-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PWt/yt6MPgvgcU/1ya1LiphODI3VavWJ3FWqka/+FIUT6Tijq6zwiWriAqXBgOW0 dGxvtb++w3Uz6SXI6ddw8A== 0000898430-01-501931.txt : 20010816 0000898430-01-501931.hdr.sgml : 20010816 ACCESSION NUMBER: 0000898430-01-501931 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVITA INC CENTRAL INDEX KEY: 0000927066 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 510354549 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04034 FILM NUMBER: 1714523 BUSINESS ADDRESS: STREET 1: 21250 HAWTHORNE BLVD STREET 2: SIE 800 CITY: TORRANCE STATE: CA ZIP: 90503-5517 BUSINESS PHONE: 3107922600 MAIL ADDRESS: STREET 1: 21250 HAWTHORNE BLVD SUITE 800 STREET 2: 21250 HAWTHORNE BLVD SUITE 800 CITY: TORRANCE STATE: CA ZIP: 90503-5517 FORMER COMPANY: FORMER CONFORMED NAME: TOTAL RENAL CARE HOLDINGS INC DATE OF NAME CHANGE: 19950524 FORMER COMPANY: FORMER CONFORMED NAME: TOTAL RENAL CARE INC DATE OF NAME CHANGE: 19940719 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED 6/30/2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q For the Quarter Ended June 30, 2001 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-4034 DAVITA INC. (Former name: Total Renal Care Holdings, Inc.) 21250 Hawthorne Blvd., Suite 800 Torrance, California 90503-5517 Telephone # (310) 792-2600 Delaware 51-0354549 (State of incorporation) (I.R.S. employer identification no.)
The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. As of August 1, 2001, there were 84,302,734 shares of the Registrant's common stock (par value $0.001) issued and outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DAVITA INC. INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements: Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.................................................... 1 Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2001 and June 30, 2000................................................... 2 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and June 30, 2000...................... 3 Notes to Condensed Consolidated Financial Statements........ 4 Management's Discussion and Analysis of Financial Condition Item 2. and Results of Operations................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 15 Risk Factors......................................................... 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 20 Item 4. Submission of Matters to a Vote of Security Holder.......... 20 Item 6. Exhibits and Reports on Form 8-K............................ 20 Signatures........................................................... 22
- -------- Note: Items 2, 3, and 5 of Part II are omitted because they are not applicable. i DAVITA INC. CONSOLIDATED BALANCE SHEETS (unaudited) (dollars in thousands, except per share data)
June 30, December 31, 2001 2000 ---------- ------------ ASSETS ------ Cash and cash equivalents............................. $ 85,258 $ 31,207 Accounts receivable, less allowance of $53,551 and $61,619.............................................. 297,907 290,412 Inventories........................................... 44,604 20,641 Other current assets.................................. 12,726 10,293 Income taxes receivable............................... 2,830 Deferred income taxes................................. 42,846 42,492 ---------- ---------- Total current assets.............................. 483,341 397,875 Property and equipment, net........................... 241,538 236,659 Intangible assets, net................................ 945,821 921,623 Investments in third-party dialysis businesses........ 11,206 34,194 Other long-term assets................................ 2,117 1,979 Deferred income taxes................................. 4,302 ---------- ---------- $1,684,023 $1,596,632 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Accounts payable...................................... $ 79,227 $ 74,882 Other current liabilities............................. 116,066 102,563 Accrued compensation and benefits..................... 83,166 70,406 Current portion of long-term debt..................... 15,419 1,676 Income taxes payable.................................. 689 ---------- ---------- Total current liabilities......................... 294,567 249,527 Long-term debt........................................ 935,247 974,006 Other long-term liabilities........................... 4,984 4,855 Deferred income taxes................................. 521 Minority interests.................................... 21,125 18,876 Shareholders' equity: Preferred stock ($0.001 par value; 5,000,000 shares authorized; none issued or outstanding)............ Common stock ($0.001 par value, 195,000,000 shares authorized; 84,135,381 and 82,135,634 shares issued and outstanding)................................... 84 82 Additional paid-in capital.......................... 450,817 430,676 Notes receivable from shareholders.................. (83) Treasury stock, at cost (126,000 shares)............ (2,494) Accumulated deficit................................. (20,828) (81,307) ---------- ---------- Total shareholders' equity........................ 427,579 349,368 ---------- ---------- $1,684,023 $1,596,632 ========== ==========
See notes to condensed consolidated financial statements. 1 DAVITA INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (dollars in thousands, except per share data)
Three months ended Six months ended June 30, June 30, ------------------- ------------------- 2001 2000 2001 2000 -------- --------- -------- --------- Net operating revenues.............. $400,640 $ 378,908 $786,857 $ 751,021 Operating expenses: Dialysis centers and labs......... 271,545 267,714 532,519 527,012 General and administrative........ 32,417 31,619 64,230 63,540 Depreciation and amortization..... 26,624 29,670 52,772 57,388 Provision for uncollectible accounts......................... (378) 12,648 (8,563) 25,507 Impairment and valuation adjustments...................... 4,414 4,414 -------- --------- -------- --------- Total operating expenses........ 330,208 346,065 640,958 677,861 -------- --------- -------- --------- Operating income.................... 70,432 32,843 145,899 73,160 Other income (loss), net............ 1,120 (11,984) 2,468 (10,589) Debt expense........................ 18,715 34,482 38,439 67,647 Minority interests in income of consolidated subsidiaries.......... (2,269) (1,023) (4,726) (2,021) -------- --------- -------- --------- Income (loss) before income taxes and extraordinary item............. 50,568 (14,646) 105,202 (7,097) Income tax expense.................. 22,000 709 45,700 4,411 -------- --------- -------- --------- Income (loss) before extraordinary item............................... 28,568 (15,355) 59,502 (11,508) Extraordinary gain related to early extinguishment of debt, net of tax of $652............................ 977 977 -------- --------- -------- --------- Net income (loss)............... $ 29,545 $(15,355) $ 60,479 $(11,508) ======== ========= ======== ========= Earnings (loss) per common share-- basic: Income (loss) before extraordinary item............................. $ 0.34 $ (0.19) $ 0.72 $ (0.14) Extraordinary gain, net of tax.... 0.01 0.01 -------- --------- -------- --------- Net income (loss)............... $ 0.35 $ (0.19) $ 0.73 $ (0.14) ======== ========= ======== ========= Earnings (loss) per common share-- assuming dilution: Income (loss) before extraordinary item............................. $ 0.32 $ (0.19) $ 0.67 $ (0.14) Extraordinary gain, net of tax.... 0.01 0.01 -------- --------- -------- --------- Net income (loss)............... $ 0.33 $ (0.19) $ 0.68 $ (0.14) ======== ========= ======== ========= Comprehensive income: Net income (loss)................. $ 29,545 $ (15,355) $ 60,479 $ (11,508) Foreign currency translation...... 4,718 4,718 -------- --------- -------- --------- Comprehensive income (loss)....... $ 29,545 $ (10,637) $ 60,479 $ (6,790) ======== ========= ======== =========
See notes to condensed consolidated financial statements. 2 DAVITA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (dollars in thousands)
Six months ended June 30, ---------------------- 2001 2000 ----------- --------- Cash flows from operating activities: Net income (loss).................................... $ 60,479 $ (11,508) Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization...................... 52,772 57,388 Impairment and valuation losses.................... 4,414 Loss (gain) on divestitures........................ 362 (2,107) Deferred income taxes.............................. 4,469 6,057 Non-cash debt expense.............................. 1,155 1,720 Stock option expense and tax benefits.............. 9,931 941 Equity investment losses (income).................. (1,070) 821 Foreign currency translation loss.................. 4,718 Minority interests in income of consolidated subsidiaries...................................... 4,726 2,021 Extraordinary gain................................. (977) Changes in operating assets and liabilities, net of acquisitions and divestitures: Accounts receivable................................ (2,368) 37,016 Inventories........................................ (23,456) 9,959 Other current assets............................... (957) 4,740 Other long-term assets............................. 137 2,200 Accounts payable................................... 4,031 (30,236) Accrued compensation and benefits.................. 9,143 6,175 Other current liabilities.......................... 13,485 (2,593) Income taxes....................................... 2,767 19,789 Other long-term liabilities........................ 129 674 ----------- --------- Net cash provided by operating activities........ 134,758 112,189 ----------- --------- Cash flows from investing activities: Additions of property and equipment, net............. (18,583) (24,651) Acquisitions and divestitures, net................... (51,124) 147,300 Investments in affiliates, net....................... 20,646 (3,283) Intangible assets.................................... (10) (381) ----------- --------- Net cash provided by (used in) investing activities...................................... (49,071) 118,985 ----------- --------- Cash flows from financing activities: Borrowings........................................... 1,305,824 Payments on long-term debt........................... (1,331,617) (143,117) Deferred financing costs............................. (9,972) (1,092) Net proceeds from issuance of common stock........... 10,295 263 Distributions to minority interests.................. (3,672) (4,537) Purchase of treasury shares.......................... (2,494) ----------- --------- Net cash used in financing activities............ (31,636) (148,483) ----------- --------- Net increase in cash................................... 54,051 82,691 Cash and cash equivalents at beginning of period....... 31,207 107,981 ----------- --------- Cash and cash equivalents at end of period............. $ 85,258 $ 190,672 =========== =========
See notes to condensed consolidated financial statements. 3 DAVITA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (dollars in thousands, except per share data) Unless otherwise indicated in this Form 10-Q "the Company", "we", "us", "our" and similar terms refer to DaVita Inc. and its subsidiaries. 1. Condensed consolidated interim financial statements The condensed consolidated interim financial statements included in this report have been prepared by the Company without audit. In the opinion of management, all adjustments necessary for a fair presentation are reflected in these interim financial statements. These adjustments are of a normal and recurring nature. The results of operations for the periods ended June 30, 2001 are not necessarily indicative of the operating results for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2000 Form 10-K as amended by Form 10-K/A. Certain reclassifications have been made to prior periods to conform with current reporting. 2. Earnings per share calculation The reconciliation of the numerators and denominators used to calculate earnings per common share for the periods presented are as follows (shares in 000's):
Three months ended Six months ended June 30, June 30, ---------------- ---------------- 2001 2000 2001 2000 ------- -------- ------- -------- Basic: Net income............................... $29,545 $(15,355) $60,479 $(11,508) ======= ======== ======= ======== Weighted average number of shares outstanding during the period........... 83,548 81,479 82,997 81,415 Reduction in shares in connection with notes receivable from employees......... (41) (39) ------- -------- ------- -------- Weighted average number of shares outstanding for earnings per share-- basic................................... 83,548 81,438 82,997 81,376 ======= ======== ======= ======== Earnings per share--basic................ $ 0.35 $ (0.19) $ 0.73 $ (0.14) ======= ======== ======= ======== Assuming dilution: Net income............................... $29,545 $(15,355) $60,479 $(11,508) Debt expense, net of tax, resulting from dilutive effect of convertible debt..... 1,055 2,111 ------- -------- ------- -------- Net income--assuming dilution.......... $30,600 $(15,355) $62,590 $(11,508) ======= ======== ======= ======== Weighted average number of shares outstanding for earnings per share-- basic................................... 83,548 81,438 82,997 81,376 Incremental shares from stock option plans................................. 4,266 4,386 Incremental shares from convertible debt.................................. 4,879 4,879 ------- -------- ------- -------- Weighted average outstanding and incremental shares for earnings per share--assuming dilution................ 92,693 81,438 92,262 81,376 ======= ======== ======= ======== Earnings per share--assuming dilution.... $ 0.33 $ (0.19) $ 0.68 $ (0.14) ======= ======== ======= ========
