving Term B Facility Credit Facility Eurodollar Rate Advances Term A Facility/Revolving Term B Facility Credit Facility Performance Level Leverage Ratio I II III IV V VI Less than 2.00x Greater than or equal to 2.00x but less than 2.50x Greater than or equal to 2.50x but less than 2.75x Greater than or equal to 2.75x but less than 3.00x Greater than or equal to 3.00x but less than 3.50x Greater than or equal to 3.50x 0.50% 1.00% 1.25% 1.25% 1.50% 1.75% 1.00% 1.00% 1.00% 1.25% 1.50% 1.50% 1.50% 2.00% 2.25% 2.25% 2.50% 2.75% 2.00% 2.00% 2.00% 2.25% 2.50% 2.50% For the purposes of: (A) clause (ii) of the immediately preceding sentence, the Applicable Margin for each Base Rate Advance shall be determined by reference to the Performance Level in effect from time to time and the Applicable Margin for each Eurodollar Rate Advance shall be determined by reference to the Performance Level in effect on the first day of each Interest Period for such Eurodollar Rate Advance; and (B) determining the Performance Level in respect of the Applicable Margin at any date of determination, changes in the Performance Level shall be effective on the date on which the Administrative Agent and the Lender Parties receive the Required Financial Information reflecting such change; provided, however, that if the Borrower has not delivered to the Administrative Agent and the Lender Parties all of the information required under this clause (B) within five Business Days after the date on which such information is otherwise required under Section 5.03(b) or 5.03(c), as applicable, the Performance Level in respect of the Revolving Credit Facility and the Term A Facility shall be deemed to be at Performance Level VI for so long as such information has not been submitted and provided, further, that the Performance Level in respect of the Term B Facility shall be deemed to be at Performance Level IV for so long as the information required under Section 5.03(b) in respect of the 2003 Fiscal Year has not been submitted. “Applicable Percentage” means, with respect to the Commitment Fee, a rate per annum equal to 0.375% if the Leverage Ratio for the most recently completed Measurement Period is less than 3.00:1.00 and 0.50% if such Leverage Ratio is greater than or equal to 3.00:1.00. For the purposes of determining the Leverage Ratio in respect of the Applicable Percentage at any date of determination, changes in the Applicable Percentage shall be effective on the date on which the Administrative Agent and the Lender Parties receive the Required Financial Information reflecting such change; provided, however, that if the Borrower has not delivered to the Administrative Agent and the Lender Parties all of the information required under this definition within five Business Days after the date on which such information is otherwise required under Section 5.03(b) or 5.03(c), as applicable, the Applicable Percentage shall be 0.50% for so long as such information has not been submitted. “Appropriate Lender” means, at any time, (a) with respect to the Term A Facility, the Term B Facility or the Revolving Credit Facility, a Lender that has outstanding Advances or a Commitment with respect to such Facility at such time, (b) with respect to the Letter of Credit Facility, (i) the Issuing Bank and (ii) if the Revolving Credit Lenders have made Letter of Credit Advances pursuant to Section 2.03(b) that are outstanding at such time, each such Revolving Credit Lender and (c) with respect to the Swing Line Facility, 3
Slide 86: (i) the Swing Line Bank and (ii) if the Revolving Credit Lenders have made Swing Line Advances pursuant to Section 2.02(b) that are outstanding at such time, each such Revolving Credit Lender. “Approved Fund” means any Person (other than a natural Person) that (i) is (or will be) an “accredited investor” (as defined in Regulation D under the Securities Act) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business and (ii) is administered, advised or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers, advises or manages a Lender. “Assignment and Assumption” means an Assignment and Assumption entered into by a Lender Party and an Eligible Assignee, and accepted by the Administrative Agent and, if applicable, the Borrower, in accordance with Section 8.07 and in substantially the form of Exhibit C hereto. “Available Amount” of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time (assuming compliance at such time with all conditions to drawing). “Base Rate” means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of: (a) the rate of interest established by CSFB from time to time as its prime rate (which rate of interest may not be the lowest rate of interest charged by CSFB to its customers); and (b) the Federal Funds Rate plus 0.50%. Any change in the Base Rate resulting from a change in the prime rate established by CSFB shall become effective on the Business Day on which such change in the prime rate is announced by CSFB. “Base Rate Advance” means an Advance that bears interest as provided in Section 2.07(a)(i). “Base Rate Lending Office” means, with respect to each of the Lender Parties, the office of such Lender Party specified as its “Base Rate Lending Office” opposite its name on Schedule I hereto or in the Assignment and Assumption pursuant to which it became a Lender Party, as the case may be, or such other office of such Lender Party as such Lender Party may from time to time specify to the Borrower and the Administrative Agent for such purpose. “Borrower’s Account” means such account of the Borrower as is agreed from time to time in writing between the Borrower and the Administrative Agent. “Borrower’s Percentage” means, in respect of the sale or issuance of Equity Interests by any Subsidiary of the Borrower, the percentage of the common Equity Interests of such Subsidiary beneficially owned directly or indirectly by the Borrower after giving effect to such sale or issuance. “Borrowing” means a Term A Borrowing, a Term B Borrowing, a Revolving Credit Borrowing or a Swing Line Borrowing, as the context may require. “Business Day” means a day of the year on which banks are not required or authorized by law to close in New York, New York, and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in U.S. dollar deposits in the London interbank market. “Capital Assets” means, with respect to any Person, all equipment, fixed assets and real property or improvements of such Person, or replacements or substitutions therefor or additions thereto, that, in accordance with GAAP, have been or should be reflected as additions to property, plant or equipment on the balance sheet of such Person. “Capital Expenditures” means, with respect to any Person for any period, all expenditures made directly or indirectly by such Person during such period for Capital Assets (whether paid in cash or other consideration or accrued as a liability and including, without limitation, all expenditures for maintenance and repairs which are required, in accordance with GAAP, to be capitalized on the books of such Person). 4
Slide 87: For purposes of this definition, the purchase price of equipment or other fixed assets that are purchased simultaneously with the trade-in of existing assets or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount by which such purchase price exceeds the credit granted by the seller of such assets for the assets being traded in at such time or the amount of such insurance proceeds, as the case may be. “Capitalized Lease” means any lease with respect to which the lessee is required to recognize concurrently the acquisition of property or an asset and the incurrence of a liability in accordance with GAAP. “Capitalized Lease Obligations” means, with respect to any Capitalized Lease, the amount required to be capitalized in the financial statements of the lessee in accordance with GAAP. “Cash Distributions” means, with respect to any Person for any period, all dividends and other distributions on any of the outstanding Equity Interests in such Person, all purchases, redemptions, retirements, defeasances or other acquisitions of any of the outstanding Equity Interests in such Person and all returns of capital to the stockholders, partners or members (or the equivalent persons) of such Person, in each case to the extent paid in cash by or on behalf of such Person during such period. “Cash Equivalents” means (a) securities with maturities of one year or less from the date of acquisition, issued, fully guaranteed or insured by the United States Government, (b) securities with maturities of one year or less from the date of acquisition issued, fully guaranteed or insured by any State of the United States of America or any political subdivision thereof rated at least AA- by S&P or Aa3 by Moody’s, or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (c) certificates of deposit, time deposits, overnight bank deposits, bankers’ acceptances and repurchase agreements issued by a Qualified Issuer having maturities of 270 days or less from the date of acquisition, (d) commercial paper of an issuer rated at least A-2 by S&P or P-2 by Moody’s, or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, and having maturities of 270 days or less from the date of acquisition, (e) money market accounts or funds, a substantial portion of the assets of which constitute Cash Equivalents described in clauses (a) through (d) above, with, issued by or managed by Qualified Issuers, (f) money market accounts or funds, a substantial portion of the assets of which constitute Cash Equivalents described in clauses (a) through (d) above, which money market accounts or funds have net assets of not less than $500,000,000 and have the highest rating available of either S&P or Moody’s, or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (g) auction rate securities rated AAA by S&P and Aaa by Moody’s, and (h) money market accounts or funds rated at least AA by S&P and at least Aa by Moody’s. “CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time. “CERCLIS” means the Comprehensive Environmental Response, Compensation and Liability Information System maintained by the U.S. Environmental Protection Agency. “CHAMPUS” means the United States Department of Defense Human Civilian Health and Medical Program of the Uniformed Services. “Change of Control” means, at any time: (a) any “person” or “group” (each as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) (i) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of Voting Interests in the Borrower (including through securities convertible into or exchangeable for such Voting Interests) representing 35% or more of the combined voting power of all of the Voting Interests in the Borrower (on a fully diluted basis) or (ii) otherwise has the ability, directly or indirectly, to elect a majority of the board of directors of the Borrower; or 5
Slide 88: (b) during any period of 24 consecutive months, whether commencing before or after the date of this Agreement, individuals who at the beginning of such 24-month period were Continuing Directors shall cease for any reason to constitute a majority of the board of directors of the Borrower; “Closing Date” means the first date on which all of the conditions precedent to the effectiveness of this Agreement set forth in Article III are satisfied, which date shall occur on or prior to November 18, 2003. “Collateral” means all of the “Collateral” referred to in the Collateral Documents and all of the other property and assets that are or are intended under the terms of the Collateral Documents to be subject to Liens in favor of the Administrative Agent for the benefit of the Secured Parties. “Collateral Documents” means, collectively, the Security Agreement, the Intellectual Property Security Agreement, collateral assignments, Security Agreement Supplements, security agreements, pledge agreements, mortgages, deeds of trust or other similar agreements delivered to the Administrative Agent and the Lender Parties pursuant to Section 3.01(a) or Section 5.01(j), and each of the other agreements, instruments or documents that creates or purports to create a Lien in favor of the Administrative Agent for the benefit of the Secured Parties. “Commitment” means a Revolving Credit Commitment or a Swing Line Commitment, as the context may require. “Commitment Fee” has the meaning specified in Section 2.08(a). “Confidential Information” means information that is furnished to the Administrative Agent or any of the Lender Parties by or on behalf of the Borrower or any of its Subsidiaries in a writing that is marked as confidential or otherwise on an expressly confidential basis, but does not include any such information that (a) is or becomes generally available to the public (other than as a result of a breach by the Administrative Agent or such Lender Party of its confidentiality obligations under this Agreement) or (b) is or becomes available to the Administrative Agent or such Lender Party from a source other than the Borrower or any of its Subsidiaries that is not, to the knowledge of the Administrative Agent or such Lender Party, acting in violation of a confidentiality agreement with the Borrower or any such Subsidiary. “Consolidated” refers to the consolidation of accounts in accordance with GAAP. “Consolidated Cash Taxes” means, with respect to any Person for any period, (a) the aggregate amount of all payments in respect of income taxes made in cash by such Person and its Subsidiaries to any applicable Governmental Authority during such period less (b) the aggregate amount of all cash refunds in respect of income taxes received by such Person and its Subsidiaries from any applicable Governmental Authority during such period, after giving effect, to the extent available, to the application of net operating losses available to such Person or any such Subsidiary. “Consolidated EBITDA” means, with respect to any Person for any period, the amount equal to (I) the sum of (a) the Consolidated Net Income of such Person and its Subsidiaries for such period plus (b) the sum of each of the following expenses that have been deducted in the determination of the Consolidated Net Income of such Person and its Subsidiaries for such period: (i) the Consolidated Interest Expense of such Person and its Subsidiaries for such period, (ii) all income tax expense (whether federal, state, local, foreign or otherwise) of such Person and its Subsidiaries for such period, (iii) all depreciation expense of such Person and its Subsidiaries for such period, (iv) all amortization expense of such Person and its Subsidiaries for such period and (v) all non-cash charges otherwise deducted in determining the Consolidated Net Income of such Person and its Subsidiaries for such period less all extraordinary gains added in determining the Consolidated Net Income of such Person and its Subsidiaries for such period; provided that for any period, the amount of non-cash charges arising from the write-off of current assets shall not be included in this subclause (v) plus (c) for each such period ending during the twelve-month period immediately following the closing of any acquisition permitted under Section 5.02(f), an amount equal to the Consolidated EBITDA (calculated on the basis as provided herein) for each such acquisition calculated on a pro forma basis as if such acquisition had occurred on the first day of the twelve-month period then ended, minus (d) any cash expenditures for such period relating to the non-cash charges set forth in subclause (b)(v) 6
Slide 89: hereof, whether for such period or any prior period, plus (e) non-recurring charges incurred during such period not exceeding in the aggregate during the period from April 1, 2000 and continuing through the term of this Agreement $45,000,000 resulting from the write-off of accounts receivable and other related charges as a result of the pending third party carrier review of claims for Medicare reimbursement submitted by the Subsidiary of the Borrower operating the Borrower’s Florida laboratory or other Governmental Reimbursement Program Costs, minus (II) in respect of (a) any Subsidiary sold in such period or (b) any assets sold or disposed of in such period as to which EBITDA attributable thereto can be determined, an amount equal to the Consolidated EBITDA (calculated on the basis as provided herein) for each such sale or disposition otherwise included in Consolidated EBITDA for such period. “Consolidated Interest Expense” means, with respect to any Person for any period, the gross interest expense accrued on all Debt of such Person and its Subsidiaries during such period, determined on a Consolidated basis and in accordance with GAAP for such period, including, without limitation, (a) in the case of the Borrower, all fees paid or payable pursuant to Section 2.08(a), (b) commissions, discounts and other fees and charges paid or payable in connection with letters of credit (including, without limitation, the Letters of Credit), (c) all amortization of original issue discount in respect of all Debt of such Person and its Subsidiaries, (d) all dividends on Redeemable Preferred Interests, to the extent paid or payable in cash, and (e) the net payment, if any, paid or payable in connection with Hedge Agreements less the net credit, if any, received in connection with Hedge Agreements. “Consolidated Net Income” means, for any period, the net income (or net loss) of any Person and its Subsidiaries for such period, determined on a Consolidated basis and in accordance with GAAP. “Consolidated Pre-Minority EBITDA” means Consolidated EBITDA plus minority interests in income of consolidated Subsidiaries of the Borrower to the extent deducted in determining net income of the Borrower and its Subsidiaries on a Consolidated basis in the calculation of Consolidated EBITDA. “Constitutive Documents” means, with respect to any Person, the certificate of incorporation or registration (including, if applicable, certificate of change of name), articles of incorporation or association, memorandum of association, charter, bylaws, certificate of limited partnership, partnership agreement, trust agreement, joint venture agreement, certificate of formation, articles of organization, limited liability company operating or members agreement, joint venture agreement or one or more similar agreements, instruments or documents constituting the organization or formation of such Person. “Contingent Obligation” means, with respect to any Person, any Obligation or arrangement of such Person to guarantee or intended to guarantee any Debt, leases, dividends or other obligations (“primary obligations”) of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the Obligation of a primary obligor, (b) the Obligation to make take-or-pay or similar payments, if required, regardless of nonperformance by any other party or parties to an agreement or (c) any Obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of any such primary obligation or (B) to maintain working capital, equity capital, net worth or other balance sheet condition or any income statement condition of the primary obligor or otherwise to maintain the solvency of the primary obligor, (iii) to purchase, lease or otherwise acquire property, assets, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such Person may be liable pursuant to the terms of the agreement, instrument or other document evidencing such Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder), as determined by such Person in good faith. 7
Slide 90: “Continuing Director” means, for any period, an individual who is a member of the board of directors of the Borrower on the first day of such period or who has been nominated to the board of directors of the Borrower by a majority of the other Continuing Directors who were members of the board of directors of the Borrower at the time of such nomination. “Conversion”, “Convert” and “Converted” each refer to a conversion of Advances of one Type into Advances of the other Type pursuant to Section 2.09 or 2.10. “Debt” means, with respect to any Person (without duplication) (a) all indebtedness of such Person for borrowed money, (b) all Obligations of such Person for the deferred purchase price of property or services (other than unsecured trade payables incurred in the ordinary course of such Person’s business, provided that at all times during which the aggregate amount of such payables exceed 50% of Consolidated EBITDA for the most recent Measurement Period, “Debt” shall include all such payables which are past due for more than 60 days (excluding payables being contested in good faith) after the date on which such payable was first past due), (c) all Obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, or upon which interest payments are customarily made, (d) all Obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Capitalized Lease Obligations of such Person, (f) all Obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all Obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any preferred Equity Interests in such Person or any other Person, valued, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all Obligations of such Person in respect of Hedge Agreements, take-or-pay agreements or other similar arrangements, valued, in the case of Hedge Agreements, at the Agreement Value thereof, (i) all Obligations of such Person under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing if the transaction giving rise to such Obligation is considered indebtedness for borrowed money for tax purposes but is classified as an operating lease in accordance with GAAP; (j) all Contingent Obligations, and (k) all indebtedness and other payment Obligations referred to in clauses (a) through (j) above of another Person secured by (or for which the holder of such indebtedness or other payment Obligations has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness or other payment Obligations: provided that for the purposes of this subclause (k) the amount thereof shall be equal to the lesser of (i) the amount of such indebtedness or other payment Obligations and (ii) the fair market value of the property subject to such Lien. “Declining Lender” has the meaning specified in Section 2.06(d). “Default” means any Event of Default or any event or condition that would constitute an Event of Default but for the requirement that notice be given or time elapse or both. “Defaulted Advance” means, with respect to any Lender Party at any time, the portion of any Advance required to be made by such Lender Party to the Borrower pursuant to Section 2.01 or 2.02 at or prior to such time that has not been made by such Lender Party or by the Administrative Agent for the account of such Lender Party pursuant to Section 2.02(e) as of such time. In the event that a portion of a Defaulted Advance shall be deemed made pursuant to Section 2.16(a), the remaining portion of such Defaulted Advance shall be considered a Defaulted Advance originally required to be made pursuant to Section 2.01 on the same date as the Defaulted Advance so deemed made in part. “Defaulted Amount” means, with respect to any Lender Party at any time, any amount required to be paid by such Lender Party to the Administrative Agent or any other Lender Party hereunder or under any other Loan Document at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Lender Party to (a) the Swing Line Bank pursuant to Section 2.02(b) to purchase a portion of a Swing Line Advance made by the Swing Line Bank, (b) the 8
Slide 91: Issuing Bank pursuant to Section 2.03(b) to purchase a portion of a Letter of Credit Advance made by the Issuing Bank, (c) the Administrative Agent pursuant to Section 2.02(e) to reimburse the Administrative Agent for the amount of any Advance made by the Administrative Agent for the account of such Lender Party, (d) any other Lender Party pursuant to Section 2.14 to purchase any participation in Advances owing to such other Lender Party and (e) the Administrative Agent or the Issuing Bank pursuant to Section 7.05 to reimburse the Administrative Agent or the Issuing Bank for such Lender Party’s ratable share of any amount required to be paid by the Lender Parties to the Administrative Agent or the Issuing Bank as provided therein. In the event that a portion of a Defaulted Amount shall be deemed paid pursuant to Section 2.16(b), the remaining portion of such Defaulted Amount shall be considered a Defaulted Amount originally required to be paid hereunder or under any other Loan Document on the same date as the Defaulted Amount so deemed paid in part. “Defaulting Lender” means, at any time, any Lender Party that, at such time, (a) owes a Defaulted Advance or a Defaulted Amount or (b) shall take any action or be the subject of any action or proceeding of a type described in Section 6.01(f). “Dialysis Facilities” has the meaning specified in Section 4.01(s). “Domestic Person” means a Person that is organized under the laws of, or whose property is located in, a jurisdiction within the United States. “Domestic Subsidiary” means, at any time, any of the direct or indirect Subsidiaries of the Borrower that is incorporated or organized under the laws of any state of the United States of America or the District of Columbia. “Eligible Assignee” means (a) with respect to any Facility (other than the Letter of Credit Facility), (i) a Lender; (ii) an Affiliate of a Lender or an Approved Fund of a Lender; (iii) a commercial bank organized under the laws of the United States, or any State thereof having a combined capital and surplus of at least $100,000,000; (iv) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof having a combined capital and surplus of at least $100,000,000; (v) a commercial bank organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch, agency or Affiliate located in the United States or managed and controlled by a branch, agency or affiliate located in the United States; (vi) the central bank of any country that is a member of the OECD; (vii) a finance company, insurance company or other financial institution, fund (whether a corporation, partnership, trust or other entity) or other entity that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and, except with respect to a Term Facility, having total assets (inclusive of assets of Affiliates or Approved Funds thereof) of at least $100,000,000; and (viii) any other Person approved by the Administrative Agent and, provided no Event of Default is continuing, the Borrower, provided that the approval of the Administrative Agent and the Borrower, when required, shall not be unreasonably withheld or delayed, and (b) with respect to the Letter of Credit Facility, a Person that is an Eligible Assignee under subclause (iii) or (v) of clause (a) of this definition and is approved by the Administrative Agent (such approval not to be unreasonably withheld or delayed); provided, however, that neither any Loan Party nor any Affiliate of a Loan Party shall qualify as an Eligible Assignee under this definition. “Environmental Action” means any outstanding action, suit, demand, demand letter, claim, notice of noncompliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement, abatement order or other order or directive (conditional or otherwise) relating in any way to any Environmental Law, any Environmental Permit or any Hazardous Materials or arising from alleged injury or threat to health, safety, natural resources or the environment, including, without limitation, (a) by any Governmental Authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any applicable Governmental Authority or any other third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief. 9
Slide 92: “Environmental Law” means any Requirement of Law relating to (a) the generation, use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials, (b) pollution or the protection of the environment, health, safety or natural resources or (c) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, including, without limitation, CERCLA, in each case as amended from time to time, and including the regulations promulgated and the rulings issued from time to time thereunder. “Environmental Permit” means any permit, approval, identification number, license or other authorization required under any Environmental Law. “Equipment” has the meaning specified in Section 1(a) of the Security Agreement. “Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and the rulings issued from time to time thereunder. “ERISA Affiliate” means any Person that for purposes of Title IV of ERISA is a member of the controlled group of any Loan Party, or under common control with any Loan Party, within the meaning of Section 414 of the Internal Revenue Code. “ERISA Event” means (a)(i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC or (ii) the requirements of Section 4043(b) of ERISA are met with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA could reasonably be expected to occur with respect to such Plan within the following 30 days; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of any Loan Party or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e) the partial or complete withdrawal by any Loan Party or any ERISA Affiliate from a Plan or a Multiple Employer Plan; (f) the conditions for imposition of a lien under Section 302(f) of ERISA shall have been met with respect to any Plan; (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA, that constitutes grounds for the termination of, or the appointment of a trustee to administer, a Plan. “Eurodollar Lending Office” means, with respect to each of the Lenders, the office of such Lender specified as its “Eurodollar Lending Office” opposite its name on Schedule I hereto or in the Assignment and Assumption pursuant to which it became a Lender, as the case may be (or, if no such office is specified, its Base Rate Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent for such purpose. “Eurodollar Rate” means, with respect to any Eurodollar Rate Advance for any Interest Period, the rate per annum determined by the Administrative Agent at approximately 11:00 a.m. (London time) on the date which is two Business Days prior to the beginning of such Interest Period by reference to the 10
Slide 93: British Bankers’ Association Interest Settlement Rates for deposits in U.S. dollars (as set forth by any service selected by the Administrative Agent which has been nominated by the British Bankers’ Association as an authorized information vendor for the purpose of displaying such rates) for a period equal to such Interest Period; provided that, to the extent that an interest rate is not ascertainable pursuant to the foregoing provisions of this definition the Eurodollar Rate shall be the interest rate per annum determined by the Administrative Agent to be the average of the rates per annum at which deposits in U.S. dollars are offered for such Interest Period to major banks in the London interbank market in London, England by the Agent at approximately 11:00 a.m. (London time) on the date which is two Business Days prior to the beginning of such Interest Period. Each determination by the Administrative Agent pursuant to this definition shall be conclusive absent manifest error. “Eurodollar Rate Advance” means an Advance that bears interest as provided in Section 2.07(a)(ii). “Events of Default” has the meaning specified in Section 6.01. “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. “Existing Credit Agreement” has the meaning specified in Preliminary Statement (l) to this Agreement. “Existing Issuing Bank” means each bank which issued existing Letters of Credit issued under the Existing Credit Agreement. “Existing Letters of Credit” means all letters of credit issued under the Existing Credit Agreement and outstanding on the Closing Date, as more fully described on Schedule II hereto. “Facility” means the Term A Facility, the Term B Facility, the Revolving Credit Facility, the Swing Line Facility or the Letter of Credit Facility, as the context may require. “Federal Funds Rate” means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York or, if such rate is not so published for any day that is a Business Day, the average rate charged to the Administrative Agent (in its individual capacity) on such day on such transactions as determined by the Administrative Agent. “Fiscal Quarter” means, with respect to the Borrower or any of its Subsidiaries, the period commencing January 1 in any Fiscal Year and ending on the next succeeding March 31, the period commencing April 1 in any Fiscal Year and ending on the next succeeding June 30, the period commencing July 1 in any Fiscal Year and ending on the next succeeding September 30 or the period commencing October 1 in any Fiscal Year and ending on the next succeeding December 31, as the context may require, or, if any such Subsidiary was not in existence on the first day of any such period, the period commencing on the date on which such Subsidiary is incorporated, organized, formed or otherwise created and ending on the last day of such period. “Fiscal Year” means, with respect to the Borrower or any of its Subsidiaries, the period commencing on January 1 in any calendar year and ending on the next succeeding December 31 or, if any such Subsidiary was not in existence on January 1 in any calendar year, the period commencing on the date on which such Subsidiary is incorporated, organized, formed or otherwise created and ending on the next succeeding December 31. “Fixed Charge Coverage Ratio” means, for any period, the ratio of (a) the amount equal to (i) the sum of (A) Consolidated Pre-Minority EBITDA and (B) Lease Expense less (ii) Capital Expenditures, in each case for the Borrower and its Subsidiaries for such period, to (b) the sum of (i) Consolidated Interest Expense, (ii) the aggregate principal amount (or the equivalent thereto) of all Required Principal Payments, 11
