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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the Quarter Ended June 30, 2001
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-4034
DAVITA INC.
(Former name: Total Renal Care Holdings, Inc.)
21250 Hawthorne Blvd., Suite 800
Torrance, California 90503-5517
Telephone # (310) 792-2600
Delaware 51-0354549
(State of incorporation) (I.R.S. employer identification no.)
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.
As of August 1, 2001, there were 84,302,734 shares of the Registrant's
common stock (par value $0.001) issued and outstanding.
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DAVITA INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2001 and December
31, 2000.................................................... 1
Consolidated Statements of Income and Comprehensive Income
for the three and six months ended June 30, 2001 and June
30, 2000................................................... 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and June 30, 2000...................... 3
Notes to Condensed Consolidated Financial Statements........ 4
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 15
Risk Factors......................................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holder.......... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
Signatures........................................................... 22
--------
Note: Items 2, 3, and 5 of Part II are omitted because they are not applicable.
i
DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
June 30, December 31,
2001 2000
---------- ------------
ASSETS
------
Cash and cash equivalents............................. $ 85,258 $ 31,207
Accounts receivable, less allowance of $53,551 and
$61,619.............................................. 297,907 290,412
Inventories........................................... 44,604 20,641
Other current assets.................................. 12,726 10,293
Income taxes receivable............................... 2,830
Deferred income taxes................................. 42,846 42,492
---------- ----------
Total current assets.............................. 483,341 397,875
Property and equipment, net........................... 241,538 236,659
Intangible assets, net................................ 945,821 921,623
Investments in third-party dialysis businesses........ 11,206 34,194
Other long-term assets................................ 2,117 1,979
Deferred income taxes................................. 4,302
---------- ----------
$1,684,023 $1,596,632
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable...................................... $ 79,227 $ 74,882
Other current liabilities............................. 116,066 102,563
Accrued compensation and benefits..................... 83,166 70,406
Current portion of long-term debt..................... 15,419 1,676
Income taxes payable.................................. 689
---------- ----------
Total current liabilities......................... 294,567 249,527
Long-term debt........................................ 935,247 974,006
Other long-term liabilities........................... 4,984 4,855
Deferred income taxes................................. 521
Minority interests.................................... 21,125 18,876
Shareholders' equity:
Preferred stock ($0.001 par value; 5,000,000 shares
authorized; none issued or outstanding)............
Common stock ($0.001 par value, 195,000,000 shares
authorized; 84,135,381 and 82,135,634 shares issued
and outstanding)................................... 84 82
Additional paid-in capital.......................... 450,817 430,676
Notes receivable from shareholders.................. (83)
Treasury stock, at cost (126,000 shares)............ (2,494)
Accumulated deficit................................. (20,828) (81,307)
---------- ----------
Total shareholders' equity........................ 427,579 349,368
---------- ----------
$1,684,023 $1,596,632
========== ==========
See notes to condensed consolidated financial statements.
1
DAVITA INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2001 2000 2001 2000
-------- --------- -------- ---------
Net operating revenues.............. $400,640 $ 378,908 $786,857 $ 751,021
Operating expenses:
Dialysis centers and labs......... 271,545 267,714 532,519 527,012
General and administrative........ 32,417 31,619 64,230 63,540
Depreciation and amortization..... 26,624 29,670 52,772 57,388
Provision for uncollectible
accounts......................... (378) 12,648 (8,563) 25,507
Impairment and valuation
adjustments...................... 4,414 4,414
-------- --------- -------- ---------
Total operating expenses........ 330,208 346,065 640,958 677,861
-------- --------- -------- ---------
Operating income.................... 70,432 32,843 145,899 73,160
Other income (loss), net............ 1,120 (11,984) 2,468 (10,589)
Debt expense........................ 18,715 34,482 38,439 67,647
Minority interests in income of
consolidated subsidiaries.......... (2,269) (1,023) (4,726) (2,021)
-------- --------- -------- ---------
Income (loss) before income taxes
and extraordinary item............. 50,568 (14,646) 105,202 (7,097)
Income tax expense.................. 22,000 709 45,700 4,411
-------- --------- -------- ---------
Income (loss) before extraordinary
item............................... 28,568 (15,355) 59,502 (11,508)
Extraordinary gain related to early
extinguishment of debt, net of tax
of $652............................ 977 977
-------- --------- -------- ---------
Net income (loss)............... $ 29,545 $(15,355) $ 60,479 $(11,508)
======== ========= ======== =========
Earnings (loss) per common share--
basic:
Income (loss) before extraordinary
item............................. $ 0.34 $ (0.19) $ 0.72 $ (0.14)
Extraordinary gain, net of tax.... 0.01 0.01
-------- --------- -------- ---------
Net income (loss)............... $ 0.35 $ (0.19) $ 0.73 $ (0.14)
======== ========= ======== =========
Earnings (loss) per common share--
assuming dilution:
Income (loss) before extraordinary
item............................. $ 0.32 $ (0.19) $ 0.67 $ (0.14)
Extraordinary gain, net of tax.... 0.01 0.01
-------- --------- -------- ---------
Net income (loss)............... $ 0.33 $ (0.19) $ 0.68 $ (0.14)
======== ========= ======== =========
Comprehensive income:
Net income (loss)................. $ 29,545 $ (15,355) $ 60,479 $ (11,508)
Foreign currency translation...... 4,718 4,718
-------- --------- -------- ---------
Comprehensive income (loss)....... $ 29,545 $ (10,637) $ 60,479 $ (6,790)
======== ========= ======== =========
See notes to condensed consolidated financial statements.