4 DAVITA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the three and six months ended June 30, 2001, the calculation of earnings per share assuming dilution includes conversion of the 5 5/8% convertible subordinated notes, but does not include conversion of the 7% convertible subordinated notes as they were anti-dilutive. For the three and six months ended June 30, 2000, both the 7% convertible subordinated notes and the 5 5/8% convertible subordinated notes were anti-dilutive and therefore not included in the computation of earnings per share assuming dilution. Shares associated with stock options that have exercise prices greater than the average market price of shares outstanding during the period, which were not included in the computation of earnings per share assuming dilution, as they were anti-dilutive, are as follows:
Three months Six months ended June ended June 30, 30, ------------- ------------- 2001 2000 2001 2000 ------ ------ ------ ------ Shares associated with stock options not included in computation (shares in 000's)................. 1,544 9,729 1,637 9,729 Exercise price range of shares not included in computation: Low............................................. $18.10 $ 3.92 $17.44 $ 4.07 High............................................ $33.00 $36.13 $33.00 $36.13
3. Debt transactions On April 6, 2001 the Company completed the issuance of $225,000 9 1/4% Senior Subordinated Notes in a private offering. The Notes mature on April 15, 2011 and will be callable by the Company on or after April 15, 2006. Net proceeds of $219,375 from the offering were used to pay down amounts outstanding under the Company's then-existing senior credit facilities. In August 2001 these notes were exchanged for a series of notes with identical terms that had been registered under the Securities Act of 1933. On May 4, 2001 the Company completed a refinancing of its existing senior credit facilities. Proceeds from this refinancing were used to pay down $222,925, representing all outstanding amounts under the then-existing senior credit facilities. The new credit facilities consist of a Term A loan of $50,000, a Term B loan of $200,000 and a $150,000 undrawn revolving credit facility. The starting interest rate for both the Term A and B loans was LIBOR plus 2.75%, a decrease of 0.25% and 1.0%, respectively, from the previous term loan rates. The Term A loan and revolver interest rates are subject to increases or decreases based on changes in our leverage ratio. The new term loan facilities are also subject to aggregate quarterly principal amortization of $3,000 for the next five years. The entire facility is due in 2006 with an automatic one year extension of the Term B loan if our $125,000 5 5/8% subordinated convertible notes have been extended or converted by March 2006. As a result of these transactions, the write-off of deferred financing costs and accelerated recognition of deferred swap liquidation gains associated with the refinanced debt are reported as a net extraordinary gain of $977 for the quarter ended June 30, 2001. 5 DAVITA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-term debt was comprised of the following:
June 30, December 31, 2001 2000 -------- ------------ Senior secured credit facilities..................... $244,000 $498,800 Senior subordinated notes, 9 1/4%, due 2011.......... 225,000 Convertible subordinated notes, 7%, due 2009......... 345,000 345,000 Convertible subordinated notes, 5 5/8%, due 2006..... 125,000 125,000 Acquisition obligations and other notes payable...... 5,444 829 Capital lease obligations............................ 6,222 6,053 -------- -------- 950,666 975,682 Less current portion................................. (15,419) (1,676) -------- -------- $935,247 $974,006 ======== ========
Scheduled maturities of long-term debt at June 30, 2001 were as follows: 2001............................................................... 3,913 2002............................................................... 18,064 2003............................................................... 12,856 2004............................................................... 12,365 2005............................................................... 12,242 2006............................................................... 318,288 Thereafter......................................................... 572,938
4. Provision for uncollectible accounts The provision for uncollectible accounts for the three and six months ended June 30, 2001 includes cash recoveries of $8,944 and $24,944, respectively, associated with aged accounts receivable that had been written-off in 1999. 5. Contingencies Health care provider revenues may be subject to adjustment as a result of (1) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (2) differing interpretations of government regulations by different fiscal intermediaries; (3) differing opinions regarding a patient's medical diagnosis or the medical necessity of services provided; and (4) retroactive applications or interpretations of governmental requirements. The Company's Florida-based laboratory subsidiary is the subject of a third-party carrier review of its Medicare reimbursement claims. The carrier has issued formal overpayment determinations in the amount of $5,600 for the review period from January 1995 to April 1996, and $15,000 for the review period from May 1996 to March 1998. The carrier has suspended all payments of Medicare claims from this laboratory since May 1998. The carrier has also determined that $16,100 of the suspended claims for the review period from April 1998 to August 1999 and $11,600 of the suspended claims for the review period from August 1999 to May 2000 were not properly supported by the prescribing physicians' medical justification. The carrier has alleged that 99% of the tests the laboratory performed during the review period from January 1995 to April 1996, 96% of the tests performed in the period from May 1996 to March 1998, 70% of the tests performed in the period from April 1998 to August 1999, and 72% of the tests performed in the period from August 1999 to May 2000 were not properly supported by the prescribing physicians' medical justification. 6 DAVITA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company is disputing the overpayment determinations and has provided supporting documentation of its claims. The Company has initiated the process of a formal review of each of the carrier's determinations. The first step in this formal review process is a hearing before a hearing officer at the carrier. The Company has received minimal responses from the carrier to its repeated requests for clarification and information regarding the continuing payment suspension. The hearing regarding the initial review period from January 1995 to April 1996 was held in July 1999. In January 2000 the hearing officer issued a decision upholding the overpayment determination of $5,600. The hearing regarding the second review period from May 1996 to March 1998 was held in April 2000. In July 2000 the hearing officer issued a decision upholding $14,200, or substantially all of the overpayment determination. The Company has filed appeals of both decisions to a federal administrative law judge, who has consolidated the two appeals at the Company's request. The Company has received a request for additional information from the administrative law judge. The Company expects to provide the requested information in the third quarter of 2001. A hearing will be scheduled after the administrative law judge receives this information. In addition to the formal appeal process with a federal administrative law judge, beginning in the third quarter of 1999 we sought a meeting with the Department of Justice, or DOJ, to begin a process to resolve this matter. The carrier had previously informed the local office of the DOJ and HHS of this matter, and we had provided requested information to the DOJ. The Company met with the DOJ in February 2001 at which time the DOJ requested additional information, which the Company is providing. Timing of the final resolution of this matter is highly uncertain, and beyond the Company's control or influence. Beginning in the third quarter of 2000, the Company stopped recognizing Medicare revenue from this laboratory until the uncertainties regarding both the timing of resolution and the ultimate revenue valuations are at least substantially eliminated. The amount of potential Medicare revenue not accrued beginning in the third quarter of 2000 was approximately $4,000 per quarter. We estimate that the potential cash exposure as of June 30, 2001 is not more than $10,000 based on the carrier's overpayment findings noted above. If this matter is resolved in a manner adverse to the Company, the government could impose additional fines and penalties, which could be substantial. In February 2001, the Civil Division of the United States Attorney's Office for the Eastern District of Pennsylvania contacted us and requested that the Company cooperate in a review of some of our historical practices, including billing and other operating procedures and our financial relationships with physicians. The Civil Division has requested that we provide a wide range of information responding to the areas of review. The Civil Division has not initiated any legal process or served any subpoena on the Company. The Civil Division has indicated that it is not making any allegation of wrongdoing at this time and that no criminal action against the Company or any individual is contemplated. The Company is cooperating in this review. The inquiry appears to be at an early stage. As it proceeds, the Civil Division could expand its areas of concern. If a court determines there has been wrongdoing, the penalties under applicable statutes could be substantial. In addition to the foregoing, DaVita is subject to claims and suits in the ordinary course of business. Management believes that the ultimate resolution of these additional matters, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. 6. Recent accounting pronouncements In July 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets which will be effective July 1, 2001 and January 1, 2002, respectively, for the Company. 7 DAVITA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. Under SFAS 142, amortization of goodwill and other indefinite-lived intangible assets, including any such intangibles recorded in past business combinations, will be discontinued beginning January 1, 2002. In addition, goodwill and other indefinite-lived intangible assets recorded as a result of business combinations completed during the six-month period ending December 31, 2001 will not be amortized. Under the new standards, goodwill and other indefinite-lived intangible assets will be written down with a goodwill impairment charge against current earnings whenever the recorded values exceed their fair values. As with goodwill amortization, such goodwill charges would not directly affect cash flows. The Company is currently reviewing the provisions of SFAS 141 and SFAS 142 and assessing the impact of their adoption. 7. Condensed consolidating financial statements The following information is presented as required under the Securities and Exchange Commission's Financial Reporting Release No. 55 in connection with the Company's publicly traded debt. The operating and investing activities of the separate legal entities included in the consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other services. Other income (loss) for the six months ended June 30, 2001 includes intercompany interest charges in accordance with the intercompany debt agreements in effect at June 30, 2001. The $125,000 5 5/8% Convertible Subordinated Notes due 2006, issued by the wholly-owned subsidiary Renal Treatment Centers, Inc., or RTC, are guaranteed by DaVita Inc. The $225,000 9 1/4% Senior Subordinated Notes issued in April 2001 by DaVita Inc. are guaranteed by all of its wholly-owned domestic subsidiaries. Non-wholly-owned subsidiaries, joint ventures and partnerships are not guarantors of either obligation. 8 DAVITA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed Consolidating Balance Sheets
