UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the Quarter Ended
September 30, 2002March 31, 2003
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-4034
DAVITA INC.
21250 Hawthorne Blvd., Suite 800
Torrance, California 90503-5517
Telephone #number (310) 792-2600
Delaware | ||
(State of incorporation) | 51-0354549 (I.R.S. |
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.
The Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
As of NovemberMay 1, 2002,2003, there were approximately 60.561.1 million shares of the Registrant’s common stock (par value $0.001) outstanding.
DAVITA INC.
Page No. | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1. | ||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
Item 2. | 13 | |||
Item 3. | 17 | |||
Item 4. | 17 | |||
18 | ||||
PART II. OTHER INFORMATION | ||||
Item 1. | 23 | |||
Item 6. | 24 | |||
25 | ||||
26 |
Note: | Items 2, 3, 4 and 5 of Part II are omitted because they are not applicable. |
i
DAVITA INC.
(unaudited)
(dollars in thousands, except per share data)
September 30, 2002 | December 31, 2001 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 115,361 | $ | 36,711 | ||||
Accounts receivable, less allowance of $50,165 and $52,475 | 339,955 | 333,546 | ||||||
Inventories | 21,931 | 34,901 | ||||||
Other current assets | 17,068 | 9,364 | ||||||
Deferred income taxes | 63,741 | 60,142 | ||||||
Total current assets | 558,056 | 474,664 | ||||||
Property and equipment, net | 278,761 | 252,778 | ||||||
Amortizable intangibles, net | 65,635 | 73,108 | ||||||
Investments in third-party dialysis businesses | 3,266 | 4,346 | ||||||
Other long-term assets | 1,831 | 2,027 | ||||||
Goodwill | 860,425 | 855,760 | ||||||
$ | 1,767,974 | $ | 1,662,683 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Accounts payable | $ | 77,846 | $ | 74,630 | ||||
Other current liabilities | 106,456 | 111,164 | ||||||
Accrued compensation and benefits | 99,070 | 88,826 | ||||||
Current portion of long-term debt | 8,166 | 9,034 | ||||||
Income taxes payable | 33,473 | 15,027 | ||||||
Total current liabilities | 325,011 | 298,681 | ||||||
Long-term debt | 1,313,847 | 811,190 | ||||||
Other long-term liabilities | 8,034 | 5,012 | ||||||
Deferred income taxes | 49,910 | 23,441 | ||||||
Minority interests | 22,462 | 20,722 | ||||||
Shareholders’ equity: | ||||||||
Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued) | ||||||||
Common stock ($0.001 par value, 195,000,000 shares authorized; 88,314,176 and 85,409,037 shares issued) | 88 | 85 | ||||||
Additional paid-in capital | 511,627 | 467,904 | ||||||
Retained earnings | 154,526 | 56,008 | ||||||
Treasury stock, at cost (26,325,677 and 888,700 shares) | (617,531 | ) | (20,360 | ) | ||||
Total shareholders’ equity | 48,710 | 503,637 | ||||||
$ | 1,767,974 | $ | 1,662,683 | |||||
March 31, 2003 | December 31, 2002 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 304,994 |
| $ | 96,475 |
| ||
Accounts receivable, less allowance of $48,743 and $48,927 |
| 346,145 |
|
| 344,292 |
| ||
Inventories |
| 25,465 |
|
| 34,929 |
| ||
Other current assets |
| 24,049 |
|
| 28,667 |
| ||
Deferred income taxes |
| 41,773 |
|
| 40,163 |
| ||
Total current assets |
| 742,426 |
|
| 544,526 |
| ||
Property and equipment, net |
| 305,742 |
|
| 298,475 |
| ||
Amortizable intangibles, net |
| 60,080 |
|
| 63,159 |
| ||
Investments in third-party dialysis businesses |
| 3,368 |
|
| 3,227 |
| ||
Other long-term assets |
| 2,609 |
|
| 1,520 |
| ||
Goodwill |
| 865,449 |
|
| 864,786 |
| ||
$ | 1,979,674 |
| $ | 1,775,693 |
| |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Accounts payable | $ | 71,295 |
| $ | 77,890 |
| ||
Other liabilities |
| 113,505 |
|
| 101,389 |
| ||
Accrued compensation and benefits |
| 82,391 |
|
| 95,435 |
| ||
Current portion of long-term debt |
| 43,908 |
|
| 7,978 |
| ||
Income taxes payable |
| 26,550 |
|
| 9,909 |
| ||
Total current liabilities |
| 337,649 |
|
| 292,601 |
| ||
Long-term debt |
| 1,420,585 |
|
| 1,311,252 |
| ||
Other long-term liabilities |
| 10,346 |
|
| 9,417 |
| ||
Deferred income taxes |
| 72,381 |
|
| 65,930 |
| ||
Minority interests |
| 27,156 |
|
| 26,229 |
| ||
Shareholders’ equity: | ||||||||
Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued) | ||||||||
Common stock ($0.001 par value, 195,000,000 shares authorized; 89,162,390 and 88,874,896 shares issued) |
| 89 |
|
| 89 |
| ||
Additional paid-in capital |
| 523,572 |
|
| 519,369 |
| ||
Retained earnings |
| 249,750 |
|
| 213,337 |
| ||
Treasury stock, at cost (28,187,326 and 28,216,177 shares) |
| (661,854 | ) |
| (662,531 | ) | ||
Total shareholders’ equity |
| 111,557 |
|
| 70,264 |
| ||
$ | 1,979,674 |
| $ | 1,775,693 |
| |||
See notes to condensed consolidated financial statements.
DAVITA INC.
(unaudited)
(dollars in thousands, except per share data)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Net operating revenues | $ | 481,194 | $ | 434,239 | $ | 1,351,536 | $ | 1,221,096 | ||||||||
Operating expenses: | ||||||||||||||||
Dialysis centers and lab | 308,438 | 277,252 | 900,624 | 809,771 | ||||||||||||
General and administrative | 37,048 | 31,150 | 115,125 | 95,380 | ||||||||||||
Depreciation and amortization | 16,267 | 26,281 | 47,770 | 79,053 | ||||||||||||
Provision for uncollectible accounts | 8,117 | 2,689 | 19,254 | (5,874 | ) | |||||||||||
Impairments and valuation adjustments | (2,390 | ) | ||||||||||||||
Total operating expenses | 369,870 | 337,372 | 1,080,383 | 978,330 | ||||||||||||
Operating income | 111,324 | 96,867 | 271,153 | 242,766 | ||||||||||||
Other income, net | 1,124 | 1,856 | 4,972 | 4,324 | ||||||||||||
Debt expense | 19,967 | 18,319 | 52,178 | 56,758 | ||||||||||||
Minority interests in income of consolidated subsidiaries | (1,911 | ) | (2,126 | ) | (7,171 | ) | (6,852 | ) | ||||||||
Income before income taxes and extraordinary item | 90,570 | 78,278 | 216,776 | 183,480 | ||||||||||||
Income tax expense | 36,400 | 34,000 | 88,900 | 79,700 | ||||||||||||
Income before extraordinary item | 54,170 | 44,278 | 127,876 | 103,780 | ||||||||||||
Extraordinary (loss) gain related to early extinguishment of debt, net of tax of $19,572 in 2002 and $652 in 2001 | (29,358 | ) | 977 | |||||||||||||
Net income | $ | 54,170 | $ | 44,278 | $ | 98,518 | $ | 104,757 | ||||||||
Comprehensive income | $ | 54,170 | $ | 44,278 | $ | 98,518 | $ | 104,757 | ||||||||
Basic earnings per share: | ||||||||||||||||
Income before extraordinary item | $ | 0.84 | $ | 0.52 | $ | 1.69 | $ | 1.25 | ||||||||
Extraordinary (loss) gain, net of tax | (0.39 | ) | 0.01 | |||||||||||||
Net income | $ | 0.84 | $ | 0.52 | $ | 1.30 | $ | 1.26 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Income before extraordinary item | $ | 0.72 | $ | 0.47 | $ | 1.51 | $ | 1.15 | ||||||||
Extraordinary (loss) gain, net of tax | (0.31 | ) | 0.01 | |||||||||||||
Net income | $ | 0.72 | $ | 0.47 | $ | 1.20 | $ | 1.16 | ||||||||
Three months ended March 31, | ||||||
2003 | 2002 | |||||
Net operating revenues | $ | 459,807 | $ | 427,665 | ||
Operating expenses and charges: | ||||||
Dialysis centers and labs |
| 316,710 |
| 291,634 | ||
General and administrative |
| 36,787 |
| 36,053 | ||
Depreciation and amortization |
| 17,445 |
| 15,805 | ||
Provision for uncollectible accounts |
| 8,237 |
| 5,255 | ||
Minority interests and equity income, net |
| 1,294 |
| 2,135 | ||
Total operating expenses and charges |
| 380,473 |
| 350,882 | ||
Operating income |
| 79,334 |
| 76,783 | ||
Debt expense |
| 19,456 |
| 15,072 | ||
Other income, net |
| 785 |
| 267 | ||
Income before income taxes |
| 60,663 |
| 61,978 | ||
Income tax expense |
| 24,250 |
| 26,000 | ||
Net income | $ | 36,413 | $ | 35,978 | ||
Comprehensive income | $ | 36,413 | $ | 35,978 | ||
Earnings per share: | ||||||
Basic | $ | 0.60 | $ | 0.43 | ||
Diluted | $ | 0.52 | $ | 0.40 | ||
Weighted average shares for earnings per share: | ||||||
Basic |
| 60,905,056 |
| 82,967,141 | ||
Diluted |
| 78,772,410 |
| 102,246,452 | ||
See notes to condensed consolidated financial statements.
DAVITA INC.