2
DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six months ended
June 30,
----------------------
2001 2000
----------- ---------
Cash flows from operating activities:
Net income (loss).................................... $ 60,479 $ (11,508)
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization...................... 52,772 57,388
Impairment and valuation losses.................... 4,414
Loss (gain) on divestitures........................ 362 (2,107)
Deferred income taxes.............................. 4,469 6,057
Non-cash debt expense.............................. 1,155 1,720
Stock option expense and tax benefits.............. 9,931 941
Equity investment losses (income).................. (1,070) 821
Foreign currency translation loss.................. 4,718
Minority interests in income of consolidated
subsidiaries...................................... 4,726 2,021
Extraordinary gain................................. (977)
Changes in operating assets and liabilities, net of
acquisitions and divestitures:
Accounts receivable................................ (2,368) 37,016
Inventories........................................ (23,456) 9,959
Other current assets............................... (957) 4,740
Other long-term assets............................. 137 2,200
Accounts payable................................... 4,031 (30,236)
Accrued compensation and benefits.................. 9,143 6,175
Other current liabilities.......................... 13,485 (2,593)
Income taxes....................................... 2,767 19,789
Other long-term liabilities........................ 129 674
----------- ---------
Net cash provided by operating activities........ 134,758 112,189
----------- ---------
Cash flows from investing activities:
Additions of property and equipment, net............. (18,583) (24,651)
Acquisitions and divestitures, net................... (51,124) 147,300
Investments in affiliates, net....................... 20,646 (3,283)
Intangible assets.................................... (10) (381)
----------- ---------
Net cash provided by (used in) investing
activities...................................... (49,071) 118,985
----------- ---------
Cash flows from financing activities:
Borrowings........................................... 1,305,824
Payments on long-term debt........................... (1,331,617) (143,117)
Deferred financing costs............................. (9,972) (1,092)
Net proceeds from issuance of common stock........... 10,295 263
Distributions to minority interests.................. (3,672) (4,537)
Purchase of treasury shares.......................... (2,494)
----------- ---------
Net cash used in financing activities............ (31,636) (148,483)
----------- ---------
Net increase in cash................................... 54,051 82,691
Cash and cash equivalents at beginning of period....... 31,207 107,981
----------- ---------
Cash and cash equivalents at end of period............. $ 85,258 $ 190,672
=========== =========
See notes to condensed consolidated financial statements.
3
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)
Unless otherwise indicated in this Form 10-Q "the Company", "we", "us",
"our" and similar terms refer to DaVita Inc. and its subsidiaries.
1. Condensed consolidated interim financial statements
The condensed consolidated interim financial statements included in this
report have been prepared by the Company without audit. In the opinion of
management, all adjustments necessary for a fair presentation are reflected in
these interim financial statements. These adjustments are of a normal and
recurring nature. The results of operations for the periods ended June 30,
2001 are not necessarily indicative of the operating results for the full
year. The interim financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's 2000 Form 10-K as amended by Form 10-K/A. Certain reclassifications
have been made to prior periods to conform with current reporting.
2. Earnings per share calculation
The reconciliation of the numerators and denominators used to calculate
earnings per common share for the periods presented are as follows (shares in
000's):
Three months
ended Six months ended
June 30, June 30,
---------------- ----------------
2001 2000 2001 2000
------- -------- ------- --------
Basic:
Net income............................... $29,545 $(15,355) $60,479 $(11,508)
======= ======== ======= ========
Weighted average number of shares
outstanding during the period........... 83,548 81,479 82,997 81,415
Reduction in shares in connection with
notes receivable from employees......... (41) (39)
------- -------- ------- --------
Weighted average number of shares
outstanding for earnings per share--
basic................................... 83,548 81,438 82,997 81,376
======= ======== ======= ========
Earnings per share--basic................ $ 0.35 $ (0.19) $ 0.73 $ (0.14)
======= ======== ======= ========
Assuming dilution:
Net income............................... $29,545 $(15,355) $60,479 $(11,508)
Debt expense, net of tax, resulting from
dilutive effect of convertible debt..... 1,055 2,111
------- -------- ------- --------
Net income--assuming dilution.......... $30,600 $(15,355) $62,590 $(11,508)
======= ======== ======= ========
Weighted average number of shares
outstanding for earnings per share--
basic................................... 83,548 81,438 82,997 81,376
Incremental shares from stock option
plans................................. 4,266 4,386
Incremental shares from convertible
debt.................................. 4,879 4,879
------- -------- ------- --------
Weighted average outstanding and
incremental shares for earnings per
share--assuming dilution................ 92,693 81,438 92,262 81,376
======= ======== ======= ========
Earnings per share--assuming dilution.... $ 0.33 $ (0.19) $ 0.68 $ (0.14)
======= ======== ======= ========
4
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the three and six months ended June 30, 2001, the calculation of
earnings per share assuming dilution includes conversion of the 5 5/8%
convertible subordinated notes, but does not include conversion of the 7%
convertible subordinated notes as they were anti-dilutive. For the three and
six months ended June 30, 2000, both the 7% convertible subordinated notes and
the 5 5/8% convertible subordinated notes were anti-dilutive and therefore not
included in the computation of earnings per share assuming dilution.
Shares associated with stock options that have exercise prices greater than
the average market price of shares outstanding during the period, which were
not included in the computation of earnings per share assuming dilution, as
they were anti-dilutive, are as follows:
Three months Six months
ended June ended June
30, 30,
------------- -------------
2001 2000 2001 2000
------ ------ ------ ------
Shares associated with stock options not included
in computation (shares in 000's)................. 1,544 9,729 1,637 9,729
Exercise price range of shares not included in
computation:
Low............................................. $18.10 $ 3.92 $17.44 $ 4.07
High............................................ $33.00 $36.13 $33.00 $36.13
3. Debt transactions
On April 6, 2001 the Company completed the issuance of $225,000 9 1/4%
Senior Subordinated Notes in a private offering. The Notes mature on April 15,
2011 and will be callable by the Company on or after April 15, 2006. Net
proceeds of $219,375 from the offering were used to pay down amounts
outstanding under the Company's then-existing senior credit facilities. In
August 2001 these notes were exchanged for a series of notes with identical
terms that had been registered under the Securities Act of 1933.
On May 4, 2001 the Company completed a refinancing of its existing senior
credit facilities. Proceeds from this refinancing were used to pay down
$222,925, representing all outstanding amounts under the then-existing senior
credit facilities. The new credit facilities consist of a Term A loan of
$50,000, a Term B loan of $200,000 and a $150,000 undrawn revolving credit
facility. The starting interest rate for both the Term A and B loans was LIBOR
plus 2.75%, a decrease of 0.25% and 1.0%, respectively, from the previous term
loan rates. The Term A loan and revolver interest rates are subject to
increases or decreases based on changes in our leverage ratio. The new term
loan facilities are also subject to aggregate quarterly principal amortization
of $3,000 for the next five years. The entire facility is due in 2006 with an
automatic one year extension of the Term B loan if our $125,000 5 5/8%
subordinated convertible notes have been extended or converted by March 2006.