Wholly-owned subsidiaries ----------------- DaVita All Non-participating Consolidating Inc. RTC others subsidiaries adjustments Consolidated ---------- -------- -------- ----------------- ------------- ------------ As of June 30, 2001 Cash and cash equivalents............ $ 75,065 $ 7 $ 10,186 $ 85,258 Accounts receivable, net.................... 89,839 178,706 $ 29,362 297,907 Other current assets.... 1,533 14,307 82,306 2,030 100,176 ---------- -------- -------- -------- ----------- ---------- Total current assets... 76,598 104,153 271,198 31,392 483,341 Property and equipment, net.................... 8,713 56,465 152,117 24,243 241,538 Investments in subsidiaries........... 252,411 $ (252,411) Receivables from subsidiaries........... 894,483 (894,483) Intangible assets, net.. 20,080 289,050 520,648 116,043 945,821 Other assets............ 7,366 4,712 1,201 44 13,323 ---------- -------- -------- -------- ----------- ---------- Total assets........... $1,259,651 $454,380 $945,164 $171,722 $(1,146,894) $1,684,023 ========== ======== ======== ======== =========== ========== Current liabilities..... 26,937 21,809 241,352 4,469 294,567 Payables to subsidiaries/parent.... 116,291 747,822 30,370 (894,483) Long-term liabilities... 805,135 125,151 5,327 5,139 940,752 Minority interests...... 21,125 21,125 Shareholders' equity.... 427,579 191,129 (49,337) 131,744 (273,536) 427,579 ---------- -------- -------- -------- ----------- ---------- Total liabilities and shareholders' equity.. $1,259,651 $454,380 $945,164 $171,722 $(1,146,894) $1,684,023 ========== ======== ======== ======== =========== ========== As of December 31, 2000 Cash and cash equivalents............ $ 16,553 $ 1,871 $ 12,783 $ 31,207 Accounts receivable, net.................... 83,313 180,263 $ 26,836 290,412 Other current assets.... 2,014 15,967 55,947 2,328 76,256 ---------- -------- -------- -------- ----------- ---------- Total current assets... 18,567 101,151 248,993 29,164 397,875 Property and equipment, net.................... 5,377 61,686 146,959 22,637 236,659 Investments in subsidiaries........... 199,079 $ (199,079) Receivables from subsidiaries........... 938,183 (938,183) Intangible assets, net.. 9,548 299,813 493,946 118,316 921,623 Other assets............ 37,692 2,146 593 44 40,475 ---------- -------- -------- -------- ----------- ---------- Total assets........... $1,208,446 $464,796 $890,491 $170,161 $(1,137,262) $1,596,632 ========== ======== ======== ======== =========== ========== Current liabilities..... 15,278 23,996 206,275 3,978 249,527 Payables to subsidiaries/parent.... 146,877 746,892 44,414 (938,183) Long-term liabilities... 843,800 125,000 5,311 4,750 978,861 Minority interests...... 18,876 18,876 Shareholders' equity.... 349,368 168,923 (67,987) 117,019 (217,955) 349,368 ---------- -------- -------- -------- ----------- ---------- Total liabilities and shareholders' equity... $1,208,446 $464,796 $890,491 $170,161 $(1,137,262) $1,596,632 ========== ======== ======== ======== =========== ==========
9 DAVITA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed Consolidating Statements of Income
Wholly-owned subsidiaries Non- -------------------- participating Consolidating DaVita Inc. RTC All others subsidiaries adjustments Consolidated ----------- -------- ---------- ------------- ------------- ------------ For the six months ended June 30, 2001 Net operating revenues.. $ 65,271 $253,247 $440,793 $89,822 $(62,276) $786,857 Operating expenses...... 37,347 210,732 387,302 67,853 (62,276) 640,958 -------- -------- -------- ------- -------- -------- Operating income....... 27,924 42,515 53,491 21,969 145,899 Other income (loss), net.................... 39,519 (43) (37,008) 2,468 Debt expense............ 34,730 3,446 (2,361) 2,624 38,439 Minority interests...... (4,726) (4,726) Income taxes............ 14,067 16,820 14,813 45,700 Equity earnings in consolidated subsidiaries........... 40,856 14,619 (55,475) Extraordinary gain...... 977 977 -------- -------- -------- ------- -------- -------- Net income............. $ 60,479 $ 22,206 $ 18,650 $19,345 $(60,201) $ 60,479 ======== ======== ======== ======= ======== ======== For the six months ended June 30, 2000 Net operating revenues.. $ 53,959 $251,857 $417,499 $77,746 $(50,040) $751,021 Operating expenses...... 18,464 236,664 407,520 65,253 (50,040) 677,861 -------- -------- -------- ------- -------- -------- Operating income....... 35,495 15,193 9,979 12,493 73,160 Other income (loss), net.................... (10,182) (1,067) 660 (10,589) Debt expense............ 63,693 4,083 (1,857) 1,728 67,647 Minority interests...... (2,021) (2,021) Income taxes............ (15,736) 5,305 14,946 (104) 4,411 Equity earnings in consolidated subsidiaries........... 11,136 9,508 (20,644) -------- -------- -------- ------- -------- -------- Net income (loss)...... $(11,508) $ 5,805 $ 5,331 $11,529 $(22,665) $(11,508) ======== ======== ======== ======= ======== ========
10 DAVITA INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Wholly-owned subsidiaries Non- --------------------- participating Consolidating DaVita Inc. RTC All others subsidiaries adjustments Consolidated ----------- --------- ---------- ------------- ------------- ------------ Six months ended June 30, 2001 Cash flows from operating activities: Net income............ $ 60,479 $ 22,206 $ 18,650 $19,345 $(60,201) $ 60,479 Changes in operating and intercompany assets and liabilities and non cash items included in net income........ 34,221 (21,340) 13,344 (12,147) 60,201 74,279 --------- --------- -------- ------- -------- --------- Net cash provided by operating activities......... 94,700 866 31,994 7,198 -- 134,758 --------- --------- -------- ------- -------- --------- Cash flows from investing activities: Purchases of property and equipment, net... (4,217) (2,881) (7,531) (3,954) (18,583) Acquisitions and divestitures, net.... (51,124) (51,124) Other items........... 20,611 25 20,636 --------- --------- -------- ------- -------- --------- Net cash used in investing activities......... (4,217) (2,881) (38,044) (3,929) (49,071) --------- --------- -------- ------- -------- --------- Cash flows from financing activities: Long-term debt........ (29,800) 151 3,453 403 (25,793) Other items........... (2,171) (3,672) (5,843) --------- --------- -------- ------- -------- --------- Net cash provided by (used in) financing activities......... (31,971) 151 3,453 (3,269) (31,636) --------- --------- -------- ------- -------- --------- Net increase (decrease) in cash............... 58,512 (1,864) (2,597) -- 54,051 Cash at the beginning of the period......... 16,553 1,871 12,783 31,207 --------- --------- -------- ------- -------- --------- Cash at the end of the period................ $ 75,065 $ 7 $ 10,186 $ -- $ -- $ 85,258 ========= ========= ======== ======= ======== ========= Six months ended June 30, 2000 Cash flows from operating activities: Net income (loss)..... $ (11,508) $ 5,805 $ 5,331 $11,529 $(22,665) $ (11,508) Changes in operating and intercompany assets and liabilities and non cash items included in net income (loss)............... 61,920 (104,511) 152,790 (9,167) 22,665 123,697 --------- --------- -------- ------- -------- --------- Net cash provided by (used in) operating activities......... 50,412 (98,706) 158,121 2,362 -- 112,189 --------- --------- -------- ------- -------- --------- Cash flows from investing activities: Purchases of property and equipment, net... (111) (8,936) (14,410) (1,194) (24,651) Acquisitions and divestitures, net.... 105,342 41,958 147,300 Other items........... (342) (3,322) (3,664) --------- --------- -------- ------- -------- --------- Net cash provided by (used in) investing activities......... (453) 96,406 24,226 (1,194) 118,985 --------- --------- -------- ------- -------- --------- Cash flows from financing activities: Long-term debt........ (139,615) (2,334) (1,168) (143,117) Other items........... (829) (4,537) (5,366) --------- --------- -------- ------- -------- --------- Net cash used in financing activities......... (140,444) (6,871) (1,168) (148,483) --------- --------- -------- ------- -------- --------- Net increase (decrease) in cash............... (90,485) (2,300) 175,476 82,691 Cash at the beginning of the period......... 90,544 4,118 13,319 107,981 --------- --------- -------- ------- -------- --------- Cash at the end of the period................ $ 59 $ 1,818 $188,795 $ -- $ -- $ 190,672 ========= ========= ======== ======= ======== =========
11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements This Form 10-Q contains statements that are forward-looking statements within the meaning of the federal securities laws, including statements about our expectations, beliefs, intentions or strategies for the future. These statements involve known and unknown risks and uncertainties, including risks resulting from economic and market conditions, the regulatory environment in which we operate, competitive activities, other business conditions, accounting estimates, and the risk factors set forth in this Form 10-Q. These risks, among others, include those relating to possible reductions in private and government reimbursement rates, the concentration of profits generated from PPO and private indemnity patients and from ancillary services including pharmaceuticals, the ongoing payment suspension and review of the Company's Florida laboratory subsidiary by its Medicare carrier and the Department of Justice, the ongoing review by the Civil Division of the US Attorney's Office for the Eastern District of Pennsylvania and the Company's ability to maintain contracts with physician medical directors. Our actual results may differ materially from results anticipated in our forward-looking statements. We base our forward-looking statements on information currently available to us, and we have no current intention to update these statements, whether as a result of changes in underlying factors, new information, future events or other developments. Results of operations Continental U.S. and non-continental U.S. operating revenues and operating expenses were as follows (dollars in millions):
Quarter ended ---------------------------- June 30, March June 30, 2001 31, 2001 2000 -------- -------- -------- Revenues: Continental U.S................................. $397 99% $382 99% $345 91% Non-continental U.S............................. 4 1% 4 1% 34 9% ---- --- ---- --- ---- --- 401 100% 386 100% 379 100% ==== === ==== === ==== === Operating expenses: Continental U.S................................. 326 99% 306 98% 308 89% Non-continental U.S............................. 4 1% 5 2% 38 11% ---- --- ---- --- ---- --- 330 100% 311 100% 346 100% ==== === ==== === ==== === Consolidated operating income..................... $ 71 $ 75 $ 33 ==== ==== ====
The Company's divestiture of its dialysis operations outside the continental United States was substantially completed during 2000, reducing the number of dialysis centers that we operate outside the continental United States from 84 to 2 by the end of 2000. Because all operations outside the continental United States have been divested with the exception of the pending completion of the sale of two centers in Puerto Rico, the non-continental U.S. operating results are excluded from the revenue and cost trends discussed below. 12 Continental U.S. operations (dollars in millions, except per treatment data)
Quarter ended ----------------------------------------- June 30, June 30, 2001 March 31, 2001 2000 ----------- ----------------- ---------- Revenues........................ $ 397 100% $ 382 100 % $ 345 100% Operating expenses: Dialysis centers and labs..... 269 68% 256 67 % 240 70% General and administrative.... 32 8% 32 8 % 30 9% Depreciation and amortization................. 26 7% 26 7 % 26 8% Provision for uncollectible accounts..................... (1) (8) (2)% 12 3% ------ -------- ------ 326 82% 306 80 % 308 89% ------ -------- ------ Operating income before impairment losses.............. $ 71 18% $ 76 20 % $ 37 11% ====== ======== ====== Dialysis treatments (000's)..... 1,409 1,366 1,336 Average dialysis revenue per dialysis treatment............. $ 276 $ 274 $ 249
Net operating revenues for the continental U.S. operations were $397 million for the second quarter of 2001, approximately 15% higher than in the second quarter of 2000. Approximately 10% was due to higher average revenue per treatment and approximately 5% was due to the increase in the number of treatments. The average dialysis revenue per treatment (excluding lab and pharmacy revenues and management fee income) was $276 for the second quarter of 2001, compared with $249 for the same period of 2000. The increase in the average revenue per treatment was principally attributable to improvements in revenue capture, billing and collections operations, and payor contracting, increased revenue associated with the administration of new higher-cost drugs and the increases in the Medicare composite reimbursement rate that became effective on both January 1 and April 1, 2001. Non-dialysis revenues were approximately $8 million in the second quarter of 2001, approximately $4 million lower than the second quarter of 2000 primarily due to reduced lab revenues and reduced management fees resulting from the acquisition of eight previously managed centers in the first quarter of 2001. Second quarter 2001 net operating revenues were approximately 3.7% higher than in the first quarter of 2001. The number of treatments increased by 3.1% in the second quarter. Net dialysis revenue per treatment increased approximately $2 from first quarter 2001 to second quarter of 2001, principally attributable to the Medicare rate increase that became effective April 1, 2001. Center operating expenses were approximately 68% of operating revenues for continental U.S. operations in the second quarter of 2001, compared with 67% in the first quarter of 2001 and 70% in the second quarter of 2000. On a per- treatment basis, second quarter 2001 center operating expenses were approximately $2 higher than in the prior quarter, and averaged approximately $10 per treatment higher than in the second quarter of 2000. The higher average cost per treatment was primarily attributable to higher labor and drug costs, which were more than offset by the increased revenue per treatment. General and administrative expenses were approximately 8% of operating revenues for continental U.S. operations in both the second and first quarters of 2001, compared to 9% in the second quarter of 2000. The decrease from the second quarter of 