(unaudited)
(dollars in thousands)
Nine months ended September 30, | ||||||||
2002 | 2001 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 98,518 | $ | 104,757 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation and amortization | 47,770 | 79,053 | ||||||
Impairments and valuation adjustments | (2,390 | ) | ||||||
(Gain) loss on divestitures | (220 | ) | 528 | |||||
Deferred income taxes | 22,574 | 16,514 | ||||||
Non-cash debt expense | 2,375 | 1,823 | ||||||
Stock options, principally tax benefits | 18,035 | 12,864 | ||||||
Equity investment (income) | (1,465 | ) | (2,666 | ) | ||||
Minority interests in income of consolidated subsidiaries | 7,171 | 6,852 | ||||||
Extraordinary loss (gain) | 29,358 | (977 | ) | |||||
Changes in operating assets and liabilities, excluding acquisitions and divestitures: | ||||||||
Accounts receivable | (13,362 | ) | (21,647 | ) | ||||
Inventories | 12,506 | (11,847 | ) | |||||
Other current assets | (7,726 | ) | 4,026 | |||||
Other long-term assets | 216 | (53 | ) | |||||
Accounts payable | 9,787 | 1,789 | ||||||
Accrued compensation and benefits | 10,531 | 14,896 | ||||||
Other current liabilities | 7,181 | 19,072 | ||||||
Income taxes payable | 38,315 | 21,563 | ||||||
Other long-term liabilities | 3,075 | 357 | ||||||
Net cash provided by operating activities | 282,249 | 246,904 | ||||||
Cash flows from investing activities: | ||||||||
Additions of property and equipment, net | (66,999 | ) | (30,180 | ) | ||||
Acquisitions and divestitures, net | (11,979 | ) | (66,588 | ) | ||||
Investments in affiliates, net | 3,488 | 24,533 | ||||||
Intangible assets | (142 | ) | (11 | ) | ||||
Net cash used in investing activities | (75,632 | ) | (72,246 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings | 1,928,326 | 1,541,890 | ||||||
Payments on long-term debt | (1,426,537 | ) | (1,697,941 | ) | ||||
Debt redemption premium | (40,910 | ) | ||||||
Deferred financing costs | (10,794 | ) | (10,018 | ) | ||||
Purchases of treasury stock | (597,171 | ) | (2,494 | ) | ||||
Proceeds from issuance of common stock | 25,691 | 13,139 | ||||||
Distributions to minority interests | (6,572 | ) | (5,186 | ) | ||||
Net cash used in financing activities | (127,967 | ) | (160,610 | ) | ||||
Net increase in cash | 78,650 | 14,048 | ||||||
Cash and cash equivalents at beginning of period | 36,711 | 31,207 | ||||||
Cash and cash equivalents at end of period | $ | 115,361 | $ | 45,255 | ||||
Three months ended March 31, | ||||||||
2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 36,413 |
| $ | 35,978 |
| ||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation and amortization |
| 17,445 |
|
| 15,805 |
| ||
Loss (gain) on divestitures |
| 119 |
|
| (458 | ) | ||
Deferred income taxes |
| 4,841 |
|
| 7,861 |
| ||
Non-cash debt expense |
| 840 |
|
| 634 |
| ||
Stock options, principally tax benefits |
| 1,378 |
|
| 8,931 |
| ||
Equity investment income |
| (519 | ) |
| (298 | ) | ||
Minority interests in income of consolidated subsidiaries |
| 1,813 |
|
| 2,433 |
| ||
Distributions to minority interests |
| (2,465 | ) |
| (1,501 | ) | ||
Changes in operating assets and liabilities, excluding acquisitions and divestitures: | ||||||||
Accounts receivable |
| (676 | ) |
| (11,163 | ) | ||
Inventories |
| 9,543 |
|
| 6,726 |
| ||
Other current assets |
| 4,721 |
|
| (2,840 | ) | ||
Other long-term assets |
| (2,457 | ) | |||||
Accounts payable |
| (6,674 | ) |
| 8,969 |
| ||
Accrued compensation and benefits |
| (13,075 | ) |
| (2,617 | ) | ||
Other current liabilities |
| 11,952 |
|
| 15,050 |
| ||
Income taxes |
| 16,641 |
|
| 261 |
| ||
Other long-term liabilities |
| 809 |
|
| (287 | ) | ||
Net cash provided by operating activities |
| 80,649 |
|
| 83,484 |
| ||
Cash flows from investing activities: | ||||||||
Additions of property and equipment, net |
| (21,708 | ) |
| (16,115 | ) | ||
Acquisitions and divestitures, net |
| (718 | ) |
| (1,379 | ) | ||
Investments in affiliates, net |
| 1,931 |
|
| 499 |
| ||
Intangible assets |
| (300 | ) | |||||
Net cash used in investing activities |
| (20,795 | ) |
| (16,995 | ) | ||
Cash flows from financing activities: | ||||||||
Borrowings |
| 623,822 |
|
| 335,883 |
| ||
Payments on long-term debt |
| (478,659 | ) |
| (355,803 | ) | ||
Deferred financing costs |
| (57 | ) | |||||
Purchase of treasury stock |
| (67,877 | ) | |||||
Proceeds from issuance of common stock |
| 3,502 |
|
| 16,351 |
| ||
Net cash provided by (used in) financing activities |
| 148,665 |
|
| (71,503 | ) | ||
Net increase (decrease) in cash |
| 208,519 |
|
| (5,014 | ) | ||
Cash and cash equivalents at beginning of period |
| 96,475 |
|
| 36,711 |
| ||
Cash and cash equivalents at end of period | $ | 304,994 |
| $ | 31,697 |
| ||
See notes to condensed consolidated financial statements.
DAVITA INC.
(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 are prepared by the Company without audit. In the opinion of management, all adjustments consisting only of normal recurring items necessary for a fair presentation of the results of operations are reflected in these condensed consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenuesrevenue recognition and bad debt provisions for uncollectible accounts, impairments and correspondingly, accounts receivable.valuation adjustments, accounting for income taxes and variable compensation accruals. The results of operations for the ninethree month period ended September 30, 2002March 31, 2003 are not necessarily indicative of the operating results for the full year. The condensed consolidated interim financial statements should be read in conjunction with the Management’s Discussion and Analysis and consolidated financial statements and notes thereto included in the Company’s 20012002 Form 10-K. Certain reclassificationsFinancial statement presentations and classifications have been madeconformed for consistent presentation.
2. Significant new accounting standardsStock-based compensation
If the Company had adopted the fair value-based compensation expense provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill123 upon the issuance of that standard, net income and Other Intangible Assets, and SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No. 142 goodwill is not amortized after December 31, 2001, but is routinely assessed for possible valuation impairment. An impairment charge must be recorded against current earnings if the book value of goodwill exceeds its fair value. If this standard had been effective as of January 1, 2001, amortization expense would have been reduced by approximately $6,300 and $18,900, net of tax, for the three and nine months ended September 30, 2001. Income before extraordinary item and diluted income before extraordinary item per share would have been approximately $50,500 and $122,600 and $0.53 and $1.33 per share foradjusted to the same periods.
Pro forma - As if all stock options were expensed | Three months ended March 31, | |||||||
2003 | 2002 | |||||||
Net income: | ||||||||
As reported | $ | 36,413 |
| $ | 35,978 |
| ||
Add: Stock-based employee compensation expense included in reported net income, net of tax |
| 161 |
|
| 88 |
| ||
Deduct: Total stock-based employee compensation expense under the fair value-based method, net of tax |
| (1,911 | ) |
| (3,561 | ) | ||
Pro forma net income | $ | 34,663 |
| $ | 32,505 |
| ||
Pro forma basic earnings per share: | ||||||||
Pro forma net income for basic earnings per share calculation | $ | 34,663 |
| $ | 32,505 |
| ||
Weighted average shares outstanding during the quarter |
| 60,847 |
|
| 82,925 |
| ||
Vested deferred stock units |
| 58 |
|
| 42 |
| ||
Weighted average shares for basic earnings per share calculation |
| 60,905 |
|
| 82,967 |
| ||
Basic net income per share—pro forma | $ | 0.57 |
| $ | 0.39 |
| ||
Basic net income per share—as reported | $ | 0.60 |
| $ | 0.43 |
| ||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share data)
Three months ended March 31, | ||||||
2003 | 2002 | |||||
Pro forma diluted earnings per share: | ||||||
Pro forma net income | $ | 34,663 | $ | 32,505 | ||
Debt expense savings, net of tax, from assumed conversion of convertible debt |
| 4,915 |
| 1,067 | ||
Pro forma net income for diluted earnings per share calculation | $ | 39,578 | $ | 33,572 | ||
Weighted average shares outstanding during the quarter |
| 60,847 |
| 82,925 | ||
Vested deferred stock units |
| 58 |
| 42 | ||
Assumed incremental shares from stock plans |
| 3,268 |
| 5,386 | ||
Assumed incremental shares from convertible debt |
| 15,394 |
| 4,879 | ||
Weighted average shares for diluted earnings per share calculation |
| 79,567 |
| 93,232 | ||
Diluted net income per share—pro forma | $ | 0.50 | $ | 0.36 | ||
Diluted net income per share—as reported | $ | 0.52 | $ | 0.40 | ||
2. Significant new accounting standards
In June 2002,January 2003 the Company completedFASB issued Interpretation (FIN) No. 46Consolidation of Variable Interest Entities, which addresses the next phaseconsolidation of certain entities (“variable interest entities”) in which an enterprise has a controlling financial interest through other than voting interests. FIN No. 46 requires that a variable interest entity be consolidated by the holder of the recapitalization planmajority of the expected risks and rewards associated with the repurchaseactivities of 16,682,337 shares of its common stock for approximately $402,000, or $24the variable interest entity. FIN No. 46 is not expected to have a material effect on the Company’s consolidated financial statements.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share through a modified dutch auction tender offer.