As a result of these transactions, the write-off of deferred financing
costs and accelerated recognition of deferred swap liquidation gains
associated with the refinanced debt are reported as a net extraordinary gain
of $977 for the quarter ended June 30, 2001.
5
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt was comprised of the following:
June 30, December 31,
2001 2000
-------- ------------
Senior secured credit facilities..................... $244,000 $498,800
Senior subordinated notes, 9 1/4%, due 2011.......... 225,000
Convertible subordinated notes, 7%, due 2009......... 345,000 345,000
Convertible subordinated notes, 5 5/8%, due 2006..... 125,000 125,000
Acquisition obligations and other notes payable...... 5,444 829
Capital lease obligations............................ 6,222 6,053
-------- --------
950,666 975,682
Less current portion................................. (15,419) (1,676)
-------- --------
$935,247 $974,006
======== ========
Scheduled maturities of long-term debt at June 30, 2001 were as follows:
2001............................................................... 3,913
2002............................................................... 18,064
2003............................................................... 12,856
2004............................................................... 12,365
2005............................................................... 12,242
2006............................................................... 318,288
Thereafter......................................................... 572,938
4. Provision for uncollectible accounts
The provision for uncollectible accounts for the three and six months ended
June 30, 2001 includes cash recoveries of $8,944 and $24,944, respectively,
associated with aged accounts receivable that had been written-off in 1999.
5. 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; (3) differing opinions regarding a patient's medical
diagnosis or the medical necessity of services provided; and (4) retroactive
applications or interpretations of governmental requirements.
The Company's Florida-based laboratory subsidiary is the subject of a
third-party carrier review of its Medicare reimbursement claims. The carrier
has issued formal overpayment determinations in the amount of $5,600 for the
review period from January 1995 to April 1996, and $15,000 for the review
period from May 1996 to March 1998. The carrier has suspended all payments of
Medicare claims from this laboratory since May 1998. The carrier has also
determined that $16,100 of the suspended claims for the review period from
April 1998 to August 1999 and $11,600 of the suspended claims for the review
period from August 1999 to May 2000 were not properly supported by the
prescribing physicians' medical justification. The carrier has alleged that
99% of the tests the laboratory performed during the review period from
January 1995 to April 1996, 96% of the tests performed in the period from May
1996 to March 1998, 70% of the tests performed in the period from April 1998
to August 1999, and 72% of the tests performed in the period from August 1999
to May 2000 were not properly supported by the prescribing physicians' medical
justification.
6
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is disputing the overpayment determinations and has provided
supporting documentation of its claims. The Company has initiated the process
of a formal review of each of the carrier's determinations. The first step in
this formal review process is a hearing before a hearing officer at the
carrier. The Company has received minimal responses from the carrier to its
repeated requests for clarification and information regarding the continuing
payment suspension. The hearing regarding the initial review period from
January 1995 to April 1996 was held in July 1999. In January 2000 the hearing
officer issued a decision upholding the overpayment determination of $5,600.
The hearing regarding the second review period from May 1996 to March 1998 was
held in April 2000. In July 2000 the hearing officer issued a decision
upholding $14,200, or substantially all of the overpayment determination. The
Company has filed appeals of both decisions to a federal administrative law
judge, who has consolidated the two appeals at the Company's request. The
Company has received a request for additional information from the
administrative law judge. The Company expects to provide the requested
information in the third quarter of 2001. A hearing will be scheduled after
the administrative law judge receives this information.
In addition to the formal appeal process with a federal administrative law
judge, beginning in the third quarter of 1999 we sought a meeting with the
Department of Justice, or DOJ, to begin a process to resolve this matter. The
carrier had previously informed the local office of the DOJ and HHS of this
matter, and we had provided requested information to the DOJ. The Company met
with the DOJ in February 2001 at which time the DOJ requested additional
information, which the Company is providing.
Timing of the final resolution of this matter is highly uncertain, and
beyond the Company's control or influence. Beginning in the third quarter of
2000, the Company stopped recognizing Medicare revenue from this laboratory
until the uncertainties regarding both the timing of resolution and the
ultimate revenue valuations are at least substantially eliminated. The amount
of potential Medicare revenue not accrued beginning in the third quarter of
2000 was approximately $4,000 per quarter. We estimate that the potential cash
exposure as of June 30, 2001 is not more than $10,000 based on the carrier's
overpayment findings noted above. If this matter is resolved in a manner
adverse to the Company, the government could impose additional fines and
penalties, which could be substantial.
In February 2001, the Civil Division of the United States Attorney's Office
for the Eastern District of Pennsylvania contacted us and requested that the
Company cooperate in a review of some of our historical practices, including
billing and other operating procedures and our financial relationships with
physicians. The Civil Division has requested that we provide a wide range of
information responding to the areas of review. The Civil Division has not
initiated any legal process or served any subpoena on the Company. The Civil
Division has indicated that it is not making any allegation of wrongdoing at
this time and that no criminal action against the Company or any individual is
contemplated. The Company is cooperating in this review. The inquiry appears
to be at an early stage. As it proceeds, the Civil Division could expand its
areas of concern. If a court determines there has been wrongdoing, the
penalties under applicable statutes could be substantial.
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 matters, 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.
6. Recent accounting pronouncements
In July 2001 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS 142, Goodwill and Other Intangible Assets which will be
effective July 1, 2001 and January 1, 2002, respectively, for the Company.
7
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated or completed after June 30, 2001. Under SFAS
142, amortization of goodwill and other indefinite-lived intangible assets,
including any such intangibles recorded in past business combinations, will be
discontinued beginning January 1, 2002. In addition, goodwill and other
indefinite-lived intangible assets recorded as a result of business
combinations completed during the six-month period ending December 31, 2001
will not be amortized.
Under the new standards, goodwill and other indefinite-lived intangible
assets will be written down with a goodwill impairment charge against current
earnings whenever the recorded values exceed their fair values. As with
goodwill amortization, such goodwill charges would not directly affect cash
flows. The Company is currently reviewing the provisions of SFAS 141 and SFAS
142 and assessing the impact of their adoption.
