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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the Quarter Ended March 31, 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 May 1, 2001, there were 83,050,889 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 March 31, 2001 and
December 31, 2000........................................... 1
Consolidated Statements of Income and Comprehensive Income
for the three months ended March 31, 2001 and March 31,
2000........................................................ 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and March 31, 2000..................... 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 13
Item 6. Exhibits and Reports on Form 8-K............................ 13
Signature............................................................ 14
- --------
Note: Items 2, 3, 4 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)
March 31, December 31,
2001 2000
---------- ------------
ASSETS
Cash and cash equivalents............................. $ 17,443 $ 31,207
Accounts receivable, less allowance of $60,790 and
$61,619.............................................. 299,424 290,412
Inventories........................................... 45,566 20,641
Other current assets.................................. 14,259 10,293
Income taxes receivable............................... 2,830
Deferred income taxes................................. 42,265 42,492
---------- ----------
Total current assets.............................. 418,957 397,875
Property and equipment, net........................... 242,797 236,659
Intangible assets, net................................ 947,946 921,623
Investments in third-party dialysis businesses........ 12,203 34,194
Other long-term assets................................ 2,205 1,979
Deferred income taxes................................. 1,629 4,302
---------- ----------
$1,625,737 $1,596,632
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable...................................... $ 77,345 $ 74,882
Other current liabilities............................. 106,781 102,563
Accrued compensation and benefits..................... 72,484 70,406
Current portion of long-term debt..................... 7,580 1,676
Income taxes payable.................................. 15,503
---------- ----------
Total current liabilities......................... 279,693 249,527
Long-term debt........................................ 932,025 974,006
Other long-term liabilities........................... 4,755 4,855
Minority interests.................................... 21,045 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; 82,943,817 and 82,135,634 shares issued
and outstanding)................................... 83 82
Additional paid-in capital.......................... 438,509 430,676
Notes receivable from shareholders.................. (83)
Accumulated deficit................................. (50,373) (81,307)
---------- ----------
Total shareholders' equity........................ 388,219 349,368
---------- ----------
$1,625,737 $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 March 31
------------------
2001 2000
-------- --------
Net operating revenues..................................... $386,217 $372,113
Operating expenses:
Dialysis centers and labs................................ 260,974 259,298
General and administrative............................... 31,813 31,921
Depreciation and amortization............................ 26,148 27,718
Provision for uncollectible accounts..................... (8,185) 12,859
-------- --------
Total operating expenses............................... 310,750 331,796
-------- --------
Operating income........................................... 75,467 40,317
Other income, net.......................................... 1,348 1,395
Debt expense............................................... 19,724 33,165
Minority interests in income of consolidated subsidiaries.. (2,457) (998)
-------- --------
Income before income taxes................................. 54,634 7,549
Income tax expense......................................... 23,700 3,702
-------- --------
Net income................................................. $ 30,934 $ 3,847
======== ========
Earnings per common share--basic........................... $ 0.37 $ 0.05
======== ========
Earnings per common share--assuming dilution............... $ 0.35 $ 0.05
======== ========
COMPREHENSIVE INCOME
Net income and comprehensive income........................ $ 30,934 $ 3,847
======== ========
See notes to condensed consolidated financial statements.