3. Earnings per share
The reconciliation of the Company’s Board of Directors authorized thenumerators and denominators used to calculate basic and diluted earnings per share is as follows:
Three months ended March 31, | ||||||
2003 | 2002 | |||||
Basic: | ||||||
Net income | $ | 36,413 | $ | 35,978 | ||
Weighted average shares outstanding during the period |
| 60,847 |
| 82,925 | ||
Vested deferred stock units |
| 58 |
| 42 | ||
Weighted average shares for basic earnings per share calculations |
| 60,905 |
| 82,967 | ||
Basic net income per share | $ | 0.60 | $ | 0.43 | ||
Diluted: | ||||||
Net income | $ | 36,413 | $ | 35,978 | ||
Debt expense savings, net of tax, from assumed conversion of convertible debt |
| 4,915 |
| 4,915 | ||
Net income for diluted earnings per share calculations | $ | 41,328 | $ | 40,893 | ||
Weighted average shares outstanding during the period |
| 60,847 |
| 82,925 | ||
Vested deferred stock units |
| 58 |
| 42 | ||
Assumed incremental shares from stock plans |
| 2,473 |
| 3,885 | ||
Assumed incremental shares from convertible debt |
| 15,394 |
| 15,394 | ||
Weighted average shares for diluted earnings per share calculations |
| 78,772 |
| 102,246 | ||
Diluted net income per share | $ | 0.52 | $ | 0.40 | ||
Options to purchase of an additional $225,000 of common stock over eighteen months. As of September 30, 2002, 5,808,940 shares had been acquired for $127,200 under this authorization. As of October 31, 2002, an additional 1,660,5002,854,224 shares at a cost of $39,322 had been repurchased. For$22.40 to $33.00 per share and 643,573 shares at $23.61 to $33.00 per share were excluded from the ninediluted earnings per share calculations for the three months ended September 30,March 31, 2003 and 2002, stock repurchases, including 2,945,700 shares acquired prior to initiatingrespectively, because they were anti-dilutive. The calculation of diluted earnings per share assumes conversion of both the recapitalization plan, amounted to $597,20055/8% convertible subordinated notes and the 7% convertible subordinated notes for 25,436,977 shares, for a composite average of $23.48all periods presented.
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share.
4. Long-term debt
In January 2003 the Company borrowed all $850,000 of the Term Loan B, and $843,950 of the Term Loan B remained outstanding as of September 30, 2002. The Term Loan B bears interest equal to LIBOR plus 3.00%. The interest rate$150,000 that was available under the Term Loan A (which is currently undrawn) and the revolvingsenior credit facility isthat was entered into in 2002. At March 31, 2003, $143,662 of the Term Loan A remained outstanding. The Term Loan A bears interest equal to LIBOR plus a margin ranging from 1.5% to 2.75% based on the Company’s leverage ratio. The Companycurrent margin is currently evaluating its future liquidity requirements2.25% for potential borrowings underan overall effective rate of 3.61%. The aggregate annual principal payments for the Term Loan A but has no obligation to draw the loan. The lenders’ commitment to fund the undrawn portion of the Term Loan A will expire in January 2003. If the entire $1,000,000 term credit facility is drawn, the aggregate annual principal payments will range from $10,600 to $50,700are approximately $34,000 in years one through five,three and will be $403,000 in each of years six and seven, with the balance of approximately $42,000 in year four, due notno later than 2009. The new senior credit facility is secured by all personal property of the Company and that of its wholly-owned subsidiaries, along with the stock of the Company’s subsidiaries. The new senior credit facility also contains financial and operating covenants including investment limitations. The Company was in compliance with the covenants of the credit facility as of September 30, 2002.
Long-term debt was comprised of the following:
September 30, 2002 | December 31, 2001 | |||||||
Senior secured credit facilities | $ | 843,950 | $ | 114,000 | ||||
Senior subordinated notes, 9¼%, 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 | 482 | 5,455 | ||||||
Capital lease obligations | 7,581 | 5,769 | ||||||
1,322,013 | 820,224 | |||||||
Less current portion | (8,166 | ) | (9,034 | ) | ||||
$ | 1,313,847 | $ | 811,190 | |||||
March 31, 2003 | December 31, 2002 | |||||||
Term Loans under senior secured credit facilities | $ | 985,162 |
| $ | 841,825 |
| ||
Convertible subordinated notes, 7%, due 2009 |
| 345,000 |
|
| 345,000 |
| ||
Convertible subordinated notes, 5 5/8%, due 2006 |
| 125,000 |
|
| 125,000 |
| ||
Capital lease obligations |
| 8,713 |
|
| 6,820 |
| ||
Acquisition obligations and other notes payable |
| 618 |
|
| 585 |
| ||
| 1,464,493 |
|
| 1,319,230 |
| |||
Less current portion |
| (43,908 | ) |
| (7,978 | ) | ||
$ | 1,420,585 |
| $ | 1,311,252 |
| |||
2002 | $ | 1,049 | |
2003 | 9,437 | ||
2004 | 8,919 | ||
2005 | 8,813 | ||
2006 | 133,856 | ||
2007 | 306,961 | ||
Thereafter | 852,978 |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||
Basic: | |||||||||||||
Income before extraordinary item | $ | 54,170 | $ | 44,278 | $ | 127,876 | $ | 103,780 | |||||
Weighted average shares outstanding during the period | 64,085 | 84,354 | 75,514 | 83,411 | |||||||||
Vested deferred stock units | 43 | 43 | |||||||||||
Weighted average shares for basic earnings per share calculations | 64,128 | 84,354 | 75,557 | 83,411 | |||||||||
Basic income per share, before extraordinary item | $ | 0.84 | $ | 0.52 | $ | 1.69 | $ | 1.25 | |||||
Basic net income per share | $ | 0.84 | $ | 0.52 | $ | 1.30 | $ | 1.26 | |||||
Diluted: | |||||||||||||
Income before extraordinary item | $ | 54,170 | $ | 44,278 | $ | 127,876 | $ | 103,780 | |||||
Debt expense savings, net of tax, resulting from assumed conversion of convertible debt | 4,915 | 4,862 | 14,746 | 14,587 | |||||||||
Income for diluted earnings per share calculations, before extraordinary item | 59,085 | 49,140 | 142,622 | 118,367 | |||||||||
Extraordinary (loss) gain | (29,358 | ) | 977 | ||||||||||
Net income | $ | 59,085 | $ | 49,140 | $ | 113,264 | $ | 119,344 | |||||
Weighted average shares outstanding during the period | 64,085 | 84,354 | 75,514 | 83,411 | |||||||||
Vested deferred stock units | 43 | 43 | |||||||||||
Assumed incremental shares from stock option plans | 2,901 | 4,278 | 3,351 | 4,352 | |||||||||
Assumed incremental shares from convertible debt | 15,394 | 15,394 | 15,394 | 15,394 | |||||||||
Weighted average shares for diluted earnings per share calculations | 82,423 | 104,026 | 94,302 | 103,157 | |||||||||
Diluted income per share, before extraordinary item | $ | 0.72 | $ | 0.47 | $ | 1.51 | $ | 1.15 | |||||
Diluted net income per share | $ | 0.72 | $ | 0.47 | $ | 1.20 | $ | 1.16 | |||||
2004 | $ | 43,908 | |
2005 |
| 43,082 | |
2006 |
| 43,025 | |
2007 |
| 176,569 | |
2008 |
| 406,178 | |
Thereafter |
| 751,731 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
Anti-dilutive stock options (shares in 000’s) | 2,808 | 474 | 862 | 1,483 | ||||||||
Exercise price range of these stock options: | ||||||||||||
Low | $ | 22.32 | $ | 20.59 | $ | 23.32 | $ | 18.45 | ||||
High | $ | 33.00 | $ | 33.00 | $ | 33.00 | $ | 33.00 |
Continental U.S. operations | $ | (1,001 | ) | |
Non-continental U.S. operations | (1,389 | ) | ||
$ | (2,390 | ) | ||
The net gain of $1,001 associated with continental U.S. operations consisted of a realized gain of approximately $2,200 on a previously impaired investment offset by other operating asset impairment losses. The gain of $1,389 for non-continental U.S. operations was associated with the completion of the divestiture of these operations during the second quarter of 2002.
Florida laboratoryLaboratory payment dispute
The Company’s Florida-basedFlorida laboratory subsidiary is the subject ofto a third-party carrier review of its Medicare reimbursement claims. In 1998 theThe carrier issued a formal overpayment determinationhas reviewed claims for services provided in the amount of $5,600 for thesix separate review periodperiods, extending from January 1995 to April 1996.May 2001. The carrier had made determinations that many of the claims submitted were not supported by the prescribing physicians’ medical justification. The carrier had also suspended all payments of Medicare claims from the laboratory beginning in May 1998. In 1999, the carrier issued a formal overpayment determination in the amount of $15,000 for the review period from May 1996 to March 1998. Subsequently, the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share data)
Medicare claims for the review periodto this laboratory from AprilMay 1998 to August 1999June 2002, and $11,600 ofreferred the suspended claims for the review period from August 1999matter to May 2000 were not properly supported by the prescribing physicians’ medical justification. The carrier’s allegations regarding improperly supported claims represented approximately 99%, 96%, 70% and 72%, respectively, of the tests the laboratory billed to Medicare for these four review periods. In March 2002, the carrier requested selected patient records for two additional review periods, June 2000 to December 2000 and December 2000 to May 2001, which the Company provided in May 2002. Resolution of the disputed claims in a manner adverse to the Company could result in government-imposed fines and penalties, which could be substantial.
In June 2002 an administrative law judge ruled that the sampling procedures and extrapolations that the carrier used as the basis of its overpayment determinations for the first two review periods were invalid. This decision invalidated the carrier’s overpayment determinations, totaling $20,600, for the first two review periods. The judge’s decision did not address the individual claims in the two samples that were used to support the overpayment extrapolations, which totaled approximately $100. The administrative law judge’s decision on the first two review periods also does not apply to the remaining four review periods, as each review period is evaluated independently. Moreover, the carrier’s sampling procedures have varied from period to period, and the conclusions the judge arrived at with respect to the first two periods may not hold for the subsequent periods. The hearings before a carrier has assigned hearing officersofficer for the third and fourth review periods butare scheduled to take place in the hearings have not been scheduled. Forsecond quarter of 2003. A total of $27,700 in claims are in dispute. The Company has also filed a notice of appeal to the carrier for the fifth and sixth review periods, the carrier is reviewing the records we have submitted and has yet to inform the Companyfor which a total of its initial determinations.