Slide 94: (iii) the aggregate amount of all Consolidated Cash Taxes, (iv) Lease Expense and (v) amounts paid as cash dividends by the Borrower pursuant to Section 5.02(g)(i), in each case for the Borrower and its Subsidiaries for such period. “Foreign Subsidiary” means, at any time, any direct or indirect Subsidiary of the Borrower that is not a Domestic Subsidiary. “Funded Debt” of any Person means all Debt of such Person that by its terms matures more than one year after the date of determination or matures within one year from such date but is renewable or extendible, at the option of such Person, to a date more than one year after such date or arises under a revolving credit or similar agreement that obligates the lender or lenders to extend credit during a period of more than one year after such date, in each case determined on a Consolidated basis in accordance with GAAP, including, without limitation, (i) the aggregate amount of Governmental Reimbursement Program Costs (exclusive of, with respect to the determination of Funded Debt in any period, the portion of Governmental Reimbursement Program Costs paid in such period) and (ii) in the case of the Borrower, the Advances; provided, however, that the term “Funded Debt” shall not include (x) any Contingent Obligations of such Person (if and to the extent such Contingent Obligations would otherwise be included in such term on any date of determination) that are incurred solely to support Debt or Governmental Reimbursement Program Costs of the Borrower or one or more Subsidiaries of the Borrower to the extent such Contingent Obligations are otherwise expressly permitted to be incurred under Section 5.02(b), and (y) all Obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Redeemable Preferred Interests. “GAAP” has the meaning specified in Section 1.03. “Governmental Authority” means any nation or government, any state, province, city, municipal entity or other political subdivision thereof, and any governmental, executive, legislative, judicial, administrative or regulatory agency, department, authority, instrumentality, commission, board or similar body, whether federal, state, provincial, territorial, local or foreign. “Governmental Authorization” means any authorization, approval, consent, franchise, license, covenant, order, ruling, permit, certification, exemption, notice, declaration or similar right, undertaking or other action of, to or by, or any filing, qualification or registration with, any Governmental Authority. “Governmental Reimbursement Program Costs” means with respect to and payable by the Borrower and its Subsidiaries the sum of: (i) all amounts (including punitive and other similar amounts) agreed to be paid in settlement or payable as a result of a final, non-appealable judgment, award or similar order relating to participation in Medical Reimbursement Programs; (ii) all final, non-appealable fines, penalties, forfeitures or other amounts rendered pursuant to criminal indictments or other criminal proceedings relating to participation in Medical Reimbursement Programs; and (iii) the amount of final, non-appealable recovery, damages, awards, penalties, forfeitures or similar amounts rendered in any litigation, suit, arbitration, investigation or other legal or administrative proceeding of any kind relating to participation in Medical Reimbursement Programs. “Guarantee Supplement” has the meaning specified in the Subsidiary Guarantee. “Guaranteed Obligations” has the meaning specified in the Subsidiary Guarantee. “Guarantor” means each Subsidiary of the Borrower party to the Subsidiary Guarantee or, as the case may be, a Guarantee Supplement. “Hazardous Materials” means (a) petroleum or petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and 12
Slide 95: (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law. “Hedge Agreements” means, collectively, interest rate swap, cap or collar agreements, interest rate future or option contracts, commodity future or option contracts, currency swap agreements, currency future or option contracts, equity swap agreements and other similar agreements. “Hedge Bank” means any Person that is a Lender Party or an Affiliate of a Lender Party, in its capacity as a party to a Hedge Agreement. “Indemnified Party” has the meaning specified in Section 8.04(b). “Information Memorandum” means the information memorandum dated November 2003 used in connection with the syndication of the Term B Facility. “Initial Extension of Credit” means, collectively, the initial Borrowings under one or more of the Facilities, and/or the initial issuances of one or more Letters of Credit, made on the closing date of the Existing Credit Agreement. “Insufficiency” means, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA. “Intellectual Property Security Agreement” means the Intellectual Property Security Agreement dated as of April 26, 2002 executed by the Borrower and certain subsidiaries of the Borrower as Grantors (as defined therein) under the Existing Credit Agreement and which has been ratified by such parties pursuant to Section 3.01(a)(vii) hereof. “Intercreditor Agreement” means that certain Intercreditor Agreement dated as of April 26, 2002, duly executed by the Agent on behalf of the Lender Parties, the Collateral Agent, as defined therein, and any Lender or an Affiliate thereof who is as of such date or thereafter a party to a Hedge Agreement. “Interest Period” means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance, and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below, provided that for each Eurodollar Rate Advance outstanding on the Closing Date the then applicable Interest Period shall be as determined under the Existing Credit Agreement. The duration of each such Interest Period shall be one, two, three or six months, or if available to the Lenders and the Administrative Agent, one year, as the Borrower may, upon notice received by the Administrative Agent not later than 2:00 P.M. (New York, New York time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that: (a) the Borrower may not select any Interest Period with respect to any Eurodollar Rate Advance under a Facility that ends after any principal repayment installment date for such Facility unless, after giving effect to such selection, the aggregate principal amount of Base Rate Advances and of Eurodollar Rate Advances having Interest Periods that end on or prior to such principal repayment installment date for such Facility shall be at least equal to the aggregate principal amount of Advances under such Facility due and payable on or prior to such date; (b) Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Borrowing shall be of the same duration; (c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided, however, that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the immediately preceding Business Day; and 13
Slide 96: (d) whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month. “Internal Revenue Code” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. “Investment” means, with respect to any Person, any loan or advance to such Person, any purchase or other acquisition of Equity Interests in or Debt of, or the property and assets comprising a division or business unit or all or a substantial part of the business of, such Person, any capital contribution to such Person or any other investment in such Person, including, without limitation, any acquisition by way of a merger or consolidation (or similar transaction) and any arrangement pursuant to which the investor incurs Debt of the types referred to in clause (j) or (k) of the definition of “Debt” set forth in this Section 1.01 in respect of such Person. “ISDA Master Agreement” means the Master Agreement (Multicurrency-Cross Border) published by the International Swap and Derivatives Association, Inc., as in effect from time to time. “Issuing Bank” means (i) CSFB or any Affiliate thereof that may from time to time issue Letters of Credit for the account of the Borrower, (ii) any other Revolving Credit Lender that from time to time agrees in writing to issue Letters of Credit hereunder, and (iii) solely with respect to the Existing Letters of Credit, each Existing Issuing Bank. “L/C Cash Collateral Account” has the meaning specified in the Preliminary Statements to the Security Agreement. “L/C Related Documents” has the meaning specified in Section 2.03(b)(ii). “Lease Expense” means, with respect to any Person, for any period for such Person and its subsidiaries on a Consolidated basis, lease and rental expense accrued during such period under all leases and rental agreements, other than Capitalized Leases and leases of personal property, of renal treatment centers, determined in conformity with GAAP. “Lender Party” means any Lender, the Issuing Bank or the Swing Line Bank. “Lenders” means, collectively, the banks, financial institutions and the institutional lenders listed on the signature pages as “Lenders” and each Person that becomes a Lender pursuant to Section 8.07 for so long as such Lender or Person, as the case may be, shall be a party to this Agreement. “Letter of Credit” has the meaning specified in Section 2.01(e)(i). “Letter of Credit Advance” means an advance made by an Issuing Bank or any Revolving Credit Lender pursuant to Section 2.03(b). “Letter of Credit Agreement” has the meaning specified in Section 2.03(a). “Letter of Credit Facility” means, at any time, an amount equal to the lesser of (a) the aggregate amount of the Unused Revolving Credit Commitments of the Issuing Banks at such time and (b) $50,000,000, as such amount may be reduced at or prior to such time pursuant to Section 2.05. “Leverage Ratio” means, at any date of determination, the ratio of (a) (i) all Funded Debt of the Borrower and its Subsidiaries plus (ii) to the extent not otherwise included in subclause (a)(i) of this definition, the face amount of all Letters of Credit issued for the account of the Borrower or any of its Subsidiaries minus (iii) cash and cash equivalents of the Borrower and its Subsidiaries on a Consolidated basis to (b) Consolidated Pre-Minority EBITDA of the Borrower and its Subsidiaries for the most recently completed Measurement Period prior to such date. “Lien” means, with respect to any Person, (a) any mortgage, lien (statutory or other), pledge, hypothecation, security interest, charge or encumbrance of any kind (including, without limitation, any 14
Slide 97: agreement to give any of the foregoing), (b) any sale of accounts receivable or chattel paper, or any assignment, deposit arrangement or lease intended as, or having the effect of, security, (c) any easement, right of way or other encumbrance on title to real property or (d) any other interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or any Capitalized Lease or upon or with respect to any property or asset of such Person (including, in the case of Equity Interests, voting trust agreements and other similar arrangements). “Loan Documents” means, collectively, this Agreement, the Notes, the Subsidiary Guarantee, the Collateral Documents and each Letter of Credit Agreement, in each case as amended, supplemented or otherwise modified hereafter from time to time in accordance with the terms thereof and Section 8.01. “Loan Parties” means, collectively, the Borrower and each of the Subsidiaries of the Borrower party to the Subsidiary Guarantee or any of the Collateral Documents. “Margin Stock” means ‘margin stock’ as defined in Regulation U of the Board of Governors of the Federal Reserve System, as the same may be amended or supplemented from time to time. “Material Adverse Change” means any material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower and its Subsidiaries, taken as a whole; provided that the occurrence or subsistence of any such material adverse change which has been disclosed by the Borrower in any filing made with the Securities and Exchange Commission prior to the date of this Agreement shall not constitute a Material Adverse Change. “Material Adverse Effect” means a material adverse effect on (a) the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower and its Subsidiaries taken as a whole, (b) the rights and remedies of the Administrative Agent or any Lender Party under any Loan Document or (c) the ability of any Loan Party to perform its Obligations under any Loan Document to which it is or is to be a party; provided that the occurrence or subsistence of any such material adverse effect which has been disclosed by the Borrower in any filing made with the Securities and Exchange Commission prior to the date of this Agreement shall not constitute a Material Adverse Effect. “Material Subsidiaries” means, as of any date, any Subsidiary or Subsidiaries of the Borrower that either individually or taken as a whole accounted for more than 5% of Consolidated Net Income of the Borrower and its Subsidiaries for the most recently completed Fiscal Quarter on or prior to such date, in each case as reflected in the Required Financial Information most recently delivered to the Administrative Agent and the Lender Parties on or prior to such date and determined in accordance with GAAP for such period. “Measurement Period” means, at any date of determination, the most recently completed four consecutive Fiscal Quarters ended prior to such date for which financial information is available. “Medicaid” means that means-tested entitlement program under Title XIX of the Social Security Act that provides federal grants to states for medical assistance based on specific eligibility criteria. (Social Security Act of 1965, Title XIX, P.L. 89-87, as amended; 42 U.S.C. 1396 et seq.). “Medical Reimbursement Programs” means the Medicare, Medicaid and CHAMPUS programs and any other health care program operated by or financed in whole or in part by any federal, state or local government. “Medicare” means that government-sponsored entitlement program under Title XVIII of the Social Security Act that provides for a health insurance system for eligible elderly and disabled individuals. (Social Security Act of 1965, Title XVIII, P.L. 89-87 as amended; 42 U.S.C. 1395 et seq.). “Moody’s” means Moody’s Investors Service, Inc. “Multiemployer Plan” means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to which any Loan Party or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. 15
Slide 98: “Multiple Employer Plan” means a single employer plan (as defined in Section 4001(a)(15) of ERISA) that (a) is maintained for employees of any Loan Party or any ERISA Affiliate and at least one Person other than the Loan Parties and the ERISA Affiliates or (b) was so maintained and in respect of which any Loan Party or any ERISA Affiliate could reasonably be expected to have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. “Net Cash Proceeds” means, with respect to any sale, lease, transfer or other disposition of any property or asset, or the incurrence or issuance of any Debt, or the sale or issuance of any Equity Interests (including, without limitation, any capital contribution) in any Person, the aggregate amount of cash received from time to time (whether as initial consideration or through payment or disposition of deferred consideration) by or on behalf of such Person for its own account in connection with any such transaction, after deducting therefrom only (without duplication): (a) out-of-pocket expenses, including brokerage commissions, underwriting fees and discounts, legal fees, finder’s fees and other similar fees and commissions; (b) the amount of taxes payable in connection with or as a result of such transaction, and if not paid at the time of the respective transaction, the amount thereof reserved in accordance with GAAP as in effect on the date of determination; (c) in the case of any sale, lease, transfer or other disposition of any property or asset, the outstanding principal amount of, the premium or penalty, if any, on, and any accrued and unpaid interest on, any Debt (other than the Debt outstanding under the Loan Documents) that is secured by a Lien on the property and assets subject to such sale, lease, transfer or other disposition and is required to be repaid under the terms thereof as a result of such sale, lease, transfer or other disposition; (d) in the case of any sale, lease, transfer or other disposition of any property or asset, an amount reserved, in accordance with GAAP as in effect on the date on which the Net Cash Proceeds from such sale, lease, transfer or other disposition are determined, and so reserved, against liabilities under indemnification obligations, liabilities related to environmental matters or other liabilities associated with the property and assets subject to such sale, lease, transfer or other disposition that are required to be so provided for under the terms of the documentation for such sale, lease, transfer or other disposition; and (e) in the case of any sale, lease, transfer or other disposition of any property or asset by a Subsidiary, the amount of any payments or distributions required to be made in respect of such transaction to owners of Equity Interests in such Subsidiary other than the Borrower or any other Subsidiary; provided, however, in the case of clauses (b) and (d) of this definition, that if, at the time such taxes or such contingent liabilities are actually paid or otherwise satisfied, the amount of the reserve therefor exceeds the amount paid or otherwise satisfied, then the Borrower shall prepay the outstanding Advances in accordance with the terms of Section 2.06(b), in an amount equal to the amount of such excess reserve. “Note” means a Term A Note, a Term B Note or a Revolving Credit Note, as the context may require. “Notice of Borrowing” has the meaning specified in Section 2.02(a). “Notice of Conversion” has the meaning specified in Section 2.09(a). “Notice of Covenant Reduction” means, with respect to any restricted payment pursuant to Section 5.02(g)(vi)(C), a notice substantially in the form of Exhibit H hereto duly executed by a Responsible Officer of the Borrower specifying that (i) immediately prior to such restricted payment and after giving pro forma effect thereto the Leverage Ratio is less than 3.00:1.00 and the Senior Leverage Ratio is less than 1.75:1.00 and (ii) at all times thereafter, for purposes of Section 5.04(a) and (e), respectively, the Leverage Ratio shall be 3.00:1.00 and the Senior Leverage Ratio shall be 1.75:1.00. “Notice of Issuance” has the meaning specified in Section 2.03(a). 16
Slide 99: “Notice of Renewal” has the meaning specified in Section 2.01(e)(ii). “Notice of Swing Line Borrowing” has the meaning specified in Section 2.02(b). “Notice of Termination” has the meaning specified in Section 2.01(e)(ii). “NPL” means the National Priorities List under CERCLA. “Obligation” means, with respect to any Person, any payment, performance or other obligation of such Person of any kind, including, without limitation, any liability of such Person on any claim, whether or not the right of any creditor to payment in respect of such claim is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed, legal, equitable, secured or unsecured, and whether or not such claim is discharged, stayed or otherwise affected by any proceeding referred to in Section 6.01(f). Without limiting the generality of the foregoing, the Obligations of the Loan Parties under the Loan Documents include (a) the obligation to pay principal, interest, Letter of Credit commissions, charges, expenses, fees, attorneys’ fees and disbursements, indemnity payments and other amounts payable by any Loan Party under any Loan Document and (b) the obligation of any Loan Party to reimburse any amount in respect of any of the foregoing items that any Lender Party, in its sole discretion, may elect to pay or advance on behalf of such Loan Party. “OECD” means the Organization for Economic Cooperation and Development. “Open Year” means, with respect to any Person, any year for which United States federal income tax returns have been filed by or on behalf of such Person and for which the expiration of the applicable statute of limitations for assessment or collection has not occurred (whether by reason of extension or otherwise). “Other Taxes” has the meaning specified in Section 2.13(b). “PBGC” means the Pension Benefit Guaranty Corporation or any successor thereto. “Performance Level” means Performance Level I, Performance Level II, Performance Level III, Performance Level IV, Performance Level V or Performance Level VI, as identified in the definition of “Applicable Margin”, as the context may require. “Permitted Liens” means the following types of Liens (excluding any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA or any such Lien relating to or imposed in connection with any Environmental Action): (a) Liens for taxes, assessments and governmental charges or levies to the extent not otherwise required to be paid under Section 5.01(b); (b) Liens imposed by law, such as materialmen’s, mechanics’, carriers’, landlords’, workmen’s and repairmen’s Liens and other similar Liens arising in the ordinary course of business securing obligations (other than Debt for borrowed money) (i) that are not overdue for a period of more than 60 days or (ii) the amount, applicability or validity of which are being contested in good faith and by appropriate proceedings diligently conducted and with respect to which the Borrower or any of its Subsidiaries, as the case may be, has established reserves in accordance with GAAP; (c) pledges or deposits to secure obligations incurred in the ordinary course of business under workers’ compensation laws, unemployment insurance or similar social security legislation (other than in respect of employee benefit plans subject to ERISA) or to secure public or statutory obligations; (d) Liens, pledges and deposits securing the performance of, or payment in respect of, bids, tenders, leases, contracts (other than for the repayment of borrowed money), surety and appeal bonds, letters of credit, and other obligations of a similar nature incurred in the ordinary course of business; (e) any interest or title of a lessor or sublessor and any restriction or encumbrance to which the interest or title of such lessor or sublessor may be subject that is incurred in the ordinary course of business and, either individually or when aggregated with all other Permitted Liens in effect on any date of determination, could not be reasonably expected to have a Material Adverse Effect; (f) Liens in favor of customs and revenue authorities arising as a matter of law or pursuant to a bond to secure payment of customs duties in connection with the importation of goods; (g) Liens arising out of judgments or awards that do not constitute an Event of Default under Section 6.01(g) or 6.01(h) and in respect of which the Borrower or any of its Subsidiaries subject thereto shall be prosecuting an appeal or proceedings for review in good faith and, 17
Slide 100: pending such appeal or proceedings, shall have secured within 30 days after the entry thereof a subsisting stay of execution and shall be maintaining reserves, in accordance with GAAP, with respect to any such judgment or award; (h) unperfected Liens of suppliers and vendors to secure the purchase price of the property or assets sold; (i) protective Uniform Commercial Code filings by lessors under operating leases; and (j) any easements, rights of way, restrictions, defects, encroachments and other encumbrances on title to real property which either individually or when aggregated with all other permitted Liens, would not be reasonably expected to have a Material Adverse Effect. “Person” means an individual, partnership, corporation (including a business trust), limited liability company, unlimited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. “Plan” means a Single Employer Plan or a Multiple Employer Plan. “Pledged Debt” has the meaning specified in Section 1 of the Security Agreement. “Pledged Shares” has the meaning specified in Section 1 of the Security Agreement. “Prepayment Date” has the meaning specified in Section 2.06(d). “primary obligation” has the meaning specified in the definition of “Contingent Obligation” set forth in this Section 1.01. “primary obligor” has the meaning specified in the definition of “Contingent Obligation” set forth in this Section 1.01. “Pro Rata Share” of any amount means, with respect to any of the Lenders at any time, the product of (a) a fraction the numerator of which is the amount of such Lender’s Commitment(s) or Advance(s), as applicable, under the applicable Facility or Facilities at such time (or, if the Commitments shall have been terminated pursuant to Section 2.05 or 6.01 at or prior to such time, such Lender’s Commitment(s) or Advance(s), as applicable, under the applicable Facility or Facilities as in effect immediately prior to such termination) and the denominator of which is the aggregate amount of such Facility or Facilities at such time (or, if the Commitments shall have been terminated pursuant to Section 2.05 or 6.01 at or prior to such time, the applicable Facility or Facilities as in effect immediately prior to such termination) multiplied by (b) such amount. “Qualified Issuer” means (a) any Lender hereunder and (b) any commercial bank that has a combined capital and surplus in excess of $100,000,000. “Reedemable Preferred Interest” means with respect to any Person, (a) any Equity Interest of such Person that, by its terms or by the terms of any security into which it is convertible, exercisable or exchangeable, is, or upon the happening of an event or the passage of time or both would be, required to be redeemed or repurchased (including at the option of the holder thereof) by such Person or any of its Subsidiaries, in whole or in part, not earlier than July 1, 2009, and (b) any Equity Interest of any Subsidiary of such Person other than any common equity with no preferences, privileges, and no redemption or repayment provisions; provided, however, that any Equity Interest that would constitute a Redeemable Preferred Interest solely because the holders thereof have the right to require the issuer to repurchase such a Redeemable Preferred Interest upon the occurrence of a change of control shall not be so treated if the terms thereof (a) do not trigger any rights upon any circumstance constituting a change of control under such Redeemable Preferred Interest that would not constitute a Change of Control under this Agreement and (b) do not permit either any repurchase by such Person or any rights of the holder of such Equity Interest to assert any claim in respect of such failure to purchase as long as any Event of Default exists hereunder. “Reduction Amount” has the meaning specified in Section 2.06(b)(iv). “Register” has the meaning specified in Section 8.07(c). “Regulation U” means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. 18
Slide 101: “Required Financial Information” means, at any date of determination, the Consolidated financial statements of the Borrower and its Subsidiaries most recently delivered to the Administrative Agent and the Lender Parties on or prior to such date pursuant to, and satisfying all of the requirements of, Section 5.03(b) or 5.03(c) and accompanied by the certificates and other information required to be delivered therewith. “Required Lenders” means, at any time, Lenders owed or holding at least a majority in interest of the sum of (a) the aggregate principal amount of the Advances outstanding at such time, (b) the aggregate Available Amount of all Letters of Credit outstanding at such time, and (c) the aggregate Unused Revolving Credit Commitments at such time; provided, however, that if any Lender shall be a Defaulting Lender at such time, there shall be excluded from the determination of Required Lenders at such time (A) the aggregate principal amount of the Advances owing to such Lender (in its capacity as a Lender) and outstanding at such time, (B) such Lender’s Pro Rata Share of the aggregate Available Amount of all Letters of Credit issued by such Lender and outstanding at such time, and (C) the Unused Revolving Credit Commitment of such Lender at such time. For purposes of this definition, the aggregate principal amount of Swing Line Advances owing to the Swing Line Bank and of Letter of Credit Advances owing to the Issuing Bank and the Available Amount of each Letter of Credit shall be considered to be owed to the Revolving Credit Lenders ratably in accordance with their respective Revolving Credit Commitments. “Required Principal Payments” means, with respect to any Person for any period, the sum of all regularly scheduled principal payments or redemptions and all required prepayments, repurchases, redemptions or similar acquisitions for value of outstanding Funded Debt made during such period. “Requirements of Law” means, with respect to any Person, all laws, constitutions, statutes, treaties, ordinances, rules and regulations, all orders, writs, decrees, injunctions, judgments, determinations and awards of an arbitrator, a court or any other Governmental Authority, and all Governmental Authorizations, binding upon or applicable to such Person or to any of its properties, assets or businesses. “Responsible Officer” means, with respect to the Borrower or any of its Subsidiaries, the chief executive officer, the president, the chief financial officer, the principal accounting officer or the treasurer (or the equivalent of any of the foregoing) or any other officer, partner or member (or person performing similar functions) of the Borrower or any such Subsidiary responsible for overseeing the administration of, or reviewing compliance with, all or any portion of this Agreement or any of the other Loan Documents. “Revolving Credit Advance” has the meaning specified in Section 2.01(c). “Revolving Credit Borrowing” means a borrowing consisting of simultaneous Revolving Credit Advances of the same Type made by the Revolving Credit Lenders. “Revolving Credit Commitment” means, with respect to any Revolving Credit Lender at any time, the amount set forth opposite such Revolving Credit Lender’s name on Schedule I hereto under the caption “Revolving Credit Commitment” or, if such Revolving Credit Lender has entered into one or more Assignment and Assumptions, the amount set forth for such Revolving Credit Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c) as such Revolving Credit Lender’s “Revolving Credit Commitment”, as such amount may be reduced at or prior to such time pursuant to Section 2.05. “Revolving Credit Facility” means, at any time, the aggregate amount of the Revolving Credit Lenders’ Revolving Credit Commitments at such time. “Revolving Credit Lender” means, at any time, any Lender that has a Revolving Credit Commitment or Revolving Credit Advance, as the case may be, at such time. “Revolving Credit Note” means a promissory note of the Borrower payable to the order of any Revolving Credit Lender, in substantially the form of Exhibit A-3 hereto, evidencing the aggregate indebtedness of the Borrower to such Revolving Credit Lender resulting from the Revolving Credit Advances made by such Revolving Credit Lender. “S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. 19