2
DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three months ended
March 31
-------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net income................................................................... $ 30,934 $ 3,847
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.............................................. 26,148 27,718
Gain on divestures......................................................... (2,107)
Deferred income taxes...................................................... 2,900 156
Non-cash debt expense...................................................... 500 852
Stock option expense and tax benefits...................................... 3,287 88
Equity investment losses (income).......................................... (694) 396
Minority interests in income of consolidated subsidiaries.................. 2,457 998
Changes in operating assets and liabilities, net of acquisitions and
divestitures:
Accounts receivable........................................................ (2,846) 24,031
Inventories................................................................ (24,418) 7,517
Other current assets....................................................... (3,540) (4,541)
Other long-term assets..................................................... 49 1,993
Accounts payable........................................................... 2,160 (22,116)
Accrued compensation and benefits.......................................... (1,539) (261)
Other current liabilities.................................................. 4,200 (2,001)
Income taxes............................................................... 18,333 25,978
Other long-term liabilities................................................ (100) (208)
--------- --------
Net cash provided by operating activities................................ 57,831 62,340
--------- --------
Cash flows from investing activities:
Additions of property and equipment, net..................................... (6,755) (16,677)
Acquisitions and divestitures, net........................................... (50,667) 14,791
Investments in affiliates, net............................................... 19,593 (2,194)
--------- --------
Net cash used in investing activities.................................... (37,829) (4,080)
--------- --------
Cash flows from financing activities:
Borrowings................................................................... 814,813
Payments on long-term debt................................................... (851,667) (15,223)
Deferred financing costs..................................................... (50)
Net proceeds from issuance of common stock................................... 4,630 867
Distributions to minority interests.......................................... (1,492) (1,508)
--------- --------
Net cash used in financing activities.................................... (33,766) (15,864)
--------- --------
Net increase (decrease) in cash................................................ (13,764) 42,396
Cash and cash equivalents at beginning of period............................... 31,207 107,981
--------- --------
Cash and cash equivalents at end of period..................................... $ 17,443 $150,377
========= ========
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 period ended March 31,
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 is as follows:
Three months
ended March 31
--------------
2001 2000
------- ------
Basic:
Net income................................................... $30,934 $3,847
======= ======
Weighted average number of shares outstanding during the
period...................................................... 82,537 81,352
Reduction in shares in connection with notes receivable from
employees................................................... (37)
------- ------
Weighted average number of shares outstanding for earnings
per share--basic............................................ 82,537 81,315
======= ======
Earnings per share--basic.................................... $ 0.37 $ 0.05
======= ======
Assuming dilution:
Net income................................................... $30,934 $3,847
Interest, net of tax resulting from dilutive effect of
convertible debt............................................ 4,662
------- ------
Net income--assuming dilution.............................. $35,596 $3,847
======= ======
Weighted average number of shares outstanding for earnings
per share--basic............................................ 82,537 81,315
Incremental shares from stock option plans................. 4,270 429
Incremental shares from convertible debt................... 15,394
------- ------
Weighted average outstanding and incremental shares for
earnings per share--assuming dilution....................... 102,201 81,744
======= ======
Earnings per share--assuming dilution........................ $ 0.35 $ 0.05
======= ======
Stock options with exercise prices greater than the average market price of
shares outstanding during the period were not included in the calculation of
earnings per share assuming dilution because they would have been anti-
dilutive. The stock options not included in the calculation totaled 2,207,367
and 10,428,517 shares at exercise prices ranging from $16.77 to $33.50 per
share and $4.23 to $36.13 per share for the three months ended March 31, 2001
and 2000, respectively. The calculation of earnings per share assuming
dilution includes the
4
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(unaudited)
(dollars in thousands except per share data)
dilutive effect of both the 5 5/8% and the 7% convertible subordinated notes
on an "if-converted" basis for the three months ended March 31, 2001. Both the
5 5/8% and the 7% convertible subordinated notes were anti-dilutive on an "if-
converted" basis for the three months ended March 31, 2000.
3. Subsequent events
On April 6, 2001 the Company completed the sale 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. On May 4, 2001 the
Company completed a refinancing of its 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. As a result of
these refinancings, the write-off of deferred financing costs and accelerated
recognition of deferred swap liquidation gains associated with the refinanced
debt will be reported as a net extraordinary gain for the quarter ending June
30, 2001.
4. Contingencies
Health care providers' 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 $5.6 million for
the review period from January 1995 to April 1996, and $15 million 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 $16.1 million of the suspended claims for the review
period from April 1998 to August 1999 and $11.6 million 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.
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 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 $5.6
million. 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 $14.2 million, or substantially all of the overpayment
determination. The Company has filed appeals of both decisions to a federal
administrative law judge, and has moved to consolidate the two appeals. At
this time, the Company has not received a scheduled date for a hearing with an
administrative law judge, although the Department of Health and Human
Services, or HHS, has informed the Company that it can expect a hearing in the
second quarter of 2001.