7. Condensed consolidating financial statements
The following information is presented as required under the Securities and
Exchange Commission's Financial Reporting Release No. 55 in connection with
the Company's publicly traded debt. The operating and investing activities of
the separate legal entities included in the consolidated financial statements
are fully interdependent and integrated. Revenues and operating expenses of
the separate legal entities include intercompany charges for management and
other services. Other income (loss) for the six months ended June 30, 2001
includes intercompany interest charges in accordance with the intercompany
debt agreements in effect at June 30, 2001.
The $125,000 5 5/8% Convertible Subordinated Notes due 2006, issued by the
wholly-owned subsidiary Renal Treatment Centers, Inc., or RTC, are guaranteed
by DaVita Inc. The $225,000 9 1/4% Senior Subordinated Notes issued in April
2001 by DaVita Inc. are guaranteed by all of its wholly-owned domestic
subsidiaries. Non-wholly-owned subsidiaries, joint ventures and partnerships
are not guarantors of either obligation.
8
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Consolidating Balance Sheets
Wholly-owned
subsidiaries
-----------------
DaVita All Non-participating Consolidating
Inc. RTC others subsidiaries adjustments Consolidated
---------- -------- -------- ----------------- ------------- ------------
As of June 30, 2001
Cash and cash
equivalents............ $ 75,065 $ 7 $ 10,186 $ 85,258
Accounts receivable,
net.................... 89,839 178,706 $ 29,362 297,907
Other current assets.... 1,533 14,307 82,306 2,030 100,176
---------- -------- -------- -------- ----------- ----------
Total current assets... 76,598 104,153 271,198 31,392 483,341
Property and equipment,
net.................... 8,713 56,465 152,117 24,243 241,538
Investments in
subsidiaries........... 252,411 $ (252,411)
Receivables from
subsidiaries........... 894,483 (894,483)
Intangible assets, net.. 20,080 289,050 520,648 116,043 945,821
Other assets............ 7,366 4,712 1,201 44 13,323
---------- -------- -------- -------- ----------- ----------
Total assets........... $1,259,651 $454,380 $945,164 $171,722 $(1,146,894) $1,684,023
========== ======== ======== ======== =========== ==========
Current liabilities..... 26,937 21,809 241,352 4,469 294,567
Payables to
subsidiaries/parent.... 116,291 747,822 30,370 (894,483)
Long-term liabilities... 805,135 125,151 5,327 5,139 940,752
Minority interests...... 21,125 21,125
Shareholders' equity.... 427,579 191,129 (49,337) 131,744 (273,536) 427,579
---------- -------- -------- -------- ----------- ----------
Total liabilities and
shareholders' equity.. $1,259,651 $454,380 $945,164 $171,722 $(1,146,894) $1,684,023
========== ======== ======== ======== =========== ==========
As of December 31, 2000
Cash and cash
equivalents............ $ 16,553 $ 1,871 $ 12,783 $ 31,207
Accounts receivable,
net.................... 83,313 180,263 $ 26,836 290,412
Other current assets.... 2,014 15,967 55,947 2,328 76,256
---------- -------- -------- -------- ----------- ----------
Total current assets... 18,567 101,151 248,993 29,164 397,875
Property and equipment,
net.................... 5,377 61,686 146,959 22,637 236,659
Investments in
subsidiaries........... 199,079 $ (199,079)
Receivables from
subsidiaries........... 938,183 (938,183)
Intangible assets, net.. 9,548 299,813 493,946 118,316 921,623
Other assets............ 37,692 2,146 593 44 40,475
---------- -------- -------- -------- ----------- ----------
Total assets........... $1,208,446 $464,796 $890,491 $170,161 $(1,137,262) $1,596,632
========== ======== ======== ======== =========== ==========
Current liabilities..... 15,278 23,996 206,275 3,978 249,527
Payables to
subsidiaries/parent.... 146,877 746,892 44,414 (938,183)
Long-term liabilities... 843,800 125,000 5,311 4,750 978,861
Minority interests...... 18,876 18,876
Shareholders' equity.... 349,368 168,923 (67,987) 117,019 (217,955) 349,368
---------- -------- -------- -------- ----------- ----------
Total liabilities and
shareholders' equity... $1,208,446 $464,796 $890,491 $170,161 $(1,137,262) $1,596,632
========== ======== ======== ======== =========== ==========
9
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Consolidating Statements of Income
Wholly-owned
subsidiaries Non-
-------------------- participating Consolidating
DaVita Inc. RTC All others subsidiaries adjustments Consolidated
----------- -------- ---------- ------------- ------------- ------------
For the six months ended
June 30, 2001
Net operating revenues.. $ 65,271 $253,247 $440,793 $89,822 $(62,276) $786,857
Operating expenses...... 37,347 210,732 387,302 67,853 (62,276) 640,958
-------- -------- -------- ------- -------- --------
Operating income....... 27,924 42,515 53,491 21,969 145,899
Other income (loss),
net.................... 39,519 (43) (37,008) 2,468
Debt expense............ 34,730 3,446 (2,361) 2,624 38,439
Minority interests...... (4,726) (4,726)
Income taxes............ 14,067 16,820 14,813 45,700
Equity earnings in
consolidated
subsidiaries........... 40,856 14,619 (55,475)
Extraordinary gain...... 977 977
-------- -------- -------- ------- -------- --------
Net income............. $ 60,479 $ 22,206 $ 18,650 $19,345 $(60,201) $ 60,479
======== ======== ======== ======= ======== ========
For the six months ended
June 30, 2000
Net operating revenues.. $ 53,959 $251,857 $417,499 $77,746 $(50,040) $751,021
Operating expenses...... 18,464 236,664 407,520 65,253 (50,040) 677,861
-------- -------- -------- ------- -------- --------
Operating income....... 35,495 15,193 9,979 12,493 73,160
Other income (loss),
net.................... (10,182) (1,067) 660 (10,589)
Debt expense............ 63,693 4,083 (1,857) 1,728 67,647
Minority interests...... (2,021) (2,021)
Income taxes............ (15,736) 5,305 14,946 (104) 4,411
Equity earnings in
consolidated
subsidiaries........... 11,136 9,508 (20,644)
-------- -------- -------- ------- -------- --------