Slide 102: “Secured Obligations” has the meaning specified in Section 2 of the Security Agreement. “Secured Parties” means, collectively, the Agents, the Lender Parties, and the other Persons the Obligations owing to which are or are purported to be secured by the Collateral under the terms of the Collateral Documents. “Securities Act” means the Securities Act of 1933, as amended, and the regulations promulgated and the rulings issued thereunder. “Security Agreement” means the Security Agreement dated as of April 26, 2002, executed by the Borrower and certain subsidiaries of the Borrower as Grantors (as defined therein) under the Existing Credit Agreement and which has been ratified by such parties pursuant to Section 3.01(a)(vii) hereof. “Security Agreement Supplement” has the meaning specified in Section 24 of the Security Agreement. “Senior Leverage Ratio” means, at any date of determination, the ratio of (a)(i) all Funded Debt of the Borrower and its Subsidiaries plus (ii) to the extent not otherwise included in subclause (a)(i) of this definition, the face amount of all outstanding Letters of Credit issued for the account of the Borrower or any of its Subsidiaries minus (iii) cash and cash equivalents of the Borrower and its Subsidiaries on a Consolidated basis minus (iv) all Subordinated Debt of the Borrower and its Subsidiaries to (b) Consolidated Pre-Minority EBITDA of the Borrower and its Subsidiaries for the most recently completed Measurement Period prior to such date. “Single Employer Plan” means a single employer plan (as defined in Section 4001(a)(15) of ERISA) that (a) is maintained for employees of any Loan Party or any ERISA Affiliate and no Person other than the Loan Parties and the ERISA Affiliates or (b) was so maintained and in respect of which any Loan Party or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. “Solvent” and “Solvency” mean, with respect to any Person on any date of determination, that on such date (a) the fair value of the property and assets of such Person is greater than the total amount of liabilities (including, without limitation, contingent liabilities), of such Person, (b) the present fair salable value of the property and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in business or in a transaction, and is not about to engage in business or in a transaction, for which such Person’s property and assets would constitute an unreasonably small capital. The amount of contingent liabilities of any such Person at any time shall be computed as the amount that, in the light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. “Special Purpose Licensed Entity” means any Person in a related business of the Borrower and its Subsidiaries that (i) the Borrower and its Subsidiaries are prohibited from engaging in directly under applicable law, including provisions of state law (a) prohibiting the ownership of healthcare facilities by public companies, (b) prohibiting the corporate practice of medicine or (c) otherwise restricting the ability of the Borrower or one of its Subsidiaries to acquire directly a required license to operate a healthcare facility, and (ii) has entered into a transaction or series of transactions with the Borrower or any of its Subsidiaries under which: (x) the Borrower or any of its Subsidiaries provides management, administrative or consulting services to the Special Purpose Licensed Entity, (y) the owners of the Special Purpose Licensed Entity are prohibited from transferring any of their interests in the Special Purpose Licensed Entity without the consent of the Borrower or one of its Subsidiaries, and (z) the Borrower or one of its Subsidiaries has the right to require the owners of the Special Purpose Licensed Entity to transfer all of their interests in the Special Purpose Licensed Entity to a Person designated by the Borrower or one of its Subsidiaries. 20
Slide 103: “Subordinated Debt” means the subordinated debt evidenced by the Subordinated Notes or other subordinated Debt issued or incurred by the Borrower subordinated in right of payment to the payment in full of the Obligations of the Borrower to the Loan Parties under the Loan Documents and other senior obligations of the Borrower; provided that (i) the negative covenants in such subordinated Debt are less burdensome than the negative covenants in this Agreement as in effect at the time such subordinated Debt is incurred, (ii) the affirmative covenants in such subordinated Debt are no more burdensome than the affirmative covenants in this Agreement as in effect at the time such subordinated Debt is incurred, (iii) the events of default in such subordinated Debt relating to insolvency and nonpayment of amounts owed thereunder are no more restrictive than the corresponding defaults in this Agreement as in effect at the time such subordinated Debt is incurred, (iv) such subordinated Debt does not cross-default to other Debt (but may cross-accelerate to other Debt of Borrower or any Subsidiary that has guaranteed such subordinated Debt), (v) the subordination provisions in such subordinated Debt are either (A) reasonably satisfactory to the Administrative Agent or (B) confirmed by a nationally recognized investment bank (that is not the Administrative Agent) as market terms and conditions at such time for similar debt securities issued by Persons whose debt securities have credit ratings not greater than that of the Borrower, and (vi) such subordinated Debt does not provide for any scheduled payment or mandatory prepayment of principal earlier than July 1, 2009, other than (x) redemptions made at the option of the holders of such subordinated Debt upon a change in control of the Borrower in circumstances that would also constitute a Change of Control under this Agreement (provided that any such redemption cannot be made fewer than 30 days after such change in control and that any such redemption is fully and absolutely subordinated to the indefeasible payment in full of all principal, interest and other amounts under the Loan Documents) and (y) mandatory prepayments required as a result of asset dispositions if such subordinated Debt allows the Borrower to satisfy such mandatory prepayment requirement by prepayment of Loans under this Agreement or other senior obligations of the Borrower or reinvestment of the asset disposition proceeds within a specified period of time. “Subordinated Notes” means (i) the 5 5⁄8% convertible subordinated notes of Renal Treatment Centers, Inc. due 2006 in the aggregate principal amount of $125,000,000 issued pursuant to the Indenture dated June 12, 1996 between Rental Treatment Centers, Inc. and PNC Bank, National Association as trustee; (ii) the 7% convertible subordinated notes of the Borrower (f/k/a Total Renal Care Holdings, Inc.) due 2009 in the aggregate principal amount of $345,000,000 issued pursuant to the Indenture dated November 18, 1998 between Total Renal Care Holdings, Inc. and United States Trust Company of New York as trustee; and (iii) the 2001 Subordinated Notes. “Subordinated Notes Documents” means the Subordinated Notes, any indentures or other agreements, instruments and other documents pursuant to which the Subordinated Notes or other Subordinated Debt have been or will be issued or otherwise setting forth the terms of the Subordinated Notes or such Subordinated Debt, including guarantees in respect of the Subordinated Debt referred to in clauses (i) and (iii) of the definition of “Subordinated Notes,” in each case as such agreement, instrument or other document may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof, but only to the extent permitted under the terms of the Loan Documents. “Subsidiary Guarantee” means the Subsidiary Guarantee dated as of April 26, 2002, executed by the Guarantors under the Existing Credit Agreement and which has been ratified by such parties pursuant to Section 3.01(a)(vii) hereof. “Subsidiary” of any Person means any corporation, partnership, joint venture, limited liability company, unlimited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding shares of capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time shares of capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, joint venture, limited liability company or unlimited liability company or (c) the beneficial interest in such trust or estate, is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or 21
Slide 104: more of such Person’s other Subsidiaries, provided, however, that the entities listed on Exhibit I attached hereto shall not be deemed Subsidiaries for so long as the assets of each such entity do not exceed $25,000. “Swing Line Advance” means an advance made by (a) the Swing Line Bank pursuant to Section 2.01(d) or (b) simultaneous Swing Line Advances made by the Revolving Credit Lenders pursuant to Section 2.02(b). “Swing Line Bank” has the meaning specified in the recital of parties to this Agreement. “Swing Line Borrowing” means a borrowing consisting of a Swing Line Advance made by the Swing Line Bank. “Swing Line Commitment” means, with respect to the Swing Line Bank at any time, the amount set forth opposite the Swing Line Bank’s name on Schedule I hereto under the caption “Swing Line Commitment”, as such amount may be reduced at or prior to such time pursuant to Section 2.05. “Swing Line Facility” means, at any time, an amount equal to the lesser of (a) the amount of the Swing Line Commitment at such time and (b) $25,000,000, as such amount may be reduced at or prior to such time pursuant to Section 2.05. “2001 Subordinated Notes” means the 9 1⁄4% senior subordinated notes of the Borrower due April 15, 2011, in the aggregate principal amount of $225,000,000 issued pursuant to the Indenture dated April 11, 2001 between the Borrower, certain of its Subsidiaries and U.S. Trust Company of Texas, N.A. “Taxes” has the meaning specified in Section 2.13(a). “Term Advance” means a Term A Advance or a Term B Advance. “Term A Advance” means the advances made by the Term A Lenders. “Term A Borrowing” means the borrowing consisting of simultaneous Term A Advances of the same Type made by the Term A Lenders. “Term A Facility” means, at any time, the aggregate outstanding principal amount of all Term A Advances at such time. “Term A Lender” means, at any time, any Lender that has a Term A Advance at such time. “Term A Note” means a promissory note of the Borrower payable to the order of any Term A Lender, in substantially the form of Exhibit A-1 hereto, evidencing the indebtedness of the Borrower to such Term A Lender resulting from the Term A Advance made by such Term A Lender. “Term B Advance” has the meaning specified in Section 2.01(b). “Term B Borrowing” means the borrowing consisting of simultaneous Term B Advances of the same Type made by the Term B Lenders. “Term B Facility” means, at any time, the aggregate outstanding principal amount of all Term B Advances at such time. “Term B Lender” means, at any time, any Lender that has a Term B Advance at such time. “Term B Note” means a promissory note of the Borrower payable to the order of any Term B Lender, in substantially the form of Exhibit A-2 hereto, evidencing the indebtedness of the Borrower to such Term B Lender resulting from the Term B Advances made by such Term B Lender. “Term Facility” means a Term A Facility or a Term B Facility, as the context requires. “Term Lender” means a Term A Lender or a Term B Lender, as the context requires. “Termination Date” means the earlier of (a) April 26, 2007 and (b) the date of termination in whole of the Swing Line Commitments and the Revolving Credit Commitments pursuant to Section 2.05 or 6.01. “TRC” means Total Renal Care, Inc., a California corporation. 22
Slide 105: “Transaction” means, collectively, the entering into by the Loan Parties of the Loan Documents to which they are or are intended to be a party and the consummation of the transactions contemplated thereby. “Type” refers to the distinction between Advances bearing interest at the Base Rate and Advances bearing interest at the Eurodollar Rate. “Unused Revolving Credit Commitment” means, with respect to any Revolving Credit Lender at any time, (a) such Revolving Credit Lender’s Revolving Credit Commitment at such time minus (b) the sum of (i) the aggregate principal amount of all Revolving Credit Advances, Swing Line Advances and Letter of Credit Advances made by such Revolving Credit Lender (in its capacity as a Lender) and outstanding at such time and (ii) such Lender’s Pro Rata Share of (A) the aggregate Available Amount of all Letters of Credit outstanding at such time, (B) the aggregate principal amount of all Letter of Credit Advances made by the Issuing Bank pursuant to Section 2.03(b) and outstanding at such time and (C) the aggregate principal amount of all Swing Line Advances made by the Swing Line Bank pursuant to Section 2.01(d) and outstanding at such time. “Voting Interests” means shares of capital stock issued by a corporation, or equivalent Equity Interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. “Welfare Plan” means a welfare plan (as defined in Section 3(1) of ERISA) that is maintained for employees of any Loan Party or in respect of which any Loan Party could reasonably be expected to have liability. “Withdrawal Liability” has the meaning specified in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Computation of Time Periods; Other Definitional Provisions. In this Agreement and the other Loan Documents, in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”, the word “through” means “through and including” and the words “to” and “until” each means “to but excluding.” References in this Agreement or any of the other Loan Documents to any agreement, instrument or other document “as amended” shall mean and be a reference to such agreement, instrument or other document as amended, amended and restated, supplemented or otherwise modified hereafter from time to time in accordance with its terms, but solely to the extent permitted hereunder. In this Agreement, the words “herein,” “hereof” and words of similar import refer to the entirety of this Agreement and not to any particular Section, subsection, or Article of this Agreement. SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the Consolidated financial statements of the Borrower and its Subsidiaries as at December 31, 2002 and for the Fiscal Year then ended referred to in Section 4.01(g) (“GAAP”). ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES AND THE LETTERS OF CREDIT SECTION 2.01. The Advances and the Letters of Credit. (a) The Term A Advances. Each Term A Lender has made a Term A Advance pursuant to the Existing Credit Agreement. Any Term A Advance which is repaid or prepaid may not be reborrowed. (b) The Term B Advances. Each Term B Lender has made a Term B Advance pursuant to the Existing Credit Agreement Amounts borrowed under this Section 2.01(b) and repaid or prepaid may not be reborrowed. 23
Slide 106: (c) The Revolving Credit Advances. Each Revolving Credit Lender severally agrees, on the terms and conditions hereinafter set forth, to make advances (each a “Revolving Credit Advance”) in U.S. dollars to the Borrower from time to time until the Termination Date, in each case in an amount not to exceed the Unused Revolving Credit Commitment of such Revolving Credit Lender at such time. Each Revolving Credit Borrowing shall be in an aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof (other than a Borrowing the proceeds of which shall be used solely to repay or prepay in full outstanding Swing Line Advances or the outstanding Letter of Credit Advances) or, if less, the amount of the aggregate Unused Revolving Credit Commitments at such time. Each Revolving Credit Borrowing shall consist of Revolving Credit Advances made simultaneously by the Revolving Credit Lenders in accordance with their respective Pro Rata Shares of the Revolving Credit Facility. Within the limits of each Revolving Credit Lender’s Unused Revolving Credit Commitment in effect from time to time, the Borrower may borrow under this Section 2.01(c), prepay pursuant to Section 2.06(a) and reborrow under this Section 2.01(c). (d) The Swing Line Advances. The Borrower may request the Swing Line Bank to make, and the Swing Line Bank shall on the terms and conditions hereinafter set forth, make Swing Line Advances to the Borrower from time to time on any Business Day during the period from the Closing Date until the Termination Date (i) in an aggregate amount not to exceed $25,000,000 at any time outstanding (the “Swing Line Facility”) and (ii) in an amount for each such Swing Line Borrowing not to exceed the aggregate Unused Revolving Credit Commitments of the Revolving Credit Lenders at such time. No Swing Line Advance shall be used for the purpose of funding the payment of principal of any other Swing Line Advance. Each Swing Line Borrowing shall be in an amount of $500,000 or an integral multiple of $250,000 in excess thereof and shall bear interest at a rate to be agreed on by the Borrower and the Swing Line Bank. Within the limits of the first sentence of this Section 2.01(d), the Borrower may borrow under this Section 2.01(d), repay pursuant to Section 2.04(c), prepay pursuant to Section 2.06(a) and reborrow under this Section 2.01(d). (e) Letters of Credit. (i) The Borrower, the Existing Issuing Banks and each of the Revolving Credit Lenders hereby agree that each of the Existing Letters of Credit shall, on and after the Closing Date, be deemed for all purposes of this Agreement to be a Letter of Credit issued and outstanding under the terms of this Agreement. Each Issuing Bank agrees, on the terms and conditions hereinafter set forth, to issue letters of credit (the “Letters of Credit”) in U.S. dollars for the account of the Borrower from time to time on any Business Day during the period from the date hereof until five Business Days before the Termination Date (A) in an Available Amount for each such Letter of Credit not to exceed at any time the Unused Revolving Credit Commitment of such Issuing Bank at such time and (B) in an aggregate Available Amount for all Letters of Credit not to exceed the lesser of (1) the Letter of Credit Facility at such time and (2) the aggregate Unused Revolving Credit Commitments at such time. No Letter of Credit shall have an expiration date (including all rights of the Borrower or the beneficiary of such Letter of Credit to require renewal) later than the earlier of (x) five Business Days prior to the Termination Date and (y) one year after the date of issuance thereof, but any such Letter of Credit may by its terms be renewable annually on the terms set forth in clause (ii) of this Section 2.01(e). Within the limits of the Letter of Credit Facility, and subject to the limits referred to above, the Borrower may request the issuance of Letters of Credit under this Section 2.01(e)(i), repay any Letter of Credit Advances resulting from drawings thereunder pursuant to Section 2.03(b) and request the issuance of additional Letters of Credit under this Section 2.01(e)(i). (ii) Each Letter of Credit may by its terms be renewable annually upon notice (a “Notice of Renewal”) given to the Issuing Bank and the Administrative Agent on or prior to any date for notice of renewal set forth in such Letter of Credit but in any event at least three Business Days prior to the date of the proposed renewal of such Letter of Credit and upon fulfillment of the applicable conditions set forth in Article III unless such Issuing Bank has notified the Borrower (with a copy to the Administrative Agent) on or prior to the date for notice of termination set forth in such Letter of Credit but in any event at least 30 Business Days prior to the date of automatic renewal of its election not to 24
Slide 107: renew such Letter of Credit (a “Notice of Termination”); provided that the terms of each Letter of Credit that is automatically renewable annually (A) shall require the Issuing Bank to give the beneficiary of such Letter of Credit notice of any Notice of Termination, (B) shall permit such beneficiary, upon receipt of such notice, to draw under such Letter of Credit prior to the date such Letter of Credit otherwise would have been automatically renewed and (C) shall not permit the expiration date (after giving effect to any renewal) of such Letter of Credit in any event to be extended to a date later than five Business Days prior to the Termination Date. If either a Notice of Renewal is not given by the Borrower or a Notice of Termination is given by the Issuing Bank pursuant to the immediately preceding sentence, such Letter of Credit shall expire on the date on which it otherwise would have been automatically renewed; provided, however, that in the absence of receipt of a Notice of Renewal the Issuing Bank may in its discretion, unless instructed to the contrary by the Administrative Agent or the Borrower deem that a Notice of Renewal had been timely delivered and, in such case, a Notice of Renewal shall be deemed to have been so delivered for all purposes under this Agreement. SECTION 2.02. Making the Advances. (a) Except as otherwise provided in Section 2.02(b) or 2.03 and except that the Term B Borrowing shall be made on the Closing Date, each Borrowing (other than a Swing Line Borrowing) shall be made on notice, given not later than 2:00 P.M. (New York, New York time) on the third Business Day prior to the date of the proposed Borrowing in the case of a Borrowing comprised of Eurodollar Rate Advances, or on the first Business Day prior to the date of the proposed Borrowing in the case of a Borrowing comprised of Base Rate Advances, by the Borrower to the Administrative Agent, which shall give prompt notice thereof to each Appropriate Lender. Each notice of a Borrowing (a “Notice of Borrowing”) shall be by telephone, confirmed immediately in writing, or by telecopier, in substantially the form of Exhibit B-1 hereto, shall be duly executed by a Responsible Officer of the Borrower, and shall specify therein: (i) the requested date of such Borrowing (which shall be a Business Day); (ii) the Facility under which such Borrowing is requested to be made; (iii) the Type of Advances requested to comprise such Borrowing; (iv) the requested aggregate amount of such Borrowing; and (v) in the case of a Borrowing comprised of Eurodollar Rate Advances, the requested duration of the initial Interest Period for each such Advance. Each Appropriate Lender shall, before 2:00 P.M. (New York, New York time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at the Administrative Agent’s Account, in same day funds, such Lender’s Pro Rata Share of such Borrowing. After the Administrative Agent’s receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower by crediting the Borrower’s Account; provided, however, that, in the case of any Revolving Credit Borrowing, the Administrative Agent shall first make a portion of such funds equal to the aggregate principal amount of any Swing Line Advances and Letter of Credit Advances made by the Swing Line Bank or the Issuing Bank, as the case may be, and by any Revolving Credit Lender and outstanding on the date of such Revolving Credit Borrowing, plus accrued and unpaid interest thereon to and as of such date, available to the Swing Line Bank or the Issuing Bank, as applicable, and such other Revolving Credit Lenders for repayment of such Swing Line Advances and Letter of Credit Advances. (b) (i) Each Swing Line Borrowing shall be made on notice, given not later than 2:00 P.M. (New York, New York time) on the date of the proposed Swing Line Borrowing, by the Borrower to the Swing Line Bank and the Administrative Agent. Each notice of a Swing Line Borrowing (a “Notice of Swing Line Borrowing”) shall be by telephone, confirmed immediately in writing, or telecopier, shall be in substantially the form of Exhibit B-2 hereto and duly executed by a Responsible Officer of the Borrower, and shall specify therein: (A) the requested date of such Borrowing (which shall be a Business Day); (B) the requested amount of such Borrowing; and (C) the requested maturity of such Borrowing (which maturity shall be no later than the seventh day after the requested date of such Borrowing). Upon fulfillment of the applicable conditions set forth in Article III, the Swing Line Bank will make the amount thereof available for the account of its Applicable Lending Office to the Borrower by crediting the Borrower’s Account. 25
Slide 108: (ii) Upon demand by the Swing Line Bank, with a copy of such demand to the Administrative Agent (which shall give prompt notice thereof to each Revolving Credit Lender), each Revolving Credit Lender shall purchase from the Swing Line Bank, and the Swing Line Bank shall sell and assign to each such Revolving Credit Lender, such Revolving Credit Lender’s Pro Rata Share of such outstanding Swing Line Borrowing as of the date of such demand, by making available for the account of its Applicable Lending Office to the Administrative Agent at the Administrative Agent’s Account for the account of the Swing Line Bank, in same day funds, an amount equal to such Pro Rata Share. Promptly after receipt of such funds, the Administrative Agent shall transfer such funds to the Swing Line Bank at its Applicable Lending Office. Each Revolving Credit Lender hereby agrees to purchase its Pro Rata Share of an outstanding Swing Line Borrowing on (A) the Business Day on which demand therefor is made by the Swing Line Bank so long as notice of such demand is given not later than 12:00 Noon (New York, New York time) on such Business Day or (B) the first Business Day next succeeding such demand if notice of such demand is given after such time. The Borrower hereby agrees to each such sale and assignment. Upon any such assignment by the Swing Line Bank to any Revolving Credit Lender of a portion of a Swing Line Borrowing, the Swing Line Bank represents and warrants to such Revolving Credit Lender that the Swing Line Bank is the legal and beneficial owner of such interest being assigned by it, but makes no other representation or warranty and assumes no responsibility with respect to such Swing Line Borrowing, the Loan Documents or any Loan Party. If and to the extent that any Revolving Credit Lender shall not have so made its Pro Rata Share of any applicable Swing Line Borrowing available to the Administrative Agent in accordance with the foregoing provisions of this Section 2.02(b)(ii), such Revolving Credit Lender hereby agrees to pay to the Administrative Agent forthwith on demand the amount of its Pro Rata Share, together with interest thereon, for each day from the date of demand by the Swing Line Bank therefor until the date such amount is paid to the Administrative Agent, at the Federal Funds Rate. If such Lender shall pay to the Administrative Agent the amount of its Pro Rata Share for the account of the Swing Line Bank on any Business Day, such amount so paid in respect of principal shall constitute a Swing Line Advance made by such Lender on such Business Day for all purposes of this Agreement, and the outstanding principal amount of the Swing Line Advance made by the Swing Line Bank shall be reduced by such amount on such Business Day. (iii) The obligation of each Revolving Credit Lender to purchase its Pro Rata Share of each outstanding Swing Line Borrowing upon demand by the Swing Line Bank therefor pursuant to clause (ii) of this Section 2.02(b) shall be absolute, unconditional and irrevocable, and shall be made strictly in accordance with the terms of clause (ii) of this Section 2.02(b) under all circumstances, including, without limitation, the following circumstances: (A) any lack of validity or enforceability of any Loan Document or any other agreement or instrument relating thereto; (B) the existence of any claim, set-off, defense or other right that such Revolving Credit Lender may have at any time against the Swing Line Bank, the Borrower or any other Person, whether in connection with the transactions contemplated by the Loan Documents or any unrelated transaction; (C) the occurrence and continuance of any Default or Event of Default; or (D) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. (c) Anything in subsection (a) of this Section 2.02 to the contrary notwithstanding, (i) the Borrower may not select Eurodollar Rate Advances if the obligation of the Appropriate Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.09 or 2.10. In addition, the Term Advances may not be outstanding as part of more than 10 separate Borrowings and the Revolving Credit Advances may not be outstanding as part of more than 10 separate Borrowings. 26
Slide 109: (d) Each Notice of Borrowing and Notice of Swing Line Borrowing shall be irrevocable and binding on the Borrower. In the case of any Borrowing that the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Appropriate Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Eurodollar Rate Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. A certificate of the Lender requesting compensation pursuant to this subsection (d) submitted to the Borrower by such Lender and specifying therein the amount of such additional compensation (including the basis of calculation thereof) shall be conclusive and binding for all purposes, absent manifest error. (e) Unless the Administrative Agent shall have received notice from an Appropriate Lender prior to the date of any Borrowing under a Facility under which such Lender has a Commitment that such Lender will not make available to the Administrative Agent such Lender’s Pro Rata Share of such Borrowing, the Administrative Agent may assume that such Lender has made the amount of such Pro Rata Share available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) or (b) of this Section 2.02, as applicable, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made the amount of such Pro Rata Share available to the Administrative Agent, such Lender and the Borrower severally agree to repay or to pay to the Administrative Agent forthwith on demand such corresponding amount, together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid or paid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at such time under Section 2.07 to Advances comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall pay to the Administrative Agent such corresponding amount, such amount so paid shall constitute such Lender’s Advance as part of such Borrowing for all purposes under this Agreement. (f) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of Credit. (a) Request for Issuance. Each Letter of Credit shall be issued upon notice, given not later than 2:00 P.M. (New York, New York time) on the fifth Business Day prior to the date of the proposed issuance of such Letter of Credit (or such later day as the Issuing Bank in its sole discretion shall agree), by the Borrower to the Issuing Bank, which shall give to the Administrative Agent and each Revolving Credit Lender prompt notice thereof. Each notice of issuance of a Letter of Credit (a “Notice of Issuance”) shall be by telephone, confirmed immediately in writing, or by telecopier, shall be duly executed by a Responsible Officer of the Borrower, and shall specify therein: (i) the requested date of such issuance (which shall be a Business Day); (ii) the requested Available Amount of such Letter of Credit; (iii) the requested expiration date of such Letter of Credit (which shall comply with the requirements of Section 2.01(e)); (iv) the name and address of the proposed beneficiary of such Letter of Credit; and (v) the proposed form of such Letter of Credit, and shall be accompanied by such application and agreement for letters of credit as the Issuing Bank may specify to the Borrower for use in connection with such requested Letter of Credit (such applications and agreements, and all similar agreements entered into in connection with an Existing Letter of Credit, a “Letter of Credit Agreement”). If the requested form of such Letter of Credit is acceptable to the Issuing Bank in its sole discretion, the Issuing Bank will, upon fulfillment of the applicable conditions set forth in Article III, make such Letter of Credit available to the Borrower at its office referred to in Section 8.02 or as otherwise agreed with the Borrower in connection with the issuance of such Letter of Credit. If and to the extent that the provisions of any Letter of Credit Agreement shall conflict with this Agreement, the provisions of this Agreement shall govern. 27