2000, measured as a percentage of revenue, was attributable to the higher average revenue rate per treatment in the second and first quarters of 2001. In absolute dollars, general and administrative expenses for the second quarter of 2001 were approximately 2% higher than in the first quarter, reflecting higher labor and infrastructure costs. During the first and second quarters of 2001, we realized cash recoveries of $16.0 and $8.9 million associated with aged accounts receivables reserved in 1999. We recognized the cash recoveries as a reversal of bad debt expense. Before considering these cash recoveries, the provision for uncollectible accounts receivable 13 for the second quarter of 2001 was approximately 2% of operating revenues compared with approximately 3.5% for the same period for 2000. We anticipate the provision for uncollectible accounts receivable will be generally in the range of 2% to 3% over the long term. Debt expense of $19 million for the second quarter of 2001 was approximately $16 million lower than the same period of 2000 due to lower effective interest rates and reduced debt balances. Based on current conditions and recent experience, our current projections are for normal operating earnings before depreciation and amortization, debt expense and taxes to be in the range of $340 million to $360 million for the year 2001, excluding the cash recoveries of previously reserved accounts receivables discussed above. These projections assume the continuation of current cost growth trends and current trends in the internal annual growth rate in the number of dialysis treatments, minimal acquisitions, no significant changes in billing practices, continued non-recognition of Medicare lab revenue and no significant settlement or impairment losses. These and other underlying assumptions involve significant risks and uncertainties, and actual results may vary significantly from these current projections. Additionally, the renegotiation or restructuring of unfavorable managed care contracts, medical director agreements or other arrangements may result in future impairment or other charges. Liquidity and capital resources Cash flow from operations during the first half of 2001 amounted to $135 million and the reduction in long-term debt totaled $26 million. The positive cash flow included $131 million from earnings adjusted for non-cash items. Non-operating cash outflows included acquisitions of dialysis centers for $51 million (offset by liquidation of investments in third-party dialysis operations) and $19 million in capital asset expenditures. In April 2001, $225 million of 9 1/4% Senior Subordinated Notes were issued. The net proceeds of this offering were used to pay down amounts outstanding under our then-existing senior credit facilities. In August these notes were exchanged for a series of notes with identical terms that had been registered under the Securities Act of 1933. On May 4, 2001 the Company completed a refinancing of its senior credit facilities. The new financing includes a Term A loan of $50 million, a Term B loan of $200 million and a $150 million undrawn revolving credit facility. The starting interest rate for both the Term A and B loans was LIBOR plus 2.75%, a decrease of 0.25% and 1.0%, respectively, from the previous term loan rates. The Term A loan and revolver interest rates are also subject to increases or decreases based on changes in our leverage ratio. The new term loan facilities are subject to aggregate quarterly principal amortization of $3 million for the next five years. The entire facility is due in 2006 with an automatic one year extension of the Term B loan if our $125 million 5 5/8% subordinated convertible notes have been extended or converted by March 2006. Continental U.S. accounts receivable at June 30, 2001 amounted to $291 million, a decrease of $5 million during the quarter. This balance represented approximately 68 days of net revenue, an improvement of approximately 3 days over the previous quarter. New accounting pronouncements In July 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets which will be effective July 1, 2001 and January 1, 2002, respectively, for the Company. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. Under SFAS 142, amortization of goodwill and other indefinite-lived intangible assets, including any such intangibles recorded in past business combinations, will be discontinued beginning January 1, 2002. In addition, goodwill and other indefinite-lived intangible assets recorded as a result of business combinations completed during the six-month period ending December 31, 2001 will not be amortized. 14 Under the new standards, goodwill and other indefinite-lived intangible assets will be written down with a goodwill impairment charge against current earnings whenever the recorded values exceed their fair values. As with goodwill amortization, such goodwill charges would not directly affect cash flows. We are currently reviewing the provisions of SFAS 141 and SFAS 142 and assessing the impact of their adoption. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Interest rate sensitivity The table below provides information about our financial instruments that are sensitive to changes in interest rates.
Expected maturity date Average ----------------------------- Fair interest 2001 2002 2003 2004 2005 2006 Thereafter Total value rate ---- ---- ---- ---- ---- ---- ---------- ----- ----- -------- (dollars in millions) Long-term debt Fixed rate..... $125 $570 $695 $681 7.76% Variable rate.......... $ 4 $18 $13 $13 $12 193 3 256 256 6.81%
Exchange rate sensitivity We are currently not exposed to any foreign currency exchange rate risk. 15 RISK FACTORS This Form 10-Q contains statements that are forward-looking statements within the meaning of the federal securities laws, including statements about our expectations, beliefs, intentions or strategies for the future. These forward-looking statements include statements regarding our expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for uncollectible accounts receivable, earnings before depreciation and amortization, debt expense and taxes, and capital expenditures. We base our forward-looking statements on information currently available to us, and we have no current intention to update these statements, whether as a result of changes in underlying factors, new information, future events or other developments. These statements involve known and unknown risks and uncertainties, including risks resulting from economic and market conditions, the regulatory environment in which we operate, competitive activities and other business conditions. Our actual results may differ materially from results anticipated in these forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include those set forth below. The risks discussed below are not the only ones facing our business. If the percentage of our patients paying at or near our list prices declines, then our revenues, cash flows and net income would be substantially reduced. Approximately 41% of our continental U.S. dialysis revenues in 1999 and 42% in both 2000 and the first six months of 2001 were generated from patients who had private payors as the primary payor. A minority of these patients have insurance policies that reimburse us at or near our list prices, which are significantly higher than Medicare rates. The majority of these patients have insurance policies that reimburse us at rates that are below our list prices but, in most cases, higher than Medicare rates. We believe that pressure from private payors to decrease the rates at which they pay us may increase. If the percentage of patients who have insurance that pays us at or near our list prices decreases significantly, it would have an adverse effect on our revenues, cash flows and net income. If we are unable to renegotiate material contracts with managed care plans on acceptable terms, we may experience a decline in same center growth. We have contracts with some large managed care plans that include unfavorable terms. Although we are attempting to renegotiate the terms of these contracts, we cannot predict whether we will reach agreement on new terms or whether we will renew these contracts. As a result, we may lose numerous patients of these managed care plans and experience a decline in our same center growth, which will negatively impact our revenues. Future declines, or the lack of further increases, in Medicare reimbursement rates would reduce our net income and cash flows. Approximately 54% of our continental U.S. dialysis revenues in 1999 and 53% in both 2000 and the first six months of 2001 were generated from patients who had Medicare as their primary payor. The Medicare ESRD program reimburses us for dialysis and ancillary services at fixed rates. Unlike many other Medicare programs, the Medicare ESRD program does not provide for periodic inflation increases in reimbursement rates. These rates have declined over 70% in real dollars since 1972. Congress recently enacted two separate increases of 1.2% to the Medicare composite reimbursement rate for dialysis effective January 1, 2000 and January 1, 2001. An additional 1.2% increase became effective April 1, 2001, plus an adjustment factor designed to provide the benefits of the increase as if it had become effective on January 1, 2001. These were the first increases in the composite rate since 1991 and are significantly less than the cumulative rate of inflation since 1991. In addition, the Medicare Payment Advisory Commission has recommended to Congress that there be no increase in the composite rate for 2002. Increases in operating costs that are subject to inflation, such as labor and supply costs, have occurred and are expected to continue to occur without a compensating increase in reimbursement rates. 16 We cannot predict the nature or extent of future rate changes, if any. To the extent these rates are not adjusted to keep pace with inflation, our net income and cash flows would be adversely affected. Future changes in the structure of, and reimbursement rates under, the Medicare ESRD program could substantially reduce our net income and cash flows. In legislation enacted in December 2000, Congress mandated government studies on whether: . The Medicare composite rate for dialysis should be modified to include an annual inflation increase--study due July 2002; . The Medicare composite rate for dialysis should be modified to include additional services, such as laboratory and other diagnostic tests and the administration of EPO and other pharmaceuticals, in the composite rate--study due July 2002; and . Reimbursement for many outpatient prescription drugs that we administer to dialysis patients should be reduced from the current rate of 95% of the average wholesale price--study due September 2001. If Medicare began to include in its composite reimbursement rate any ancillary services that it currently reimburses separately, our revenue would decrease to the extent there was not a corresponding increase in that composite rate. In particular, Medicare revenue from EPO was approximately 13% of our net revenue in 1999, 2000 and the first six months of 2001. If EPO were included in the composite rate, and if the composite rate were not increased sufficiently, our revenue would decrease substantially. Reductions in current reimbursement rates for EPO or other outpatient prescription drugs would also reduce our revenue. If a significant number of physicians were to cease referring patients to our dialysis centers, whether due to regulatory or other reasons, our revenue and earnings would decline. If a significant number of physicians stop referring patients to our centers, it could have a material adverse effect on our revenue and earnings. Many physicians prefer to have their patients treated at centers where they or other members of their practice supervise the overall care provided as medical directors of the centers. As a result, the primary referral source for our centers is typically the physician or physician group providing medical director services to the center. If a medical director agreement terminates, whether before or at the end of its term, it may negatively impact the former medical director's decision to treat his or her patients at our centers. Medical directors contract with us for fixed periods, generally five to ten years. Medical directors have no obligation to extend their agreements with us. The agreements with medical directors at 48 centers are at risk of expiring on or before December 31, 2002. This includes agreements with terms expiring on or before December 31, 2002 and those with automatic renewal terms that will expire on or before December 31, 2002 if we or the medical director elect not to renew the agreement. We also may take actions to restructure existing relationships or take positions in negotiating extensions of relationships in order to assure compliance with anti-kickback and similar laws. These actions could negatively impact physicians' decisions to extend their medical director agreements with us. For example, we have recalled stock options and we require monthly statements from our medical directors certifying that they have performed their contractual obligations. To our knowledge, we are the only major dialysis provider to have done this. In addition, if the terms of an existing agreement were found to violate applicable laws, we may not be successful in restructuring the relationship, which could lead to the early termination of the agreement. If the current shortage of