Net income (loss)...... $(11,508) $ 5,805 $ 5,331 $11,529 $(22,665) $(11,508)
======== ======== ======== ======= ======== ========
10
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Wholly-owned
subsidiaries Non-
--------------------- participating Consolidating
DaVita Inc. RTC All others subsidiaries adjustments Consolidated
----------- --------- ---------- ------------- ------------- ------------
Six months ended June
30, 2001
Cash flows from
operating activities:
Net income............ $ 60,479 $ 22,206 $ 18,650 $19,345 $(60,201) $ 60,479
Changes in operating
and intercompany
assets and
liabilities and non
cash items included
in net income........ 34,221 (21,340) 13,344 (12,147) 60,201 74,279
--------- --------- -------- ------- -------- ---------
Net cash provided by
operating
activities......... 94,700 866 31,994 7,198 -- 134,758
--------- --------- -------- ------- -------- ---------
Cash flows from
investing activities:
Purchases of property
and equipment, net... (4,217) (2,881) (7,531) (3,954) (18,583)
Acquisitions and
divestitures, net.... (51,124) (51,124)
Other items........... 20,611 25 20,636
--------- --------- -------- ------- -------- ---------
Net cash used in
investing
activities......... (4,217) (2,881) (38,044) (3,929) (49,071)
--------- --------- -------- ------- -------- ---------
Cash flows from
financing activities:
Long-term debt........ (29,800) 151 3,453 403 (25,793)
Other items........... (2,171) (3,672) (5,843)
--------- --------- -------- ------- -------- ---------
Net cash provided by
(used in) financing
activities......... (31,971) 151 3,453 (3,269) (31,636)
--------- --------- -------- ------- -------- ---------
Net increase (decrease)
in cash............... 58,512 (1,864) (2,597) -- 54,051
Cash at the beginning
of the period......... 16,553 1,871 12,783 31,207
--------- --------- -------- ------- -------- ---------
Cash at the end of the
period................ $ 75,065 $ 7 $ 10,186 $ -- $ -- $ 85,258
========= ========= ======== ======= ======== =========
Six months ended June
30, 2000
Cash flows from
operating activities:
Net income (loss)..... $ (11,508) $ 5,805 $ 5,331 $11,529 $(22,665) $ (11,508)
Changes in operating
and intercompany
assets and
liabilities and non
cash items included
in net income
(loss)............... 61,920 (104,511) 152,790 (9,167) 22,665 123,697
--------- --------- -------- ------- -------- ---------
Net cash provided by
(used in) operating
activities......... 50,412 (98,706) 158,121 2,362 -- 112,189
--------- --------- -------- ------- -------- ---------
Cash flows from
investing activities:
Purchases of property
and equipment, net... (111) (8,936) (14,410) (1,194) (24,651)
Acquisitions and
divestitures, net.... 105,342 41,958 147,300
Other items........... (342) (3,322) (3,664)
--------- --------- -------- ------- -------- ---------
Net cash provided by
(used in) investing
activities......... (453) 96,406 24,226 (1,194) 118,985
--------- --------- -------- ------- -------- ---------
Cash flows from
financing activities:
Long-term debt........ (139,615) (2,334) (1,168) (143,117)
Other items........... (829) (4,537) (5,366)
--------- --------- -------- ------- -------- ---------
Net cash used in
financing
activities......... (140,444) (6,871) (1,168) (148,483)
--------- --------- -------- ------- -------- ---------
Net increase (decrease)
in cash............... (90,485) (2,300) 175,476 82,691
Cash at the beginning
of the period......... 90,544 4,118 13,319 107,981
--------- --------- -------- ------- -------- ---------
Cash at the end of the
period................ $ 59 $ 1,818 $188,795 $ -- $ -- $ 190,672
========= ========= ======== ======= ======== =========
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-looking statements
This Form 10-Q 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 economic and market conditions, the regulatory environment in
which we operate, competitive activities, other business conditions,
accounting estimates, and the risk factors set forth in this Form 10-Q. These
risks, among others, include those relating to possible reductions in private
and government reimbursement rates, the concentration of profits generated
from PPO and private indemnity patients and from ancillary services including
pharmaceuticals, the ongoing payment suspension and review of the Company's
Florida laboratory subsidiary by its Medicare carrier and the Department of
Justice, the ongoing review by the Civil Division of the US Attorney's Office
for the Eastern District of Pennsylvania and the Company's ability to maintain
contracts with physician medical directors. 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.
Results of operations
Continental U.S. and non-continental U.S. operating revenues and operating
expenses were as follows (dollars in millions):
Quarter ended
----------------------------
June 30, March June 30,
2001 31, 2001 2000
-------- -------- --------
Revenues:
Continental U.S................................. $397 99% $382 99% $345 91%
Non-continental U.S............................. 4 1% 4 1% 34 9%
---- --- ---- --- ---- ---
401 100% 386 100% 379 100%
==== === ==== === ==== ===
Operating expenses:
Continental U.S................................. 326 99% 306 98% 308 89%
Non-continental U.S............................. 4 1% 5 2% 38 11%
---- --- ---- --- ---- ---
330 100% 311 100% 346 100%
==== === ==== === ==== ===
Consolidated operating income..................... $ 71 $ 75 $ 33
==== ==== ====
The Company's divestiture of its dialysis operations outside the
continental United States was substantially completed during 2000, reducing
the number of dialysis centers that we operate outside the continental United
States from 84 to 2 by the end of 2000. Because all operations outside the
continental United States have been divested with the exception of the pending
completion of the sale of two centers in Puerto Rico, the non-continental U.S.
operating results are excluded from the revenue and cost trends discussed
below.