5
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(unaudited)
(dollars in thousands except per share data)
In February 1999, our Florida-based laboratory subsidiary filed a complaint
against the carrier and HHS seeking a court order to lift the payment
suspension. In July 1999, the court dismissed our complaint because we had not
exhausted all administrative remedies, that is, the carrier review and
administrative law judge processes described above.
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 million per quarter. We estimate that the potential
cash exposure as of March 31, 2001 is not more than $15 million 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.
5. Condensed consolidating financial statements
The following information is presented as required under the Securities and
Exchange Commission Financial Reporting Release No. 55 in connection with the
Company's publicly traded debt. This information is not routinely prepared for
use by management. The operating and investing activities of the separate
legal entities included in the consolidated financial statements are fully
interdependent and integrated. Accordingly, the operating results of the
separate legal entities are not representative of what the operating results
would be on a stand-alone basis. Revenues and operating expenses of the
separate legal entities include intercompany charges for management and other
services.
6
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(unaudited)
(dollars in thousands except per share data)
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 its wholly-owned domestic
subsidiaries. Non-wholly-owned subsidiaries, joint ventures and partnerships
are not guarantors of either obligations.
Condensed Consolidating Balance Sheets
Wholly-owned
subsidiaries
DaVita ------------------- Non-participating Consolidating Consolidated
Inc. RTC All others subsidiaries adjustments total
---------- -------- ---------- ----------------- ------------- ------------
As of March 31, 2001
- --------------------
Cash and cash
equivalents............ $ 6,848 $ 7 $ 10,588 $ 17,443
Accounts receivable,
net.................... 84,446 185,524 $ 29,454 299,424
Other current assets.... 2,533 14,382 83,113 2,062 102,090
---------- -------- -------- -------- ----------- ----------
Total current assets.. 9,381 98,835 279,225 31,516 418,957
Property and equipment,
net.................... 5,021 58,673 154,784 24,319 242,797
Investments in
subsidiaries........... 234,670 (234,670)
Receivables from
subsidiaries........... 940,517 (940,517)
Intangible assets, net.. 9,105 294,506 527,151 117,184 947,946
Other assets............ 12,541 5,325 (1,873) 44 16,037
---------- -------- -------- -------- ----------- ----------
Total assets.......... $1,211,235 $457,339 $959,287 $173,063 $(1,175,187) $1,625,737
========== ======== ======== ======== =========== ==========
Current liabilities..... 21,674 24,285 230,179 3,555 279,693
Payables to
subsidiaries/parent.... 129,053 774,275 37,189 (940,517)
Long-term liabilities... 801,300 125,000 5,122 5,358 936,780
Minority interests...... 21,045 21,045
Shareholders' equity.... 388,261 179,001 (50,289) 126,961 (255,715) 388,219
---------- -------- -------- -------- ----------- ----------
Total liabilities and
shareholders'
equity............... $1,211,235 $457,339 $959,287 $173,063 $(1,175,187) $1,625,737
========== ======== ======== ======== =========== ==========
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
========== ======== ======== ======== =========== ==========
7
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(unaudited)
(dollars in thousands except per share data)
Condensed Consolidating Statements of Income
Wholly-owned
subsidiaries
-----------------
All Non-participating Consolidating Consolidated
DaVita Inc. RTC others subsidiaries adjustments total
----------- -------- -------- ----------------- ------------- ------------
For the quarter ended
March 31, 2001
- ---------------------
Net operating revenues.. $33,567 $117,789 $222,583 $44,147 $(31,869) $386,217
Operating expenses...... 10,123 98,563 201,059 32,874 (31,869) 310,750
------- -------- -------- ------- -------- --------
Operating income........ 23,444 19,226 21,524 11,273 75,467
Other income............ 228 58 1,062 1,348
Debt expense............ 18,132 1,743 (1,482) 1,331 19,724
Minority interests...... (2,457) (2,457)
Income taxes............ 2,382 7,463 13,855 23,700
Equity earnings in
consolidated
subsidiaries........... 27,776 7,485 (35,261)
------- -------- -------- ------- -------- --------
Net income............ $30,934 $ 10,078 $ 17,698 $ 9,942 $(37,718) $ 30,934
