DVA

Business Context and Reporting Period

Company: Total Renal Care Holdings, Inc. (d/b/a DaVita Inc.)
Filing Type: Form 10-Q
Period Ended: June 30, 2000
Business Overview: The Company operates dialysis facilities and laboratories. During the quarter, it completed the divestiture of approximately 90% of its non-continental U.S. operations (excluding Puerto Rico and Guam) and restructured its credit facilities in July 2000 to regain compliance with debt covenants.

Key Financial Metrics

Margins (Continental U.S. Operations - 6 Months 2000):
- Operating Margin (excluding impairments): 11%
- Facility Operating Expenses: 70% of revenue
- Provision for Uncollectible Accounts: 3.5% of revenue

Material Changes vs. Prior Period

• Revenue Growth: Net operating revenues increased 6.5% year-over-year for the six months ended June 30, 2000, driven by a 7% increase in equivalent hemodialysis treatments.
• Profitability: The Company reported a net loss of $11.5 million for the six months ended June 30, 2000, compared to a net income of $1.1 million in the prior year. This was primarily due to a $10.8 million pre-tax charge for a shareholder class action settlement and a $4.7 million foreign currency translation loss.
• Debt Restructuring: As of December 31, 1999, all debt was classified as current due to covenant non-compliance. Following a July 14, 2000 restructuring (post-period end), the Company regained compliance, allowing the reclassification of long-term debt. A $50 million permanent paydown was made using proceeds from asset sales.
• Divestitures: The Company sold non-continental U.S. operations for $134 million in net cash proceeds, of which $125 million was applied to debt.
• Bad Debt Provision: The provision for uncollectible accounts dropped significantly to 3.5% of revenue in 2000 from 7% in 1999, attributed to improved billing and collection operations.

Guidance, Outlook, and Risks

Management Commentary & Outlook:
Management projects operating earnings (before non-cash items, debt, and taxes) for the remainder of 2000 to be in the same range as the first half. Assumptions include 5% internal growth in treatments and cost trends consistent with recent years. The Company anticipates a $3.5 million extraordinary loss (net of tax) in the third quarter related to the write-off of financing costs from the debt restructuring.

Key Risks and Contingencies:

• Florida Laboratory Dispute: A third-party carrier has suspended Medicare payments to the Company's Florida lab, withholding approximately $38.3 million. The Company disputes overpayment determinations totaling $19.8 million but has recorded no reserves. An adverse outcome could materially impact results.
• Debt Service: Total consolidated debt is approximately $1.3 billion. The Company faces significant scheduled principal and interest payments ($158 million in 2001, $157 million in 2002).
• Reimbursement Rates: Over 50% of revenue comes from Medicare. Risks include potential reductions in EPO reimbursement rates and a shift to capitated payment systems.
• Supply Chain: The Company relies on a single supplier (Amgen) for EPO, a material cost component. Price increases or supply interruptions pose significant risks.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the terms of the July 14, 2000 credit facility restructuring and the Company's ability to meet new covenants.
• Florida Lab Receivables: Monitor the status of the $38.3 million withheld Medicare payments and the outcome of the administrative appeals.
• Class Action Settlement: Confirm the final court approval of the $25 million shareholder settlement fund.
• Medicare Policy Changes: Track legislative developments regarding EPO reimbursement rates and potential capitated payment models.
• Goodwill Valuation: Assess the risk of impairment given that goodwill represents 43% of total assets and 255% of shareholders' equity.