12
Continental U.S. operations
(dollars in millions, except per treatment data)
Quarter ended
-----------------------------------------
June 30, June 30,
2001 March 31, 2001 2000
----------- ----------------- ----------
Revenues........................ $ 397 100% $ 382 100 % $ 345 100%
Operating expenses:
Dialysis centers and labs..... 269 68% 256 67 % 240 70%
General and administrative.... 32 8% 32 8 % 30 9%
Depreciation and
amortization................. 26 7% 26 7 % 26 8%
Provision for uncollectible
accounts..................... (1) (8) (2)% 12 3%
------ -------- ------
326 82% 306 80 % 308 89%
------ -------- ------
Operating income before
impairment losses.............. $ 71 18% $ 76 20 % $ 37 11%
====== ======== ======
Dialysis treatments (000's)..... 1,409 1,366 1,336
Average dialysis revenue per
dialysis treatment............. $ 276 $ 274 $ 249
Net operating revenues for the continental U.S. operations were $397
million for the second quarter of 2001, approximately 15% higher than in the
second quarter of 2000. Approximately 10% was due to higher average revenue
per treatment and approximately 5% was due to the increase in the number of
treatments. The average dialysis revenue per treatment (excluding lab and
pharmacy revenues and management fee income) was $276 for the second quarter
of 2001, compared with $249 for the same period of 2000. The increase in the
average revenue per treatment was principally attributable to improvements in
revenue capture, billing and collections operations, and payor contracting,
increased revenue associated with the administration of new higher-cost drugs
and the increases in the Medicare composite reimbursement rate that became
effective on both January 1 and April 1, 2001. Non-dialysis revenues were
approximately $8 million in the second quarter of 2001, approximately
$4 million lower than the second quarter of 2000 primarily due to reduced lab
revenues and reduced management fees resulting from the acquisition of eight
previously managed centers in the first quarter of 2001.
Second quarter 2001 net operating revenues were approximately 3.7% higher
than in the first quarter of 2001. The number of treatments increased by 3.1%
in the second quarter. Net dialysis revenue per treatment increased
approximately $2 from first quarter 2001 to second quarter of 2001,
principally attributable to the Medicare rate increase that became effective
April 1, 2001.
Center operating expenses were approximately 68% of operating revenues for
continental U.S. operations in the second quarter of 2001, compared with 67%
in the first quarter of 2001 and 70% in the second quarter of 2000. On a per-
treatment basis, second quarter 2001 center operating expenses were
approximately $2 higher than in the prior quarter, and averaged approximately
$10 per treatment higher than in the second quarter of 2000. The higher
average cost per treatment was primarily attributable to higher labor and drug
costs, which were more than offset by the increased revenue per treatment.
General and administrative expenses were approximately 8% of operating
revenues for continental U.S. operations in both the second and first quarters
of 2001, compared to 9% in the second quarter of 2000. The decrease from the
second quarter of 2000, measured as a percentage of revenue, was attributable
to the higher average revenue rate per treatment in the second and first
quarters of 2001. In absolute dollars, general and administrative expenses for
the second quarter of 2001 were approximately 2% higher than in the first
quarter, reflecting higher labor and infrastructure costs.
During the first and second quarters of 2001, we realized cash recoveries
of $16.0 and $8.9 million associated with aged accounts receivables reserved
in 1999. We recognized the cash recoveries as a reversal of bad debt expense.
Before considering these cash recoveries, the provision for uncollectible
accounts receivable
13
for the second quarter of 2001 was approximately 2% of operating revenues
compared with approximately 3.5% for the same period for 2000. We anticipate
the provision for uncollectible accounts receivable will be generally in the
range of 2% to 3% over the long term.
Debt expense of $19 million for the second quarter of 2001 was
approximately $16 million lower than the same period of 2000 due to lower
effective interest rates and reduced debt balances.
Based on current conditions and recent experience, our current projections
are for normal operating earnings before depreciation and amortization, debt
expense and taxes to be in the range of $340 million to $360 million for the
year 2001, excluding the cash recoveries of previously reserved accounts
receivables discussed above. These projections assume the continuation of
current cost growth trends and current trends in the internal annual growth
rate in the number of dialysis treatments, minimal acquisitions, no
significant changes in billing practices, continued non-recognition of
Medicare lab revenue and no significant settlement or impairment losses. These
and other underlying assumptions involve significant risks and uncertainties,
and actual results may vary significantly from these current projections.
Additionally, the renegotiation or restructuring of unfavorable managed care
contracts, medical director agreements or other arrangements may result in
future impairment or other charges.
Liquidity and capital resources
Cash flow from operations during the first half of 2001 amounted to $135
million and the reduction in long-term debt totaled $26 million. The positive
cash flow included $131 million from earnings adjusted for non-cash items.
Non-operating cash outflows included acquisitions of dialysis centers for $51
million (offset by liquidation of investments in third-party dialysis
operations) and $19 million in capital asset expenditures.
In April 2001, $225 million of 9 1/4% Senior Subordinated Notes were
issued. The net proceeds of this offering were used to pay down amounts
outstanding under our then-existing senior credit facilities. In August these
notes were exchanged for a series of notes with identical terms that had been
registered under the Securities Act of 1933.
On May 4, 2001 the Company completed a refinancing of its senior credit
facilities. The new financing includes a Term A loan of $50 million, a Term B
loan of $200 million and a $150 million undrawn revolving credit facility. The
starting interest rate for both the Term A and B loans was LIBOR plus 2.75%, a
decrease of 0.25% and 1.0%, respectively, from the previous term loan rates.
The Term A loan and revolver interest rates are also subject to increases or
decreases based on changes in our leverage ratio. The new term loan facilities
are subject to aggregate quarterly principal amortization of $3 million for
the next five years. The entire facility is due in 2006 with an automatic one
year extension of the Term B loan if our $125 million 5 5/8% subordinated
convertible notes have been extended or converted by March 2006.
Continental U.S. accounts receivable at June 30, 2001 amounted to $291
million, a decrease of $5 million during the quarter. This balance represented
approximately 68 days of net revenue, an improvement of approximately 3 days
over the previous quarter.
New accounting pronouncements
In July 2001 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS 142, Goodwill and Other Intangible Assets which will be
effective July 1, 2001 and January 1, 2002, respectively, for the Company.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated or completed after June 30, 2001. Under SFAS
142, amortization of goodwill and other indefinite-lived intangible assets,
including any such intangibles recorded in past business combinations, will be
discontinued beginning January 1, 2002. In addition, goodwill and other
indefinite-lived intangible assets recorded as a result of business
combinations completed during the six-month period ending December 31, 2001
will not be amortized.
14
Under the new standards, goodwill and other indefinite-lived intangible
assets will be written down with a goodwill impairment charge against current
earnings whenever the recorded values exceed their fair values. As with
goodwill amortization, such goodwill charges would not directly affect cash
flows. We are currently reviewing the provisions of SFAS 141 and SFAS 142 and
assessing the impact of their adoption.
Item 3. 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.