======= ======== ======== ======= ======== ========
For the quarter ended
March 31, 2000
- ---------------------
Net operating revenues.. $21,201 $124,734 $206,125 $39,505 $(19,452) $372,113
Operating expenses...... 6,780 114,427 196,726 33,315 (19,452) 331,796
------- -------- -------- ------- -------- --------
Operating income...... 14,421 10,307 9,399 6,190 40,317
Other income............ 385 48 950 12 1,395
Debt expense............ 31,647 1,728 (3,351) 3,141 33,165
Minority interests...... (998) (998)
Income taxes............ (6,905) 3,424 7,223 (40) 3,702
Equity earnings in
consolidated
subsidiaries........... 13,783 2,103 (15,886)
------- -------- -------- ------- -------- --------
Net income............ $ 3,847 $ 5,203 $ 8,580 $ 3,101 $(16,884) $ 3,847
======= ======== ======== ======= ======== ========
8
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(unaudited)
(dollars in thousands except per share data)
Condensed Consolidating Statements of Cash Flows
Wholly-owned
subsidiaries
------------------
All Non-participating Consolidating Consolidated
DaVita Inc. RTC others subsidiaries adjustments total
----------- -------- -------- ----------------- ------------- ------------
Quarter ended March 31,
2001
Cash flows from
operating activities:
Net income.............. $ 30,934 $ 10,078 $ 17,698 $ 9,942 $(37,718) $ 30,934
Changes in operating and
intercompany assets and
liabilities and non
cash items included in
net income............. (2,610) (10,903) 8,953 (6,261) 37,718 26,897
-------- -------- -------- ------- -------- --------
Net cash provided by
(used in) operating
activities: 28,324 (825) 26,651 3,681 -- 57,831
-------- -------- -------- ------- -------- --------
Cash flows from
investing activities:
Purchases of property
and equipment, net..... (109) (1,039) (2,779) (2,828) (6,755)
Acquisitions and
divestitures, net...... (50,667) (50,667)
Other items............. 19,568 25 19,593
-------- -------- -------- ------- -------- --------
Net cash used in
investing activities.. (109) (1,039) (33,878) (2,803) (37,829)
-------- -------- -------- ------- -------- --------
Cash flows from
financing activities:
Long-term debt.......... (42,500) 5,032 614 (36,854)
Other items............. 4,580 (1,492) 3,088
-------- -------- -------- ------- -------- --------
Net cash provided (used
in) financing
activities............ (37,920) 5,032 (878) (33,766)
-------- -------- -------- ------- -------- --------
Net decrease in cash.... (9,705) (1,864) (2,195) -- (13,764)
Cash at the beginning of
the period............. 16,553 1,871 12,783 31,207
-------- -------- -------- ------- -------- --------
Cash at the end of the
period................. $ 6,848 $ 7 $ 10,588 $ -- $ -- $ 17,443
======== ======== ======== ======= ======== ========
Quarter ended March 31,
2000
Cash flows from
operating activities:
Net income.............. $ 3,847 $ 5,203 $ 8,580 $ 3,101 $(16,884) $ 3,847
Changes in operating and
intercompany assets and
liabilities and non
cash items included in
net loss............... (56,284) (362) 98,844 (589) 16,884 58,493
-------- -------- -------- ------- -------- --------
Net cash provided by
(used in) operating
activities............ (52,437) 4,841 107,424 2,512 -- 62,340
-------- -------- -------- ------- -------- --------
Cash flows from
investing activities:
Purchases of property
and equipment, net..... (337) (4,661) (10,044) (1,635) (16,677)
Acquisitions and
divestitures, net...... 14,791 14,791
Other items............. (2,194) (2,194)
-------- -------- -------- ------- -------- --------
Net cash provided by
(used in) investing
activities............ (337) (4,661) 2,553 (1,635) (4,080)
-------- -------- -------- ------- -------- --------
Cash flows from
financing activities:
Long-term debt.......... (11,885) (2,461) (877) (15,223)
Other items............. 867 (1,508) (641)
-------- -------- -------- ------- -------- --------
Net cash used in
financing activities.. (11,018) (3,969) (877) (15,864)
Net increase (decrease)
in cash................ (63,792) 180 106,008 42,396
Cash at the beginning of
the period............. 90,544 4,118 13,319 107,981
-------- -------- -------- ------- -------- --------
Cash at the end of the
period................. $ 26,752 $ 4,298 $119,327 $ -- $ -- $150,377
======== ======== ======== ======= ======== ========
9
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
forward-looking statements are often identified with words such as
"anticipates," "believes," "expects," "will," "should," "intends," and
"projections" and the negative of these words or other comparable terminology.