skilled clinical personnel or our high level of personnel turnover continues, we may experience disruptions in our business operations and increases in operating expenses. We are experiencing difficulties in hiring nurses and increased labor costs due to a nationwide shortage of skilled clinical personnel. This shortage limits our ability to expand our operations. We also have a high personnel turnover rate in our dialysis centers and central billing offices. Turnover has been the highest among 17 our reuse technicians, patient care technicians and unit secretaries. Recent efforts to reduce this turnover may not succeed. If we are not successful, or if we are unable to hire skilled clinical personnel when needed, our operations and our same center growth will be negatively impacted. Adverse developments with respect to EPO could materially reduce our net income and cash flows and affect our ability to care for our patients. Amgen is the sole supplier of EPO and may unilaterally decide to increase its price for EPO. For example, Amgen unilaterally increased its base price for EPO by 3.9% effective March 2000 and by an additional 3.9% effective May 2001. We expect Amgen to continue to increase its base price from time to time. Also, we cannot predict whether we will continue to receive the same discount structure for EPO that we currently receive, or whether we will continue to achieve the same levels of discounts within that structure as we have historically achieved. In addition, Amgen is developing a new product, NESP, that may replace EPO or reduce its use. We cannot predict when NESP will be introduced to the dialysis market, nor what its cost and reimbursement structure will be. Increases in the cost of EPO and the introduction of NESP could have a material adverse effect on our net income and cash flows. Changes in clinical practices and reimbursement rates or rules for EPO and other drugs could substantially reduce our revenue and earnings. The administration of EPO and other drugs accounted for approximately 32% of our net operating revenue in 1999, 35% in 2000 and 38% in the first six months of 2001. Changes in physician practice patterns and accepted clinical practices, changes in private and governmental reimbursement rates and rules, the introduction of new drugs and the conversion to alternate types of administration, for example from intravenous administration to subcutaneous or oral administration, that may also result in lower or less frequent dosages, could reduce our revenues and earnings from the administration of EPO and other drugs. If we fail to adhere to all of the complex government regulations that apply to our business, we could suffer severe consequences that would substantially reduce our revenue and earnings. Our dialysis operations are subject to extensive federal, state and local government regulations, including Medicare and Medicaid reimbursement rules and regulations and federal and state anti-kickback laws. The regulatory scrutiny of healthcare providers, including dialysis providers, has increased significantly in recent years. For the fiscal year ended September 30, 2000, the DOJ announced total recoveries of $840 million from healthcare civil fraud cases, including a $486 million settlement with one of our competitors as a result of an OIG and DOJ investigation into some of its business practices. In addition, the frequency and intensity of Medicare certification surveys and inspections of dialysis centers has markedly increased over the last year, consistent with recommendations of the OIG. We endeavor to comply with all of the requirements for receiving Medicare and Medicaid reimbursement and to structure all of our relationships with referring physicians to comply with the anti-kickback laws; however, the laws and regulations in this area are complex and subject to varying interpretations. In addition, our historic dependence on manual processes that vary widely across our network of dialysis centers exposes us to greater risk of errors in billing and other business processes. If any of our operations are found to violate these or other government regulations, we could suffer severe consequences, including: . Mandated practice changes that significantly increase operating expenses; . Suspension of payments from government reimbursement programs; . Refunds of amounts received in violation of law or applicable reimbursement program requirements; 18 . Loss of required government certifications or exclusion from government reimbursement programs, such as the Medicare ESRD program and Medicaid programs; . Loss of licenses required to operate healthcare facilities in some of the states in which we operate; and . Fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements. The pending federal review of some of our historical practices and third-party carrier review of our laboratory subsidiary could result in substantial penalties against us. We are voluntarily cooperating with the Civil Division of the United States Attorney's Office for the Eastern District of Pennsylvania in a review of some of our historical practices, including billing and other operating procedures and our financial relationships with physicians. In addition, our Florida- based laboratory subsidiary is the subject of a third-party carrier review of claims it has submitted for Medicare reimbursement. All further Medicare payments to this laboratory were suspended in May 1998, and the DOJ is also reviewing the situation. We are unable to determine when these matters will be resolved, whether any additional areas of inquiry will be opened or any outcome of these matters, financial or otherwise. Any negative findings could result in substantial financial penalties against us and exclusion from future participation in the Medicare and Medicaid programs. Our rollout of new information technology systems will significantly disrupt our billing and collection activity, may not work as planned and could have a negative impact on our results of operations and financial condition. We intend to roll out new information technology systems and new processes in each of our dialysis centers over the next few years. It is likely that this rollout will disrupt our billing and collection activity and may cause other disruptions to our business operations, which may negatively impact our cash flows. Also, the new information systems may not work as planned or improve our billing and collection processes. If they do not, we may have to spend substantial amounts to enhance or replace these systems. 19 PART II OTHER INFORMATION Item 1. Legal Proceedings. The information in Note 5 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report is incorporated by this reference in response to this item. Items 2 and 3 are not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Our annual meeting of shareholders was held on June 5, 2001. Proposal 1 submitted to our stockholders at the meeting was the election of directors. The following directors were elected at the meeting, with the number of votes cast for each director or withheld from each director set forth after the director's respective name. Nancy-Ann DeParle and William L. Roper also continued as directors after the meeting.
Votes for Authority Name Director Withheld ---- ---------- --------- Richard B. Fontaine.................................... 72,669,800 741,916 Peter T. Grauer........................................ 72,667,900 743,816 C. Raymond Larkin, Jr.................................. 72,667,826 743,890 John M. Nehra.......................................... 72,669,980 741,736 Kent J. Thiry.......................................... 63,589,496 9,822,220
Proposal 2 submitted to our stockholders at the meeting was the approval of an amendment to our 1999 Equity Compensation Plan to increase the number of shares available for grant under the plan by 2,750,000. The votes were cast as follows:
For Against Abstain --- ------- ------- 58,703,477 14,542,702 165,537
Proposal 3 submitted to our stockholders at the meeting was the approval of the DaVita Inc. Executive Incentive Plan. The votes were cast as follows:
For Against Abstain --- ------- ------- 71,509,246 1,770,495 131,975
Item 5 is not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 1.1 Purchase Agreement, dated April 6, 2001, among DaVita Inc., the subsidiaries of DaVita Inc. named therein and Credit Suisse First Boston Corporation, Banc of America Securities LLC, SunTrust Equitable Securities, BNY Capital Markets, Inc. and Scotia Capital (the "Initial Purchasers").* 4.1 Indenture, dated as of April 11, 2001, between DaVita Inc., the subsidiaries of DaVita Inc. named therein and U.S. Trust Company of Texas, National Association, as trustee.* 4.3 Registration Rights Agreement, dated as of April 11, 2001, among DaVita Inc., the subsidiaries of DaVita Inc. named therein and the Initial Purchasers.* 20 10.1 Credit Agreement, dated as of May 3, 2001, by and among DaVita Inc., the lenders party thereto, Bank of America, N.A., as the Administrative Agent, Banc of America Securities LLC as joint Book Manager and Credit Suisse First Boston Corporation as joint Book Manager and Syndication Agent (the "Credit Agreement").* 10.2 Security Agreement, dated as of May 3, 2001, made by DaVita Inc. and the subsidiaries of DaVita Inc. named therein to Bank of America, N.A., as the Collateral Agent for the lenders party to the Credit Agreement.* 10.3 Subsidiary Guarantee, dated as of May 3, 2001, made by the subsidiaries of DaVita Inc. named therein in favor of the lenders party to the Credit Agreement.* 10.4 Amended and Restated 1999 Equity Compensation Plan.** 10.5 Employment Agreement, effective as of June 15, 2000, by and between DaVita Inc. and Joseph C. Mello. X 12.1 Ratio of earnings to fixed charges. X (b) Reports on Form 8-K None. - -------- X Filed herewith * Filed on June 8, 2001 as an exhibit to our Registration Statement on Form S-4 (Registration Statement No. 333-62552). ** Filed on April 27, 2001 as an exhibit to the Definitive Proxy Statement for our 2001 Annual Meeting of Stockholders. 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAVITA INC. /s/ Gary W. Beil By: _________________________________ Gary W. Beil Vice President and Controller* Date: August 14, 2001 - -------- * Mr. Beil has signed both on behalf of the Registrant as a duly authorized officer and as the Registrant's chief accounting officer. 22 INDEX TO EXHIBITS Exhibit Number Description 1.1 Purchase Agreement, dated April 6, 2001, among DaVita Inc., the subsidiaries of DaVita Inc. named therein and Credit Suisse First Boston Corporation, Banc of America Securities LLC, SunTrust Equitable Securities, BNY Capital Markets, Inc. and Scotia Capital (the "Initial Purchasers").* 4.1 Indenture, dated as of April 11, 2001, between DaVita Inc., the subsidiaries of DaVita Inc. named therein and U.S. Trust Company of Texas, National Association, as trustee.* 4.3 Registration Rights Agreement, dated as of April 11, 2001, among DaVita Inc., the subsidiaries of DaVita Inc. named therein and the Initial Purchasers.* 10.1 Credit Agreement, dated as of May 3, 2001, by and among DaVita Inc., the lenders party thereto, Bank of America, N.A., as the Administrative Agent, Banc of America Securities LLC as joint Book Manager and Credit Suisse First Boston Corporation as joint Book Manager and Syndication Agent (the "Credit Agreement").* 10.2 Security Agreement, dated as of May 3, 2001, made by DaVita Inc. and the subsidiaries of DaVita Inc. named therein to Bank of America, N.A., as the Collateral Agent for the lenders party to the Credit Agreement.* 10.3 Subsidiary Guarantee, dated as of May 3, 2001, made by the subsidiaries of DaVita Inc. named therein in favor of the lenders party to the Credit Agreement.* 10.4 Amended and Restated 1999 Equity Compensation Plan.** 10.5 Employment Agreement, effective as of June 15, 2000, by and between DaVita Inc. and Joseph C. Mello.X 12.1 Ratio of earnings to fixed charges.X - -------- X Filed herewith. * Filed on June 8, 2001 as an exhibit to our Registration Statement on Form S-4 (Registration Statement No. 333-62552). ** Filed on April 27, 2001 as an exhibit to the Definitive Proxy Statement for our 2001 Annual Meeting of Stockholders. 23 EX-10.5 3 dex105.txt EMPLOYMENT AGREEMENT-JOSEPH C. MELLO EXHIBIT 10.5 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (this "Agreement") is entered into effective June 15, 2000 (the "Effective Date"), by and between DaVita Inc. ("Employer") and Joseph C. Mello ("Employee"). In consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the parties hereto, intending to be legally bound hereby, agree as follows: Section 1. Employment and Duties. Employer hereby employs Employee to --------------------- serve as Chief Operating Officer. Employee accepts such employment on the terms and conditions set forth in this Agreement. Employee shall perform the duties of Chief Operating Officer of the Employer and shall perform such other duties as may be assigned from time to time by the Chief Executive Officer. Employee agrees to devote substantially all of his time, energy, and ability to the business of Employer on a full-time basis, provided, however, that from the -------- ------- date hereof until October 2, 2000, or such earlier date as Employee may determine (the "Transition Period"), Employee shall be employed on a part-time basis to enable Employee to complete the transition from his former employer (the "Transition Activities"). Except for the Transition Activities during the Transition Period, Employee shall not engage in any other business activities during the term of this Agreement. Employee shall at all times observe and abide by the Employer's policies and procedures as in effect from time to time. Section 2. Compensation. In consideration of the services to be performed ------------ by Employee hereunder, Employee shall receive the following compensation and benefits: 2.1 Base Salary. Employee shall be paid a base salary of $325,000 ----------- per annum, less standard withholdings and authorized deductions, provided, -------- however, that Employee will initially earn a salary of $2,700 per month during - ------- the Transition Period, which salary shall be increased proportionally to any significant increase in Employee's workload during the Transition Period. Employee shall be paid consistent with Employer's payroll schedule. The Base Salary will be reviewed each year during Employer's annual salary review. Employer, in its sole discretion, may increase the Base Salary as a result of any such review. 