Expected maturity date Average
----------------------------- Fair interest
2001 2002 2003 2004 2005 2006 Thereafter Total value rate
---- ---- ---- ---- ---- ---- ---------- ----- ----- --------
(dollars in millions)
Long-term debt
Fixed rate..... $125 $570 $695 $681 7.76%
Variable
rate.......... $ 4 $18 $13 $13 $12 193 3 256 256 6.81%
Exchange rate sensitivity
We are currently not exposed to any foreign currency exchange rate risk.
15
RISK FACTORS
This Form 10-Q 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, earnings before depreciation
and amortization, debt expense and taxes, and capital expenditures. 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.
These statements involve known and unknown risks and uncertainties,
including risks resulting from economic and market conditions, the regulatory
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 percentage of our patients paying at or near our list prices declines,
then our revenues, cash flows and net income would be substantially reduced.
Approximately 41% of our continental U.S. dialysis revenues in 1999 and 42%
in both 2000 and the first six months of 2001 were generated from patients who
had private payors as the primary payor. A minority of these patients have
insurance policies that reimburse us at or near our list prices, which are
significantly higher than Medicare rates. The majority of these patients have
insurance policies that reimburse us at rates that are below our list prices
but, in most cases, higher than Medicare rates. We believe that pressure from
private payors to decrease the rates at which they pay us may increase. If the
percentage of patients who have insurance that pays us at or near our list
prices decreases significantly, it would have an adverse effect on our
revenues, cash flows and net income.
If we are unable to renegotiate material contracts with managed care plans on
acceptable terms, we may experience a decline in same center growth.
We have contracts with some large managed care plans that include
unfavorable terms. Although we are attempting to renegotiate the terms of
these contracts, we cannot predict whether we will reach agreement on new
terms or whether we will renew these contracts. As a result, we may lose
numerous patients of these managed care plans and experience a decline in our
same center growth, which will negatively impact our revenues.
Future declines, or the lack of further increases, in Medicare reimbursement
rates would reduce our net income and cash flows.
Approximately 54% of our continental U.S. dialysis revenues in 1999 and 53%
in both 2000 and the first six months of 2001 were generated from patients who
had Medicare as their primary payor. The Medicare ESRD program reimburses us
for dialysis and ancillary services at fixed rates. Unlike many other Medicare
programs, the Medicare ESRD program does not provide for periodic inflation
increases in reimbursement rates. These rates have declined over 70% in real
dollars since 1972. Congress recently enacted two separate increases of 1.2%
to the Medicare composite reimbursement rate for dialysis effective January 1,
2000 and January 1, 2001. An additional 1.2% increase became effective April
1, 2001, plus an adjustment factor designed to provide the benefits of the
increase as if it had become effective on January 1, 2001. These were the
first increases in the composite rate since 1991 and are significantly less
than the cumulative rate of inflation since 1991. In addition, the Medicare
Payment Advisory Commission has recommended to Congress that there be no
increase in the composite rate for 2002. Increases in operating costs that are
subject to inflation, such as labor and supply costs, have occurred and are
expected to continue to occur without a compensating increase in reimbursement
rates.
16
We cannot predict 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
income 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 net income and cash
flows.
In legislation enacted in December 2000, Congress mandated government
studies on whether:
. The Medicare composite rate for dialysis should be modified to include
an annual inflation increase--study due July 2002;
. The Medicare composite rate for dialysis should be modified to include
additional services, such as laboratory and other diagnostic tests and
the administration of EPO and other pharmaceuticals, in the composite
rate--study due July 2002; and
. Reimbursement for many outpatient prescription drugs that we administer
to dialysis patients should be reduced from the current rate of 95% of
the average wholesale price--study due September 2001.
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 was approximately 13%
of our net revenue in 1999, 2000 and the first six months of 2001. If EPO were
included in the composite rate, and if the composite rate were not increased
sufficiently, our revenue would decrease substantially. Reductions in current
reimbursement rates for EPO or other outpatient prescription drugs would also
reduce our revenue.
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 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 our
centers is typically 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, it may negatively impact the former
medical director's decision to treat his or her patients at our centers.
Medical directors contract with us for fixed periods, generally five to ten
years. Medical directors have no obligation to extend their agreements with
us. The agreements with medical directors at 48 centers are at risk of
expiring on or before December 31, 2002. This includes agreements with terms
expiring on or before December 31, 2002 and those with automatic renewal terms
that will expire on or before December 31, 2002 if we or the medical director
elect not to renew the agreement.
We also may take actions to restructure existing relationships or take
positions in negotiating extensions of relationships in order to assure
compliance with anti-kickback and similar laws. These actions could negatively
impact physicians' decisions to extend their medical director agreements with
us. For example, we have recalled stock options and we require monthly
statements from our medical directors certifying that they have performed
their contractual obligations. To our knowledge, we are the only major
dialysis provider to have done this. 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.
If the current shortage of skilled clinical personnel or our high level of
personnel turnover continues, we may experience disruptions in our business
operations and increases in operating expenses.
We are experiencing difficulties in hiring nurses and increased labor costs
due to a nationwide shortage of skilled clinical personnel. This shortage
limits our ability to expand our operations. We also have a high personnel
turnover rate in our dialysis centers and central billing offices. Turnover
has been the highest among
17
our reuse technicians, patient care technicians and unit secretaries. Recent
efforts to reduce this turnover may not succeed. If we are not successful, or
if we are unable to hire skilled clinical personnel when needed, our
operations and our same center growth will be negatively impacted.
Adverse developments with respect to EPO could materially reduce our net
income and cash flows and affect our ability to care for our patients.
Amgen is the sole supplier of EPO and may unilaterally decide to increase
its price for EPO. For example, Amgen unilaterally increased its base price
for EPO by 3.9% effective March 2000 and by an additional 3.9% effective May
2001. We expect Amgen to continue to increase its base price from time to
time. Also, 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 is developing a new product,
NESP, that may replace EPO or reduce its use. We cannot predict when NESP will
be introduced to the dialysis market, nor what its cost and reimbursement
structure will be. Increases in the cost of EPO and the introduction of NESP
could have a material adverse effect on our net income and cash flows.
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 accounted for approximately 32%
of our net operating revenue in 1999, 35% in 2000 and 38% in the first six
months of 2001. Changes in physician practice patterns and accepted clinical
practices, changes in private and governmental reimbursement rates and rules,
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 also result in lower or less frequent dosages,
could reduce our revenues and earnings from the administration of EPO and
other drugs.