During 2000 the Company stopped accruing Medicare revenue from this laboratory because of the uncertainties regarding both the timing of resolution and the ultimate revenue valuations. Following the favorable ruling by the administrative law judge earlier this year related to the first two review periods covering January 1995 to March 1998,in 2002, the carrier lifted the payment suspension and began making payments in July 2002 for lab services provided subsequent to May 2001. AsAfter making its determinations with respect to the fifth and sixth review periods in December 2002, the carrier paid the laboratory all amounts that it is not disputing for the third through sixth review periods. In the second half of September 30, 2002, the Company had received $27,200,a total of $68,778, which represented approximately 30%70% of the total outstanding Medicare lab billings for the period from January 1995 through June 2002. These cash collections were recognized as revenue in the third quarter of 2002. Based on recent communications with CMS and the Medicare carrier, the Company expectsreceived. We do not expect to receive any significant additional payments of $20,000 or more relatedrelative to prior years’ Medicare lab claimsperiods unless and until the dispute over the next few months.remaining disallowed claims are resolved in our favor. The Company will continue to recognize Medicare lab revenue associated with prior periods as cash collections actually occur, to the extent that cumulative recoveries do not exceed the aggregate amount that management believes the Company will ultimately recover upon final review and settlement of disputed billings.
In addition to processing prior-periodprior period claims, the carrier also began processing billings for current period services on a timely basis. Based on these developments, wethe Company began recognizing estimated current-periodcurrent period Medicare lab revenue in the third quarter of 2002, which amounted to $5,400 for the quarter.
The carrier is also currently conducting a study of the utilization of dialysis-related laboratory services.services to determine what ongoing program safeguards are appropriate. During the study, the carrier has suspended all of its previously existing dialysis laboratory prepayment screens. The purpose of the study is to determine what ongoing program safeguards are appropriate. In its initial findings from the study, the carrier hashad determined that some of its prior prepayment screens were invalidating
In November 2001, the Company closed a smaller laboratory that it operated in Minnesota laboratory
DAVITA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share data)
In November 2001,addition to the formal appeal processes with the carrier and a federal administrative law judge, the Company closedalso has pursued resolution of this matter through meetings with representatives of CMS and the DOJ. Discussions with CMS are ongoing. The DOJ has requested, and the Company has provided, information with respect to both the Florida and the Minnesota laboratorylaboratories, most recently in September 2001. If a court determines that there has been wrongdoing by the Company or its laboratories, the fines and combined the operations of this laboratory with its Florida laboratory.
United States Attorney’s OfficeAttorney inquiry
In February 2001 the Civil Division of the United States Attorney’s Office for the Eastern District of Pennsylvania in Philadelphia contacted the Company and requested its cooperation in a review of some of the Company’s historical practices, including billing and other operating procedures and its financial relationships with physicians. The Company cooperated in this review and provided the requested records to the United States Attorney’s Office. In May 2002, the Company received a subpoena from the Philadelphia office of the Office of Inspector General of the Department of Health and Human Services, or OIG. The subpoena requiresrequired an update to the information the Company provided in its response to the February 2001 request, and also seekssought a wide range of documents relating to pharmaceutical and other ancillary services provided to patients, including laboratory and other diagnostic testing services, as well as documents relating to the Company’s financial relationships with physicians and pharmaceutical companies. The subpoena covers the period from May 1996 to May 2002. The Company has provided the documents requested.requested and continues to cooperate with the United States Attorney’s Office and the OIG in its investigation. This inquiry remains at an early stage. As it proceeds, the government could expand its areas of concern. If a court determines that there has been wrongdoing, the penalties under applicable statutes could be substantial.
Other
In addition to the foregoing, DaVita is subject to claims and suits in the ordinary course of business. Management believes that the ultimate resolution of these additional pending proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
6. Other commitments
The Company has obligations to purchase the third-party interests in several of its joint ventures. These obligations are in the form of put options, exercisable at the third-party owners’ discretion, and require the Company to purchase the minority owners’ interests at either the appraised fair market value or a predetermined multiple of cash flow or earnings. As of March 31, 2003, the Company’s potential obligations under these put options totaled approximately $60,000 of which approximately $34,000 was exercisable within one year. Additionally, the Company has certain other potential working capital commitments relating to managed and minority-owned centers of approximately $5,000 that could be called in the event of non-performance of the centers over the next five years.
7. Condensed consolidating financial statements
The following information is presented as required under the Securities and Exchange Commission’sCommission 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.
The $125,000 55/8% Convertible Subordinated Notes Duedue 2006, issued by the wholly-owned subsidiary Renal Treatment Centers, Inc., or RTC, are guaranteed by DaVita Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share data)
Condensed Consolidating Balance Sheets
DaVita Inc. | RTC | Non- guarantor subsidiaries | Consolidating adjustments | Consolidated total | ||||||||||||
As of September 30, 2002 | ||||||||||||||||
Cash and cash equivalents | $ | 115,357 | $ | 4 | $ | 115,361 | ||||||||||
Accounts receivable, net | 209,969 | 100,337 | $ | 29,649 | 339,955 | |||||||||||
Other current assets | 79,520 | 20,815 | 2,405 | 102,740 | ||||||||||||
Total current assets | 404,846 | 121,156 | 32,054 | 558,056 | ||||||||||||
Property and equipment, net | 177,668 | 73,033 | 28,060 | 278,761 | ||||||||||||
Investments in subsidiaries | 385,097 | $ | (385,097 | ) | ||||||||||||
Receivables from subsidiaries | 120,660 | (120,660 | ) | |||||||||||||
Amortizable intangibles, net | 43,311 | 15,219 | 7,105 | 65,635 | ||||||||||||
Other long-term assets | 4,314 | 742 | 41 | 5,097 | ||||||||||||
Goodwill | 464,581 | 286,721 | 109,123 | 860,425 | ||||||||||||
Total assets | $ | 1,600,477 | $ | 496,871 | $ | 176,383 | $ | (505,757 | ) | $ | 1,767,974 | |||||
Current liabilities | $ | 312,245 | $ | 8,615 | $ | 4,151 | $ | 325,011 | ||||||||
Payables to subsidiaries/parent | 94,808 | 25,852 | $ | (120,660 | ) | |||||||||||
Long-term liabilities | 1,239,522 | 127,504 | 4,765 | 1,371,791 | ||||||||||||
Minority interests | 22,462 | 22,462 | ||||||||||||||
Shareholders’ equity | 48,710 | 265,944 | 141,615 | (407,559 | ) | 48,710 | ||||||||||
Total liabilities and shareholders’ equity | $ | 1,600,477 | $ | 496,871 | $ | 176,383 | $ | (505,757 | ) | $ | 1,767,974 | |||||
As of December 31, 2001 | ||||||||||||||||
Cash and cash equivalents | $ | 34,949 | $ | 1,762 | $ | 36,711 | ||||||||||
Accounts receivable, net | 195,074 | 111,413 | $ | 27,059 | 333,546 | |||||||||||
Other current assets | 81,021 | 21,142 | 2,244 | 104,407 | ||||||||||||
Total current assets | 311,044 | 134,317 | 29,303 | 474,664 | ||||||||||||
Property and equipment, net | 169,675 | 59,717 | 23,386 | 252,778 | ||||||||||||
Investments in subsidiaries | 326,751 | $ | (326,751 | ) | ||||||||||||
Receivables from subsidiaries | 160,150 | (160,150 | ) | |||||||||||||
Amortizable intangibles, net | 49,479 | 16,294 | 7,335 | 73,108 | ||||||||||||
Other long-term assets | 5,649 | 680 | 44 | 6,373 | ||||||||||||
Goodwill | 470,150 | 279,185 | 106,425 | 855,760 | ||||||||||||
Total assets | $ | 1,492,898 | $ | 490,193 | $ | 166,493 | $ | (486,901 | ) | $ | 1,662,683 | |||||
Current liabilities | $ | 283,387 | $ | 10,728 | $ | 4,566 | $ | 298,681 | ||||||||
Payables to subsidiaries/parent | 140,548 | 19,602 | $ | (160,150 | ) | |||||||||||
Long-term liabilities | 705,874 | 128,976 | 4,793 | 839,643 | ||||||||||||
Minority interests | 20,722 | 20,722 | ||||||||||||||
Shareholders’ equity | 503,637 | 209,941 | 137,532 | (347,473 | ) | 503,637 | ||||||||||
Total liabilities and shareholders’ equity | $ | 1,492,898 | $ | 490,193 | $ | 166,493 | $ | (486,901 | ) | $ | 1,662,683 | |||||
DaVita Inc. | RTC | Non- guarantor subsidiaries | Consolidating adjustments | Consolidated total | ||||||||||||