Slide 110: (b) Drawing and Reimbursement. (i) The obligation of the Borrower to reimburse the Issuing Bank for each payment made by the Issuing Bank under any Letter of Credit, and to pay interest thereon as provided herein, shall be absolute, unconditional and irrevocable, without regard to any circumstances, including, without limitation, those referred to in Section 2.04(d) below. The payment by the Issuing Bank of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by the Issuing Bank of a Letter of Credit Advance, which shall be a Base Rate Advance, in the amount of such draft; provided that such payment shall not be deemed a Base Rate Advance if the Borrower reimburses the Issuing Bank therefor prior to 2:00 P.M. (New York, New York time) on the date of such payment, or if such payment by the Issuing Bank is made on or after 2:00 P.M. (New York, New York time), then prior to 2:00 P.M. (New York, New York time), on the Business Day immediately succeeding the date of such payment, together with interest thereon from the date of such payment to the date of such reimbursement at a rate per annum equal to the sum of the Base Rate then in effect from time to time and the Applicable Margin for Base Rate Advances that are Revolving Credit Advances then in effect from time to time. Upon demand by the Issuing Bank, with a copy of such demand to the Administrative Agent (which shall give prompt notice thereof to each Revolving Credit Lender), each Revolving Credit Lender shall purchase from the Issuing Bank, and the Issuing Bank shall sell and assign to each such Revolving Credit Lender, such Lender’s Pro Rata Share of such outstanding Letter of Credit Advance as of the date of such purchase, by making available for the account of its Applicable Lending Office to the Administrative Agent for the account of the Issuing Bank, at the Administrative Agent’s Account, in same day funds, an amount equal to the portion of the outstanding principal amount of such Letter of Credit Advance to be purchased by such Lender. Promptly after receipt thereof, the Administrative Agent shall transfer such funds to the Issuing Bank. The Borrower hereby agrees to each such sale and assignment. Each Revolving Credit Lender agrees to purchase its Pro Rata Share of an outstanding Letter of Credit Advance on (A) the Business Day on which demand therefor is made by the Issuing Bank so long as notice of such demand is given not later than 2:00 P.M. (New York, New York time) on such Business Day or (B) the first Business Day next succeeding such demand if notice of such demand is given after such time. Upon any such assignment by the Issuing Bank to any other Revolving Credit Lender of a portion of a Letter of Credit Advance, the Issuing Bank represents and warrants to such other Lender that the Issuing Bank is the legal and beneficial owner of such interest being assigned by it, free and clear of any liens, but makes no other representation or warranty and assumes no responsibility with respect to such Letter of Credit Advance, the Loan Documents or any Loan Party. If and to the extent that any Revolving Credit Lender shall not have so made the amount of such Letter of Credit Advance available to the Administrative Agent, such Revolving Credit Lender agrees to pay to the Administrative Agent forthwith on demand such amount, together with interest thereon, for each day from the date of demand by the Issuing Bank until the date such amount is paid to the Administrative Agent, at the Federal Funds Rate, for its account or the account of the Issuing Bank, as applicable. If such Revolving Credit Lender shall pay to the Administrative Agent such amount for the account of the Issuing Bank on any Business Day, such amount so paid in respect of principal shall constitute a Letter of Credit Advance made by such Revolving Credit Lender on such Business Day for all purposes of this Agreement, and the outstanding principal amount of the Letter of Credit Advance made by the Issuing Bank shall be reduced by such amount on such Business Day. (ii) The Obligation of each Revolving Credit Lender to purchase its Pro Rata Share of each outstanding Letter of Credit Advance upon demand by the Issuing Bank therefor pursuant to clause (i) of this Section 2.03(b) shall be absolute, unconditional and irrevocable, and shall be made strictly in accordance with the terms of clause (i) of this Section 2.03(b) under all circumstances, including, without limitation, the following circumstances: (A) any lack of validity or enforceability of any Loan Document, any Letter of Credit Agreement, any Letter of Credit or any other agreement or instrument relating thereto (collectively, the “L/C Related Documents”); 28
Slide 111: (B) the existence of any claim, set-off, defense or other right that such Revolving Credit Lender may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Bank, the Borrower or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction; (C) the occurrence and continuance of any Default or Event of Default; or (D) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. (c) Failure to Make Letter of Credit Advances. The failure of any Revolving Credit Lender to make the Letter of Credit Advance to be made by it on the date specified in Section 2.03(b) shall not relieve any other Revolving Credit Lender of its obligation hereunder to make its Letter of Credit Advance on such date, but no Revolving Credit Lender shall be responsible for the failure of any other Revolving Credit Lender to make the Letter of Credit Advance to be made by such other Revolving Credit Lender on such date. SECTION 2.04. Repayment of Advances. (a) Term Advances. The Borrower shall repay to the Administrative Agent for the ratable account of the Appropriate Lenders the aggregate principal amount of all Term Advances outstanding on the following dates in the respective amounts set forth opposite such dates (which amounts shall be reduced as a result of the application of prepayments in accordance with the order of priority set forth in Section 2.06): DATE AMOUNT Term A Facility Term B Facility December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,450,704.23 $ 8,450,704.23 $ 8,450,704.23 $ 8,450,704.23 $ 8,450,704.23 $ 8,450,704.23 $ 8,450,704.23 $ 8,450,704.23 $ 8,450,704.23 $ 8,450,704.23 $10,563,380.27 $10,563,380.27 $10,563,380.27 $10,563,380.27 $ 2,805,388 $ 2,805,388 $ 2,805,388 $ 2,805,388 $ 2,805,388 $ 2,805,388 $ 2,805,388 $ 2,805,388 $ 2,805,388 $ 2,805,388 $ 2,805,387 $ 2,805,387 $ 2,805,387 $ 2,805,387 $ 2,805,387 $ 2,805,387 $ 2,805,387 $ 2,805,387 $247,049,409 $247,049,409 $247,049,409 $247,049,409 provided further that the final principal installment of the respective Term Advances shall be in an amount equal to the aggregate principal amount of all such Term Advances then outstanding. (b) Revolving Credit Advances. The Borrower shall repay to the Administrative Agent for the ratable account of the Revolving Credit Lenders on the Termination Date the aggregate principal amount of all Revolving Credit Advances outstanding on such date. 29
Slide 112: (c) Swing Line Advances. The Borrower shall repay to the Administrative Agent for the account of the Swing Line Bank and each Revolving Credit Lender that has made a Swing Line Advance on the earlier of (i) the maturity date for each Swing Line Advance (as specified in the applicable Notice of Swing Line Borrowing (which maturity shall be no later than the seventh day after the date on which such Swing Line Borrowing was initially made by the Swing Line Bank) and (ii) the Termination Date, the principal amount of each such Swing Line Advance made by the Swing Line Bank and each such Revolving Credit Lender and outstanding on such date. (d) Letter of Credit Advances. (i) The Borrower shall repay to the Administrative Agent for the account of the Issuing Bank and each Revolving Credit Lender that has made a Letter of Credit Advance on the earlier of (A) the date of demand therefor and (B) the Termination Date, the principal amount of each such Letter of Credit Advance made by the Issuing Bank and each such Revolving Credit Lender and outstanding on such date. (ii) The Obligations of the Borrower under this Agreement, any Letter of Credit Agreement and any other agreement or instrument relating to any Letter of Credit shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, such Letter of Credit Agreement or such other agreement or instrument under all circumstances, including, without limitation, the following circumstances (it being understood that any such payment by the Borrower is without prejudice to, and does not constitute a waiver of, any rights the Borrower might have or might acquire as a result of the payment by the Issuing Bank of any draft drawn or the reimbursement by the Borrower thereof): (A) any lack of validity or enforceability of any L/C Related Document; (B) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations of the Borrower in respect of any L/C Related Document or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents; (C) the existence of any claim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction; (D) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (E) payment by the Issuing Bank under a Letter of Credit against presentation of a draft, certificate or other document that does not strictly comply with the terms of such Letter of Credit; (F) any exchange, release or nonperfection of any Collateral or other collateral, or any release or amendment or waiver of or consent to departure from the Subsidiary Guarantee or any other guarantee, for all or any of the Obligations of the Borrower in respect of the L/C Related Documents; or (G) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or a guarantor. SECTION 2.05. Termination or Reduction of the Commitments. (a) Optional. The Borrower may, upon at least three Business Days’ notice to the Administrative Agent, terminate in whole or reduce in part the unused portions of the Letter of Credit Facility, or the 30
Slide 113: Unused Revolving Credit Commitments; provided, however, that each partial reduction of a Facility shall be in an aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof or, if less, the aggregate amount of such Facility. (b) Mandatory. (i) The Revolving Credit Facility shall be automatically and permanently reduced on each date on which the prepayment of Revolving Credit Advances outstanding thereunder is required to be made pursuant to Section 2.06(b)(i) by an amount equal to the applicable Reduction Amount. (ii) The Swing Line Facility shall be automatically and permanently reduced on the date of each reduction in the Revolving Credit Facility by the amount, if any, by which the amount of the Swing Line Facility on such date exceeds the amount of the Revolving Credit Facility on such date (after giving effect to such reduction of the Revolving Credit Facility on such date). (iii) The Letter of Credit Facility shall be automatically and permanently reduced on the date of each reduction in the Revolving Credit Facility by an amount equal to the amount, if any, by which (A) the Letter of Credit Facility on such date exceeds (B) the Revolving Credit Facility on such date, after giving effect to such reduction of the Revolving Credit Facility. (c) Application of Commitment Reductions. Upon each reduction of a Facility pursuant to this Section 2.05, the Commitment of each Appropriate Lender under such Facility shall be reduced by such Lender’s Pro Rata Share of the amount by which such Facility is reduced. SECTION 2.06. Prepayments. (a) Optional. The Borrower may, (i) on any Business Day, prepay all or any portions of any Swing Line Advance and (ii) upon at least three Business Days’ notice to the Administrative Agent for a Eurodollar Rate Advance or upon at least one Business Days’ notice to the Administrative Agent for a Base Rate Advance, in each case, stating the Facility under which Advances are proposed to be prepaid and the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the aggregate principal amount of the Advances comprising part of the same Borrowing and outstanding on such date, in whole or ratably in part; provided, however, that each partial prepayment of (i) Revolving Credit Advances shall be in an aggregate principal amount of $1,000,000 or an integral multiple of $250,000 in excess thereof and (ii) Term Advances shall be in an aggregate principal amount of $5,000,000 or an integral multiple of $500,000 in excess thereof or, if less, the aggregate outstanding principal amount of such Facility. Each prepayment of Term Advances made pursuant to this clause (a) shall be applied against the principal repayment installments of the respective Term Facility designated by the Borrower in the respective notice of prepayment. (b) Mandatory. (i) The Borrower shall, not later than three Business Days after the date of receipt of the Net Cash Proceeds by the Borrower or any of its Subsidiaries from: (A) the sale, lease, transfer or other disposition of any property or assets of the Borrower or any of its Subsidiaries (other than any property or assets expressly permitted to be sold, leased, transferred or otherwise disposed of pursuant to clause (i), (ii), (iii), (iv) or (v) of Section 5.02(e)); (B) the incurrence or issuance by the Borrower or any of its Subsidiaries of any Debt (other than Debt expressly permitted to be incurred or issued pursuant to clause (i), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi) or (xiii) of Section 5.02(b)); and (C) the issuance or sale by the Borrower or any Subsidiary thereof (which is or will be as a result thereof subject to the Securities Exchange Act of 1934, as amended) of any Equity Interests therein (other than (i) the issuance by the Borrower of (a) its common stock pursuant to equity incentive or benefit plans of the Borrower, (b) Equity Interests to effect any acquisition permitted under Section 5.02(f) hereof, provided that in the case in which the proceeds of such issuance are 31
Slide 114: contemplated to be used to effect such acquisition, then all the proceeds thereof are used within 180 days of such issuance to effect such acquisition, and any such proceeds not so used by such 180th day shall be applied as a prepayment as provided herein, (c) Debt or Redeemable Preferred Interests permitted under Section 5.02(b)(viii) or Section 5.02(b)(xii) hereof, or (d) Equity Interests in connection with a redemption of Subordinated Debt to the extent contemplated in Section 5.02(i) and, (ii) the issuance by any Subsidiary of the Borrower of any Equity Interests therein (a) to the Borrower or to another Subsidiary thereof, or (b) to any other Person or Persons in an aggregate amount in any one transaction or series of related transactions not in excess of $10,000,000), prepay an aggregate principal amount of the Advances comprising part of the same Borrowings equal to (x) 100% of the amount of the Net Cash Proceeds in respect of any sale, lease, transfer or other disposition of any property or assets of the Borrower or any of its Subsidiaries referred to in subclause (b)(i)(A) above to the extent such Net Cash Proceeds have not been reinvested within the applicable reinvestment period as provided in Section 5.02(e)(vi); (y) the first $200,000,000 of Net Cash Proceeds from the incurrence or issuance by the Borrower or any of its Subsidiaries of all Debt referred to in subclause (b)(i)(B) above plus 50% of any such Net Cash Proceeds in excess of $200,000,000; and (z) 50% of the amount of the Net Cash Proceeds of the issuance or sale by the Borrower of any Equity Interests referred to in subclause (b)(i)(C), and in the case of Net Cash Proceeds from the issuance or sale by any Subsidiary of the Borrower of Equity Interests referred to in subclause (b)(i)(C) above, 50% of an amount equal to the Borrower’s Percentage of such Net Cash Proceeds; provided, however, that prepayments of Net Cash Proceeds from the issuance or sale by the Borrower or any Subsidiary of the Borrower of Equity Interests referred to in subclause (b)(i)(C) above shall not be required if, after giving pro forma effect to such issuance or sale, the Borrower has a Leverage Ratio of less than 2.75:1.00. Each prepayment of advances required to be made pursuant to this subclause (i) shall first be applied on a pro rata basis between the Term Facilities, and with respect to each Term Facility, applied on a pro rata basis against the respective principal repayment installments thereof, and thereafter applied to the Revolving Credit Facility in the manner set forth in this Section 2.06(b). (ii) The Borrower shall, on each Business Day, prepay an aggregate principal amount of the Revolving Credit Advances comprising part of the same Borrowings, the Letter of Credit Advances and the Swing Line Advances and, if applicable, deposit an amount into the L/C Cash Collateral Account equal to the amount by which (A) the sum of (1) the aggregate principal amount of all Revolving Credit Advances, Letter of Credit Advances and Swing Line Advances outstanding on such Business Day and (2) the aggregate Available Amount of all Letters of Credit outstanding on such Business Day exceeds (B) the Revolving Credit Facility on such Business Day (after giving effect to any permanent reduction thereof pursuant to Section 2.05 on such Business Day). (iii) The Borrower shall, on each Business Day, pay to the Administrative Agent for deposit into the L/C Cash Collateral Account an amount sufficient to cause the aggregate amount on deposit in the L/C Cash Collateral Account on such Business Day to equal the amount by which (A) the aggregate Available Amount of all Letters of Credit outstanding on such Business Day exceeds (B) the Letter of Credit Facility on such Business Day (after giving effect to any permanent reduction thereof pursuant to Section 2.05 on such Business Day). (iv) Prepayments of the Revolving Credit Facility made pursuant to clause (i), (ii) or (iii) of this Section 2.06(b), first, shall be applied to prepay Letter of Credit Advances outstanding at such time until all such Letter of Credit Advances are paid in full, second, shall be applied to prepay Swing Line Advances outstanding at such time until all such Swing Line Advances are paid in full, third, shall be applied to prepay Revolving Credit Advances comprising part of the same Borrowings and outstanding at such time until all such Revolving Credit Advances are paid in full and, fourth, shall be deposited into the L/C Cash Collateral Account to cash collateralize 100% of the Available Amount of all Letters of Credit outstanding at such time; and, in the case of prepayments of the Revolving Credit Facility required pursuant to clause (i) or (ii) of this Section 2.06(b), the amount remaining, if any, after the 32
Slide 115: prepayment in full of all Advances outstanding at such time and the 100% cash collateralization of the aggregate Available Amount of all Letters of Credit outstanding at such time (the sum of such prepayment amounts, cash collateralization amounts and remaining amount being, collectively, the “Reduction Amount”) may be retained by the Borrower for use in the ordinary course of its business, and the Letter of Credit Facility shall be automatically and permanently reduced as set forth in Section 2.05(b)(iii). Upon the drawing of any Letter of Credit for which funds are on deposit in the L/C Cash Collateral Account, such funds shall be applied (without any further action by or notice to or from the Borrower or any other Loan Party) to reimburse the Issuing Bank or the Revolving Credit Lenders, as applicable. (c) Prepayments to Include Accrued Interest, Etc. All prepayments under this Section 2.06 shall be made together with (i) accrued and unpaid interest to the date of such prepayment on the principal amount so prepaid and (ii) in the case of any such prepayment of a Eurodollar Rate Advance on a date other than the last day of an Interest Period therefor, any amounts owing in respect of such Eurodollar Rate Advance pursuant to 8.04(c). (d) Term B Lender Opt-Out. Any Term B Lender may elect (upon such election, such Term B Lender being a “Declining Lender”), by notice to the Administrative Agent in writing (or by telecopy or telephone promptly confirmed in writing) by 12:00 p.m., New York, New York time, at least two Business Days prior to any prepayment of Term B Advances required to be made by the Borrower for the account of such Declining Lender pursuant to this Section 2.06(d), not to accept the portion of such prepayment to which such Declining Lender would be entitled and upon such election, such declined amount shall be applied instead to prepay a portion of the Term A Advances (to the extent Term A Advances remain outstanding after giving effect to such prepayment of the Term A Advances) in accordance with subsection 2.06(b)(i) above and this subsection 2.06(d). On the date of such prepayment (the “Prepayment Date”), (i) an amount equal to that portion of the prepayment required to be made to the Term B Lenders other than the Declining Lenders (such Term B Lenders being the “Accepting Lenders”) shall be applied by the Administrative Agent on behalf of the Borrower to prepay Term B Advances owing to such Accepting Lenders on a pro rata basis as provided above, (ii) fifty percent of any amounts that would otherwise have been applied to prepay Advances under the Term B Facility owing to Declining Lenders shall instead be applied ratably to prepay the remaining Term A Advances owing to Term A Lenders as provided above, and (iii) the remaining fifty percent of such amounts shall be credited to the Borrower’s Account; provided that on prepayment in full of all Term B Advances owing to Accepting Lenders and all Term A Advances owing to Term A Lenders, the remainder of such amounts under subsection (ii) shall be applied ratably to prepay Term B Advances owing to Declining Lenders. (e) Term B Facility Call Protection. In the event that, during the twelve-month period following the Closing Date, the Term B Advances are prepaid in whole or in part from the proceeds of any incurrence of Debt (other than Debt issued through a public offering or a private placement) which has an interest rate lower than the interest rate then applicable to the Term B Facility, the Borrower shall pay to each Term B Lender, in connection with such prepayment, a prepayment premium of 101% on the principal amount of the Term B Advances of such Term B Lender which are prepaid. SECTION 2.07. Interest. (a) Scheduled Interest. The Borrower shall pay interest on the unpaid principal amount of each Advance owing to each Lender Party from the date of such Advance (which for purposes of each Term A Advance and Revolving Credit Advance outstanding on the Closing Date shall be the date of each such Advance under the Existing Credit Agreement) until such principal amount shall be paid in full, at the following rates per annum: (i) Base Rate Advances. During such periods as such Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (A) the Base Rate in effect from time to time and (B) the Applicable Margin for such Base Rate Advance in effect from time to time, payable in arrears quarterly 33
Slide 116: on the last Business Day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (ii) Eurodollar Rate Advances. During such periods as such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Eurodollar Rate Advance to the sum of (A) the Eurodollar Rate for such Eurodollar Rate Advance for such Interest Period and (B) the Applicable Margin for such Advance in effect on the first day of such Interest Period, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full. (iii) Default Interest. Upon the occurrence and during the continuance of a Default under Section 6.01(a) or 6.01(f) or an Event of Default, the Administrative Agent may, and upon the request of the Required Lenders shall, require that the Borrower pay interest on (i) the unpaid principal amount of each Advance owing to each Lender Party, payable in arrears on the dates referred to in clause (i) or (ii) of Section 2.07(a), as applicable, and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Advance pursuant to clause (i) or (ii) of Section 2.07(a), as applicable, and (ii) to the fullest extent permitted by applicable law, the amount of any interest, fee or other amount payable under this Agreement or any other Loan Document to any Agent or any Lender Party that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid, in the case of interest, on the Type of Advance on which such interest has accrued pursuant to clause (i) or (ii) of Section 2.07(a), as applicable, and, in all other cases, on Base Rate Advances pursuant to clause (i) of Section 2.07(a). (b) Notice of Interest Rate. Promptly after receipt of a Notice of Borrowing pursuant to Section 2.02(a), a Notice of Conversion pursuant to Section 2.09(a) or a notice of selection of an Interest Period pursuant to the definition of “Interest Period” set forth in Section 1.01, the Administrative Agent shall give notice to the Borrower and each Appropriate Lender of the applicable interest rate determined by the Administrative Agent for purposes of clause (i) or (ii) of Section 2.07(a), as applicable. SECTION 2.08. Fees. (a) Commitment Fee. The Borrower shall pay to the Administrative Agent for the account of the Revolving Credit Lenders a commitment fee (the “Commitment Fee”), from the date hereof in the case of each such Lender listed on the signature pages hereof and from the effective date specified in the Assignment and Assumption pursuant to which it became a Revolving Credit Lender in the case of each other Revolving Credit Lender until, in each case, the Termination Date, payable in arrears quarterly on the last Business Day of each March, June, September and December, commencing December 31, 2003, and on the Termination Date, at the Applicable Percentage in effect from time to time on the sum of (i) the average daily Unused Revolving Credit Commitment of each Revolving Credit Lender plus (ii) such Revolving Credit Lender’s Pro Rata Share of the average daily outstanding Swing Line Advances during such quarter; provided, however, that no Commitment Fee shall accrue on any of the Commitments of a Defaulting Lender so long as such Lender shall be a Defaulting Lender; provided further that the initial payment on December 31, 2003 shall include the accrued and unpaid amount of the commitment fee as provided in the Existing Credit Agreement. (b) Letter of Credit Fees, Etc. (i) The Borrower shall pay to the Administrative Agent for the account of each Revolving Credit Lender a commission, payable in arrears quarterly on the last Business Day of each March, June, September and December, commencing December 31, 2003, and on the earliest to occur of the full 34
Slide 117: drawing, expiration, termination or cancellation of any such Letter of Credit and on the Termination Date, on such Revolving Credit Lender’s Pro Rata Share of the average daily aggregate Available Amount of all Letters of Credit outstanding from time to time during such quarter at the rate per annum equal to the Applicable Margin in effect at such time for Eurodollar Rate Advances under the Revolving Credit Facility, provided that the initial payment on December 31, 2003 shall include the accrued and unpaid letter of credit commission as provided in the Existing Credit Agreement. Upon the occurrence and during the continuance of a Default under Section 6.01(a) or 6.01(f) or an Event of Default, the amount of commission payable by the Borrower under this clause (b)(i) shall be increased by 2% per annum. (ii) The Borrower shall pay to each Issuing Bank, for its own account, an issuing bank fee, payable in arrears quarterly on the last Business Day of each March, June, September and December, commencing December 31, 2003, and on the earliest to occur of the full drawing, expiration, termination or cancellation of any such Letter of Credit issued by such Issuing Bank and on the Termination Date, on the average daily aggregate Available Amount of all Letters of Credit issued by such Issuing Bank and outstanding from time to time during such quarter at the rate per annum equal to 0.25%, together with such commissions, transfer fees and other fees and charges in connection with the issuance or administration of each Letter of Credit as the Borrower and such Issuing Bank shall from time to time agree, provided that the initial payment on December 31, 2003 shall include the accrued and unpaid issuing bank fee and other related fees as provided in the Existing Credit Agreement. (c) Agents’ Fees. The Borrower shall pay to the Administrative Agent for the account of the Agents such fees as may from time to time be agreed between the Borrower and the Administrative Agent. (d) Amendment Fee in respect of Interest Rates. In the event that, during the twelve-month period following the Closing Date, this Agreement shall be amended to reduce the Applicable Margin in respect of the Term B Facility, then the Borrower shall pay to each Term B Lender, in connection with such amendment, an amendment fee equal to 1.00% of the principal amount of the Term B Advances of such Term B Lender then outstanding. SECTION 2.09. Conversion of Advances. (a) Optional. The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than (i) 2:00 P.M. (New York, New York time) on the third Business Day prior to the date of the proposed Conversion in the case of a Conversion of Base Rate Advances into Eurodollar Rate Advances or of Eurodollar Rate Advances of one Interest Period into Eurodollar Rate Advances of another Interest Period, or (ii) 2:00 P.M. (New York, New York time) on the Business Day immediately preceding the date of the proposed Conversion in the case of a Conversion of Eurodollar Rate Advances into Base Rate Advances; provided, however, that in each case: (A) any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be made only if no Default under Section 6.01(f) or Event of Default shall have occurred and be continuing and shall be in an amount not less than the minimum amount specified in Section 2.01(c); (B) no Conversion of any Advances shall result in more separate Borrowings than permitted under Section 2.02(c); and (C) each Conversion of Advances comprising part of the same Borrowing under any Facility shall be made among the Appropriate Lenders in accordance with their respective Pro Rata Shares of such Borrowing. Each notice of a Conversion (a “Notice of Conversion”) shall be delivered by telephone, confirmed immediately in writing, or by telecopier, in substantially the form of Exhibit B-3 hereto, shall be duly executed by a Responsible Officer of the Borrower, and shall, within the restrictions set forth in the immediately preceding sentence, specify therein: (1) the requested date of such Conversion (which shall be a Business Day); 35