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 and federal and state anti-kickback laws. The regulatory
scrutiny of healthcare providers, including dialysis providers, has increased
significantly in recent years. For the fiscal year ended September 30, 2000,
the DOJ announced total recoveries of $840 million from healthcare civil fraud
cases, including a $486 million settlement with one of our competitors as a
result of an OIG and DOJ investigation into some of its business practices. In
addition, the frequency and intensity of Medicare certification surveys and
inspections of dialysis centers has markedly increased over the last year,
consistent with recommendations of the OIG.
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 historic 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.
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;
18
. Loss of required government certifications or exclusion from government
reimbursement programs, such as the Medicare ESRD program and Medicaid
programs;
. Loss of licenses required to operate healthcare facilities in some of
the states in which we operate; and
. Fines or monetary penalties for anti-kickback law violations, submission
of false claims or other failures to meet reimbursement program
requirements.
The pending federal review of some of our historical practices and third-party
carrier review of our laboratory subsidiary could result in substantial
penalties against us.
We are voluntarily cooperating 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. In addition, our Florida-
based laboratory subsidiary is the subject of a third-party carrier review of
claims it has submitted for Medicare reimbursement. All further Medicare
payments to this laboratory were suspended in May 1998, and the DOJ is also
reviewing the situation. 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.
Our rollout of new information technology systems will significantly disrupt
our billing and collection activity, may not work as planned and could have a
negative impact on our results of operations and financial condition.
We intend to roll out new information technology systems and new processes
in each of our dialysis centers over the next few years. It is likely that
this rollout will disrupt our billing and collection activity and may cause
other disruptions to our business operations, which may negatively impact our
cash flows. Also, the new information systems may not work as planned or
improve our billing and collection processes. If they do not, we may have to
spend substantial amounts to enhance or replace these systems.
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The information in Note 5 of the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this report is incorporated by this reference
in response to this item.
Items 2 and 3 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Our annual meeting of shareholders was held on June 5, 2001.
Proposal 1 submitted to our stockholders at the meeting was the election of
directors. The following directors were elected at the meeting, with the
number of votes cast for each director or withheld from each director set
forth after the director's respective name. Nancy-Ann DeParle and William L.
Roper also continued as directors after the meeting.
Votes for Authority
Name Director Withheld
---- ---------- ---------
Richard B. Fontaine.................................... 72,669,800 741,916
Peter T. Grauer........................................ 72,667,900 743,816
C. Raymond Larkin, Jr.................................. 72,667,826 743,890
John M. Nehra.......................................... 72,669,980 741,736
Kent J. Thiry.......................................... 63,589,496 9,822,220
Proposal 2 submitted to our stockholders at the meeting was the approval of
an amendment to our 1999 Equity Compensation Plan to increase the number of
shares available for grant under the plan by 2,750,000. The votes were cast as
follows:
For Against Abstain
--- ------- -------
58,703,477 14,542,702 165,537
Proposal 3 submitted to our stockholders at the meeting was the approval of
the DaVita Inc. Executive Incentive Plan. The votes were cast as follows:
For Against Abstain
--- ------- -------
71,509,246 1,770,495 131,975
Item 5 is not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
1.1 Purchase Agreement, dated April 6, 2001, among DaVita Inc., the
subsidiaries of DaVita Inc. named therein and Credit Suisse First
Boston Corporation, Banc of America Securities LLC, SunTrust Equitable
Securities, BNY Capital Markets, Inc. and Scotia Capital (the "Initial
Purchasers").*
4.1 Indenture, dated as of April 11, 2001, between DaVita Inc., the
subsidiaries of DaVita Inc. named therein and U.S. Trust Company of
Texas, National Association, as trustee.*
4.3 Registration Rights Agreement, dated as of April 11, 2001, among DaVita
Inc., the subsidiaries of DaVita Inc. named therein and the Initial
Purchasers.*
20
10.1 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").*
10.2 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.*
10.3 Subsidiary Guarantee, 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.*
10.4 Amended and Restated 1999 Equity Compensation Plan.**
10.5 Employment Agreement, effective as of June 15, 2000, by and between
DaVita Inc. and Joseph C. Mello. X
12.1 Ratio of earnings to fixed charges. X
(b) Reports on Form 8-K
None.
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X Filed herewith
* Filed on June 8, 2001 as an exhibit to our Registration Statement on Form
S-4 (Registration Statement No. 333-62552).
** Filed on April 27, 2001 as an exhibit to the Definitive Proxy Statement for
our 2001 Annual Meeting of Stockholders.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAVITA INC.
/s/ Gary W. Beil
By: _________________________________
Gary W. Beil
Vice President and Controller*
Date: August 14, 2001
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* Mr. Beil has signed both on behalf of the Registrant as a duly authorized
officer and as the Registrant's chief accounting officer.
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INDEX TO EXHIBITS
Exhibit Number Description
1.1 Purchase Agreement, dated April 6, 2001, among DaVita Inc., the
subsidiaries of DaVita Inc. named therein and Credit Suisse First
Boston Corporation, Banc of America Securities LLC, SunTrust Equitable
Securities, BNY Capital Markets, Inc. and Scotia Capital (the "Initial
Purchasers").*
4.1 Indenture, dated as of April 11, 2001, between DaVita Inc., the
subsidiaries of DaVita Inc. named therein and U.S. Trust Company of
Texas, National Association, as trustee.*
4.3 Registration Rights Agreement, dated as of April 11, 2001, among
DaVita Inc., the subsidiaries of DaVita Inc. named therein and the
Initial Purchasers.*
10.1 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").*
10.2 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.*
10.3 Subsidiary Guarantee, 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.*
10.4 Amended and Restated 1999 Equity Compensation Plan.**
10.5 Employment Agreement, effective as of June 15, 2000, by and between
DaVita Inc. and Joseph C. Mello.X
12.1 Ratio of earnings to fixed charges.X
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X Filed herewith.
* Filed on June 8, 2001 as an exhibit to our Registration Statement on Form
S-4 (Registration Statement No. 333-62552).
** Filed on April 27, 2001 as an exhibit to the Definitive Proxy Statement for
our 2001 Annual Meeting of Stockholders.
23