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, and the risk factors set forth in the Company's Form 10-K/A for
the year ended December 31, 2000. These risks, among others, include those
relating to (1) possible reductions in private and government reimbursement
rates, (2) the concentration of profits generated from private indemnity
patients, (3) the ongoing payment suspension and review of the Company's
Florida laboratory subsidiary by its Medicare carrier and the Department of
Justice, (4) the ongoing review by the Civil Division of the US Attorney's
Office for the Eastern District of Pennsylvania and (5) 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 undertake no obligation 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
---------------------------------
March 31, December 31, March 31,
2001 2000 2000
--------- ------------- ---------
Revenues:
Continental U.S.......................... $382 99% $369 99% $339 91%
Non-continental U.S...................... 4 1% 4 1% 33 9%
---- ---- ------ ------ ---- ----
386 100% 373 100% 372 100%
==== ==== ====== ====== ==== ====
Operating expenses:
Continental U.S.......................... 306 98% 317 99% 301 91%
Non-continental U.S...................... 5 2% 4 1% 31 9%
---- ---- ------ ------ ---- ----
311 100% 321 100% 332 100%
==== ==== ====== ====== ==== ====
Consolidated operating income.............. $ 75 $ 52 $ 40
==== ====== ====
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 two 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.
10
Continental U.S. operations
(dollars in millions)
Quarter ended
-------------------------------------
December
March 31, 31, March 31,
2001 2000 2000
------------ ----------- -----------
Revenues............................. $ 382 100% $ 369 100% $ 339 100%
------ ------ ------
Operating expenses:
Dialysis centers and labs.......... 256 67% 253 68% 235 69%
General and administrative......... 32 8% 30 8% 30 9%
Depreciation and amortization...... 26 7% 27 7% 24 7%
Provision for uncollectible
accounts.......................... (8) (2%) 7 2% 12 4%
------ ------ ------
306 80% 317 86% 301 89%
------ ------ ------
Operating income before impairment
losses.............................. $ 76 20% $ 52 14% $ 38 11%
====== ====== ======
Dialysis treatments (000's).......... 1,366 1,352 1,318
Average dialysis revenue per dialysis
treatment........................... $ 274 $ 266 $ 247
Net operating revenues for the continental U.S. operations were $382
million for the first quarter of 2001, approximately 13% higher than in the
first quarter of 2000. Approximately half the increase in revenue was due to
higher average revenue per treatment. The average dialysis revenue per
treatment (excluding lab and pharmacy revenue and management fee income) was
$274 for the first quarter of 2001, compared with $247 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 and increased revenue associated with the
administration of new higher-cost drugs and the 1.2% increase in the Medicare
composite reimbursement rate that became effective on January 1, 2001. The
number of treatments in the first quarter of 2001 increased 3.7% over the same
quarter of 2000. Non-dialysis revenues were approximately $8 million in the
first quarter of 2001, approximately $6 million lower than the first quarter
of 2000 due to the sale of our pharmacy in March 2000 and reduced lab
revenues.