2.2 Benefits. Employee and/or his family, as the case may be, shall -------- be eligible for participation in and shall receive all benefits under Employer's health and welfare benefit plans (including, without limitation, medical, prescription, dental, disability, and life insurance) under the same terms and conditions applicable to most executives at similar levels of compensation and responsibility, provided, however, during the Transition Period, Employee will -------- ------- not be entitled to any such benefits until Employee regularly works twenty-four (24) or more hours per week. 1 2.3 Bonus. ----- (a) Employee shall be eligible to receive a discretionary performance bonus (the "Bonus"), payable in a manner consistent with Employer's practices and procedures. The amount of the bonus, if any, will be decided by the Chief Executive Officer and/or the Board of Directors or the Compensation Committee of the Board in his/its sole discretion. (b) Employee must be employed by Employer (or an affiliate) on the date any Bonus is paid to be eligible to receive such Bonus and, if Employee is not employed by Employer (or an affiliate) on the date any Bonus is paid for any reason whatsoever, Employee shall not be entitled to receive such Bonus, provided, however, that in the event Employee dies or is terminated by Employer - -------- ------- by reason of Disability (as defined below), Employee (or his estate) shall be entitled to receive, at such time as bonuses for such year are otherwise paid by Employer, a pro rated Bonus for that portion of any year prior to such termination (or for the whole year and a portion of a year if such termination occurs after December 31 of any year and prior to the date on which the Bonus for such year is paid) regardless of whether Employee is employed on the date such Bonus is paid; and provided further, that, in the event Employee is -------- ------- terminated without Material Cause (as defined below) or resigns following Constructive Discharge (as defined below) at any time, Employee shall be entitled to receive a Bonus for the year in which such termination occurs equal to the normal Bonus, if any, which he received for the immediately preceding calendar year multiplied by two (2), which Bonus shall be payable within five (5) business days after the effective date of such termination. 2.4 Vacation. Employee shall have vacation, subject to the approval -------- of the Chief Executive Officer. 2.5 Stock Options. Employee shall receive options to purchase ------------- 450,000 shares of Employer stock. Such options shall have a five-year term and vest over a four-year period, one-quarter vesting on each anniversary date of the grant. The exercise price for 225,000 shares shall be the closing price as reported on the New York Stock Exchange on the start date of this Agreement, June 15, 2000; the exercise price for the remaining 225,000 shares of Employee's options shall be the closing price as reported on the New York Stock Exchange on the second day of Employee's employment, June 16, 2000. The options will be reflected in a separate Stock Option Agreement. 2.6 Indemnification. Employer agrees to indemnify Employee against --------------- and in respect of any and all claims, actions, or demands, in accordance with all applicable laws. Employer also agrees to reimburse Employee in accordance with Employer's reimbursement policies for travel and entertainment expenses, as well as other business-related expenses, incurred in the performance of his duties hereunder. 2.7 Changes to Benefit Plans. Employer reserves the right to modify, ------------------------ suspend, or discontinue any and all of its health and welfare benefit plans, practices, policies, and programs 2 at any time without recourse by Employee so long as such action is taken generally with respect to all other similarly-situated peer executives and does not single out Employee. Section 3. Provisions Relating to Termination of Employment. ------------------------------------------------ 3.1 Employment Is At-Will. Employee's employment with Employer is --------------------- "at will" and is terminable by Employer or by Employee at any time and for any reason or no reason, subject to the notice requirements set forth below. 3.2 Termination for Material Cause. Employer may terminate ------------------------------ Employee's employment for Material Cause (as defined below) upon at least thirty (30) days' advance written notice specifying in detail the cause for the termination and the intended termination date. Upon termination for Material Cause, Employee shall (i) be entitled to receive the Base Salary and benefits as set forth in Section 2.1 and Section 2.2, respectively, through the effective ----------- ----------- date of such termination and (ii) not be entitled to receive any other compensation, benefits, or payments of any kind, except as otherwise required by law or by the terms of any benefit or retirement plan or other arrangement that would, by its terms, apply. 3.3 Other Termination. Employer may terminate the employment of ----------------- Employee for any reason or for no reason at any time upon at least thirty (30) days' advance written notice. If Employer terminates the employment of Employee for reasons other than for Material Cause or Disability, or if Employee resigns within sixty (60) days following Constructive Discharge (as defined below), Employee shall (i) be entitled to receive the Base Salary and benefits as set forth in Section 2.1 and Section 2.2, respectively, through the effective date ----------- ----------- of such termination, (ii) be entitled to receive the Bonus provided for in Section 2.3(b), (iii) be entitled to receive a lump-sum payment equal to the - -------------- Base Salary in effect as of the date of such termination; (iv) be entitled to continue to receive during the one-year period following the effective date of such termination (the "Severance Period") the employee health insurance benefits set forth in Section 2.2 (to the extent Employee can continue to receive such ----------- benefits under Employer's health insurance policies and programs in effect at the effective time of such termination through the exercise of his rights under COBRA, Employee shall elect to receive COBRA benefits, and Employer shall pay Employee's insurance premiums for COBRA coverage during the Severance Period; provided, however, to the extent such benefits cannot be provided under such - -------- ------- policies and programs, Employer shall purchase for Employee reasonably equivalent health insurance benefits during the Severance Period subject to the limitation set forth below and subject to the limitation set forth in Section ------- 2.7); and (v) not be entitled to receive any other compensation, benefits, or - --- payments of any kind, except as otherwise required by law or by the terms of any benefit or retirement plan or other arrangement that would, by its terms, apply. The foregoing notwithstanding, in the event Employee accepts employment (as an employee or as an independent contractor) with another employer during the Severance Period, (x) Employee shall immediately notify Employer of such employment and (y) Employer's obligation to continue to provide certain health insurance benefits pursuant to clause (iv) of the immediately preceding sentence shall terminate. 3 3.4. Voluntary Resignation. Employee may resign from Employer at any --------------------- time upon at least ninety (90) days' advance written notice. If Employee resigns from Employer other than within sixty (60) days following Constructive Discharge, Employee shall (i) be entitled to receive the Base Salary and benefits as set forth in Section 2.1 and Section 2.2, respectively, through the ----------- ----------- effective date of such termination and (ii) not be entitled to receive any other compensation, benefits, or payments of any kind, except as otherwise required by law or by the terms of any benefit or retirement plan or other arrangement that would, by its terms, apply. In the event Employee resigns from Employer at any time, Employer shall have the right to make such resignation effective as of any date before the expiration of the required notice period. 3.5 Death. In the event of Employee's death, Employee's estate shall ----- (i) be entitled to receive the Base Salary and benefits as set forth in Section ------- 2.1 and Section 2.2, respectively, through the date of Employee's death, (ii) be - --- ----------- entitled to receive the Bonus provided for in Section 2.3(b) pro rated through -------------- the date of Employee's death, and (iii) not be entitled to receive any other compensation, benefits, or payments of any kind, except as otherwise required by law or by the terms of any benefit or retirement plan or other arrangement that would, by its terms, apply. 3.6 Disability. Upon thirty (30) days' advance notice (which notice ---------- may be given before the completion of the periods described herein), Employer may terminate Employee's employment for Disability (as defined below), provided that either (i) immediately upon the effective date of such termination, Employee shall be eligible to receive full disability benefits under the disability insurance, if any, provided to Employee by Employer or (ii) Employer shall continue to pay the Base Salary to Employee until the first to occur of (A) full disability benefits are received or (B) one (1) year from the effective date of such termination. 3.7 Definitions. For the purposes of this Section 3, the following ----------- --------- terms shall have the meanings indicated: (a) "Change of Control" shall mean (i) any transaction or series of transactions in which any person or group (within the meaning of Rule 13d-5 under the Exchange Act and Sections 13(d) and 14(d) of the Exchange Act) becomes the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), by way of a stock issuance, tender offer, merger, consolidation, other business combination or otherwise, of greater than 40% of the total voting power (on a fully diluted basis as if all convertible securities had been converted and all warrants and options had been exercised) entitled to vote in the election of directors of Employer (including any transaction in which Employer becomes a wholly-owned or majority-owned subsidiary of another corporation), (ii) any merger or consolidation or reorganization in which Employer does not survive, (iii) any merger or consolidation in which Employer survives, but the shares of Employer's Common Stock outstanding immediately prior to such merger or consolidation represent 40% or less of the voting power of Employer after such merger or consolidation, and (iv) any transaction in which more than 40% of Employer's assets are sold. However, despite the ------- occurrence of any of the above-described events, a Change of Control will not --- have occurred if Kent Thiry remains the Chief Executive Officer of Employer for at least two (2) years after the Change 4 of Control or becomes the Chief Executive Officer of the surviving company with which Employer merged or consolidated and remains in that position for at least two (2) years after the Change of Control. (b) "Constructive Discharge" shall mean the occurrence of any of the following events after the date of a Change of Control without Employee's express written consent: (i) the scope of Employee's authority, duties and responsibilities are materially diminished or are not (A) in the same area of operations, (B) in the same general level of seniority, or (C) of the same general nature as Employee's authority, duties, and responsibilities with Employer immediately before such Change of Control; (ii) the failure by Employer to provide Employee with office accommodations and assistance substantially equivalent to the accommodations and assistance provided to Employee immediately before such Change of Control; (iii) the principal office to which Employee is required to report is changed to a location that is more than twenty (20) miles from the principal office to which Employee is required to report immediately before such Change of Control; or (iv) a reduction by Employer in Employee's Base Salary, bonus arrangement, or other material benefits as in effect on the date of such Change of Control. (c) "Disability" shall mean the inability, for a period of six (6) months, to adequately perform Employee's regular duties, with or without reasonable accommodation, due to a physical or mental illness, condition, or disability. (d) "Material Cause" shall mean any of the following: (i) conviction of a felony; (ii) the adjudication by a court of competent jurisdiction that Employee has committed any act of fraud or dishonesty resulting or intended to result directly or indirectly in personal enrichment at the expense of Employer; (iii) repeated failure or refusal by Employee to follow policies or directives reasonably established by the Chief Executive Officer of Employer or his designee that goes uncorrected for a period of thirty (30) consecutive days after written notice has been provided to Employee; (iv) a material breach of this Agreement that goes uncorrected for a period of thirty (30) consecutive days after written notice has been provided to Employee; (v) an act of unlawful discrimination, including sexual harassment; (vi) a violation of the duty of loyalty or of any fiduciary duty; (vii) exclusion of Employee from participating in any federal health care program; or (viii) a failure to perform his duties in a satisfactory manner, as determined by the Chief Executive Officer of Employer, in his sole discretion, so long as Kent Thiry is the Chief Executive Officer, which goes uncorrected for a period of thirty (30) consecutive days after written notice has been provided to Employee. 