德維特 (DVA) 2003 Q1 法說會逐字稿

At this time I would like to welcome everyone to the DaVita conference call. All lines have been placed on mute to prevent any background noise. After the speaker s' remarks, will be a question and answer period. If you would like to ask a question during this time, simply press star then 1 on your telephone keypad. If you would like to withdraw your question, press pound. Thank you. Mr. Whitney , you may begin your conference.

Thank you, and welcome everyone to DaVita's first quarter 2003 conference call. We appreciate your continued interest in our company. I have with me today Kent Thiry, our Chairman and CEO and Lee Ann Sumwald(ph), Vice President Press of Investor Relations. I'd like to start with forward looking disclose statements. Certain statements in our press release and supplemented information dated May 5, 2003, are forward-looking statements.

These regular to legislative and regulatory obligations, economic performance, financial condition, revenue, volume, growth , VSO, bad debt expense , expense growth, planned capital expenditures and earnings and cash flow guidance. They reflect management' current expectations and can be affected by numerous factors, including the risk factors discussed in the press release and in our 10-K and 10-Q filings.

These forward-looking statements are based upon information available to us at this time and we do not have any current intentions to update the forward-looking statements forecast or guidance whether as a result of changes to underlying factors , new information , future events or otherwise. Additionally , our press release and related disclosures include certain non-GAAP financial measure which we believe provide helpful measures. These should be considered in accordance with GAAP. Also included in a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures. I'll now turn the call over to Kent Thiry the Chairman and CEO.

Okay. Good morning and good afternoon. We're going to try to anticipate an answer to some of the primary higher level questions. Eight. In fact, number one, how are you doing clinically? Number two, what about recurring cash flow? Number three. Please provide an overview of the quarter. Number four, please provide an overview of the year, 2003. Number five , how are you doing with putting in the new billing system? Number six , what's up with government policy ? Number seven, what are you thinking about share repurchases? And number eight , how about refreshing your 2003 to 2005 outlook that was provided in November of last fall.

So those are the eight questions that I will try to answer at a higher level and then go into more detail on some of the financial stuff and then the normal Q and A.

As to number one, starting with the clinical because we are first and foremost a care giving company, provide the same two scores we have historically as to adequacy , how well we're doing in cleaning people's blood. 92% of our patients had a KTRV greater than 1.2 , that maintains as the same number we achieved in 2002, actually a tad higher than the average.

Second number , in the anemia management , [inaudible] percentage with [inaudible] patients greater than or equal to 83% , 33%. These numbers, for those of you who follow other companies and the industry in general, you will realize compare very favorably to the entire industry. Under question number two, what about recurring cash flow because, perhaps, the preeminent economic characteristic of this business from an investor point of view is the wonderful recurring cash flow. And our 12-month recurring numbers on the operating cash level, $302 million and on the free cash flow level, $244 million. For first quarter was consistent with that 12-month recurring flow.

Question number three, how about an overview of the quarter ? I'll provide that overview in three parts. First, A, EBITDA , $98million, a tad above the middle of the range. Operating income of $79 million. Our EBITDA will fluctuate a bit as we go through the year as our history has shown, goes up and down, but we remain comfortable with our 2003 EBITDA guidance.

Part B on the quarter. Our cash balance was $30 million. Why was it so high ? Answer, we were working on a significant acquisition. At this time it does not look like it will happen.

Part C , on an overview of the quarter. Whenever you think about dialysis , it's best to keep it simple, at least at first, and say it's all about revenue for treatment minus expense per treatment time says the volume of treatments. Our revenue per treatment was healthy. Multiple factors made that happen. Rich will cover them in more detail.

Our expenses were on track. The productivity and retention battle continues since labor is such a huge percentage of our cost structure. And the nursing shortage has not gone away. And then volume , volume of treatment, as you already know, was on track.

As to question number four of the eight questions, what about an overview of 2003? I think the good news is there's no new news. Revenue is expected to stay on track. We've got some tough payer battles, and at some point this year or next year , there will probably be new clinical guidelines , new guidelines which could affect economics up or down , but it's impossible at this point to speculate when they'll come out and what they might imply. So anyway, at this point, revenue for '03 appears to be set to stay on track. Expenses, expense for treatment, productivity and retention will continue to be the dominant stories. And we're thinking we can stay on track.