Slide 118: (2) the Advances requested to be Converted; and (3) if such Conversion is into Eurodollar Rate Advances, the requested duration of the Interest Period for such Eurodollar Rate Advances. The Administrative Agent shall give each of the Appropriate Lenders prompt notice of each Notice of Conversion received by it. Each Notice of Conversion shall be irrevocable and binding on the Borrower. (b) Mandatory. (i) On the last day of any Interest Period during which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $5,000,000, such Advances shall automatically Convert into Base Rate Advances. (ii) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of “Interest Period” set forth in Section 1.01, the Administrative Agent will forthwith so notify the Borrower and the Appropriate Lenders, whereupon each such Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance. (iii) Upon the occurrence and during the continuance of any Default under Section 6.01(f) or any Event of Default, (A) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (B) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended. SECTION 2.10. Increased Costs, Etc. (a) If, after the date hereof, the adoption of any applicable Requirement of Law, or any change in any applicable Requirement of Law, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency: (i) shall subject such Lender (or its Applicable Lending Office) to any tax, duty, or other charge with respect to any Eurodollar Rate Advances, any of its Notes, or its obligation to make any Eurodollar Rate Advances, or change the basis of taxation of any amounts payable to such Lender (or its Applicable Lending Office) under this Agreement or its Note in respect of any Eurodollar Rate Advances (other than, for purposes of this Section 2.10, any such increased costs resulting from (A) Taxes or Other Taxes (as to which Section 2.13 shall govern), and (B) changes in the basis of taxation of overall net income or overall gross income by the United States of America or the jurisdiction under the laws of which such Lender Party has its principal office or such Applicable Lending Office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (or its Applicable Lending Office), including the Commitments of such Lender hereunder; or (iii) shall impose on such Lender (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting this Agreement or its Note or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making, Converting into or maintaining any Eurodollar Rate Advances or to reduce any sum received or receivable by such Lender (or its Applicable Lending Office) under this Agreement or its Note with respect to any Eurodollar Rate Advances, then the Borrower shall pay to such Lender on demand such amount or amounts as will compensate such Lender for such increased cost or reduction. Each Lender shall 36
Slide 119: promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 2.10(a) and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it (other than by reason of administrative convenience or preference). Any Lender claiming compensation under this Section 2.10(a) shall furnish to the Borrower and the Administrative Agent a statement setting forth the additional amount or amounts to be paid to it hereunder (including the method of calculation), which shall be conclusive and binding, absent manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. If any Lender requests compensation by the Borrower under this Section 2.10(a), the Borrower may, by notice to such Lender (with a copy to the Administrative Agent), suspend the obligation of such Lender to make or Convert Eurodollar Rate Advances, or to Convert Base Rate Advances into Eurodollar Rate Advances, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 2.10(e) shall be applicable); provided that such suspension shall not affect the right of such Lender to receive the compensation so requested. (b) If, after the date hereof, any Lender shall have determined that the adoption of any applicable Requirement of Law regarding capital adequacy or any change therein or in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of such Lender’s obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. Each Lender shall promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 2.10(b) and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section 2.10(b) shall furnish to the Borrower and the Administrative Agent a statement setting forth the additional amount or amounts to be paid to it hereunder (including the method of calculation), which shall be conclusive and binding, absent manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. (c) If, on or prior to the first day of any Interest Period for any Eurodollar Rate Advance, the Required Lenders at any time notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately and fairly reflect the cost to the Appropriate Lenders of funding their Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall promptly so notify the Borrower and the Appropriate Lenders, whereupon (i) each such Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Appropriate Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower (promptly following notice from the Appropriate Lenders) that such Lenders have determined that the circumstances causing such suspension no longer exist. (d) Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to make, maintain, or fund Eurodollar Rate Advances hereunder, then such Lender shall promptly notify the Borrower thereof and such Lender’s obligation to make Eurodollar Rate Advances and to Convert Base Rate Advances into Eurodollar Rate Advances shall be suspended until such time as such Lender may again make, maintain and fund Eurodollar Rate Advances (in which case the provisions of Section 2.10(e) shall be applicable). 37
Slide 120: (e) If the obligation of any Lender to make a Eurodollar Rate Advance or to Convert Base Rate Advances into Eurodollar Rate Advances shall be suspended pursuant to any other provision of this Section 2.10, such Lender’s suspended Eurodollar Rate Advances shall be automatically Converted into Base Rate Advances on the last day(s) of the then current Interest Period(s) therefor (or, in the case of a Conversion required by Section 2.10(d), on such earlier date as such Lender may specify to the Borrower with a copy to the Administrative Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in such other provision of this Section 2.10 that gave rise to such Conversion no longer exist: (i) to the extent that such Lender’s suspended Eurodollar Rate Advances have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender’s suspended Eurodollar Rate Advances shall be applied instead to its Base Rate Advances; and (ii) all Eurodollar Rate Advances that would otherwise be made or Converted by such Lender shall be made instead as (or shall remain as) Base Rate Advances. If such Lender gives notice to the Borrower (with a copy to the Administrative Agent) that the circumstances otherwise specified in this Section 2.10 that gave rise to the suspension of the making of Eurodollar Rate Advances by such Lender no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Rate Advances by other Lenders with Commitments under the same Facility are outstanding, such Lender’s Base Rate Advances shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) therefor, to the extent necessary into Eurodollar Rate Advances. SECTION 2.11. Evidence of Debt. (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the debt of the Borrower to such Lender resulting from each Advance owing to such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (b) The Register maintained by the Administrative Agent pursuant to Section 8.07(c) shall include accounts for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Advance made hereunder, (ii) the terms of each Assignment and Assumption delivered to and accepted by it, (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iv) the amount of any sum received by the Administrative Agent from the Borrower hereunder and each Lender’s share thereof. (c) The entries made as provided in this Section 2.11 shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.12. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes, irrespective of any right of counterclaim, deduction or set-off (except as otherwise provided in Section 2.16), not later than 2:00 P.M. (New York, New York time) on the day when due in U.S. dollars to the Administrative Agent at the Administrative Agent’s Account in same day funds, with payments received by the Administrative Agent after such time being deemed to have been received on the next succeeding Business Day. The Administrative Agent will promptly thereafter cause like funds to be distributed (i) if such payment by the Borrower is in respect of principal, interest, commitment fees or any other Obligation then due and payable hereunder and under the Notes to more than one Lender Party, to such Lender Parties for the accounts of their respective Applicable Lending Offices in accordance with their respective Pro Rata Shares of the amounts of such respective Obligations due and payable to such Lender Parties at such time and (ii) if such payment by the Borrower is in respect of any Obligation then due and payable hereunder solely to one Lender Party, to such Lender Party for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and 38
Slide 121: Assumption and recording of the information contained therein in the Register pursuant to Section 8.07(c), from and after the effective date of such Assignment and Assumption, the Administrative Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender Party assignee thereunder, and the parties to such Assignment and Assumption shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender Party, if and to the extent payment owed to such Lender Party is not made when due hereunder or, in the case of a Lender, under the Note held by such Lender, to charge from time to time against any or all of the Borrower’s accounts with such Lender Party any amount so due. (c) All computations of interest based on the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of the letter of credit commissions and commitment or letter of credit fees payable hereunder shall be made by the Administrative Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, fees or commissions are payable. Each determination by the Administrative Agent of an interest rate, fee or commission hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest, letter of credit commissions or commitment or letter of credit fees, as the case may be; provided, however, that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next succeeding calendar month, such payment shall be made on the immediately preceding Business Day. (e) Unless the Borrower or any Lender Party has notified the Administrative Agent prior to the date any payment is required to be made by it to the Administrative Agent hereunder, that the Borrower or such Lender Party, as the case may be, will not make such payment, the Administrative Agent may assume that the Borrower or such Lender Party, as the case may be, has timely made such payment and may (but shall not be so required to), in reliance thereon, make available a corresponding amount to the Person entitled thereto. If and to the extent that such payment was not in fact made to the Administrative Agent in immediately available funds, then: (i) if the Borrower failed to make such payment, each Lender Party shall forthwith on demand repay to the Administrative Agent the portion of such assumed payment that was made available to such Lender Party in immediately available funds, together with interest thereon in respect of each day from and including the date such amount was made available by the Administrative Agent to such Lender Party to the date such amount is repaid to the Administrative Agent in immediately available funds, at the Federal Funds Rate from time to time in effect; and (ii) if any Lender Party failed to make such payment, such Lender Party shall forthwith on demand pay to the Administrative Agent the amount thereof in immediately available funds, together with interest thereon for the period from the date such amount was made available by the Administrative Agent to the Borrower to the date such amount is recovered by the Administrative Agent (the “Compensation Period”) at a rate per annum equal to the Federal Funds Rate from time to time in effect. If such Lender Party pays such amount to the Administrative Agent, then such amount shall constitute such Lender Party’s Advance included in the applicable Borrowing. If such Lender Party does not pay such amount forthwith upon the Administrative Agent’s demand therefor, the Administrative Agent may make a demand therefor upon the Borrower, and the Borrower shall pay such amount to the Administrative Agent, together with interest thereon for the Compensation Period at a rate per annum equal to the rate of interest applicable to the applicable Borrowing. Nothing herein shall be deemed to relieve any Lender Party from its obligation to fulfill its applicable Commitment or to prejudice any rights which the Administrative Agent or the Borrower may have against any Lender Party as a result of any default by such Lender Party hereunder. 39
Slide 122: A notice from the Administrative Agent to any Lender Party with respect to any amount owing under this subsection (e) shall be conclusive, absent manifest error. (f) Whenever any payment received by the Administrative Agent under this Agreement or any of the other Loan Documents is insufficient to pay in full all amounts due and payable to the Agents and the Lender Parties under or in respect of this Agreement and the other Loan Documents on any date, such payment shall be distributed by the Administrative Agent and applied by the Agents and the Lender Parties in the following order of priority: (i) first, to the payment of all of the fees, indemnification payments, costs and expenses that are due and payable to the Agents (solely in their respective capacities as Agents) under or in respect of this Agreement and the other Loan Documents on such date, ratably based upon the respective aggregate amounts of all such fees, indemnification payments, costs and expenses owing to the Agents on such date; (ii) second, to the payment of all of the fees, indemnification payments, costs and expenses that are due and payable to the Issuing Bank and the Swing Line Bank (solely in their respective capacities as such) under or in respect of this Agreement and the other Loan Documents on such date, ratably based upon the respective aggregate amounts of all such fees, indemnification payments, costs and expenses owing to the Issuing Bank and the Swing Line Bank on such date; (iii) third, to the payment of all of the indemnification payments, costs and expenses that are due and payable to the Lenders under Section 8.04 hereof, Section 12 of the Subsidiary Guarantee, Section 21 of the Security Agreement and any similar section of any of the other Loan Documents on such date, ratably based upon the respective aggregate amounts of all such indemnification payments, costs and expenses owing to the Lenders on such date; (iv) fourth, to the payment of all of the amounts that are due and payable to the Administrative Agent and the Lender Parties under Sections 2.10 and 2.13 hereof and Section 5 of the Subsidiary Guarantee on such date, ratably based upon the respective aggregate amounts thereof owing to the Administrative Agent and the Lender Parties on such date; (v) fifth, to the payment of all of the accrued and unpaid interest on the Obligations of the Borrower under or in respect of the Loan Documents that is due and payable to the Administrative Agent and the Lender Parties under Section 2.07(a) on such date and all of the fees that are due and payable to the Lenders or the Issuing Bank under Section 2.08(a) or 2.08(b) on such date, ratably based upon the respective aggregate Commitments of the Lenders under the Facilities on such date; (vi) sixth, to the payment of the principal amount of all of the outstanding Advances that is due and payable to the Administrative Agent and the Lender Parties on such date, ratably based upon the respective aggregate amounts of all such principal owing to the Administrative Agent and the Lender Parties on such date; and (vii) seventh, to the payment of all other Obligations of the Loan Parties owing under or in respect of the Loan Documents that are due and payable to the Administrative Agent and the other Secured Parties on such date, ratably based upon the respective aggregate amounts of all such Obligations owing to the Administrative Agent and the other Secured Parties on such date. If the Administrative Agent receives funds for application to the Obligations of the Loan Parties under or in respect of the Loan Documents under circumstances for which the Loan Documents do not specify the Advances or the Facility to which, or the manner in which, such funds are to be applied, the Administrative Agent may, but shall not be obligated to, elect to distribute such funds to each of the Lender Parties in accordance with such Lender Party’s Pro Rata Share of the sum of (A) the aggregate principal amount of all Advances outstanding at such time and (b) the aggregate Available Amount of all Letters of Credit outstanding at such time, in repayment or prepayment of such of the outstanding Advances or other Obligations then owing to such Lender Party, and, in the case of the Term Facility, for application to such principal repayment installments thereof, as the Administrative Agent shall direct. 40
Slide 123: SECTION 2.13. Taxes. (a) Any and all payments by the Borrower to or for the account of any Lender Party or any Agent hereunder or under any other Loan Document shall be made, in accordance with Section 2.12 or the applicable provisions of such other Loan Document, if any, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender Party and each Agent, taxes that are imposed on its overall net income by the United States and taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction under the laws of which such Lender Party or such Agent, as the case may be, is organized or is a resident, or has a fixed place of business or a permanent establishment, or any political subdivision of any of the foregoing, and, in the case of each Lender Party, taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction of either of its Applicable Lending Offices or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being, collectively, “Taxes”). If the Borrower shall be required under applicable Requirements of Law to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document to any Lender Party or any Agent, (i) the sum payable by the Borrower shall be increased as necessary so that after the Borrower and the Administrative Agent have been made all required deductions (including deductions applicable to additional sums payable under this Section 2.13) such Lender Party or such Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other Governmental Authority in accordance with applicable Requirements of Law and (iv) within 30 days after the date of any payment of Taxes, the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 8.02, the original or a certified copy of a receipt evidencing payment thereof, to the extent such a receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Administrative Agent. (b) In addition, the Borrower agrees to pay any present or future stamp, recording or documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or under any other Loan Document or from the execution, delivery of, or registration of, any performance under, or otherwise with respect to, this Agreement or any other Loan Document (collectively, “Other Taxes”). (c) The Borrower shall indemnify each of the Lender Parties and each of the Agents for, and hold each of them harmless against, the full amount of Taxes and Other Taxes, and the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.13, imposed on or paid by such Lender Party or such Agent, as the case may be, and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. The indemnity by the Borrower provided for in this subsection (c) shall apply and be made whether or not the Taxes or Other Taxes for which indemnification hereunder is sought have been correctly or legally asserted; provided, however, that such Lender or such Agent seeking such indemnification shall take all reasonable actions (consistent with its internal policy and legal and regulatory restrictions) requested by the Borrower to assist the Borrower in recovering the amounts paid thereby pursuant to this subsection (c) from the relevant taxation authority or other Governmental Authority. Amounts payable by the Borrower under the indemnity set forth in this subsection (c) shall be paid within 30 days from the date on which the applicable Lender or Agent, as the case may be, makes written demand therefor (including the method of calculation). (d) In the case of any payment hereunder or under any other Loan Document by or on behalf of the Borrower through an account or branch outside the United States, or on behalf of the Borrower by a payor that is not a United States person, if the Borrower determines that no Taxes are payable in respect thereof, the Borrower shall furnish, or shall cause such payor to furnish, to the Administrative Agent, at its address referred to in Section 8.02, an opinion of counsel reasonably acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of this subsection (d) and subsection (e) of this Section 2.13, the terms “United States” and “United States person” shall have the meanings specified in Section 7701 of the Internal Revenue Code. 41
Slide 124: (e) Each Lender Party organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Lender, the Swing Line Bank or the Initial Issuing Bank, as the case may be, and on or prior to the date of the Assignment and Assumption pursuant to which it becomes a Lender Party in the case of each other Lender Party, and from time to time thereafter as reasonably requested in writing by the Borrower (but only so long thereafter as such Lender Party remains lawfully able to do so), provide each of the Administrative Agent and the Borrower with two original Internal Revenue Service forms W-8BEN, W-8ECI or W-8IMY, or in the case of a Lender Party that has certified in writing to the Administrative Agent that it is claiming exemption from United States withholding tax under Section 871(h) or 881(c) of the Internal Revenue Code with respect to payments of “portfolio interest” from W-8BEN), (and, if such Lender Party delivers a form W-8BEN, a certificate representing that such Lender Party is not (i) a “bank” for purposes of Section 881(c) of the Internal Revenue Code, (ii) a ten-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the Borrower or (iii) a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Internal Revenue Code)), as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender Party is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or any other Loan Document or, in the case of a Lender Party providing a form W-8BEN, certifying that such Lender Party is a foreign corporation, partnership, estate or trust. If any such forms provided by a Lender Party at the time such Lender Party first becomes a party to this Agreement indicate a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender Party provides the appropriate form certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes solely for the periods governed by such forms. However, if at the date of the Assignment and Assumption pursuant to which a Lender Party becomes a party to this Agreement, the Lender Party assignor was entitled to payments under subsection (a) of this Section 2.13 in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Lender Party assignee on such date. None of the Lender Parties shall be entitled to payment pursuant to subsection (a) or (c) of this Section 2.13 with respect to any additional Taxes that result solely and directly from a change in either of the Applicable Lending Offices of such Lender Party (other than any such additional Taxes that are imposed as a result of a change in the applicable Requirements of Law, or in the interpretation of application thereof, occurring after the date of such change), unless such change is made pursuant to the terms of Section 2.10(e) or subsection (g) of this Section 2.13 or as a result of a request therefor by the Borrower. (f) For any period with respect to which a Lender Party has failed to provide the Borrower with the appropriate form, certificate or other document described in subsection (e) of this Section 2.13 (other than if such failure is due to a change in the applicable Requirements of Law, or in the interpretation or application thereof, occurring after the date on which a form, certificate or other document originally was required to be provided or if such form, certificate or other document otherwise is not required under subsection (e) of this Section 2.13), such Lender Party shall not be entitled to indemnification under subsection (a) or (c) of this Section 2.13 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender Party become subject to Taxes because of its failure to deliver a form, certificate or other document required hereunder, the Borrower shall take such steps as such Lender Party shall reasonably request to assist such Lender Party in recovering such Taxes. (g) Each of the Lender Parties hereby agrees that, upon the occurrence of any circumstances entitling such Lender Party to additional amounts pursuant to this Section 2.13, such Lender Party shall use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender Party, be otherwise disadvantageous to such Lender Party (other than by reason of administrative convenience or preference). 42
Slide 125: SECTION 2.14. Sharing of Payments, Etc. If any Lender Party shall obtain at any time any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) (a) on account of Obligations due and payable to such Lender Party under or in respect of this Agreement or any of the other Loan Documents at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations due and payable to such Lender Party at such time (other than pursuant to Section 2.10, 2.13, 8.04 or 8.07) to (ii) the aggregate amount of the Obligations due and payable to all Lender Parties at such time) of payments on account of the Obligations due and payable to all Lender Parties under or in respect of this Agreement and the other Loan Documents at such time obtained by all the Lender Parties at such time or (b) on account of Obligations owing (but not due and payable) to such Lender Party under or in respect of this Agreement or any of the other Loan Documents at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations owing to such Lender Party at such time (other than pursuant to Section 2.10, 2.13, 8.04 or 8.07) to (ii) the aggregate amount of the Obligations owing (but not due and payable) to all Lender Parties under or in respect of this Agreement and the other Loan Documents at such time) of payments on account of the Obligations owing (but not due and payable) to all Lender Parties under or in respect of this Agreement and the other Loan Documents at such time obtained by all of the Lender Parties at such time, such Lender Party shall forthwith purchase from the other Lender Parties such interests or participating interests in the Obligations due and payable or owing to them, as the case may be, as shall be necessary to cause such purchasing Lender Party to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender Party, such purchase from each other Lender Party shall be rescinded and such other Lender Party shall repay to the purchasing Lender Party the purchase price to the extent of such Lender Party’s ratable share (according to the proportion of (A) the purchase price paid to such Lender Party to (B) the aggregate purchase price paid to all Lender Parties) of such recovery, together with an amount equal to such Lender Party’s ratable share (according to the proportion of (1) the amount of such other Lender Party’s required repayment to (2) the total amount so recovered from the purchasing Lender Party) of any interest or other amount paid or payable by the purchasing Lender Party in respect of the total amount so recovered; provided further that, so long as the Obligations under the Loan Documents shall not have been accelerated, any excess payment received by any Appropriate Lender shall be shared on a pro rata basis only with other Appropriate Lenders. The Borrower hereby agrees that any Lender Party so purchasing an interest or participating interest from another Lender Party pursuant to this Section 2.14 may, to the fullest extent permitted under applicable law, exercise all its rights of payment (including the right of setoff) with respect to such an interest or participating interest, as the case may be, as fully as if such Lender Party were the direct creditor of the Borrower in the amount of such an interest or participating interest. SECTION 2.15. Use of Proceeds. The proceeds of the Term A Advances were used as provided in the Existing Credit Agreement. The proceeds of the Term B Advances will be used as provided in the Existing Credit Agreement and the proceeds of the Revolving Credit Advances shall be available (and the Borrower agrees that it shall use such proceeds) solely for acquisitions as permitted herein and for general corporate purposes of the Borrower and its subsidiaries. SECTION 2.16. Defaulting Lenders. (a) In the event that, at any one time, (i) any Lender Party shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Advance to the Borrower and (iii) the Borrower shall be required to make any payment hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then the Borrower may, so long as no Default shall occur or be continuing at such time and to the fullest extent permitted by applicable law, set off and otherwise apply the Obligation of the Borrower to make such payment to or for the account of such Defaulting Lender against the obligation of such Defaulting Lender to make such Defaulted Advance. In the event that, on any date, the Borrower shall so set off and otherwise apply its obligation to make any such payment against the obligation of such Defaulting Lender to make any such Defaulted Advance on or prior to such date, the amount so set off and otherwise applied by the Borrower shall constitute for all purposes of this Agreement and the other Loan Documents an Advance by such Defaulting Lender made on the date of such setoff under the Facility pursuant to which such Defaulted Advance was originally required to have been made pursuant to Section 2.01. Such Advance 43
Slide 126: shall be a Base Rate Advance and shall be considered, for all purposes of this Agreement, to comprise part of the Borrowing in connection with which such Defaulted Advance was originally required to have been made pursuant to Section 2.01, even if the other Advances comprising such Borrowing shall be Eurodollar Rate Advances on the date such Advance is deemed to be made pursuant to this subsection (a). The Borrower shall notify the Administrative Agent at any time the Borrower exercises its right of set-off pursuant to this subsection (a) and shall set forth in such notice (A) the name of the Defaulting Lender and the Defaulted Advance required to be made by such Defaulting Lender and (B) the amount set off and otherwise applied in respect of such Defaulted Advance pursuant to this subsection (a). Any portion of such payment otherwise required to be made by the Borrower to or for the account of such Defaulting Lender which is paid by the Borrower, after giving effect to the amount set off and otherwise applied by the Borrower pursuant to this subsection (a), shall be applied by the Administrative Agent as specified in subsection (b) or (c) of this Section 2.16. (b) In the event that, at any one time, (i) any Lender Party shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Amount to the Administrative Agent or any of the other Lender Parties and (iii) the Borrower shall make any payment hereunder or under any other Loan Document to the Administrative Agent for the account of such Defaulting Lender, then the Administrative Agent may, on its behalf or on behalf of such other Lender Parties and to the fullest extent permitted by applicable law, apply at such time the amount so paid by the Borrower to or for the account of such Defaulting Lender to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. In the event that the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this Agreement and the other Loan Documents payment, to such extent, of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Lender Parties, ratably in accordance with the respective portions of such Defaulted Amounts payable at such time to the Administrative Agent and such other Lender Parties and, if the amount of such payment made by the Borrower shall at such time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent and the other Lender Parties, in the following order of priority: (A) first, to the Administrative Agent for any Defaulted Amount then owing to the Administrative Agent; (B) second, to the Issuing Bank and the Swing Line Bank for any Defaulted Amount then owing to them, in their capacities as such, ratably in accordance with such respective Defaulted Amounts then owing to such Issuing Bank and such Swing Line Bank; and (C) third, to any other Lender Parties for any Defaulted Amounts then owing to such other Lender Parties, ratably in accordance with such respective Defaulted Amounts then owing to such other Lender Parties. Any portion of such amount paid by the Borrower for the account of such Defaulting Lender remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this subsection (b), shall be applied by the Administrative Agent as specified in subsection (c) of this Section 2.16. (c) In the event that, at any one time, (i) any Lender Party shall be a Defaulting Lender, (ii) such Defaulting Lender shall not owe a Defaulted Advance or a Defaulted Amount and (iii) the Borrower, the Administrative Agent or any other Lender Party shall be required to pay or distribute any amount hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then the Borrower or such other Lender Party shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow or the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in escrow under this subsection (c) shall be deposited by the Administrative Agent in an account with CSFB, in the name and under the control of the Administrative Agent, but subject to the provisions of this subsection (c). The terms applicable to such account, including the rate of interest 44