3.8 Notice of Termination. Any purported termination of Employee's --------------------- employment by Employer or by Employee shall be communicated by a written Notice of Termination to the other party hereto in accordance with Section 7 hereof. A --------- "Notice of Termination" shall mean a written notice that indicates the specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment. 5 3.9 Effect of Termination. Upon termination, this Agreement shall be --------------------- of no further force and effect and neither party shall have any further right or obligation hereunder; provided, however, that no termination shall modify or affect the rights and obligations of the parties that have accrued prior to termination; and provided further, that the rights and obligations of the -------- ------- parties under Section 3, Section 4, Section 5, Section 6 and Section 7 shall --------- --------- --------- --------- --------- survive termination of this Agreement. Section 4. Certain Covenants of Executive. ------------------------------ 4.1 Confidential Information. ------------------------ (a) Employee acknowledges and agrees that: (i) in the course of his employment by Employer, it will or may be necessary for Employee to create, use, or have access to (A) technical, business, or customer information, materials, or data relating to Employer's present or planned business that has not been released to the public with Employer's authorization, including, but not limited to, confidential information, materials, or proprietary data belonging to Employer or relating to Employer's affairs (collectively, "Confidential Information") and (B) information and materials that concern Employer's business that come into Employer's possession by reason of employment with Employer (collectively, "Business Related Information"); (ii) all Confidential Information and Business Related Information are the property of Employer; (iii) the use, misappropriation, or disclosure of any Confidential Information or Business Related Information would constitute a breach of trust and could cause serious and irreparable injury to Employer; and (iv) it is essential to the protection of Employer's goodwill and maintenance of Employer's competitive position that all Confidential Information and Business Related Information be kept confidential and that Employee not disclose any Confidential Information or Business Related Information to others or use Confidential Information or Business Related Information to Employee's own advantage or the advantage of others. (b) In recognition of the acknowledgment contained in Section ------- 4.1(a) above, Employee agrees that, during the term of this Agreement and - ------ thereafter until the Confidential Information and/or Business Related Information becomes publicly available (other than through a breach by Employee), Employee shall: (i) hold and safeguard all Confidential Information and Business Related Information in trust for Employer, its successors, and assigns; (ii) not appropriate or disclose or make available to anyone for use outside of Employer's organization at any time, either during employment with Employer or subsequent to the termination of employment with Employer for any reason, any Confidential Information and Business Related Information, whether or not developed by Employee, except as required in the performance of Employee's duties to Employer; (iii) keep in strictest confidence any Confidential Information or Business Related Information; and (iv) not disclose or divulge, or allow to be disclosed or divulged by any person within Employee's control, to any person, firm, or corporation, or use directly or indirectly, for Employee's own benefit or the benefit of others, any Confidential Information or Business Related Information. 6 (c) Employee agrees that all lists, materials, records, books, data, plans, files, reports, correspondence, and other documents ("Employer material") used or prepared by, or made available to, Employee shall be and remain property of Employer. Upon termination of employment, Employee shall immediately return all Employer material to Employer, and Employee shall not make or retain any copies or extracts thereof. 4.2. Competition. Employee agrees that during the term of this ----------- Agreement and for a period of one (1) year after the termination of his employment with Employer for any reason, he shall not: (i) be an officer, director, consultant, partner, owner, stockholder, employee, creditor, agent, trustee, independent contractor, or advisor of any individual, partnership, limited liability company, corporation, independent practice association, management services organization, or any other entity (collectively, "Person") that either is in the business of or, directly or indirectly, derives any economic benefit from providing, arranging, offering, managing, or subcontracting dialysis services or renal care services; or (ii) directly or indirectly, own, manage, control, operate, invest in, acquire an interest in, or otherwise engage in, act for, or act on behalf of any Person (other than Employer and its subsidiaries and affiliates) engaged in any activity in the United States or in those countries outside the United States in which Employer or any of its subsidiaries or affiliates had conducted any business during Employee's employment hereunder, where such activity is similar to or competitive with the activities carried on by Employer or any of its subsidiaries or affiliates. As used herein, the term "dialysis services" or "renal care services" includes, but shall not be limited to, all dialysis services and nephrology-related services provided by Employer at any time during the period of Employee's employment, including, but not limited to, hemodialysis, acute dialysis, apheresis services, peritoneal dialysis of any type, staff-assisted hemodialysis, home hemodialysis, dialysis-related laboratory and pharmacy services, access-related services, Method II dialysis supplies and services, nephrology practice management, or renal physician/center network management, and any other services or treatment for persons diagnosed as having end stage renal disease ("ESRD") or pre-end stage renal disease, including any dialysis services provided in an acute hospital. The term "ESRD" shall have the same meaning as set forth in Title 42, Code of Federal Regulations 405.2101 et seq. or any successor thereto. Employee acknowledges that the nature of Employer's activities is such that competitive activities could be conducted effectively regardless of the geographic distance between Employer's place of business and the place of any competitive business. Notwithstanding anything herein to the contrary, such activities shall not include the ownership of 1% or less of the issued and outstanding stock, which is purchased in the open market, of a public company that conducts business that is similar to or competitive with the business carried on by the Employer or any of its subsidiaries or affiliates. Employee acknowledges and agrees that the geographical limitations and duration of this covenant not to compete is reasonable. In particular, Employee agrees that his position is national in scope and that he will have an impact on every location where Employer currently conducts and will conduct business. Therefore, Employee acknowledges and agrees that, like his position, this covenant cannot be limited to any particular geographic region. 7 4.3 Solicitation of Employees. Employee promises and agrees that he ------------------------- will not, for a period of one (1) year after the termination of his employment, directly or indirectly, solicit any of Employer's employees to work for any business, individual, partnership, firm, corporation, or other entity that is then in competition with Employer's business or any subsidiary or affiliate of Employer. Employee also agrees that during his employment and for a period of one (1) year after the termination of his employment, directly or indirectly, that he will not hire any of Employer's employees to work (as an employee or an independent contractor) for any business, individual, partnership, firm, corporation, or other entity that is then in competition with Employer's business or any subsidiary or affiliate of Employer. In addition, Employee agrees that during his employment and for a period of one (1) year after the termination of his employment, directly or indirectly, that he will not take any action that may reasonably result in any of Employer's employees going to work (as an employee or an independent contractor) for any business, individual, partnership, firm, corporation, or other entity that is then in competition with Employer's business or any subsidiary or affiliate of Employer. 4.4 Other solicitation. Employee promises and agrees that during the ------------------ term of this Agreement and for a period of one (1) year after the termination of his employment for any reason, he shall not, directly or indirectly: (i) induce any patient or customer of Employer, either individually or collectively, to patronize any competing dialysis facility; (ii) request or advise any patient, customer, or supplier of Employer to withdraw, curtail, or cancel such person's business with Employer; (iii) enter into any contract the purpose or result of which would benefit Employee if any patient or customer of Employer were to withdraw, curtail, or cancel such person's business with Employer; (iv) solicit, induce, or encourage any physician (or former physician) affiliated with Employer or induce or encourage any other person under contract with Employer to curtail or terminated such person's affiliation or contractual relationship with Employer; (v) disclose to any Person the names or addresses of any patient or customer of Employer or of any physician (or former physician) affiliated with Employer; or (vi) disparage Employer or any of its agents, employees, or affiliated physicians in any fashion. 4.5 Enforcement. In the event that any part of this Section 4 shall ----------- --------- be held unenforceable or invalid, the remaining parts hereof shall nevertheless continue to be valid and enforceable as though the invalid portions had not been a part hereof. In the event that the area, period of restriction, activity, or subject established in accordance with this Section 4 shall be deemed to exceed --------- the maximum area, period of restriction, activity, or subject that a court of competent jurisdiction deems enforceable, such area, period of restriction, activity, or subject shall, for the purpose of Section 4, be reduced to the --------- extent necessary to render them enforceable. 