And third , volume, the same answer , we think, will stay on track , no dramatic new developments positive or negative. Question number five, how is our new billing system ? Also known as BORIS, how are we doing in putting it in? The short answer is fine. We are on schedule. The schedule that we have disclosed to you previously. We also repeat that the implementation may cause a swing of two to three DSO days, although so far it has not.

Number six. Government policy. What's the right way for you all to be assessing it and the impact it might have on your investments or the investments you're contemplating. There's really five issues here. There's no way to shorten the list, so I apologize in advance , but it's the way to answer this important question. AWP , Medicaid , EPO program referendum , annual inflation update and bundling are the five relevant government are the five topics.

First as to AWP, what's the probability that there will be AWP reform in the Pharma(ph)world. 50/50 which means it's anyone's guess. What's the probability that if it happens , dialysis will be excluded? I'd say that 60/40 or 65/35 in our favor. There has been legislation proposed in the last two years. In both of those years dialysis was excluded, but we can't be sure it will happen again. The fact is, they know that we rely on the small contribution from Pharma to offset our losses on the part of the composite rate. So to fix one without fixing the other would be a recipe for disaster. So we have been excluded, and they are aware , and we'll have to see what happens, if they try to fix both at the same time or not. If it happens, and if we're not excluded , if we're included, what's the materiality? It's modest.

It's modest. AWP-driven drugs only represent about 7% of our Medicare revenue. So while that is not trivial and in particular for our centers that are dominantly filled with Medicare patients could make a big difference for those centers and whether or not they stay open , nevertheless for the aggregate economics is modest.

B , Medicaid. Medicaid cuts. The probability that there will be Medicaid cut as cross the country is 100% at this point , either reducing rates or changing eligibility rules. The probability that dialysis as an industry will be affected by some of this is also 100%. What's the materiality ? Once again , it is modest. It is a few million dollars, maybe a little bit this year, maybe more in '04. So it is nothing to ignore. But nor is it-earth-shaking consequence. Unless they do stuff far more dramatic than what's currently contemplated.

Number three, our government policy issues. As the referendum program , for those of you who don't know , this is a national guideline provided by CMS to all the fiscal intermediaries through whom they pay. And this expired last year, this national guideline on EPO and when it could be paid for and when it shouldn't be paid for. It expired some fiscal

intermediaries started experimenting with some of our own policies in their own part of the country. This created immense , tension , et cetera, and so it was renewed in short order. It expires again in August. It would be rational for it to be extended, but we can't opine that we know this is going to happen. The fact is the fiscal intermediaries do not have a lot of clinical expertise with respect to the specific clinical protocols around EPO which is why this referendum has existed at this point for I think four or five years.

Number four, under government policy, the annual inflation update. First question, what's the probability that the industry will get an annual inflation update? Since we are the only significant segment without one ? Unfortunately, I think if you had to bet a dollar either way, you'd bet against us, just because of the government deficit situation and the administration 's position on provider reimbursement generally. The good news is we do have a real chance because there is growing recognition that the industry loses money on Medicare patients as centers are being closed, and particularly in inner city and rural areas access issues are emerging. The current status is legislation advocating an annual inflation update has been introduced in the house and has bipartisan support and anticipate it being produced in the senate.

The fifth and final government factor to think about bundling . With respect to bundling , three questions. If it would happen, when would it happen ? Second question , what's the probability that it will happen? Third, what about the impact ? As to the first question , if it would happen, when? Our answer is the same as before. 2006 is probably the earliest as there's a demonstration project of some sort contemplated for the 2003, 2004 period. We need to review results of that in '04 and '05. And be careful about changing the [inaudible] structures in the single GRZ segment because it could explode in everyone's face. And so it appears the earliest it could be implemented it is in 2006. Now, you never say never. You could create a scenario which would be earlier. You could create a scenario which would be later. We're merely trying to answer the question of when is the earliest it would most likely happen, if it were to happen.