Slide 127: payable with respect to the credit balance of such account from time to time, shall be CSFB’s standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this subsection (c). The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Advances required to be made by such Defaulting Lender and to pay any amount payable by such Defaulting Lender hereunder and under the other Loan Documents to the Administrative Agent or any other Lender Party, as and when such Advances or amounts are required to be made or paid and, if the amount so held in escrow shall at any time be insufficient to make and pay all such Advances and amounts required to be made or paid at such time, in the following order of priority: (A) first, to the Administrative Agent for any amount then due and payable by such Defaulting Lender to the Administrative Agent hereunder; (B) second, to the Issuing Bank and the Swing Line Bank for any amounts then due and payable to them hereunder, in their capacities as such, by such Defaulting Lender, ratably in accordance with such amounts then due and payable to such Issuing Bank and such Swing Line Bank; (C) third, to any other Lender Parties for any amount then due and payable by such Defaulting Lender to such other Lender Parties hereunder, ratably in accordance with such respective amounts then due and payable to such other Lender Parties; and (D) fourth, to the Borrower for any Advance then required to be made by such Defaulting Lender pursuant to a Commitment of such Defaulting Lender. In the event that any Lender Party that is a Defaulting Lender shall, at any time, cease to be a Defaulting Lender, any funds held by the Administrative Agent in escrow at such time with respect to such Lender Party shall be distributed by the Administrative Agent to such Lender Party and applied by such Lender Party to the Obligations owing to such Lender Party at such time under this Agreement and the other Loan Documents ratably in accordance with the respective amounts of such Obligations outstanding at such time. (d) The rights and remedies against a Defaulting Lender under this Section 2.16 are in addition to other rights and remedies that the Borrower may have against such Defaulting Lender with respect to any Defaulted Advance and that the Administrative Agent or any Lender Party may have against such Defaulting Lender with respect to any Defaulted Amount. ARTICLE III CONDITIONS OF EFFECTIVENESS OF THIS AGREEMENT AND LENDING AND ISSUANCES OF LETTERS OF CREDIT SECTION 3.01. Conditions Precedent to Effectiveness of this Agreement. This Agreement shall be effective on the date when each of the following conditions precedent are satisfied: (a) The Administrative Agent shall have received on or before the Closing Date the following, each dated such day (unless otherwise specified), in form and substance satisfactory to the Administrative Agent (unless otherwise specified) and in sufficient copies for each Lender Party: (i) Certified copies of the resolutions of the Board of Directors of each Loan Party approving the Transaction and each Loan Document to which it is or is to be a party, and of all documents evidencing other necessary Governmental Authorizations and other necessary corporate actions or third party approvals and consents, if any, with respect to the Transaction and each Loan Document to which it is or is to be a party. (ii) a copy of a certificate of the Secretary of State of the jurisdiction of incorporation of each Loan Party that is a Domestic Subsidiary, dated reasonably near the Closing Date, certifying (A) as to a 45
Slide 128: true and correct copy of the charter (or comparable Constitutive Document) of such Loan Party and each amendment thereto on file in such Secretary’s office (B) that such amendments are the only amendments to such Loan Party’s charter (or comparable Constitutive Document) on file in such Secretary’s office, and (C) that such Loan Party is duly incorporated and in good standing or presently subsisting under the laws of the State of the jurisdiction of its incorporation; provided, that, in the case of (A) and (B), such certifications shall only be required to the extent only that there have been amendments to the relevant documents since the delivery of such documents pursuant to the Existing Credit Agreement. (iii) A certificate of each Loan Party, signed on behalf of such Loan Party by its President or a Vice President and its Secretary or any Assistant Secretary, dated the Closing Date (the statements made in which certificate shall be true on and as of the Closing Date), certifying as to (A) the absence of any amendments to the charter (or comparable Constitutive Document) of such Loan Party provided pursuant to the Existing Credit Agreement, (B) the absence of any amendments to the bylaws (or comparable Constitutive Document) provided pursuant to the terms of the Existing Credit Agreement, or, in respect of any Loan Party not a party to the Existing Credit Agreement, a true and correct copy of the bylaws (or comparable Constitutive Document) of such Loan Party as in effect on the date on which the resolutions referred to in Section 3.01(a)(i) were adopted and on the Closing Date, (C) the due incorporation and good standing or valid existence of such Loan Party as a corporation organized under the laws of the jurisdiction of its incorporation, and the absence of any proceeding for the dissolution or liquidation of such Loan Party, and (D) the truth of the representations and warranties contained in the Loan Documents as though made on and as of the Closing Date except for representations and warranties that by their terms speak as of another specific date, which shall be true as of such specific date. (iv) A certificate of the Secretary or an Assistant Secretary of each Loan Party certifying the names and true signatures of the officers of such Loan Party authorized to sign each Loan Document to which it is or is to be a party and the other documents to be delivered hereunder and thereunder. (v) Such financial, business and other information regarding each Loan Party and its Subsidiaries as the Lender Parties shall have reasonably requested, including, without limitation, information as to possible contingent liabilities, tax matters, environmental matters, obligations under Plans, Multiemployer Plans and Welfare Plans, collective bargaining agreements and other arrangements with employees, audited annual financial statements dated December 31, 2002, interim financial statements dated the end of the most recent fiscal quarter for which financial statements are available, pro forma financial statements as to the Borrower and forecasts prepared by management of the Company, of balance sheets, income statements and cash flow statements on a quarterly basis for the first year following the Closing Date and on an annual basis for five years thereafter. (vi) Confirmation and ratification of the continued validity of the Subsidiary Guarantee and the Collateral Documents, such confirmation and ratification to be in the form attached hereto as Exhibit J. (b) All Governmental Authorizations and all third party consents and approvals necessary in connection with the Transaction shall have been obtained (without the imposition of any conditions that are not acceptable to the Lender Parties) and shall remain in effect; and no Requirements of Law shall be applicable in the judgment of the Lender Parties that restrains, prevents or imposes materially adverse conditions upon the Transaction. (c) The Borrower shall have paid all accrued fees and expenses of the Agents. (d) Each of the Term B Lenders and, to the extent that the Term B Lenders do not comprise the Required Lenders under the terms of the Credit Agreement, such Term A Lenders and Revolving Credit Lenders as are required to comprise, together with the Term B Lenders, the Required Lenders, shall have executed the Consent to the amendments to the Existing Credit Agreement. 46
Slide 129: SECTION 3.02. Conditions Precedent to Each Borrowing and Issuance and Renewal. The obligation of each Appropriate Lender to make an Advance (other than a Letter of Credit Advance made by the Issuing Bank or a Revolving Credit Lender pursuant to Section 2.03(b) and a Swing Line Advance made by a Revolving Credit Lender pursuant to Section 2.02(b)) on the occasion of each Borrowing excluding any conversion of Advances pursuant to Section 2.09 as provided therein), and the obligation of the Issuing Bank to issue a Letter of Credit (including the initial issuance but excluding any Existing Letters of Credit) or renew a Letter of Credit and the right of the Borrower to request a Swing Line Borrowing, shall be subject to the further conditions precedent that on the date of such Borrowing or issuance or renewal (a) the following statements shall be true and the Administrative Agent shall have received for the account of such Lender or the Issuing Bank a certificate signed by a duly authorized officer of the Borrower, dated the date of such Borrowing or issuance or renewal, stating that (and each of the giving of the applicable Notice of Borrowing, Notice of Swing Line Borrowing, Notice of Issuance or Notice of Renewal and the acceptance by the Borrower of the proceeds of such Borrowing or of such Letter of Credit or the renewal of such Letter of Credit shall constitute a representation and warranty by the Borrower that both on the date of such notice and on the date of such Borrowing or issuance or renewal such statements are true): (i) the representations and warranties contained in each Loan Document are correct on and as of such date, before and after giving effect to such Borrowing or issuance or renewal and to the application of the proceeds therefrom, as though made on and as of such date except (A) for any such representations or warranties that, by their terms, refer to a specific date other than the date of such Borrowing or issuance or renewal, in which case as of such specific date and (B) if any Required Financial Information has been delivered to the Administrative Agent and the Lender Parties on or prior to the date of such Borrowing or issuance or renewal, that the Consolidated financial statements of the Borrower and its Subsidiaries referred to in Section 4.01(g)(i) shall be deemed at any time and from time to time after the Closing Date to refer to the Consolidated financial statements of the Borrower and its Subsidiaries comprising part of the Required Financial Information most recently delivered to the Administrative Agent and the Lender Parties pursuant to Sections 5.03(b) and 5.03(c) (except that in the case of financial statements delivered pursuant to Section 5.03(c), such financial statements may not contain all notes and may be subject to year end audit adjustments), respectively, on or prior to the date of such Borrowing, issuance or renewal; and (ii) no Default has occurred and is continuing, or would result from such Borrowing or issuance or renewal or from the application of the proceeds therefrom; and (b) the Administrative Agent shall have received such other approvals, opinions or documents as any Appropriate Lender through the Administrative Agent may reasonably request. SECTION 3.03. Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Lender Party shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender Parties unless an officer of the Administrative Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Lender Party, specifying its objection thereto. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) Each Loan Party and each of its Subsidiaries (i) is duly organized, validly existing and in good standing (if such concept is applicable) under the laws of the jurisdiction of its organization, (ii) is duly 47
Slide 130: qualified and in good standing as a foreign business enterprise (if such concept is applicable) in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to be so qualified or licensed would not result in a Material Adverse Effect and (iii) has all requisite power and authority (including, without limitation, all material Governmental Authorizations) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted. (b) Set forth on Schedule 4.01(b) hereto is a complete and accurate list of all Subsidiaries of the Borrower, showing as of the date hereof (as to each such Subsidiary) the jurisdiction of its organization, the number of shares or other units of each class of its Equity Interests authorized, and the number outstanding, on the date hereof and the percentage of each such class of its Equity Interests owned (directly or indirectly) by the Borrower or any Subsidiary thereof and the number of shares or other units covered by all outstanding options, warrants, rights of conversion or purchase and similar rights at the date hereof, except for any obligations or rights of the Borrower or any of its Subsidiaries to acquire any minority interest in any Subsidiary of the Borrower that is a partnership or a limited liability company. All of the outstanding Equity Interests in each such Subsidiary have (A) (in the case of Subsidiaries that are corporations) been validly issued, are fully paid and non-assessable and are (B) to the extent owned by the Borrower or one or more of its Subsidiaries, free and clear of all Liens, except those created under the Collateral Documents or Permitted Liens. (c) The execution, delivery and performance by each Loan Party of each Loan Document to which it is or is to be a party, and the consummation of the Transaction, are within such Loan Party’s corporate, partnership or limited liability company powers, as applicable, have been duly authorized by all necessary corporate, partnership or limited liability company action, as applicable, and do not (i) contravene such Loan Party’s Constitutive Documents, (ii) violate any Requirements of Law, (iii) conflict with or result in the breach of, or constitute a default or require any payment to be made under, any material contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party or any of its properties or (iv) except for the Liens created under the Loan Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Loan Party. No Loan Party is in violation of any such Requirements of Law or in breach of any such contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument, the violation or breach of which would be reasonably likely to have a Material Adverse Effect. (d) No Governmental Authorization, and no other authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or any other third party is required for (i) the due execution, delivery, recordation, filing or performance by any Loan Party of any Loan Document to which it is or is to be a party, or for the consummation of the Transaction, (ii) the grant by any Loan Party of the Liens granted by it pursuant to the Collateral Documents, (iii) the perfection or maintenance of the Liens created under the Collateral Documents on such of the Collateral located in the United States in which a Lien may be perfected by the filing of financing statements, the recordation of security agreements with the U.S. Patent and Trademark Office or the U.S. Copyright Office or the delivery of Collateral (including the first priority nature thereof) or (iv) the exercise by any Agent or any Lender Party of its rights under the Loan Documents or the remedies in respect of the Collateral pursuant to the Collateral Documents, except for (A) the authorizations, approvals, filings and actions on Schedule 4.01(d) hereto, all of which have been duly obtained and are in full force and effect or will be obtained and in full force and effect prior to the Closing Date, (B) filings, notices, recordings and other similar actions necessary for the creation or perfection of the Liens and security interests contemplated by the Loan Documents and (C) the actions required by laws generally with respect to the exercise by secured creditors of their rights and remedies. All applicable waiting periods in connection with the Transaction have expired without any action having been taken by any competent authority restraining, preventing or imposing materially adverse conditions upon the Transaction or the rights of the Loan Parties or their Subsidiaries freely to transfer or otherwise dispose of, or to create any Lien on, any properties now owned or hereafter acquired by any of them. 48
Slide 131: (e) This Agreement has been, and each other Loan Document when delivered hereunder will have been, duly executed and delivered by each Loan Party thereto. This Agreement is, and each other Loan Document when delivered hereunder will be, the legal, valid and binding obligation of each Loan Party thereto, enforceable against such Loan Party in accordance with its terms. (f) There is no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries, including any Environmental Action, pending or, to the knowledge of the Borrower, threatened before any Governmental Authority or arbitrator that (i) could be reasonably likely to have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of any Loan Document or the consummation of the Transaction, except as described on Schedule 4.01(f) hereto or disclosed prior to the Closing Date in the Borrower’s filings made with the Securities and Exchange Commission. (g) (i) The Consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 2002, and the related Consolidated statement of income and Consolidated statement of cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, accompanied by an unqualified opinion of KPMG LLP, independent public accountants, copies of which have been furnished to each Lender Party, fairly present the Consolidated financial condition of the Borrower and its Subsidiaries as at such date and the Consolidated results of operations of the Borrower and its Subsidiaries for the period ended on such date, all in accordance with generally accepted accounting principles applied on a consistent basis, and (ii) since December 31, 2002, there has been no Material Adverse Change. (h) The Consolidated forecasted balance sheet, statement of income and statement of cash flows of the Borrower and its Subsidiaries delivered to the Lender Parties pursuant to Section 3.01(a)(vi) or Section 5.03 were prepared in good faith on the basis of the assumptions stated therein, which assumptions were believed to be reasonable in light of the conditions existing at the time of delivery of such forecasts, and represented, at the time of delivery, the Borrower’s best estimate of its future financial performance. (i) Neither the Information Memorandum nor any other information, exhibit or report furnished by any Loan Party to any Agent or any Lender Party in connection with the negotiation and syndication of the Loan Documents or pursuant to the terms of the Loan Documents contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein not misleading. (j) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and no proceeds of any Advance or drawings under any Letter of Credit will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, except for the purchase by the Borrower of its common stock as contemplated in Sections 5.02(g)(v) and (vi). (k) Neither any Loan Party nor any of its Subsidiaries is an “investment company”, or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company”, as such terms are defined in the Investment Company Act of 1940, as amended. Neither any Loan Party nor any of its Subsidiaries is a “holding company”, or a “subsidiary company” of a “holding company”, or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company”, as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. Neither the making of any Advances, nor the issuance of any Letters of Credit, nor the application of the proceeds or repayment thereof by the Borrower, nor the consummation of the other transactions contemplated by the Loan Documents and Related Documents, will violate any provision of any such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder. (l) Upon making of the filings and taking of the other actions necessary to create, perfect and protect the security interest in the Collateral created under the Collateral Documents, the Collateral Documents create in favor of the Administrative Agent for the benefit of the Secured Parties a valid and, together with such filings and other actions, perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations, subject to Permitted Liens. The Loan Parties are the legal and beneficial owners of the Collateral free and clear of any Lien, except for the liens and security interests created or permitted under the Loan Documents. 49
Slide 132: (m) Each Loan Party is, individually and together with its Subsidiaries, Solvent. (n) (i) No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan that has resulted in or is reasonably expected to result in a material liability of any Loan Party or any ERISA Affiliate. (ii) Schedule B (Actuarial Information) to the most recent annual report (Form 5500 Series) for each Plan, copies of which have been filed with the Internal Revenue Service and furnished to the Lender Parties, is complete and accurate and fairly presents the funding status of such Plan, and since the date of such Schedule B there has been no material adverse change in such funding status. (iii) Neither any Loan Party nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability exceeding $100,000 to any Multiemployer Plan. (iv) Neither any Loan Party nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA. (o) Except as described on Schedule 4.01(o) hereto: (i) The operations and properties of each Loan Party comply in all material respects with all applicable Environmental Laws and Environmental Permits, except where any such failure to comply would not be reasonably expected to have a Material Adverse Effect, all past non-compliance with such Environmental Laws and Environmental Permits has been resolved without ongoing obligations or costs, except where any such failure to comply would not be reasonably expected to have a Material Adverse Effect and, to Borrower’s knowledge, no circumstances exist that could be reasonably likely to (A) form the basis of an Environmental Action against any Loan Party or any of their properties that could have a Material Adverse Effect or (B) cause any such property to be subject to any restrictions on ownership, occupancy, use or transferability under any Environmental Law. (ii) None of the properties currently or, to Borrower’s knowledge, formerly owned or operated by any Loan Party is listed or proposed for listing on the NPL or on the CERCLIS or any analogous foreign, state or local list or, to Borrower’s knowledge, is adjacent to any such property; and except to the extent that any of the following would not have a Material Adverse Effect, (A) there are no and, to Borrower’s knowledge, never have been any underground or aboveground storage tanks or any surface impoundments, septic tanks, pits, sumps or lagoons in which Hazardous Materials are being or have been treated, stored or disposed on any property currently owned or operated by any Loan Party or, to its knowledge, on any property formerly owned or operated by any Loan Party, (B) there is no asbestos or asbestos-containing material on any property currently owned or operated by any Loan Party, and (C) Hazardous Materials have not been released, discharged or disposed of on any property currently or, to Borrower’s knowledge, formerly owned or operated by any Loan Party except in compliance with Environmental Laws. (iii) No Loan Party is undertaking, and has not completed, either individually or together with other potentially responsible parties, any investigation or assessment or remedial or response action relating to any actual or threatened release, discharge or disposal of Hazardous Materials at any site, location or operation, either voluntarily or pursuant to the order of any Governmental Authority or the requirements of any Environmental Law; and all Hazardous Materials generated, used, treated, handled or stored at, or transported to or from, any property currently or formerly owned or operated by any Loan Party have been disposed of in a manner not reasonably expected to result in liability to any Loan Party that, individually or in the aggregate, would have a Material Adverse Effect. (p) Each Loan Party and each of its Affiliates has filed, has caused to be filed or has been included in all tax returns (Federal, state, local and foreign) required to be filed and has paid all taxes shown thereon to be due, together with applicable interest and penalties. Set forth on Schedule 4.01(p) hereto is a complete and accurate list, as of the date hereof, of each Open Year of each Loan Party and each of its Affiliates. The aggregate unpaid amount, as of the date hereof, of adjustments to the Federal income tax liability of each 50
Slide 133: Loan Party and each of its Affiliates proposed by the Internal Revenue Service with respect to Open Years does not exceed $62,500,000. No issues have been raised by the Internal Revenue Service in respect of Open Years that, in the aggregate, could be reasonably likely to have a Material Adverse Effect. (q) Set forth on Schedule 4.01(q) hereto is a complete and accurate list of all Liens (other than Permitted Liens) on the property or assets of any Loan Party, showing as of the date hereof the lienholder thereof, the principal amount of the obligations secured thereby and the property or assets of such Loan Party subject thereto. (r) Set forth on Schedule 4.01(r) hereto is a complete and accurate list of all Investments held by any Loan Party on the date hereof, showing the amount, obligor or issuer and maturity, if any, thereof. (s) Except as set forth on Schedule 4.01(s), the dialysis facilities operated by each of the Borrower and its Subsidiaries (the “Dialysis Facilities”) are qualified for participation in the Medicare programs and the Medicaid programs in which they participate (together with their respective intermediaries or carriers, the “Government Reimbursement Programs”) and are entitled to reimbursement under the Medicare program for services rendered to qualified Medicare beneficiaries, and comply in all material respects with the conditions of participation in all Government Reimbursement Programs in which they participate or have participated. Except as set forth on Schedule 4.01(s), there is no pending or, to Borrower’s knowledge, threatened proceeding or investigation by any of the Government Reimbursement Programs with respect to (i) the Borrower’s or any of its Subsidiaries’ qualification or right to participate in any Government Reimbursement Program in which they participate or have participated, (ii) the compliance or noncompliance by the Borrower or any of its Subsidiaries with the terms or provisions of any Government Reimbursement Program in which they participate or have participated, or (iii) the right of the Borrower or any of its Subsidiaries to receive or retain amounts received or due or to become due from any Government Reimbursement Program in which they participate or have participated, which proceeding or investigation, together with all other such proceedings and investigations, could reasonably be expected to (x) have a Material Adverse Effect or (y) result in Consolidated net operating revenues for any (including any future) four fiscal quarter period of the Borrower constituting less than 95% of Consolidated net operating revenues for the immediately preceding four fiscal quarter period of the Borrower. (t) Neither the Borrower nor any of its Subsidiaries, nor any of their respective officers or directors has, on behalf of the Borrower or any of its Subsidiaries, knowingly or willfully violated the federal Medicare and Medicaid statutes, 42 U.S.C. § 1320a-7b, or the regulations promulgated pursuant to such statutes or related state or local statutes or regulations, including but not limited to the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any applications for any benefit or payment; (ii) knowingly and willfully making or causing to be made any false statement or representation of a material fact for use in determining rights to any benefit or payment; (iii) failing to disclose knowledge by a claimant of the occurrence of any event affecting the initial or continued right to any benefit or payment on its own behalf or on behalf of another, with intent to secure such benefit or payment fraudulently; (iv) knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind or offering to pay such remuneration (a) in return for referring an individual to a Person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part by Medicare, Medicaid or other applicable government payers, or (b) in return for purchasing, leasing or ordering or arranging for or recommending the purchasing, leasing or ordering of any good, facility, service or item for which payment may be made in whole or in part by Medicare, Medicaid or other applicable government payers. With respect to this Section, knowledge of an individual director or officer of the Borrower or a Subsidiary of any of the events described in this Section shall not be imputed to the Borrower or such Subsidiary unless such knowledge was obtained or learned by the director or officer in his or her official capacity as a director or officer of the Borrower or such Subsidiary. (u) The subordination provisions of (i) the Subordinated Notes Documents, (ii) the Subordinated Notes, (iii) any Subordinated Debt now existing or hereafter incurred or assumed by any Loan Party and (iv) any guarantee by any Loan Party of any Subordinated Debt will be enforceable against the holders thereof, and 51