As of March 31, 2003 | ||||||||||||||||
Cash and cash equivalents | $ | 304,986 | $ | 8 | $ | 304,994 | ||||||||||
Accounts receivable, net |
| 194,600 |
| 114,108 | $ | 37,437 |
| 346,145 | ||||||||
Other current assets |
| 73,018 |
| 15,745 |
| 2,524 |
| 91,287 | ||||||||
Total current assets |
| 572,604 |
| 129,861 |
| 39,961 |
| 742,426 | ||||||||
Property and equipment, net |
| 174,908 |
| 92,180 |
| 38,654 |
| 305,742 | ||||||||
Investments in subsidiaries |
| 423,834 | $ | (423,834 | ) | |||||||||||
Receivables from subsidiaries |
| 119,790 |
| (119,790 | ) | |||||||||||
Amortizable intangible assets, net |
| 40,282 |
| 16,015 |
| 3,783 |
| 60,080 | ||||||||
Other assets |
| 5,578 |
| 354 |
| 45 |
| 5,977 | ||||||||
Goodwill |
| 432,613 |
| 320,945 |
| 111,891 |
| 865,449 | ||||||||
Total assets | $ | 1,769,609 | $ | 559,355 | $ | 194,334 | $ | (543,624 | ) | $ | 1,979,674 | |||||
Current liabilities | $ | 309,512 | $ | 15,598 | $ | 12,539 | $ | 337,649 | ||||||||
Payables to subsidiaries/parent |
| 97,969 |
| 21,821 | $ | (119,790 | ) | |||||||||
Long-term liabilities |
| 1,348,540 |
| 148,795 |
| 5,977 |
| 1,503,312 | ||||||||
Minority interests |
| 27,156 |
|
| 27,156 | |||||||||||
Shareholders’ equity |
| 111,557 |
| 296,993 |
| 153,997 |
| (450,990 | ) |
| 111,557 | |||||
Total liabilities and shareholders’ equity | $ | 1,769,609 | $ | 559,355 | $ | 194,334 | $ | (543,624 | ) | $ | 1,979,674 | |||||
As of December 31, 2002 | ||||||||||||||||
Cash and cash equivalents | $ | 96,468 | $ | 7 | $ | 96,475 | ||||||||||
Accounts receivable, net |
| 213,410 |
| 98,825 | $ | 32,057 |
| 344,292 | ||||||||
Other current assets |
| 86,777 |
| 14,368 |
| 2,614 |
| 103,759 | ||||||||
Total current assets |
| 396,655 |
| 113,200 |
| 34,671 |
| 544,526 | ||||||||
Property and equipment, net |
| 185,676 |
| 80,532 |
| 32,267 |
| 298,475 | ||||||||
Investments in subsidiaries |
| 399,190 | $ | (399,190 | ) | |||||||||||
Receivables from subsidiaries |
| 81,833 |
| (81,833 | ) | |||||||||||
Amortizable intangible assets, net |
| 44,090 |
| 15,062 |
| 4,007 |
| 63,159 | ||||||||
Other assets |
| 3,973 |
| 729 |
| 45 |
| 4,747 | ||||||||
Goodwill |
| 461,153 |
| 291,602 |
| 112,031 |
| 864,786 | ||||||||
Total assets | $ | 1,572,570 | $ | 501,125 | $ | 183,021 | $ | (481,023 | ) | $ | 1,775,693 | |||||
Current liabilities | $ | 270,060 | $ | 12,386 | $ | 10,155 | $ | 292,601 | ||||||||
Payables to parent |
| 60,489 |
| 21,344 | $ | (81,833 | ) | |||||||||
Long-term liabilities |
| 1,232,246 |
| 148,877 |
| 5,476 |
| 1,386,599 | ||||||||
Minority interests |
| 26,229 |
|
| 26,229 | |||||||||||
Shareholders’ equity |
| 70,264 |
| 279,373 |
| 146,046 |
| (425,419 | ) |
| 70,264 | |||||
Total liabilities and shareholders’ equity | $ | 1,572,570 | $ | 501,125 | $ | 183,021 | $ | (481,023 | ) | $ | 1,775,693 | |||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share data)
Condensed Consolidating Statements of Income
DaVita Inc. | RTC | Non- guarantor subsidiaries | Consolidating adjustments | Consolidated total | |||||||||||||||
For the nine months ended September 30, 2002 | |||||||||||||||||||
Net operating revenues | $ | 891,074 | $ | 423,718 | $ | 143,182 | $ | (106,438 | ) | $ | 1,351,536 | ||||||||
Operating expenses | 734,351 | 341,980 | 110,490 | (106,438 | ) | 1,080,383 | |||||||||||||
Operating income | 156,723 | 81,738 | 32,692 | — | 271,153 | ||||||||||||||
Other income (loss) | 4,983 | (11 | ) | 4,972 | |||||||||||||||
Debt expense | 43,532 | 5,214 | 3,432 | 52,178 | |||||||||||||||
Minority interests | (7,171 | ) | (7,171 | ) | |||||||||||||||
Income taxes | 56,753 | 32,141 | 6 | 88,900 | |||||||||||||||
Equity earnings in consolidated subsidiaries | 66,455 | (66,455 | ) | ||||||||||||||||
Extraordinary loss | (29,358 | ) | (29,358 | ) | |||||||||||||||
Net income | $ | 98,518 | $ | 44,383 | $ | 29,243 | $ | (73,626 | ) | $ | 98,518 | ||||||||
For the nine months ended September 30, 2001 | |||||||||||||||||||
Net operating revenues | $ | 793,964 | $ | 375,726 | $ | 136,561 | $ | (85,155 | ) | $ | 1,221,096 | ||||||||
Operating expenses | 639,445 | 320,220 | 103,820 | (85,155 | ) | 978,330 | |||||||||||||
Operating income | 154,519 | 55,506 | 32,741 | — | 242,766 | ||||||||||||||
Other income | 4,324 | 4,324 | |||||||||||||||||
Debt expense | 47,722 | 5,172 | 3,864 | 56,758 | |||||||||||||||
Minority interests | (6,852 | ) | (6,852 | ) | |||||||||||||||
Income taxes | 58,006 | 21,694 | 79,700 | ||||||||||||||||
Equity earnings in consolidated subsidiaries | 88,006 | (88,006 | ) | ||||||||||||||||
Extraordinary gain | 977 | 977 | |||||||||||||||||
Net income | $ | 142,098 | $ | 28,640 | $ | 28,877 | $ | (94,858 | ) | $ | 104,757 | ||||||||
DaVita Inc. | RTC | Non-guarantor subsidiaries | Consolidating adjustments | Consolidated total | ||||||||||||
For the three months ended March 31, 2003 | ||||||||||||||||
Net operating revenues | $ | 291,365 | $ | 153,522 | $ | 51,631 | $ | (36,711 | ) | $ | 459,807 | |||||
Operating expenses |
| 239,358 |
| 133,157 |
| 42,856 |
| (34,898 | ) |
| 380,473 | |||||
Operating income |
| 52,007 |
| 20,365 |
| 8,775 |
| (1,813 | ) |
| 79,334 | |||||
Debt expense |
| 16,661 |
| 1,710 |
| 1,085 |
| 19,456 | ||||||||
Other income |
| 785 |
| 785 | ||||||||||||
Income taxes |
| 16,434 |
| 7,816 |
| 24,250 | ||||||||||
Equity earnings in consolidated subsidiaries |
| 16,716 |
| (16,716 | ) | |||||||||||
Net income | $ | 36,413 | $ | 10,839 | $ | 7,690 | $ | (18,529 | ) | $ | 36,413 | |||||
For the three months ended March 31, 2002 | ||||||||||||||||
Net operating revenues | $ | 272,862 | $ | 137,960 | $ | 46,690 | $ | (29,847 | ) | $ | 427,665 | |||||
Operating expenses |
| 227,371 |
| 115,500 |
| 35,425 |
| (27,414 | ) |
| 350,882 | |||||
Operating income |
| 45,491 |
| 22,460 |
| 11,265 |
| (2,433 | ) |
| 76,783 | |||||
Debt expense |
| 12,170 |
| 1,767 |
| 1,135 |
| 15,072 | ||||||||
Other income |
| 267 |
| 267 | ||||||||||||
Income taxes |
| 17,300 |
| 8,694 |
| 6 |
| 26,000 | ||||||||
Equity earnings in consolidated subsidiaries |
| 19,690 |
| (19,690 | ) | |||||||||||
Net income | $ | 35,978 | $ | 11,999 | $ | 10,124 | $ | (22,123 | ) | $ | 35,978 | |||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(unaudited)
(dollars in thousands, except per share data)
Condensed Consolidating Statements of Cash Flows
DaVita Inc. | RTC | Non-guarantor subsidiaries | Consolidating adjustments | Consolidated total | ||||||||||||||||
For the nine months ended September 30, 2002 | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income | $ | 98,518 | $ | 44,383 | $ | 29,243 | $ | (73,626 | ) | $ | 98,518 | |||||||||
Changes in operating and intercompany assets and liabilities and non-cash items included in net income | 135,703 | (11,647 | ) | (13,951 | ) | 73,626 | 183,731 | |||||||||||||
Net cash provided by operating activities | 234,221 | 32,736 | 15,292 | — | 282,249 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment, net | (36,144 | ) | (22,461 | ) | (8,394 | ) | (66,999 | ) | ||||||||||||
Acquisitions and divestitures, net | (11,979 | ) | (11,979 | ) | ||||||||||||||||
Other items | 3,346 | 3,346 | ||||||||||||||||||
Net cash used in investing activities | (32,798 | ) | (34,440 | ) | (8,394 | ) | (75,632 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Long-term debt, net | 502,169 | (54 | ) | (326 | ) | 501,789 | ||||||||||||||
Other items | (623,184 | ) | (6,572 | ) | (629,756 | ) | ||||||||||||||
Net cash used in financing activities | (121,015 | ) | (54 | ) | (6,898 | ) | (127,967 | ) | ||||||||||||
Net increase (decrease) in cash | 80,408 | (1,758 | ) | — | 78,650 | |||||||||||||||
Cash and cash equivalents at the beginning of the period | 34,949 | 1,762 | 36,711 | |||||||||||||||||
Cash and cash equivalents at the end of the period | $ | 115,357 | $ | 4 | $ | — | $ | — | $ | 115,361 | ||||||||||
For the nine months ended September 30, 2001 | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income | $ | 142,098 | $ | 28,640 | $ | 28,877 | $ | (94,858 | ) | $ | 104,757 | |||||||||
Changes in operating and intercompany assets and liabilities and non-cash items included in net income | 92,090 | (25,501 | ) | (19,300 | ) | 94,858 | 142,147 | |||||||||||||
Net cash provided by operating activities | 234,188 | 3,139 | 9,577 | — | 246,904 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment, net | (20,434 | ) | (5,134 | ) | (4,612 | ) | (30,180 | ) | ||||||||||||
Acquisitions and divestitures, net | (66,588 | ) | (66,588 | ) | ||||||||||||||||
Other items | 24,497 | 25 | 24,522 | |||||||||||||||||
Net cash used in investing activities | (62,525 | ) | (5,134 | ) | (4,587 | ) | (72,246 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Long-term debt, net | (156,381 | ) | 134 | 196 | (156,051 | ) | ||||||||||||||
Other items | 627 | (5,186 | ) | (4,559 | ) | |||||||||||||||
Net cash (used in) provided by financing activities | (155,754 | ) | 134 | (4,990 | ) | (160,610 | ) | |||||||||||||
Net increase (decrease) in cash | 15,909 | (1,861 | ) | — | 14,048 | |||||||||||||||
Cash and cash equivalents at the beginning of the period | 29,336 | 1,871 | 31,207 | |||||||||||||||||
Cash and cash equivalents at the end of the period | $ | 45,245 | $ | 10 | $ | — | $ | — | $ | 45,255 | ||||||||||