First quarter 2001 net operating revenues were approximately 3.5% higher
than in the fourth quarter of 2000. The number of treatments increased by 1%
in the first quarter. The increase in treatments due to acquisitions in the
first quarter of 2001 was offset by one less treatment day in the first
quarter of 2001 compared to the fourth quarter of 2000. Net dialysis revenue
per treatment increased approximately $8 from fourth quarter 2000 to first
quarter of 2001, or approximately 3%, attributable to the same factors
discussed above.
Center operating expenses were approximately 67% of operating revenues for
continental U.S. operations in the first quarter of 2001, compared with 68% in
the fourth quarter of 2000 and 69% in the first quarter of 2000. On a per-
treatment basis, first quarter 2001 center operating expenses were
approximately $2 higher than in the prior quarter, and averaged approximately
$10 per treatment higher than in the first 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 expense was approximately 8% of operating
revenues for continental U.S. operations in both the first quarter of 2001 and
the fourth quarter of 2000, compared with 9% in the first quarter of 2000. The
decrease from the first quarter of 2000, measured as a percentage of revenue,
was attributable to the higher average revenue rate per treatment in the first
quarter of 2001 and the fourth quarter of 2000. In absolute dollars, general
and administrative expense for the first quarter of 2001 was approximately 5%
higher than in the fourth quarter, reflecting higher labor and infrastructure
costs.
11
During the first quarter of 2001, we realized cash recoveries of
approximately $16 million associated with aged accounts receivables reserved
in 1999, and recognized the cash recoveries as a reversal of bad debt expense.
At this time, we do not anticipate further collections of old accounts
receivable that would result in additional significant bad debt recoveries.
The provision for uncollectible accounts receivable for the first quarter of
2001 was approximately 2% of operating revenues before considering the
recoveries of $16 million, 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 $20 million for the first quarter of 2001 was approximately
$13 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 $320 million to $360 million for the
year 2001, excluding the $16 million of bad debt recoveries in the first
quarter. These projections assume minimal acquisitions, an internal annual
growth rate in the number of dialysis treatments of approximately 3% to 4%,
limited opportunities to improve the mix of and reimbursement rates for non-
Medicare treatments, and underlying cost growth trends. 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. 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 Department
of Justice or the Department of Health and Human Services in any pending or
future review of our business or otherwise.
Liquidity and capital resources
Cash flow from operations during the first quarter amounted to $58 million
and total long-term debt was reduced by $37 million. The positive cash flow
included $66 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
$7 million in capital asset expenditures.
In April 2001, $225 million of 9 1/4% Senior Subordinated Notes were sold.
The net proceeds of this offering were used to pay down amounts outstanding
under our senior credit facilities. 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 revolving credit
facility with $150 million of availability, none of which is currently drawn.
The starting interest rate for both Term A and B loans is LIBOR plus 2.75%, an
improvement of 0.25% and 1.0%, respectively, from the previous term loan
rates. The Term A loan and revolver interest rates are subject to increase or
decrease based on changes in our leverage ratio. The new term loan facilities
are subject to aggregate quarterly amortization of principal of $3.0 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.
Continental U.S. accounts receivable at March 31, 2001 amounted to $296
million, an increase of $13 million during the quarter. The first quarter
continental U.S. accounts receivable balance represented approximately 71 days
of revenue, an improvement of approximately 2 days for the quarter.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk exposure from that
reported in our Form 10-K/A for the fiscal year ended December 31, 2000.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The information in Note 4 of the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this report is incorporated by this reference
in response to this item.
Items 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges.X
(b) Reports on Form 8-K
Current Report on Form 8-K, dated February 5, 2001, reporting under Item 5
our issuance of a press release announcing our cooperation with the review of
some of our historical practices by the Civil Division of the United States
Attorney's Office for the Eastern District of Pennsylvania.
- --------
X Filed herewith.
13
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: May 14, 2001
- --------
* Mr. Beil has signed both on behalf of the registrant as a duly authorized
officer and as the Registrant's chief accounting officer.
14
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
12.1 Ratio of earnings to fixed charges.X..............
- --------
X Filed herewith.
15