Slide 134: the Advances and all other monetary obligations hereunder and all monetary obligations under the Subsidiary Guarantee will constitute “Senior Indebtedness” and “Designated Senior Indebtedness” (or any comparable terms) as defined in such provisions. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender Party shall have any Commitment hereunder, the Borrower will: (a) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, in all material respects, with all applicable Requirements of Law, such compliance to include, without limitation, compliance with ERISA and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970, except to the extent that non-compliance could not be reasonably expected to result in a Material Adverse Effect. (b) Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property and (ii) all lawful claims that, if unpaid, might by law become a Lien upon its property; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim (A) the non-payment or non-discharge of which could not be reasonably expected to result in a Material Adverse Effect or (B) that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained, unless and until any Lien resulting therefrom attaches to its property and becomes enforceable against its other creditors and subjects the property to a substantial risk of forfeiture. (c) Compliance with Environmental Laws. Comply, and cause each of its Subsidiaries and all lessees and other Persons operating or occupying its properties to comply, in all material respects, with all applicable Environmental Laws and Environmental Permits; obtain and renew and cause each of its Subsidiaries to obtain and renew all Environmental Permits necessary for its operations and properties; and conduct, and cause each of its Subsidiaries to conduct, any investigation, study, sampling and testing, and undertake any cleanup, removal, remedial or other action necessary to remove and clean up all Hazardous Materials from any of its properties, in accordance with the requirements of all Environmental Laws; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to undertake any such cleanup, removal, remedial or other action to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances. (d) Maintenance of Insurance. Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates. (e) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its existence, legal structure, legal name, rights (charter and statutory) and material franchises; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to preserve any right, privilege or franchise if the Board of Directors of the Borrower or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Borrower, such Subsidiary or the Lender Parties and any Subsidiary may merge with or into or be liquidated into another Subsidiary or the Borrower as permitted under Section 5.02(d). 52
Slide 135: (f) Visitation Rights. At any reasonable time and from time to time, and, unless a Default or an Event of Default shall have occurred and be continuing, upon reasonable notice, permit any of the Agents or any of the Lender Parties, or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their officers or directors and with their independent certified public accountants (provided that representatives of the Borrower shall be entitled to notice of and to participate in any such discussion). (g) Keeping of Books. Keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and each such Subsidiary using sound business practices sufficient to permit the preparation of financial statements based thereon in accordance with generally accepted accounting principles in effect from time to time. (h) Maintenance of Properties, Etc. Maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (i) Transactions with Affiliates. Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under the Loan Documents with any of their Affiliates on terms that are fair and reasonable and no less favorable to the Borrower or such Subsidiary than it would obtain in a comparable arm’s-length transaction with a Person not an Affiliate. (j) Covenant to Guarantee Obligations and Give Security. Upon (x) the formation or acquisition of any new direct or indirect Subsidiaries by any Loan Party or (y) the acquisition of any personal property or real property fee interests (other than any real property fee interest on which the only business conducted by the Borrower or any of its Subsidiaries is the operation of a Dialysis Facility and services related or incidental thereto) by any Loan Party, which, in the judgment of the Administrative Agent, shall not already be subject to a perfected first priority security interest in favor of the Administrative Agent for the benefit of the Secured Parties, then the Borrower shall, in each case at the Borrower’s expense: (i) in connection with the formation or acquisition of a wholly-owned Domestic Subsidiary, not later than 15 Business Days following the last day of the Fiscal Quarter in which such formation or acquisition occurs, cause each such Domestic Subsidiary, and cause each direct and indirect parent of such Domestic Subsidiary (if it has not already done so), to duly execute and deliver to the Administrative Agent a guarantee or guarantee supplement, in form and substance satisfactory to the Administrative Agent, guaranteeing the other Loan Parties’ obligations under the Loan Documents, and, in connection with the formation or acquisition of a Foreign Subsidiary, not later than 15 Business Days following the last day of the Fiscal Quarter in which such formation or acquisition occurs, pledge or, cause its respective Subsidiary to pledge, to the Administrative Agent for the benefit of the Secured Parties 65% of the Equity Interests in such Foreign Subsidiary, (ii) not later than 15 Business Days following the last day of the Fiscal Quarter in which such formation or acquisition occurs, furnish to the Administrative Agent a description of (A) the material personal properties and such real property fee interests of such wholly-owned Domestic Subsidiary and (B) such property which was not previously subject to such perfected security interest, in each case in detail satisfactory to the Administrative Agent, (iii) not later than 15 Business Days following the last day of the Fiscal Quarter in which such formation or acquisition occurs, duly execute and deliver, and cause each such wholly-owned Domestic Subsidiary and each direct and indirect parent of such wholly-owned Domestic Subsidiary (if it has not already done so) to duly execute and deliver, to the Administrative Agent pledges, assignments, mortgages, deeds of trust, security agreements and security agreement supplements, as specified by and in form and substance satisfactory to the Administrative Agent, with respect to the Equity Interests in and assets of such wholly-owned Domestic Subsidiary and such personal property and such real property fee interests, 53
Slide 136: (iv) not later than 15 Business Days following the last day of the Fiscal Quarter in which such formation or acquisition occurs, take, and cause such wholly-owned Subsidiary or such parent to take, whatever action (including, without limitation, the filing of Uniform Commercial Code financing statements, the filing of mortgages or deeds of trust, the giving of notices and the endorsement of notices on title documents) may be necessary or advisable in the opinion of the Administrative Agent to vest in the Administrative Agent (or in any representative of the Administrative Agent designated by it) valid and subsisting Liens on the properties purported to be subject to the pledges, assignments, mortgages, deeds of trust, security agreements and security agreement supplements delivered pursuant to this Section 5.01(j), enforceable against all third parties in accordance with their terms, (v) not later than 45 days following the last day of the Fiscal Quarter in which such formation or acquisition occurs, deliver to the Administrative Agent, upon the request of the Administrative Agent in its sole discretion, a signed copy of a favorable opinion (subject to customary qualifications, limitations and exceptions), addressed to the Administrative Agent and the other Secured Parties, of counsel for the Loan Parties acceptable to the Administrative Agent as to the matters contained in clauses (i), (iii) and (iv) above, as to such guarantees, guarantee supplements, pledges, assignments, mortgages, deeds of trust, security agreements and security agreement supplements being legal, valid and binding obligations of the respective Loan Party thereto enforceable in accordance with their terms, as to the matters contained in clause (iv) above, as to such recordings, filings, notices, endorsements and other actions being sufficient to create valid perfected Liens on such properties, and as to such other matters as the Administrative Agent may reasonably request, and (vi) at any time and from time to time, promptly execute and deliver any and all further instruments and documents and take all such other action as the Administrative Agent may deem necessary or desirable in obtaining the full benefits of, or in perfecting and preserving the Liens of, such guaranties, pledges, assignments, mortgages, deeds of trust, security agreements and security agreement supplements. (k) Further Assurances. (i) Promptly upon request by any Agent, or any Lender Party through the Administrative Agent, correct, and cause each of its Subsidiaries promptly to correct, any material defect or error that may be discovered in any Loan Document or in the execution, acknowledgment, filing or recordation thereof; and (ii) Promptly upon request by any Agent, or any Lender Party through the Administrative Agent, do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register any and all such further acts, pledge agreements, assignments, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments as any Agent, or any Lender Party through the Administrative Agent, may reasonably require from time to time in order to (A) carry out more effectively the purposes of the Loan Documents, (B) to the fullest extent permitted by applicable law, subject any Loan Party’s properties, assets, rights or interests to the Liens now or hereafter intended to be covered by any of the Collateral Documents, (C) perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and any of the Liens intended to be created thereunder and (D) assure, convey, grant, assign, transfer, preserve, protect and confirm more effectively unto the Secured Parties the rights granted or now or hereafter intended to be granted to the Secured Parties under any Loan Document or under any other instrument executed in connection with any Loan Document to which any Loan Party is or is to be a party, and cause each of its Subsidiaries to do so. SECTION 5.02. Negative Covenants. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender Party shall have any Commitment hereunder, the Borrower will not, at any time: (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on or with respect to any of its properties of any character whether now 54
Slide 137: owned or hereafter acquired, or sign or file or suffer to exist, or permit any of its Subsidiaries to sign or file or suffer to exist, under the Uniform Commercial Code of any jurisdiction, a financing statement that names the Borrower or any of its Subsidiaries as debtor, or sign or suffer to exist, or permit any of its Subsidiaries to sign or suffer to exist, any security agreement authorizing any secured party thereunder to file such financing statement, or assign, or permit any of its Subsidiaries to assign, any accounts or other right to receive income, except: (i) Liens created under the Loan Documents; (ii) Permitted Liens; (iii) Liens existing on the Closing Date and described on Schedule 4.01(q) hereto; (iv) Liens upon or in real property or equipment acquired or held by the Borrower or any of its Subsidiaries in the ordinary course of business to secure the purchase price of such property or equipment or to secure Debt incurred solely for the purpose of financing the acquisition, construction or improvement of any such property or equipment to be subject to such Liens, or Liens existing on any such property or equipment at the time of acquisition (other than any such Liens created in contemplation of such acquisition that do not secure the purchase price), or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount; provided, however, that (a) such Liens shall be created not more than 180 days after the date of acquisition or completion of construction or improvement and (b) no such Lien shall extend to or cover any property other than the property or equipment being acquired, constructed or improved and any attachments thereto and proceeds thereof, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced; and provided further that the aggregate principal amount of the Debt secured by Liens permitted by this clause (iv) shall not exceed the amount permitted under Section 5.02(b)(v) at any time outstanding; (v) Liens arising in connection with Capitalized Leases permitted under Section 5.02(b)(vi); provided that no such Lien shall extend to or cover any Collateral or assets other than the assets subject to such Capitalized Leases; and (vi) the replacement, extension or renewal of any Lien permitted by clause (iii) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Debt secured thereby. (b) Debt. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Debt, except: (i) Debt under the Loan Documents; (ii) Debt existing on the Closing Date and described on Schedule 5.02(b) hereto; (iii) Debt of the Borrower in respect of Hedge Agreements (A) existing on the date of this Agreement and described in Schedule 5.02(b) hereto or (B) entered into from time to time after the date of this Agreement with counter parties that are Lender Parties at the time such Hedge Agreement is entered into (or Affiliates of such Lender Party at such time); and which counter party is then a party to the Intercreditor Agreement; provided that, in all cases under this clause (iii), all such Hedge Agreements shall not be speculative in nature (including, without limitation, with respect to the term and purpose thereof); (iv) Debt of (A) the Borrower owing to any other Loan Party, and (B) any of the Subsidiaries owing to the Borrower or any other Loan Party to the extent permitted under Section 5.02(f)(viii); (v) Debt incurred after the date of this Agreement and secured by Liens expressly permitted under Section 5.02(a)(iv) in an aggregate principal amount not to exceed, when aggregated with the principal amount of all Debt incurred under clause (vi) of this Section 5.02(b), $50,000,000 any time outstanding; 55
Slide 138: (vi) Capitalized Leases incurred after the date of this Agreement which, when aggregated with the principal amount of all Debt incurred under clause (v) of this Section 5.02(b), do not exceed $50,000,000 at any time outstanding; (vii) Contingent Obligations of (A) the Borrower guaranteeing all or any portion of the outstanding Obligations of any of the Subsidiaries and (B) any Subsidiary of the Borrower guaranteeing any Obligations of the Borrower or another Subsidiary thereof; provided that each such primary Obligation is otherwise permitted under the terms of the Loan Documents; (viii) Unsecured Debt not otherwise permitted under this Section 5.02(b) in an aggregate amount not to exceed $50,000,000 at any time outstanding; (ix) Endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (x) Debt comprised of indemnities given by the Borrower or any of its Subsidiaries, or guarantees or other similar undertakings by the Borrower or any of its Subsidiaries entered into in lieu thereof, in favor of the purchaser of property and assets of the Borrower and its Subsidiaries being sold, leased, transferred or otherwise disposed of in accordance with this Agreement and covering liabilities incurred by the Borrower or its applicable Subsidiary in respect of such property and assets prior to the date of consummation of the sale, lease, transfer or other disposition thereof, which indemnities, guarantees or undertakings are required under the terms of the documentation for such sale, lease, transfer or other disposition; (xi) Debt comprised of liabilities or other Obligations assumed or retained by the Borrower or any of its Subsidiaries from Subsidiaries of the Borrower that are, or all or substantially all of the property and assets of which are, sold, leased, transferred or otherwise disposed of pursuant to Section 5.02(e)(iii) or (vi); provided that such liabilities or other Obligations were not created or incurred in contemplation of the related sale, lease, transfer or other disposition; (xii) Unsecured Subordinated Debt or Redeemable Preferred Interests not otherwise permitted under this Section 5.02(b), provided that the aggregate amount of the outstanding principal amount of such unsecured Subordinated Debt and the maximum amount of the purchase price, redemption price or liquidation value (whichever is greater) of such Redeemable Preferred Interests does not exceed $400,000,000 at any time; provided further that the Net Cash Proceeds thereof are applied to prepay the Advances to the extent provided in Section 2.06(b); (xiii) Debt extending the maturity of, or refunding, refinancing or replacing, in whole or in part, any Debt incurred under clause (ii) of this Section 5.02(b); provided, however, that (A) the aggregate principal amount of such extended, refunding, refinancing or replacement Debt shall not be increased above the principal amount thereof and the premium, if any, thereon outstanding immediately prior to such extension, refunding, refinancing or replacement, (B) the direct and contingent obligors therefor shall not be changed as a result of or in connection with such extension, refunding, refinancing or replacement, (C) such extended, refunding, refinancing or replacement Debt shall not mature prior to the stated maturity date or mandatory redemption date of the Debt being so extended, refunded, refinanced or replaced, and (D) if the Debt being so extended, refunded, refinanced or replaced is subordinated in right of payment or otherwise to the Obligations of the Borrower or any of its Subsidiaries under and in respect of the Loan Documents, such extended, refunding, refinancing or replacement Debt shall be subordinated to such Obligations to at least the same extent; and (xiv) Debt comprised of guarantees given by the Borrower or any of its Subsidiaries in respect of any Special Purpose Licensed Entity which obligations, when aggregated with the aggregate amount of all Investments made under Section 5.02(f)(ix) hereof, shall not exceed $30,000,000 at any time. (c) Change in Nature of Business. Engage or permit any of its Subsidiaries to engage in any business other than the businesses carried on at the date hereof and any businesses incidental or related thereto. 56
Slide 139: (d) Mergers, Etc. Merge into or consolidate with any Person or permit any Person to merge into it, or permit any of its Subsidiaries to do so, except that: (i) any of the Subsidiaries may merge into or consolidate with the Borrower, provided that the Borrower is the surviving corporation; (ii) any Subsidiary of the Borrower may merge into or consolidate with any other Subsidiary of the Borrower, provided that, in the case of any such merger or consolidation involving a wholly-owned Subsidiary, the Person formed by or surviving such merger or consolidation shall be a wholly-owned Subsidiary of the Borrower, provided further that, in the case of any such merger or consolidation to which a Subsidiary Guarantor is a party, the Person formed by such merger or consolidation shall be a Subsidiary Guarantor; (iii) in connection with any purchase or other acquisition of Equity Interests in, or property and assets of, any Person permitted under Section 5.02(f)(v), the Borrower may permit any other Person to merge into or consolidate with it (provided that the Borrower is the surviving entity), and any of the Subsidiaries of the Borrower may merge into or consolidate with any other Person or permit any other Person to merge into or consolidate with it; provided that the Person with which such Subsidiary is merging or consolidating (1) shall be engaged in substantially the same lines of business as one or more of the businesses of the Borrower and the Subsidiaries or in an incidental or related business and (2) shall not have any contingent liabilities that could reasonably be expected to be material and adverse to the Borrower and its Subsidiaries, taken as a whole (as determined in good faith by the board of directors (or persons performing similar functions) of the Borrower or such Subsidiary if the board of directors is otherwise approving such transaction, and in each other case, by a Responsible Officer), and (3) in the case of any wholly-owned Domestic Subsidiary, such Person shall take all actions required under Section 5.01(j); and (iv) in connection with any sale, transfer or other disposition of all or substantially all of the Equity Interests in, or the property and assets of, any Person permitted under Section 5.02(e)(vi), any of the Subsidiaries of the Borrower may merge into or consolidate with any other Person or permit any other Person to merge into or consolidate with it; and provided, however, that in each case, immediately after giving effect thereto, no event shall occur and be continuing that constitutes a Default. (e) Sales, Etc., of Assets. Sell, lease, transfer or otherwise dispose of, or permit any of its Subsidiaries to sell, lease, transfer or otherwise dispose of, any assets, or grant any option or other right to purchase, lease or otherwise acquire any assets, except: (i) the Borrower and its Subsidiaries may sell inventory in the ordinary course of business; (ii) (A) the Borrower may sell, lease, transfer or otherwise dispose of any of its property or assets to any of the Subsidiaries, and (B) any of the Subsidiaries may sell, lease, transfer or otherwise dispose of any of its property or assets to the Borrower or any of the other Subsidiaries; provided that, in each case, no such sale, lease, transfer or other disposition to non-wholly-owned Subsidiaries shall be made unless, after giving pro forma effect thereto, the Borrower and its Subsidiaries would be in compliance with Section 5.02(l) and Section 5.04(d); (iii) any Subsidiary of the Borrower that is no longer actively engaged in any business or activities and does not have property and assets with an aggregate book value in excess of $1,000,000 may be wound up, liquidated or dissolved so long as such winding up, liquidation or dissolution is determined in good faith by management of the Borrower to be in the best interests of the Borrower and its Subsidiaries; (iv) the Borrower and its Subsidiaries may sell, lease, transfer or otherwise dispose of any obsolete, damaged or worn out equipment thereof or any other equipment that is otherwise no longer useful in the conduct of their businesses; 57
Slide 140: (v) the Borrower and its Subsidiaries may lease or sublease real property to the extent required for their respective businesses and operations in the ordinary course so long as such lease or sublease is not otherwise prohibited under the terms of the Loan Documents; (vi) the Borrower and its Subsidiaries may sell, lease, transfer or otherwise dispose of property and assets not otherwise permitted to be sold, leased, transferred or disposed of pursuant to this Section 5.02(e) so long as the aggregate book value of all of the property and assets of the Borrower and its Subsidiaries sold, leased, transferred or otherwise disposed of pursuant to this clause (vi) does not exceed $300,000,000 in the aggregate during the term of this Agreement; provided that: (A) the gross proceeds received from any such sale, lease, transfer or other disposition shall be at least equal to the fair market value of the property and assets so sold, leased, transferred or otherwise disposed of, determined at the time of such sale, lease, transfer or other disposition; (B) at least 75% of the value of the aggregate consideration received from any such sale, lease, transfer or other disposition shall be in cash, provided, that up to one-third of such 75% may consist of notes or other obligations received by the Borrower or such Subsidiary that are due and payable or otherwise converted by the Borrower or such Subsidiary into cash within 365 days of receipt, which cash (to the extent received) shall constitute Net Cash Proceeds attributable to the original transaction; and provided further that any Debt of the Borrower or any of its Subsidiaries (as shown on the Borrower’s or such Subsidiary’s most recent balance sheet) that is assumed by the transferee of any such assets shall constitute cash for purposes of this Section 5.02(e)(vi), so long as the Borrower and all of its Subsidiaries are fully and unconditionally released therefrom; (C) immediately before and immediately after giving pro forma effect to any such sale, lease, transfer or other disposition, no Default shall have occurred and be continuing; (D) within fifteen Business Days after each disposition under this subsection, the Borrower shall deliver to the Administrative Agent, on behalf of the Lender Parties, a certificate identifying the property disposed of and stating (a) that immediately before and after giving effect thereto, no Default or Event or Default existed, (b) that the consideration received or to be received by the Borrower or such Subsidiary for such property has been determined by the Borrower or the applicable Subsidiary to be not less than the fair market value of such property and (c) the total consideration to be paid in respect of such disposition and (d) the Net Cash Proceeds resulting from such disposition; and (E) if and to the extent that the Net Cash Proceeds of any transaction effected pursuant to this Section 5.02(e)(vi) shall not have been reinvested in assets or property of the Borrower or any of its Subsidiaries with respect to any transaction completed (1) on or prior to December 31, 2002, by December 27, 2003 and (2) thereafter, within 360 days after the date of receipt thereof, then such uninvested Net Cash Proceeds shall be applied on the first Business Day following December 27, 2003 or the applicable 360-day period, as the case may be, to prepay Advances in accordance with Section 2.06(b); and (vii) the Borrower and its Subsidiaries may exchange assets and properties with another Person; provided that: (A) the assets or properties received by the Borrower or its Subsidiaries shall be used in the business of the Borrower or such Subsidiary as conducted immediately prior to such transaction, or in an incidental or related business; (B) the total consideration received by the Borrower or such Subsidiary for such assets or property shall have been determined by the Borrower or such Subsidiary to be not less than the fair market value of the assets or property exchanged; (C) immediately before and immediately after giving pro forma effect to any such exchange, no Default shall have occurred and be continuing; 58
Slide 141: (D) any cash received by the Borrower or any such Subsidiary in connection with such exchange shall be treated as Net Cash Proceeds subject to Section 2.06(b) and any cash paid by the Borrower or any Subsidiary in connection with such exchange shall be treated as an acquisition expenditure under Section 5.02(f)(v); and (E) within fifteen Business Days after each exchange under this Section 5.02(e)(vii), the Borrower shall deliver to the Administrative Agent, on behalf of the Lender Parties, a certificate identifying the assets or property disposed of and acquired in such exchange, and stating (a) that immediately before and after giving effect thereto, no Default or Event or Default existed, (b) that the total consideration received by the Borrower or such Subsidiary for such assets or property has been determined by the Borrower or such Subsidiary to be not less than the fair market value of the assets or property exchanged, and (c) the amount, if any, of the cash paid or Net Cash Proceeds received in connection with such exchange. (f) Investments in Other Persons. Make or hold, or permit any of its Subsidiaries to make or hold, any Investment in any Person, except: (i) Investments by the Borrower and its Subsidiaries in Cash Equivalents; (ii) Investments existing on the Closing Date and described on Schedule 4.01(r) hereto; (iii) Investments by the Borrower in Hedge Agreements permitted under Section 5.02(b) (iii); (iv) Investments in accounts and notes payable in the ordinary course of business, including notes received in transactions permitted under Section 5.02(e)(vi); (v) the purchase or other acquisition of (1) Equity Interests in any Domestic Person that, upon the consummation thereof, will be more than 50% owned by the Borrower or one or more of its wholly owned Subsidiaries (including, without limitation, as a result of a merger or consolidation) or (2) all or substantially all the property and assets of a Person or consisting of a line of business or business unit of a Person; provided that, with respect to each purchase or other acquisition made pursuant to this clause (v): (A) the lines of business of the Person to be (or the property and assets of which are to be) so purchased or otherwise acquired shall be substantially the same lines of business as one or more of the businesses of the Borrower and its Subsidiaries or a business that is incidental or related thereto; (B) such purchase or other acquisition shall not include or result in any contingent liabilities that could reasonably be expected to be material and adverse to the business, financial condition, operations or prospects of the Borrower and its Subsidiaries, taken as a whole (as determined in good faith by the board of directors (or the persons performing similar functions) of the Borrower or such Subsidiary if the board of directors is otherwise approving such transaction and, in each other case, by a Responsible Officer); (C) the total cash consideration (excluding all Equity Interests issued or transferred to the sellers thereof but including the aggregate amounts paid or to be paid under deferred purchase price, noncompete, consulting and other similar agreements with the sellers thereof and all assumptions of debt, liabilities and other obligations in connection therewith) paid by or on behalf of the Borrower and its Subsidiaries (1) for any such purchase or other acquisition (or any series of related purchases or acquisitions) shall not exceed $50,000,000 unless such purchase or acquisition has been approved by the Required Lenders, and (2) for all such purchases or acquisitions effected during the term of this Agreement (excluding those purchases and acquisitions subject to a letter of intent or definitive agreement entered into prior to the date hereof) shall not exceed $200,000,000; provided that such amount shall be increased to $400,000,000 at all times after the Leverage Ratio is less than or equal to 2.75:1.00; 59