DaVita Inc. | RTC | Non-guarantor subsidiaries | Consolidating adjustments | Consolidated total | ||||||||||||||||
For the three months ended March 31, 2003 | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income | $ | 36,413 |
| $ | 10,839 |
| $ | 7,690 |
| $ | (18,529 | ) | $ | 36,413 |
| |||||
Changes in operating and intercompany assets and liabilities and non cash items included in net income |
| 28,968 |
|
| (2,176 | ) |
| (1,085 | ) |
| 18,529 |
|
| 44,236 |
| |||||
Net cash provided by (used in) operating activities |
| 65,381 |
|
| 8,663 |
|
| 6,605 |
|
| — |
|
| 80,649 |
| |||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment, net |
| (5,767 | ) |
| (8,643 | ) |
| (7,298 | ) |
| (21,708 | ) | ||||||||
Acquisitions and divestitures, net |
| (718 | ) |
| (718 | ) | ||||||||||||||
Other items |
| 170 |
|
| 1,461 |
|
| 1,631 |
| |||||||||||
Net cash used in investing activities |
| (5,597 | ) |
| (8,643 | ) |
| (6,555 | ) |
| (20,795 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Long-term debt |
| 145,232 |
|
| (19 | ) |
| (50 | ) |
| 145,163 |
| ||||||||
Other items |
| 3,502 |
|
| 3,502 |
| ||||||||||||||
Net cash provided (used in) financing activities |
| 148,734 |
|
| (19 | ) |
| (50 | ) |
| 148,665 |
| ||||||||
Net decrease in cash |
| 208,518 |
|
| 1 |
|
| — |
|
| 208,519 |
| ||||||||
Cash at the beginning of the period |
| 96,468 |
|
| 7 |
|
| 96,475 |
| |||||||||||
Cash at the end of the period | $ | 304,986 |
| $ | 8 |
| $ | — |
| $ | — |
| $ | 304,994 |
| |||||
For the three months ended March 31, 2002 | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income | $ | 35,978 |
| $ | 11,999 |
| $ | 10,124 |
| $ | (22,123 | ) | $ | 35,978 |
| |||||
Changes in operating and intercompany assets and liabilities and non cash items included in net income |
| 39,013 |
|
| (4,746 | ) |
| (8,884 | ) |
| 22,123 |
|
| 47,506 |
| |||||
Net cash provided by (used in) operating activities |
| 74,991 |
|
| 7,253 |
|
| 1,240 |
|
| — |
|
| 83,484 |
| |||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment, net |
| (6,870 | ) |
| (7,955 | ) |
| (1,290 | ) |
| (16,115 | ) | ||||||||
Acquisitions and divestitures, net |
| (1,379 | ) |
| (1,379 | ) | ||||||||||||||
Other items |
| 499 |
|
| 499 |
| ||||||||||||||
Net cash used in investing activities |
| (6,371 | ) |
| (9,334 | ) |
| (1,290 | ) |
| (16,995 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Long-term debt |
| (20,294 | ) |
| 324 |
|
| 50 |
|
| (19,920 | ) | ||||||||
Other items |
| (51,583 | ) |
| (51,583 | ) | ||||||||||||||
Net cash provided (used in) financing activities |
| (71,877 | ) |
| 324 |
|
| 50 |
|
| (71,503 | ) | ||||||||
Net decrease in cash |
| (3,257 | ) |
| (1,757 | ) |
| — |
|
| (5,014 | ) | ||||||||
Cash at the beginning of the period |
| 34,949 |
|
| 1,762 |
|
| 36,711 |
| |||||||||||
Cash at the end of the period | $ | 31,692 |
| $ | 5 |
| $ | — |
| $ | — |
| $ | 31,697 |
| |||||
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 the regulatory environment in which we operate, economic and market conditions, competitive activities, other business conditions, accounting estimates, and the risk factors set forth in this Form 10-Q. These risks, among others, include those relating to possible reductions in private mix and private and government reimbursement rates, the concentration of profits generated from PPO and private and indemnity patients and from ancillary services including the administration of pharmaceuticals, changes in pharmaceutical practice patterns or reimbursement policies, the ongoing review of the Company’s Florida laboratory subsidiary by its Medicare carrier and the DOJ, the ongoing review by the US Attorney’s Office and the OIG in Philadelphia 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.developments
Results of operations
Quarter ended | ||||||||||||||||||
March 31, 2003 | December 31, 2002 | March 31, 2002 | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||
Net operating revenues: | ||||||||||||||||||
Current period services | $ | 460 | 100 | % | $ | 461 | 100 | % | $ | 428 | 100 | % | ||||||
Prior period services—laboratory |
| 42 | ||||||||||||||||
Total net operating revenues | $ | 460 | $ | 503 | $ | 428 | ||||||||||||
Operating expenses and charges: | ||||||||||||||||||
Dialysis centers and labs |
| 317 | 69 | % |
| 317 | 69 | % |
| 292 | 68 | % | ||||||
General and administrative |
| 37 | 8 | % |
| 41 | 9 | % |
| 36 | 8 | % | ||||||
Depreciation and amortization |
| 18 | 4 | % |
| 17 | 4 | % |
| 16 | 4 | % | ||||||
Provision for uncollectible accounts, net of recoveries |
| 8 | 2 | % |
| 8 | 2 | % |
| 5 | 1 | % | ||||||
Minority interest and equity income, net |
| 1 |
| 2 |
| 2 | ||||||||||||
Total operating expenses and charges |
| 381 | 83 | % |
| 385 | 83 | % |
| 351 | 82 | % | ||||||
Operating income | $ | 79 | 17 | % | $ | 118 | 23 | % | $ | 77 | 18 | % | ||||||
Operating income excluding prior period service revenue | $ | 79 | 17 | % | $ | 76 | 17 | % | $ | 77 | 18 | % | ||||||
Dialysis treatments (000’s) |
| 1,503 |
| 1,538 |
| 1,434 | ||||||||||||
Average dialysis treatments per treatment day |
| 19,673 |
| 19,319 |
| 18,767 | ||||||||||||
Average dialysis revenue per dialysis treatment | $ | 296 | $ | 291 | $ | 290 |
The quarter ended March 31, 2002 includes $4 million of revenues and $4 million of operating expenses related to non-continental U.S. operations in Puerto Rico that were divested in the second quarter of 2002.
Net operating revenue
The net operating resultsrevenues of $460 million for the thirdfirst quarter of 2003 represents an increase of $32 million, or an increase of $36 million excluding non-continental U.S. operations that were fully divested during 2002. This represented an 8.5% increase in continental U.S. revenue compared with the first quarter of 2002. Of this 8.5% increase, approximately 4.5% was due to an increase in the number of dialysis treatments, and approximately 2.0% was attributable to increases in the average reimbursement rate per dialysis treatment. The increase in 2003 also included approximately $6 million of Medicare laboratory revenue. No Medicare lab revenue had been recognized during the first quarter of 2002 weredue to the payment withholds by the third-party carrier, as discussed below. The increase in line with our expectationsthe number of treatments was principally attributable to a non-acquired annual growth rate of approximately 3.3%. The balance of the increase in treatment volumes was due to acquisitions. We continue to expect the non-acquired growth rate to remain in the range with no significant unanticipated changes inof 3.0% to 5.0% throughout 2003. The average dialysis revenue or expense trends,per treatment (excluding lab and no material changesclinical research revenues and management fee income) was $296 for the first quarter of 2003 as compared to $290 for the first quarter of 2002. The increase in our general risk assessments. Additionally, recent positive developments regarding disputed Medicare claims at our Florida laboratory have allowed usaverage revenue per treatment was primarily due to recognize Medicare labrate increases and continued improvements in revenue forcapture.
First quarter 2003 current services beginningperiod operating revenues were approximately the same as the fourth quarter of 2002. The number of treatments decreased by approximately 2% in the thirdfirst quarter of 2003 as compared to the fourth quarter of 2002 because of fewer treatments days in the first quarter.
Lab and other services
As discussed in Note 6 to the condensed consolidated interim financial statements (Contingencies), our Florida-based laboratory subsidiary has been under an ongoing third-party carrier review for Medicare reimbursement claims since 1998. Prior to the third quarter of 2002, weno Medicare payments had been received no payments since May 1998. Following a favorable ruling by an administrative law judge earlier this year related to the first two review periods covering January 1995 to March 1998,in June 2002 the carrier began releasing funds for lab services provided subsequent to May 2001. As of September 30,The carrier also paid us amounts it is not disputing for prior periods. During 2002, the carrier had paid us $27.2a total of approximately $69 million, which representsrepresenting approximately 30%70% of the total outstanding Medicare lab billings for the period from January 1995 through June 2002. These cash collections were recognized as revenue in the third quarter received. Approximately $42 million of 2002. Based on recent communications with the Medicare carrier, we expect to receive additional payments of $20 million or more related to prior years’ Medicare lab claims over the next few months. We will continue to recognize Medicare lab revenue associated with prior periods as cashthese total collections actually occur, to the extent that cumulative recoveries do not exceed the aggregate amount that we believe the Company will ultimately recover upon final review and settlement of disputed billings. In addition to processing prior-period claims, the carrier also began processing billings for current period services on a timely basis. Based on these developments, we also began recognizing estimated current-period Medicare lab revenuewere received in the third quarter of 2002, which amounted to $5.4 million for the quarter.