4.6 Equitable Relief. Employee agrees that any violation by Employee ---------------- of any covenant in Section 4 will or would cause Employer to suffer irreparable --------- injury, the exact amount of which will be difficult to ascertain. For that reason, Employee agrees that Employer shall be entitled, as a matter of right, to a temporary, preliminary, and/or permanent injunction and/or other injunctive relief, ex parte or otherwise, from any court of competent jurisdiction, restraining any further violations by Employee. Such injunctive relief shall be in addition to and in no way limit any 8 and all other remedies Employer shall have in law and equity for the enforcement of such covenants and provisions. Employee consents and stipulates to the entry of such injunctive relief in such a court prohibiting him from any further violation of the covenants and provisions of Section 4. --------- Section 5. Excess Parachute Payment. In the event that any payment or ------------------------ benefit received or to be received by Employee in connection with a Change of Control, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement by Employer, any predecessor or successor to Employer or any corporation affiliated (within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code")) with Employer or which becomes so affiliated pursuant to the transactions resulting in a Change of Control (collectively all such payments are hereinafter referred to as the "Total Payments"), is deemed to be an "Excess Parachute Payment" (in whole or in part) to Employee within the meaning of Section 280G of the Code, as in effect at such time, no change shall be made to the Total Payments to be made in connection with the Change of Control, except that, in addition to all other amounts to be paid to Employee by Employer hereunder, Employer shall, within thirty (30) days of the date on which any Excess Parachute Payment is made, pay to Employee, in addition to any other payment, coverage or benefit due and owing hereunder, an amount determined by (i) multiplying the rate of excise tax then imposed by Code Section 4999 by the amount of the "Excess Parachute Payment" received by Employee (determined without regard to any payments made to Employee pursuant to this Section 5) and (ii) dividing the product so obtained by the --------- amount obtained by subtracting (A) the aggregate local, state and Federal income tax rates (including the value of the loss of itemized deductions under Section 68 of the Internal Revenue Code) applicable to the receipt by Employee of the "Excess Parachute Payment" (taking into account the deductibility for Federal income tax purposes of the payment of state and local income taxes thereon) from (B) the amount obtained by subtracting from 1.00 the rate of excise tax then imposed by Section 4999 of the Code. It is Employer's intention that Employee's net after-tax position be identical to that which would have obtained had Sections 280G and 4999 not been part of the Code. For purposes of implementing this Section 5, (i) no portion, if any, of the Total Payments, the receipt or --------- enjoyment of which Employee shall have effectively waived in writing prior to the date of payment of the Total Payments, shall be taken into account, and (ii) the value of any non-cash benefit or any deferred cash payment included in the Total Payments shall be determined by Employer's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. The calculation of the excess parachute payment is as follows: X = Y / (1 - - (A + B + C)), where X is the total dollar amount of the Tax Gross-Up Payment, Y is the total Excise Tax imposed with respect to such Change in Control Benefit, A is the Excise Tax rate in effect at the time, B is the highest combined marginal federal income and applicable state income tax rate in effect, after taking into account the deductibility of state income taxes against federal income taxes to the extent allowable, for the calendar year in which the Tax Gross-Up Payment is made, and C is the applicable Hospital Insurance (Medicare) Tax Rate in effect for the calendar year in which the Tax Gross-Up Payment is made. 9 Section 6. Representations, Warranties and Agreements of Employee. ------------------------------------------------------ Employer represents and warrants to Employer that (i) upon the conclusion of the Transition Period, he will have resigned as an officer and employee of Vivra Asthma and Allergy, Inc. and all affiliated companies and, as of the date hereof, is not an officer, director, or employee of any other corporation or entity, (ii) the performance of this Agreement will not breach any other agreement or obligation by which Employee is bound to keep in confidence proprietary information acquired by Employee in confidence or in trust before employment by Employer and or any agreement restricting or purporting to restrict his right to perform services for Employer, and (iii) upon the conclusion of the Transition Period, he will not have taken and will not have in his possession or control any confidential information or property relating to any former employer. Employee agrees that he will not use confidential information or property of any other employer while employed by Employer. Employee shall indemnify and hold Employer harmless for any breach of the representations, warranties, and agreements set forth in Section 6, including reasonable attorneys' fees and costs of suit. Section 7. Miscellaneous. ------------- 7.1 Mediation of Disputes Concerning Employment. In the event of any ------------------------------------------- dispute concerning Employee's employment by Employer, whether or not relating to this Agreement, Employee and Employer shall first attempt to resolve such dispute through mediation as provided in this Section 7.1 before instituting any ----------- action or other proceedings with respect thereto; provided, however, that -------- ------- neither party shall be required to utilize such mediation procedures to the extent that equitable relief is being sought by a party in the good faith belief that an immediate remedy is required to avoid irreparable injury to such party. Except as otherwise provided in the proviso to the immediately preceding sentence, in the event that either party desires to institute litigation or other legal proceedings to resolve a dispute concerning Employee's employment by Employer, such party shall first give written notice to the other party setting forth in detail the nature of the dispute and the facts which such party believes supports such party's position in such dispute. The parties shall then promptly (and, in any event, within ten (10) business days of the giving of notice of a dispute) engage the services of an impartial, experienced employment mediator (the "Mediator") under the auspices of JAMS/Endispute (or such other mediation service as the parties may mutually select) in Los Angeles County, California. If the parties cannot mutually agree on the selection of a Mediator, JAMS/Endispute shall select a Mediator within ten (10) business days after being advised of the parties' inability to select a Mediator. Once the Mediator is selected, the parties shall promptly schedule a mediation session with the Mediator for a date which is not later than forty-five (45) days after the date of the selection of the Mediator. The Mediator shall conduct a one-day mediation session, attended by both parties and their counsel, in an attempt to informally resolve the dispute. By oral or written agreement of both parties, follow-up or additional mediation sessions may be scheduled, but neither party shall be required to participate in more than one day of mediation. Neither party shall be required to submit briefs or position papers to the Mediator, but both parties shall have the right to do so, subject to such rules and procedures as the Mediator may establish in his or her sole discretion. Except as otherwise agreed by the parties, all written submissions to the Mediator shall remain confidential as between the submitting party and the Mediator. The mediation 10 process shall be treated as a settlement negotiation and no evidence introduced in the mediation process may be used in any way by either party or any other person in connection with any subsequent litigation or other legal proceedings (except to the extent independently obtained through discovery in such litigation or proceedings) and the disclosure of any privileged information to the Mediator shall not operate as a waiver of privilege with respect to such information. Each party shall bear all of its own costs, attorneys' fees and expenses related to preparing for and attending any mediation conducted under this Agreement. The fees and expenses of the Mediator and the mediation service used, if any, shall be borne equally by Employer and Employee. 7.2 Arbitration. Except as provided below and in Section 4, any ----------- --------- controversy or claim arising out of, relating to, or in any way connected with this Agreement, any alleged breach thereof, or Employee's employment, which was not resolved through the use of the mediation procedure set forth in Section ------- 7.1, shall be settled by arbitration in accordance with the rules of the - --- National Rules for the Resolution of Employment Disputes of the American Arbitration Association. Without limiting the general nature of the foregoing, such claims include, but are not limited to: wage and benefit claims; contract claims; tort claims; defamation claims; claims for employment discrimination (statutory or nonstatutory) based on age, race, sex, national origin, color, religion, disability (perceived, actual, or record of), medical condition, sexual orientation, and marital status; claims for harassment; and claims for a violation of federal, state, local, or other government law, constitution, statute, regulation, or ordinance. The arbitrator shall apply the appropriate federal or state law, shall have the authority to interpret this Agreement (but does not have the power to amend, change, delete, or add any terms), and shall have the power to determine the appropriate legal or equitable remedy, if any. The arbitrator's decision, which must be in writing, will be final and binding, and the arbitrator's award may be entered in any court having jurisdiction thereof. The arbitration will be held in a mutually agreeable location in Southern California. The arbitrator shall apply California law. 7.3 Entire Agreement; Amendment. This Agreement and the separate --------------------------- Stock Option Agreement represents the entire understanding of the parties hereto with respect to the employment of Employee and supersedes all prior agreements with respect thereto. This Agreement may not be altered or amended except in writing executed by both parties hereto. 7.4 Assignment; Benefit. This Agreement is personal and may not be ------------------- assigned by Employee. This Agreement may be assigned by Employer and shall inure to the benefit of and be binding upon the successors and assigns of Employer. 7.5 Applicable Law. This Agreement shall be governed by the laws of -------------- the State of California, without regard to the principles of conflicts of laws. 7.6 Notice. Notices and all other communications provided for in ------ this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to Employer at its principal office and to Employee at Employee's principal residence as shown in Employer's 11 personnel records, provided that all notices to Employer shall be directed to the attention of the Chief Executive Officer with a copy to the General Counsel of Employer, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7.7 Construction. Each party has cooperated in the drafting and ------------ preparation of this Agreement. Hence, in any construction to be made of this Agreement, the same shall not be construed against any party on the basis that the party was the drafter. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 7.8 Execution. This Agreement may be executed in one or more --------- counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Photographic or facsimile copies of such signed counterparts may be used in lieu of the originals for any purpose. 7.9 Legal Counsel. Employee and Employer recognize that this is a ------------- legally binding contract and acknowledge and agree that they have had the opportunity to consult with legal counsel of their choice. 7.10 Waiver. The waiver by any party of a breach of any provision of ------ this Agreement by the other shall not operate or be construed as a waiver of any other or subsequent breach of such or any provision. 7.11 Invalidity of Provision. In the event that any provision of ----------------------- this Agreement is determined to be illegal, invalid, or void for any reason, the remaining provisions hereof shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date and year first written above. DAVITA INC. EMPLOYEE By /s/ Kent J. Thiry /s/ Joseph C. Mello __________________________________ ____________________________________ Kent J. Thiry Joseph C. Mello Chief Executive Officer and Chairman of the Board 12 EX-12.1 4 dex121.txt RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 DAVITA INC. RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to fixed charges is computed by dividing fixed charges into earnings. Earnings is defined as pretax income from continuing operations adjusted by adding fixed charges and excluding interest capitalized during the period. Fixed charges means the total of interest expense, amortization of financing costs, and the estimated interest component of rental expense on operating leases.
Six months Year ended December 31, ended June --------------------------------------------- 30, 2001 2000 1999 1998 1997 1996 ---------- -------- --------- -------- -------- ------- (dollars in thousands) Income (loss) before income taxes, extraordinary items and cumulative effect of a change in accounting principle.............. $105,202 $ 44,935 $(181,826) $ 48,641 $ 81,178 $54,563 -------- -------- --------- -------- -------- ------- Fixed charges: Interest expense and amortization of debt issuance costs and discounts on all indebtedness......... 38,439 116,637 110,797 84,003 29,082 13,670 Interest portion of rental expense....... 8,773 17,140 17,501 12,992 8,196 5,301 -------- -------- --------- -------- -------- ------- Total fixed charges.......... . 47,212 133,777 128,298 96,995 37,278 18,971 -------- -------- --------- -------- -------- ------- Earnings (loss) before income taxes, extraordinary items, cumulative effect of a change in accounting principle and fixed charges................ $152,414 $178,712 $ (53,528) $145,636 $118,456 $73,534 ======== ======== ========= ======== ======== ======= Ratio of earnings to fixed charges.......... 3.23 1.34 (a) 1.50 3.18 3.88 ======== ======== ========= ======== ======== =======
- -------- (a) Due to the Company's loss in 1999, the ratio coverage was less than 1:1. The Company would have had to generate additional earnings of $181,826 to achieve a coverage of 1:1. -----END PRIVACY-ENHANCED MESSAGE-----