Slide 142: (D) (1) immediately before and immediately after giving pro forma effect to any such purchase or other acquisition, no Default shall have occurred and be continuing and (2) immediately after giving effect to such purchase or other acquisition, the Borrower and its Subsidiaries shall be in pro forma compliance with all of the covenants set forth in Section 5.04, such compliance to be determined on the basis of the Required Financial Information most recently delivered to the Administrative Agent and the Lender Parties as though such purchase or other acquisition had been consummated as of the first day of the fiscal period covered thereby; and (E) the Borrower shall have delivered to the Administrative Agent, on behalf of the Lender Parties, at least three Business Days prior to the date on which any such purchase or other acquisition in which the total cash consideration is more than $30,000,000 is to be consummated, a certificate of a Responsible Officer, in form and substance reasonably satisfactory to the Administrative Agent, certifying that all of the requirements set forth in this clause (v) have been satisfied or will be satisfied on or prior to the consummation of such purchase or other acquisition; (vi) Investments by the Borrower or any Subsidiary in 50% or less of the Equity Interests in another Person (the “Minority Investment”), provided that (i) the Borrower or any Subsidiary owns at least 20% (on a fully diluted basis) of the issued and outstanding Equity Interests in such Person, (ii) the aggregate outstanding amount of Minority Investments made by the Borrower and any Subsidiary shall not exceed $60,000,000 at any one time, (iii) the Borrower or any Subsidiary shall have full control over all bank accounts of such Person if the Borrower or any Subsidiary is the largest holder of Equity Interests in such Person, (iv) the Borrower or any Subsidiary shall control or act as the managing general partner of such Person if such Person is a partnership and if the Borrower or any Subsidiary is the largest holder of Equity Interests in such Person, and (v) immediately before and after giving effect thereto, no Default or Event of Default shall exist; (vii) notes from employees issued to the Borrower representing payment for capital stock of the Borrower or representing payment of the exercise price of options to purchase capital stock of the Borrower, and employee relocation expenses incurred in the ordinary course of business, in an aggregate amount at any time outstanding not to exceed $10,000,000; (viii) Investments of the Borrower or any of its Subsidiaries in any Subsidiary of the Borrower; provided that no such Investments in non-wholly-owned Subsidiaries shall be made unless, after giving pro forma effect thereto, the Borrower and its Subsidiaries would be in compliance with Section 5.02(l) and Section 5.04(d); and (ix) Investments of the Borrower or any of its Subsidiaries in any Special Purpose Licensed Entity which, when aggregated with the aggregate amount of all obligations guaranteed under Section 5.02(b)(xiv) hereof, shall not exceed $30,000,000 at any time. (g) Restricted Payments. Declare or pay any dividends, purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Interests now or hereafter outstanding, return any capital to its stockholders, partners or members (or the equivalent Persons thereof) as such, make any distribution of assets, Equity Interests, obligations or securities to its stockholders, partners or members (or the equivalent Persons thereof) as such, or permit any of its Subsidiaries to do any of the foregoing, or permit any of its Subsidiaries to purchase, redeem, retire, defease or otherwise acquire for value any Equity Interests in the Borrower, except that, so long as no Default shall have occurred and be continuing at the time of any action described below or would result therefrom: (i) the Borrower may (A) declare and pay dividends and distributions payable in its common Equity Interests, (B) except to the extent the Net Cash Proceeds thereof are required to be applied to the prepayment of the Advances pursuant to Section 2.06(b), purchase, redeem, retire, defease or otherwise acquire Equity Interests with the proceeds received contemporaneously from the issue of new Equity Interests with equal or inferior voting powers, designations, preferences and rights, and (C) repurchase its Equity Interests owned by management or employees and physicians under contract with the Borrower or any of its Subsidiaries in an amount not in excess of $10,000,000 in any twelve month period; 60
Slide 143: (ii) any Subsidiary of the Borrower may (A) declare and pay cash dividends to the Borrower, and (B) declare and pay cash dividends to any other Loan Party of which it is a Subsidiary; (iii) any of the non-wholly owned Subsidiaries of the Borrower may declare and pay or make dividends and other distributions to its shareholders, partners or members (or the equivalent persons thereof) generally so long as the Borrower and each of the Subsidiaries that own any of the Equity Interests therein receive at least their respective proportionate shares of any such dividend or distribution (based upon their relative holdings of the Equity Interests therein and taking into account the relative preferences, if any, of the various classes of the Equity Interests therein); (iv) purchase, redeem or otherwise acquire for value any of the subordinated notes referred to in clause (i) or (ii) of the definition of “Subordinated Notes”, provided that immediately prior to each such transaction and after giving effect thereto the aggregate amount of the Unused Revolving Credit Commitment is not less than $75,000,000; (v) the Borrower may from time to time, during the period from the Closing Date to December 31, 2004, (A) purchase its common stock, or (B) declare and pay dividends and distributions payable in cash, in an aggregate amount for all such purchases and payments not in excess of $150,000,000; and (vi) in addition to the purchase by the Borrower of its common stock or the payment by the Borrower of cash dividends or distributions pursuant to Section 5.02(g)(v) above, the Borrower may (A) purchase, redeem or otherwise acquire for value any of its Equity Interests or (B) declare and pay dividends and distributions payable in cash: (A) in an aggregate amount for all such purchases, redemptions, acquisitions and payments not in excess of $50,000,000, provided that such amount shall increase to $125,000,000 if at least 95% of the outstanding subordinated notes of the Borrower referred to in clause (i) of the definition of “Subordinated Notes” have been converted into common stock of the Borrower as permitted by Section 5.02(i); (B) in an aggregate amount for all such purchases, redemptions, acquisitions and payments not in excess of $75,000,000 in any Fiscal Year, or $300,000,000 during the term of this Agreement, provided that at the time of each such transaction and immediately after giving pro forma effect to each such transaction the Senior Leverage Ratio is less than 2.25:1.00, and (C) without being subject to the restrictions in this Section 5.02(g), provided that (1) at least three Business Days prior to the initial such transaction under this subsection 5.02(g)(vi)(C) the Administrative Agent has received from a Responsible Officer of the Borrower a Notice of Covenant Reduction, and (2) at the time of each such transaction and immediately after giving pro forma effect to each such transaction the Leverage Ratio is less than 3:00:1:00 and the Senior Leverage Ratio is less than 1.75:1.00, provided further, in the case of each transaction under this subsection 5.02(g)(vi), immediately prior to each such transaction and after giving effect thereto the aggregate amount of the Unused Revolving Credit Commitment is not less than $75,000,000. (h) Accounting Changes. Make or permit, or permit any of its Subsidiaries to make or permit, any change in (i) accounting policies or reporting practices, except as allowed by generally accepted accounting principles, or (ii) Fiscal Year. (i) Prepayments, Etc., of Subordinated Debt. Except as permitted under Section 5.02(g)(iv) or (vi) and except for the purchase of the 2001 Subordinated Notes, including those purchased pursuant to an Offer to Purchase and Consent Solicitation dated March 21, 2002, (i) prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity thereof in any manner, or make any payment in violation of any subordination terms of, any Subordinated Debt, or give any notice in respect thereof, or (ii) amend, modify or change in any manner any term or condition of any of the Subordinated Notes Documents, or permit any of its Subsidiaries to do any of the foregoing, except that if such Subordinated Debt is convertible into 61
Slide 144: common stock of the Borrower, the Borrower, subject to the approval of the Administrative Agent (which approval shall not unreasonably be withheld), may give notice with respect thereof if the purpose of such notice is to force the holders of such Subordinated Debt to convert such Subordinated Debt into common stock of the Borrower and thereafter the Borrower may exercise any right it may have to so redeem all or any part of such Subordinated Debt. (j) Negative Pledge. Enter into or suffer to exist, or permit any of its Subsidiaries to enter into or suffer to exist, any agreement prohibiting or conditioning the creation or assumption of any Lien upon any of its property or assets except (i) in favor of the Secured Parties or (ii) in connection with (A) any Debt permitted by Section 5.02(b)(v) solely to the extent that the agreement or instrument governing such Debt prohibits a Lien on the property acquired with the proceeds of such Debt, or (B) any Capitalized Lease permitted by Section 5.02(b)(vi) solely to the extent that such Capitalized Lease prohibits a Lien on the property subject thereto, or (C) any Debt outstanding on the date any Subsidiary of the Borrower becomes such a Subsidiary (so long as such agreement was not entered into solely in contemplation of such Subsidiary becoming a Subsidiary of the Borrower), or (D) solely with respect to Subsidiaries that are not Guarantors, restrictions contained in the Constitutive Documents of such Subsidiaries. (k) Payment Restrictions Affecting Subsidiaries. Directly or indirectly, enter into or suffer to exist, or permit any of its Subsidiaries to enter into or suffer to exist, any agreement or arrangement limiting the ability of any of its Subsidiaries to declare or pay dividends or other distributions in respect of its Equity Interests or repay or prepay any Debt owed to, make loans or advances to, or otherwise transfer assets to or invest in, the Borrower or any Subsidiary of the Borrower (whether through a covenant restricting dividends, loans, asset transfers or investments, a financial covenant or otherwise), except (i) the Loan Documents, (ii) any agreement in effect at the time such Subsidiary becomes a Subsidiary of the Borrower, so long as such agreement was not entered into solely in contemplation of such Person becoming a Subsidiary of the Borrower, (iii) restrictions on transfer contained in Debt incurred pursuant to Sections 5.02(b)(v) and (vi); provided, that such restrictions relate only to the transfer of the property financed with such Debt; (iv) in connection with and pursuant to refinancing Debt under Section 5.02(b)(xiii), replacements of restrictions that are not more restrictive than those being replaced and do not apply to any other Person or assets than those that would have been covered by the restrictions in the Debt so refinanced; (v) solely with respect to Subsidiaries that are not Guarantors, restrictions under the Constitutive Documents governing such Subsidiary: (A) with respect to existing Subsidiaries, existing on the date of this Agreement; and (B) with respect to Subsidiaries created or acquired after the date of this Agreement: (1) prohibiting such Subsidiary from guaranteeing Debt of the Borrower or another Subsidiary; (2) on dividend payments and other distributions solely to permit pro rata dividends and other distributions in respect of any Equity Interests of such Subsidiary; (3) limiting transactions with the Borrower or another Subsidiary to those with terms that are fair and reasonable to such Subsidiary and no less favorable to such Subsidiary than could have been obtained in an arm’s length transaction with an unrelated third party; and (4) limiting such Subsidiary’s ability to transfer assets or incur Debt without the consent of the holders of the Equity Interests of such Subsidiary; and (vi) encumbrances or restrictions (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract entered into in the ordinary course of business, or the assignment or transfer of any lease, license or contract entered into in the ordinary course of business and (B) arising by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Borrower or any Subsidiary. (l) Non-Wholly-Owned Subsidiaries. Permit at any time (x) the aggregate total assets (calculated without duplication) at such time of all Subsidiaries of the Borrower formed or acquired after April 30, 1998 that are not Guarantors, plus (y) the aggregate total Investments made during the period from April 30, 1998 to such time (calculated without duplication and excluding Investments made pursuant to Section 5.02(f)(vi) to the extent the proceeds thereof were used to acquire Equity Interests or assets included in (x) above) by the Loan Parties in all Subsidiaries of the Borrower that are not Guarantors, less (z) the aggregate total assets at such time of all Subsidiaries of the Borrower existing on April 30, 1998 that became Guarantors after April 30, 1998, to exceed 10% of the Consolidated total assets of the Borrower and its Subsidiaries. 62
Slide 145: (m) Issuance of Additional Stock. Permit any of its Subsidiaries to issue any additional Equity Interests, except as follows: (i) in connection with a permitted Investment or to employees or consultants in the ordinary course of business; (ii) the Borrower and any Subsidiary thereof may organize new wholly-owned Subsidiaries and any Subsidiary may issue additional Equity Interests to the Borrower or to a wholly-owned Subsidiary of the Borrower; (iii) subject to compliance with the provisions this Agreement, including Section 5.02(1) and Section 5.04(d), the Borrower and its Subsidiaries may (A) organize new non-wholly-owned Subsidiaries, and (B) (i) cause Subsidiaries to issue additional Equity Interests or (ii) sell outstanding Equity Interests therein, in each case to Persons other than Affiliates of the Borrower or its Subsidiaries. SECTION 5.03. Reporting Requirements. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender Party shall have any Commitment hereunder, the Borrower will furnish to the Administrative Agent (for distribution to the agents and Lender Parties): (a) Default Notice. As soon as possible and in any event within five days after the Borrower knows or reasonably should have known of the occurrence of a Default or any event, development or occurrence reasonably likely to have a Material Adverse Effect continuing on the date of such statement, a statement of the chief financial officer of the Borrower setting forth details of such Default or other event, development or occurrence and the action that the Borrower has taken and proposes to take with respect thereto. (b) Annual Financials. As soon as available and in any event within 90 days after the end of each Fiscal Year, a copy of the annual audit report for such year for the Borrower and its Subsidiaries, including therein Consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such Fiscal Year and a Consolidated and consolidating statements of income and a Consolidated statement of cash flows of the Borrower and its Subsidiaries for such Fiscal Year, in each case accompanied by an unqualified opinion of KPMG LLP or other independent public accountants of recognized national standing, together with (i) a certificate of such accounting firm to the Lender Parties stating that in the course of the regular audit of the business of the Borrower and its Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default has occurred and is continuing, or if, in the opinion of such accounting firm, a Default has occurred and is continuing, a statement as to the nature thereof, (ii) a schedule in form satisfactory to the Administrative Agent of the computations used by such accountants in determining, as of the end of such Fiscal Year, compliance with the covenants contained in Section 5.04, provided that in the event of any change in generally accepted accounting principles used in the preparation of such financial statements, the Borrower shall also provide, if necessary for the determination of compliance with Section 5.04 from GAAP, a statement of reconciliation conforming such financial statements to GAAP and (iii) a certificate of the Chief Financial Officer of the Borrower stating that to the best of such officer’s knowledge, no Default has occurred and is continuing or, if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Borrower has taken and proposes to take with respect thereto. (c) Quarterly Financials. As soon as available and in any event within 45 days after the end of each of the first three quarters of each Fiscal Year, Consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such quarter and Consolidated and consolidating statements of income for the period commencing at the end of the previous fiscal quarter and ending with the end of such fiscal quarter and Consolidated and consolidating statements of income and a Consolidated statement of cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous Fiscal Year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding 63
Slide 146: figures for the corresponding date or period of the preceding Fiscal Year, all in reasonable detail and duly certified (subject to normal year-end audit adjustments) by the Chief Financial Officer of the Borrower as having been prepared in accordance with generally accepted accounting principles (except that such financial statements may not contain all required notes and may be subject to year end audit adjustments), together with (i) a certificate of said officer stating that to the best of such officer’s knowledge, no Default has occurred and is continuing or, if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Borrower has taken and proposes to take with respect thereto, (ii) a schedule in form satisfactory to the Administrative Agent of the computations used by the Borrower in determining compliance with the covenants contained in Section 5.04, provided that in the event of any change in generally accepted accounting principles used in the preparation of such financial statements as compared to GAAP, the Borrower shall also provide, if necessary for the determination of compliance with Section 5.04, a statement of reconciliation conforming such financial statements to GAAP, and (iii) a report (in a form satisfactory to the Administrative Agent) specifying all permitted Investments made during such quarter and during the period from the date hereof to the end of such quarter and specifying the total consideration paid with respect to each such Investment. (d) Annual Forecasts. As soon as available and in any event no later than 30 days after the end of each Fiscal Year, forecasts prepared by management of the Borrower, in form satisfactory to the Administrative Agent, of Consolidated balance sheets, income statements and cash flow statements of the Borrower and its Subsidiaries on a quarterly basis for the Fiscal Year following such Fiscal Year and on an annual basis for each Fiscal Year thereafter until the Termination Date. (e) Litigation. (i) Promptly after the commencement thereof, notice of all actions, suits, investigations, litigation and proceedings before any Governmental Authority or arbitrator, affecting any Loan Party or any of its Subsidiaries of the type described in Section 4.01(f), and promptly after the occurrence thereof, notice of any material adverse change in the status or the financial effect on any Loan Party or any of its Subsidiaries of the litigation from that described on Schedule 4.01(f) hereto, and (ii) prompt written notice of: (A) any citation, summons, subpoena, order to show cause or other document naming the Borrower or any of its Subsidiaries a party to any proceeding before any Governmental Authority that could reasonably be expected to have a Material Adverse Effect or that expressly calls into question the validity or enforceability of any of the Loan Documents, and include with such notice a copy of such citation, summons, subpoena, order to show cause or other document, (B) any lapse or other termination of any material intellectual property, license, permit, franchise or other authorization issued to the Borrower or any of its Subsidiaries by any Person or Governmental Authority, or (C) any refusal by any Person or Governmental Authority to renew or extend such material intellectual property, license, permit, franchise or other authorization, which lapse, termination, refusal or dispute could reasonably be expected to have a Material Adverse Effect. (f) Securities Reports. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that any Loan Party or any of its Subsidiaries sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements, that any Loan Party or any of its Subsidiaries files with the Securities and Exchange Commission or any governmental authority that may be substituted therefor, or with any national securities exchange. (g) ERISA. (i) ERISA Events and ERISA Reports. (A) Promptly and in any event within 10 days after any Loan Party or any ERISA Affiliate knows or has reason to know that any ERISA Event has occurred, a statement of the Chief Financial Officer of the Borrower describing such ERISA Event and the action, if any, that such Loan Party or such ERISA Affiliate has taken and proposes to take with respect thereto and (B) on the date any records, documents or other information must be furnished to the PBGC with respect to any Plan pursuant to Section 4010 of ERISA, a copy of such records, documents and information. 64
Slide 147: (ii) Plan Terminations. Promptly and in any event within two Business Days after receipt thereof by any Loan Party or any ERISA Affiliate, copies of each notice from the PBGC stating its intention to terminate any Plan or to have a trustee appointed to administer any Plan. (iii) Plan Annual Reports. Promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan. (iv) Multiemployer Plan Notices. Promptly and in any event within five Business Days after receipt thereof by any Loan Party or any ERISA Affiliate from the sponsor of a Multiemployer Plan, copies of each notice concerning (A) the imposition of Withdrawal Liability by any such Multiemployer Plan, (B) the reorganization or termination, within the meaning of Title IV of ERISA, of any such Multiemployer Plan or (C) the amount of liability incurred, or that may be incurred, by such Loan Party or any ERISA Affiliate in connection with any event described in clause (A) or (B). (h) Environmental Conditions. Promptly after the assertion or occurrence thereof, notice of any Environmental Action against or of any noncompliance by any Loan Party or any of its Subsidiaries with any Environmental Law or Environmental Permit that could reasonably be expected to have a Material Adverse Effect. (i) Other Information. Such other information respecting the business, condition (financial or otherwise), operations, performance, properties or prospects of any Loan Party or any of its Subsidiaries as any Agent or any Lender Party, through the Administrative Agent, may from time to time reasonably request. SECTION 5.04. Financial Covenants. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender Party shall have any Commitment hereunder, the Borrower will: (a) Leverage Ratio. Maintain a Leverage Ratio at all times during each Measurement Period set forth below of not more than the amount set forth below opposite such Measurement Period: Measurement Period Ending In Ratio September 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2006 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00:1.00 4.00:1.00 3.75:1.00 3.75:1.00 3.50:1.00 3.50:1.00 3.50:1.00 3.50:1.00 3.25:1.00 3.25:1.00 3.00:1.00 provided, however, that upon receipt by the Administrative Agent of a Notice of Covenant Reduction, the Leverage Ratio thereafter for purposes of this covenant shall at all times be 3.00:1.00. 65
Slide 148: (b) Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio as of the last day of each Measurement Period set forth below of not less than the amount set forth below opposite such Measurement Period: Measurement Period Ending In Ratio September 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2007 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20:1.00 1.20:1.00 1.20:1.00 1.20:1.00 1.20:1.00 1.20:1.00 1.25:1.00 1.25:1.00 1.25:1.00 1.25:1.00 1.30:1.00 0.90:1.00 0.90:1.00 0.90:1.00 0.90:1.00 0.70:1.00 (c) Minimum Net Worth. Maintain at all times a Consolidated net worth of the Borrower and its Subsidiaries of not less than (negative $250,000,000), plus the sum of 75% of Consolidated Net Income of the Borrower and its Subsidiaries (determined as of the end of each Fiscal Quarter, but excluding net losses in any Fiscal Quarter) and 100% of the Net Cash Proceeds received by the Borrower from its issuance of Equity Interests, in each case determined on a cumulative basis for the period commencing April 1, 2002, minus non-recurring charges incurred not exceeding in the aggregate $45,000,000 resulting from the writeoff of accounts receivable and other related charges as a result of the pending third party carrier review of claims for Medicare reimbursement submitted by the Subsidiary of the Borrower operating the Borrower’s Florida laboratory or other Governmental Reimbursement Program Costs. (d) Minimum Consolidated EBITDA Ratio. Maintain at all times a ratio of Consolidated EBITDA to Consolidated Pre-Minority EBITDA of not less than 0.8:1.0. (e) Senior Leverage Ratio. Maintain a Senior Leverage Ratio at all times during each Measurement Period set forth below of not more than the amount set forth below opposite such period. Measurement Period Ending In Ratio September 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2006 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.25:1.00 3.25:1.00 3.10:1.00 3.10:1.00 2.85:1.00 2.85:1.00 2.60:1.00 2.50:1.00 2.25:1.00 2.15:1.00 2.00:1.00 provided, however, that upon receipt by the Administrative Agent of a Notice of Covenant Reduction, the Leverage Ratio thereafter for purposes of this covenant shall at all times be 2.00:1.00. 66
Slide 149: ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events (“Events of Default”) shall occur and be continuing: (a) the Borrower shall fail to pay (i) any principal of any Advance when the same shall become due and payable, or (ii) within three Business Days after the date due and payable, any interest on any Advance; or any of the Loan Parties shall fail to make any other payment under or in respect of any of the Loan Documents required to have been made by it, within three Business Days after the same shall become due and payable, in each case whether by scheduled maturity or at a date fixed for prepayment or by acceleration, demand or otherwise; or (b) any representation or warranty made by any of the Loan Parties (or any of their respective officers) under or in connection with any of the Loan Documents (including, without limitation, in any certificate, report, statement or other writing at any time furnished (or deemed to have been furnished) to the Administrative Agent or any of the Lender Parties by or on behalf of any of the Loan Parties) shall prove to have been incorrect in any material respect on the date as of which it was made or deemed made; or (c) (i) the Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(e) or Section 5.02, 5.03 or 5.04 or (ii) any of the other Loan Parties shall fail to perform or observe any term, covenant or agreement contained in Section 4 or 7 of the Subsidiary Guarantee on its part to be performed or observed; or (d) any of the Loan Parties shall fail to perform or observe any term, covenant or agreement contained in any of the Loan Documents on its part to be performed or observed that is not otherwise referred to in Section 6.01(c) if such failure shall remain unremedied for at least 30 consecutive days after the earlier of the date on which (i) a Responsible Officer of the Borrower or any of its Subsidiaries first becomes aware of such failure and (ii) written notice thereof shall have been given to the Borrower by the Administrative Agent or any of the Lender Parties; or (e) (i) the Borrower or any of its Subsidiaries shall fail to pay any principal of, premium or interest on, or any other amount payable in respect of, one or more items of Debt of the Borrower and its Subsidiaries (excluding Debt outstanding hereunder) that is outstanding (or under which one or more Persons have a commitment to extend credit) in an aggregate principal amount (or, in the case of any Hedge Agreement, having an Agreement Value) of at least $10,000,000 at the time of such failure, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreements or instruments relating to all such Debt; or (ii) any other event shall occur or condition shall exist under the agreements or instruments relating to one or more items of Debt of the Borrower and its Subsidiaries (excluding Debt outstanding hereunder) that is outstanding (or under which one or more Persons have a commitment to extend credit) in an aggregate principal amount (or, in the case of any Hedge Agreement, having an Agreement Value) of at least $10,000,000 at the time of such other event or condition, and shall continue after the applicable grace period, if any, specified in all such agreements or instruments, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt or otherwise to cause, or to permit the holder thereof to cause, such Debt to mature; or (iii) one or more items of Debt of the Borrower and its Subsidiaries (excluding Debt outstanding hereunder) that is outstanding (or under which one or more Persons have a commitment to extend credit) in an aggregate principal amount (or, in the case of any Hedge Agreement, having an Agreement Value) of at least $10,000,000 shall be declared to be due and payable or required to be prepaid or redeemed (other than by a regularly scheduled or required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; or (f) the Borrower or any Material Subsidiary or Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general 67
Slide 150: assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Material Subsidiary or Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, administrator or other similar official for it or for any substantial part of its property and assets and, in the case of any such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of at least 60 consecutive days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property and assets) shall occur; or any event or action analogous to or having a substantially similar effect to any of the events or actions set forth above in this Section 6.01(f) (other than a solvent reorganization) shall occur under the Requirements of Law of any jurisdiction applicable to the Borrower or any Material Subsidiary or Subsidiaries; or the Borrower or any Material Subsidiary or Subsidiaries shall take any corporate, partnership, limited liability company or other similar action to authorize any of the actions set forth above in this Section 6.01(f); or (g) one or more judgments or orders for the payment of money in excess of $10,000,000 in the aggregate shall be rendered against one or more of the Borrower and its Subsidiaries and shall remain unsatisfied and there shall be any period of at least 30 consecutive Business Days during which a stay of enforcement of any such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; provided, however, that any such judgment or order shall not give rise to an Event of Default under this Section 6.01(g) if and for so long as (A) the amount of such judgment or order which remains unsatisfied is covered by a valid and binding policy of insurance between the defendant and the insurer covering full payment thereof and (B) such insurer has been notified, and has not disputed the claim made for payment, of the amount of such judgment or order; or (h) one or more nonmonetary judgments or orders (including, without limitation, writs or warrants of attachment, garnishment, execution, distraint or similar process) shall be rendered against the Borrower or any of its Subsidiaries that, either individually or in the aggregate, is reasonably expected to have a Material Adverse Effect and there shall be any period of at least 30 consecutive Business Days during which a stay of enforcement of any such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (i) any provision of any of the Loan Documents after delivery thereof pursuant to Sections 3.01, 5.01(j) or 5.01(k) shall for any reason (other than pursuant to the terms thereof) cease to be valid and binding on or enforceable against any of the Loan Parties intended to be a party to it, or any such Loan Party shall so state in writing; or (j) any Collateral Document or financing statement after delivery thereof pursuant to Sections 3.01, 5.01(j) or 5.01(k) shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected Lien on any material portion of the Collateral purported to be covered thereby subject only to Liens permitted thereby; or (k) any of the following events or conditions shall have occurred and such event or condition, when aggregated with any and all other such events or conditions set forth in this subsection (k), has resulted or is reasonably expected to result in liabilities of the Loan Parties and/or the ERISA Affiliates in an aggregate amount exceeding $10,000,000 at any time: (i) any ERISA Event shall have occurred with respect to a Plan; or (ii) any of the Loan Parties or any of the ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan; or (iii) any of the Loan Parties or any of the ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization, is insolvent or is being terminated, within the meaning of Title IV of ERISA, and, as a result of such reorganization, insolvency or termination, the aggregate annual contributions of the Loan Parties and the ERISA 68