Quarter ended | ||||||||||||||||||
September 30, 2002 | June 30, 2002 | September 30, 2001 | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||
Continental U.S. operations(1) | ||||||||||||||||||
Net operating revenues: | ||||||||||||||||||
Current period services | $ | 454 | 100 | % | $ | 441 | 100 | % | $ | 408 | 100 | % | ||||||
Prior period services—laboratory | 27 | |||||||||||||||||
Prior period services—dialysis | 22 | |||||||||||||||||
Operating expenses: | ||||||||||||||||||
Dialysis centers and labs | 308 | 68 | % | 298 | 68 | % | 274 | 67 | % | |||||||||
General and administrative | 37 | 8 | % | 42 | 10 | % | 31 | 8 | % | |||||||||
Depreciation and amortization | 16 | 4 | % | 16 | 4 | % | 15 | 4 | % | |||||||||
Provision for uncollectible accounts (excluding recoveries of approximately $1, $2 and $5 associated with amounts reserved in 1999) | 9 | 2 | % | 8 | 2 | % | 8 | 2 | % | |||||||||
Total operating expenses before net impairment gains | 370 | 81 | % | 364 | 82 | % | 328 | 80 | % | |||||||||
Operating profit margins (excluding prior period services revenue and recoveries and before goodwill amortization of $10 in 2001) | $ | 84 | 19 | % | $ | 77 | 18 | % | 80 | 20 | % | |||||||
Dialysis treatments (000’s) | 1,517 | 1,487 | 1,432 | |||||||||||||||
Average dialysis treatments per treatment day | 19,201 | 19,062 | 18,365 | |||||||||||||||
Average dialysis revenue per dialysis treatment | $ | 291 | $ | 291 | $ | 280 |
Dialysis centers and collecting operations.
Center operating expenses were approximately 68%69% of net operating revenues forin the thirdfirst quarter of 2003 and second quartersthe fourth quarter of 2002 as(excluding prior period lab revenue) compared to 67%68% in the thirdfirst quarter of 2001.2002. On a per-treatment basis, center operating expenses for the thirdfirst quarter of 2002 were2003 increased approximately $3 higher than$5 from the secondfourth quarter of 2002 and were approximately $12 higher than$10 from the thirdfirst quarter of 2001.2002. The increase fromin both prior periods was principally dueprimarily attributable to higher pharmaceutical, insurance and labor costs.
General and pharmaceutical costs, as well as revenue-impacting changes in the mix of physician-prescribed pharmaceuticals.
General and administrative expenses were approximately 8% of current period net operating revenues for continental U.S. operations forboth the thirdfirst quarters of 20022003 and 2001, as compared to 10%2002. General and administrative expenses in the secondfourth quarter of 2002. In absolute dollars,2002 included impairments and valuation adjustments of $2 million. Excluding these impairment charges, the fourth quarter general and administrative expenses were also approximately 8% of net operating revenue.
Provision for the third quarter of 2002 were approximately $5 million, or approximately $4 per treatment, lower than in the second quarter of 2002. The decrease in the amount of general and administrative expenses was primarily attributable to the timing of expenditures, including spending on our new clinical information systems.
The provisions for uncollectible accounts receivable excludingbefore considering cash recoveries waswere approximately 1.8% to 1.9% of current period net operating revenues for all periods presented. WeDuring the fourth quarter of 2002 and the first quarter of 2002, we realized cash recoveries of approximately $1 million and $2 million, in the third and second quarters of 2002, and $5 million in the third quarter of 2001. These recoveries were the result of our improved collection processes and are associated with aged accounts receivables reserved in 1999.
Debt expense
Debt expense of $20approximately $19.5 million for the thirdfirst quarter of 20022003 was approximately $3$4.5 million higher than the secondfirst quarter of 2002 and was approximately $1 millionas a result of higher than the third quarter of 2001. The increase in debt expense relates to additional borrowings inbalances, primarily associated with our recapitalization during the second quarter of 2002 in conjunction with our debt restructuring and common stock repurchases, partially offset by lower average2002. Average interest rates.
Projections for 2003
Based on the current conditions and trends, weour current projections for 2003 remain unchanged. Operating income for 2003 is currently project quarterly EBITDA before recoveries of prior year’s Medicare lab claimsprojected to generally be in these same ranges through 2003, or $380the range of $300 million to $400 million for 2003. Based on current trends and assessments of opportunities and operating variables, including our planned growth through acquiring and building new centers, we currently anticipate that recurring EBITDA will grow, on average, at an annual rate of 3% to 8% over the next three years.
Significant new accounting standards
EffectiveIn January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets, and SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No. 142 goodwill is not amortized after December 31, 2001, but is routinely assessed for possible valuation impairment. An impairment charge must be recorded against current earnings if the book
Liquidity and capital resources
Cash flow from operations during the first nine monthsquarter of 20022003 amounted to approximately $282$81 million. Investing cash outflows consisted principally of capital asset additions of $22 million, which included $32 million in prior-period-service recoveries, andincludes approximately $20 million in tax payments have been deferred until the fourth quarter of the year. The non-operating cash outflows were primarily associated with the recapitalization transactions and stock repurchases, as discussed below, and a net investment of approximately $76 in acquisitions and new center developments, systems infrastructure and other capital assets.
In January 2003 the second quarter of 2002 consists of a Term Loan A for $150 million, a Term Loan B for $850 million and a $115 million undrawn revolving credit facility, which includes up to $50 millionCompany borrowed $150,000 that was available for letters of credit. During the second quarter of 2002, we borrowed all $850 million of the Term Loan B, and $844 million of the Term Loan B remained outstanding as of September 30, 2002. The Term Loan B bears interest equal to LIBOR plus 3.00%. The interest rate under the Term Loan A (which is undrawn) and the revolvingsenior credit facility isthat was secured during 2002. The Term Loan A bears interest equal to LIBOR plus a margin ranging from 1.5% to 2.75% based on ourthe Company’s leverage ratio. We are currently evaluating our future liquidity requirementsThe current margin is 2.25% for potential borrowings underan overall effective rate of 3.61%. The aggregate annual principal payments for the Term Loan A but have no obligation to draw the loan. The lenders’ commitment to fund the undrawn portion of the Term Loan A will expire in January 2003. If the entire $1.0 billion term credit facility is drawn, the aggregate annual principal payments will range from $11 million to $51 millionare approximately $34,000 in years one through five,three and will be $403 millionapproximately $42,000 in each of years six and seven, with the balance due not later than 2009. The new senior credit facility is secured by all our personal property and that of all our wholly-owned subsidiaries, along with the stock of our subsidiaries. The new senior credit facility also contains financial and operating covenants including investment limitations. We were in compliance with the financial and operating covenants of the credit facility as of September 30, 2002.
Accounts receivable at September 30, 2002March 31, 2003 amounted to $340$346 million, a decreasean increase of approximately $7$2 million fromduring the previous quarter. In the thirdThe first quarter of 2002, the continental U.S. accounts receivable balance represented approximately 7069 days of revenue, a decreasecompared to 70 days as of three days fromDecember 31, 2002.
Our current plans continue to call for capital expenditures to be in the secondsame range as 2002, including investment expenditures for information technology projects and for new dialysis centers, relocations and expansions. During the first quarter of 2002.
We believe that we will have sufficient liquidity and operating cash flows to fund our capital investments and scheduled debt service and other obligations over the next twelve months.
Interest rate sensitivity
The table below provides information about our financial instruments that are sensitive to changes in interest rates.
Expected maturity date | Thereafter | Total | Fair Value | Average interest rate | ||||||||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |||||||||||||||||||||||||
Long-term debt (in millions) | ||||||||||||||||||||||||||||||
Fixed rate | $ | 125 | $ | 345 | $ | 470 | $ | 466 | 6.63 | % | ||||||||||||||||||||
Variable rate | $ | 1 | $ | 9 | $ | 9 | $ | 9 | $ | 9 | $ | 307 | $ | 508 | $ | 852 | $ | 852 | 5.34 | % |
Expected maturity date | Thereafter | Total | Fair Value | Average Interest Rate | ||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||
Fixed rate | $ | 125 | $ | 345 | $ | 470 | $ | 478 | 6.63 | % | ||||||||||||||||||||
Variable rate | $ | 33 | $ | 43 | $ | 43 | $ | 49 | $ | 318 | $ | 404 | $ | 104 | $ | 994 | $ | 994 | 4.44 | % |
Management maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed by the Company pursuant to the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and regulations, and that such information is accumulated and communicated to the Company’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow for timely decisions regarding required disclosures. Management recognizes that these controls and procedures can provide only reasonable assurance of desired outcomes, and that estimates and judgements are still inherent in the process of maintaining effective controls and procedures.
Within 90 days of the date of this report, we carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for timely identification and review of material information required to be included in the Company’s Exchange Act Reports,reports, including this report on Form 10-Q.
We have established and maintain a system of internal controls designed to provide reasonable assurance that transactions are executed with proper authorization and are properly recorded in the Company’s records, and that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period. Internal controls are periodically reviewed and revised if necessary, and are augmented by appropriate oversight and audit functions.
Subsequent to the date that these controls were last evaluated by the Chief Executive Officer and Chief Financial Officer, we have not made any significant changes in the design and operation of our internal controls, nor have there been changes in other factors that could significantly affect the overall effectiveness of the control environment to process, record and disclose transactions.
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,operating income, and capital expenditures. We base our forward-looking statements on information currently available to us, and we do not currently intend to update these statements, whether as a result of changes in underlying factors, new information, future events or other developments.
These statements involve known and unknown risks and uncertainties, including risks resulting from economic and market conditions, the regulatory 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 payingcollections at or near our listbilled prices declines, then our revenues, cash flows and earnings would be substantially reduced.
Approximately 44%45% of our continental U.S. dialysis revenues wereare generated from patients who have private payors as the primary payor. A minority of these patients have insurance policies that reimburse us at or near our listbilled prices, which are significantly higher than Medicare rates. The majority of these patients have insurance policies that reimburse us at lower 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 they pay us may increase. If the percentage of patients who have insurance that pays uscollections at or near our listbilled prices decreases significantly, it would have a material adverse effect on our revenues, cash flows and earnings.
If the percentage of patients with insurance paying at or near our billed prices declines, then our revenues, cash flows and earnings would be substantially reduced.
Our revenue levels are sensitive to the mix of reimbursements from higher paying commercial plans to total reimbursements from all payor plans and program types. If there is a significant change in the number of patients under higher paying commercial plans relative to plans that pay at lower rates, for example a reduction in the average number of patients under indemnity and PPO plans compared with the average number of patients under HMO plans and government programs, it would negatively impact our revenues, cash flows and earnings.
If we are unable to renegotiate material contracts with managed care plans on acceptable terms, we may experience a decline in same center growth and earnings.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 would negatively impact our revenues and near-term earnings.
Changes in clinical practices and reimbursement rates or rules for EPO and other drugs could substantially reduce our revenue and earnings.
The administration of EPO and other drugs accounts for approximately 40%one third of our net operating revenue.revenues. 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. For example, some Medicare fiscal intermediaries are seeking to implement local medical review policies for EPO and vitamin D analogs that would effectively limit utilization of and reimbursement for these drugs.
Future declines, or the lack of further increases, in Medicare reimbursement rates would reduce our net income and cash flows.
Approximately 51%49% of our continental U.S. dialysis revenues wereare generated from patients who hadhave 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. Increases of 1.2% in 2000 and 2.4% in 2001 were the first increases in the composite rate since 1991, and were significantly less than the cumulative rate of inflation since 1991. There wasSince then there has been no increase toin the composite rate for 2002.rate. Increases in operating costs that are subject to inflation, such as labor and supply costs, have occurred and are expected to continue to occur with or without a compensating increase in reimbursement rates. We cannot predict 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 operating earnings and cash flows.
In legislation enacted in December 2000, Congress mandated government studies on whether:
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 thethat composite rate. In particular, Medicare revenue from EPO and other pharmaceuticals is approximately 40%27% of our total Medicare revenue. In January 2003, CMS implemented a new payment structure utilizing a single drug pricer for all drugs that Medicare reimburses, including many we administer. Based on the initial prices CMS has set, we do not expect our reimbursement under this single drug pricer in 2003 to differ materially from what it would have been under the AWP-based reimbursement structure. We expect, however, that CMS will change the prices set under this single drug pricer in the future or make other changes to the payment structure for these drugs. If these pharmaceuticalsEPO were included in the composite rate, and if the composite rate waswere not increased sufficiently, our operating earnings and cash flows could decrease substantially. Reductions in current reimbursement rates for EPO or other pharmaceuticalsoutpatient prescription drugs would also reduce our net earnings and cash flows.
Future declines in Medicaid reimbursement rates would reduce our net income and cash flows.
Approximately 10%5% of our continental U.S. dialysis revenues wereare generated from patients who have Medicaid payors.as their primary coverage. In addition approximately 3% of our dialysis revenues are from Medicaid secondary coverage. Approximately 45% of our Medicaid revenue is derived from patients in California. If state governments change Medicaid programs or the rates paid by those programs for our services, then our revenue and earnings may decline. Some of the states’ Medicaid programs have proposed eligibility changes or have announced that they are considering reductions in the rates for certain services. Any action to reduce the Medicaid coverage rules or reimbursement rates for dialysis and related services would adversely affect our revenue and earnings.
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 most of our centers is often the physician or physician group providing medical director services to the center. If a medical director agreement terminates, whether before or at the end of its term, and a new medical director is appointed, it may negatively impact the former medical director’s
Our medical director contracts are for fixed periods, generally five to ten years. Medical directors have no obligation to extend their agreements with us. In the twelve months ended September 30, 2002, we renewed the agreements with medical directors at 41 centers. In addition, asAs of September 30, 2002,April 1, 2003, there were 40 additional24 centers at which the medical director agreements required renewal on or before September 30, 2003.
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 or other factors could negatively impact physicians’ decisions to extend their medical director agreements with us or to refer their patients to us. In addition, if the terms of an existing agreement were found to violate applicable laws, we may not be successful in restructuring the relationship, which could lead to the early termination of the agreement, or force the physician to stop referring patients to the centers.
If the current shortage of skilled clinical personnel or our high level of personnel turnover continues, we may experience disruptions in our business operations and increases in operating expenses.
We are experiencing increased labor costs and difficulties in hiring nurses due to a nationwide shortage of skilled clinical personnel. We compete for nurses with hospitals and other health care providers. This nursing shortage limitsmay limit our ability to expand our operations. We also have a high personnel turnover rate in our dialysis centers. Turnover has been the highest among our technicians, nurses 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 at any time. For example, Amgen unilaterally increased its base price for EPO by 3.9% in each of 2002, 2001 and 2000. 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 has developed a new product, Aranesp®, that may replace EPO or reduce its use with dialysis patients. We cannot predict if or when Aranesp® will be introduced to the U.S. dialysis market, what its cost and reimbursement structure will be, or how it may impact our revenues from EPO. Increases in the cost of EPO and the introduction of Aranesp® could have a material adverse effect on our net income and cash flows.
The pending federal review of some of our historical practices and the 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 and OIG in Philadelphia in a review of some of our practices, including billing and other operating procedures, financial relationships with physicians and pharmaceutical companies, and the provision of pharmaceutical and other ancillary services. In addition, our Florida-basedFlorida laboratory subsidiary isand our now closed Minnesota laboratory are each the subject of a third-party carrier review of claims it has submitted for Medicare reimbursement. The DOJ has also requested and received information regarding the laboratory.these laboratories. We are unable to determine when these matters
will be resolved, whether any additional areas of inquiry will be opened or the ultimateany outcome of these matters, financial or otherwise. Any negative findings could result in substantial financial penalties against us and exclusion from future participation in the Medicare and Medicaid programs.
If we fail to adhere to all of the complex government regulations that apply to our business, we could suffer severe consequences that would substantially reduce our revenuesrevenue and earnings.
Our dialysis operations are subject to extensive federal, state and local government regulations, including Medicare and Medicaid reimbursement rules and regulations, federal and state anti-kickback laws, and federal and state laws regarding the collection, use and disclosure of patient health information. The regulatory scrutiny of healthcare providers, including dialysis providers, has increased significantly in recent years. In addition, the frequency and intensity of Medicare certification surveys and inspections of dialysis centers has increased markedly since 2000.
We endeavor to comply with all of the requirements for receiving Medicare and Medicaid reimbursement and to structure all of our relationships with referring physicians to comply with the anti-kickback laws; however, the laws and regulations in this area are complex and subject to varying interpretations. In addition, our 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.
Due to regulatory considerations unique to each of these states, all of our dialysis operations in New York and part of our dialysis operations in New Jersey are conducted through privately-owned companies to which we provide a broad range of administrative services. These operations account for approximately 7% of our dialysis revenues. We believe that we have structured these operations to comply with the laws and regulations of these states, but we can give no assurances that they will not be challenged.
If any of our operations are found to violate these or other government regulations, we could suffer severe consequences, including:
Our rollout of new information technology systems maywill 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 are rolling outwill be continuing the rollout of new information technology systems and new processes in each of our dialysis centersbilling offices over the next eighteen months.year. 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.processes as expected. If they do not, we may have to spend substantial amounts to enhance or replace these systems.
Provisions in our charter documents and compensation programs we have adopted may deter a change of control that our stockholders would otherwise determine to be in their best interests.
Our charter documents include provisions thatwhich may deter hostile takeovers, delay or prevent changes of control or changes in our management, or limit the ability of our stockholders to approve transactions that they may otherwise determine to be in their best interests. These include provisions prohibiting our stockholders from acting by written consent, requiring 60 days advance notice of stockholder proposals or nominations to our Board of Directors and granting our Board of Directors the authority to issue up to five million shares of preferred stock and to determine the rights and preferences of the preferred stock without the need for further stockholder approval.
In addition, most of our outstanding employee stock options include a provision accelerating the vesting of the options in the event of a change of control. We have also adopted a change of control protection program for our employees who do not have a significant number of stock options, which provides for cash bonuses to the employees in the event of a change of control. Based on the shares of our common stock outstanding and the market price of our stock on September 30, 2002,March 31, 2003, these cash bonuses would total approximately $55 million.$44 million if a control transaction occurred at that price and our Board of Directors did not modify the program. These compensation programs may affect the price an acquirer would be willing to pay.
These provisions could also discourage bids for our common stock at a premium and cause the market price or favored by a majority of unaffiliated stockholders. Furthermore, we may adopt some of these measures without any further vote or action by our stockholders.
OTHER INFORMATION
The information in Note 65 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.
(a) Exhibits
Exhibit Number | Description | |
12.1 | Ratio of earnings to fixed charges.ü | |
99.1 | Certification of the Chief Executive Officer, dated | |
99.2 | Certification of the Chief Financial Officer, dated |
ü | Filed herewith. |
(b)Reports on Form 8-K
Current report on Form 8-K dated August 7, 2002, reportingMay 5, 2003, furnished under Item 9, Regulation“Regulation FD Disclosures, that eachDisclosure” but furnished pursuant to Item 12, “Disclosure of Results of Operations and Financial Condition”, pursuant to interim guidance issued by the SEC in Release Nos. 33-8216 and 34-47583. A copy of the Principal Executive Officer and Principal Financial Officer of DaVita Inc. submittedpress release announcing the Company’s financial results for the quarter ended March 31, 2003 was attached to the Securities and Exchange Commission sworn statements pursuant to the Securities and Exchange Commission’s June 27, 2002 order requiring the filing of sworn statements pursuant to section 21(a)(1) of the Exchange Act (No. 4-460).
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DAVITA INC. | ||
By: | /s/ GARY W. BEIL | |
Gary W. Beil Vice President and Controller* |
Date: November 12, 2002
* | Mr. Beil has signed both on behalf of the registrant as a duly authorized officer and as the Registrant’s |
I, Kent J. Thiry, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of DaVita Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
/s/ KENT J. THIRY | ||
Kent J. Thiry Chief Executive Officer |
CERTIFICATIONS
I, Richard K. Whitney, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of DaVita Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
/s/ RICHARD K. WHITNEY | ||
Richard K. Whitney Chief Financial Officer |
INDEX TO EXHIBITS
Exhibit Number | Description | |
12.1 | Ratio of earnings to fixed charges.ü | |
99.1 | Certification of the Chief Executive Officer, dated | |
99.2 | Certification of the Chief Financial Officer, dated |
ü | Filed herewith. |
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