As to the probability that it will happen at all , this, again , falls in the category of a 50/50 proposition, difficult to look out a couple of years. The actual legislative decision would precede the implementation by a year or two or three. The probability is 50/50. CMS wants bundling. Many people in CMS , that is, because it's significantly easier for them, far fewer claims and rules to worry about because it creates some cost-reduction incentive in a more intense way than they think exists now. And some of them will advocate it because, in fact, they intend to reduce the amount of money they spend on dialysis, that this is a mechanism to actually just cut the dialysis budget, and therefore they advocate it. The argument against it are significant, and this would help you understand why many in Congress will be skeptical. And this is the reason why it's 50/50.

Four quick ones. Number one , a growing sense that you're fixing a segment or proposing to a segment that's not broken, [inaudible] quality improvement over eight , nine years , wonderful taxpayer efficiencies, sort of what's the point of throwing all the balls up in the year. It's a policy of looking through a review mirror. That the use of drugs in our single DRG, homogeneous patient base and center structure industry is irrelevant given all of our Pharma is increasingly applied through evidence base clearly written clinical protocols which exceptions at either end, overused or under-use , so it's been a policy through a rear view mirror increasingly with each passing year.

Number three of four, reducing use of farm ma could very well increase total costs because increasingly, the evidence points to a reduction in hospitalizations and surgical procedures as a result of these clinically driven protocols. And fourth and finally , because some of the current fiscal intermediaries probably restrict the use inappropriately, which is they're letting financial considerations get in the way of their providers being able to use an appropriate amount of the drug by restricting payment. Patients in significant parts of the country would actually get less of the drug just because they were on the wrong end of a CMS bell curve, and they will go bananas, and their representatives in Congress will hear about it. So those are the reasons why it's 50/50. Too difficult to handicap and any more intense a way right now because it's too far off.

Category number seven, share repurchases. How are we thinking about doing any of those going forward? Point number one is just a fact, that the business has great cash glow and will continue to, even if we do have to close in centers because there aren't enough private patients to sub Sid dies Medicare. Second , on the issue of chair repurchases, as we've said consistently in the past, it is not in any of our steak holders' best interest to discuss specifics. Our 2002 recap and purchases are a matter of record and continue to look like sound decisions , vis-à-vis our shareholders in retrospect.

We will continue to carefully evaluate our alternative cash deployment strategies as we go forward. It's important to remind everyone that when we think about alternative cash deployment strategies , we take a five to ten year point of view on this issue. And therefore discussing it in the much shorter term becomes a little bit awkward.

Eighth and finally , what about our three-year outlook, the three-year outlook we issued in November, 2003 to 2005, so now a two and a half year outlook. The short abs to the question is that there's no change to the numbers, and there's no change that the qualification, which is to say that if the government changes some material policy, that forecast would have to change. But the forecast of an average of 3% to 8% EBITDA growth during that period of time stands. Now I'll turn it over to Rich.

Great. As Kent mentioned, we had a good quarter financially. EBITDA was very much on track with our guidance despite a short treatment quarter, and was up 6% from the prior year. Continental EBITDA margin was 21.3%. Up 30 basis points from the fourth quarter and down 40 basis points from last year as we had told you to expect. Cash flow continued to be robust. It's worth reiterating a rolling 12 months operating cash flow was $302 million and free cash flow was $244 million, or over $3 per share. Both of those numbers exclude one-time lab and AR recoveries of cash and extraordinary items.

Operating cash flow for the quarter was $81 million, maintenance CAPEX was $11 million, resulting in free cash flow of $70 million. Here are some other highlights for the quarter. And please note all year over year comparisons are Continental results only. Our non-acquired treatment growth rate of 3.3% improved slightly from last quarter but still lags the industry. As we have indicated in the last few quarters , our not acquired growth is negatively impacted by certain inherited problematic physician agreements. And this quarter not acquired treatment growth, for example , would have been 3.8% without the physician losses we experienced.

On a positive note , we are getting some traction in the area of new centers opening 7 centers this quarter but it will take many more quarters of hard work to significantly improve our internal growth rate. Revenue was up 8.5% year over year with 4.8% driven by volume and the balance from a few things, the reinstatement of our Medicare lab revenue lab recognition improved contracting and billing collections improvements. Dialysis treatment was up 1.8% from the fourth quarter , while on a dollar basis, dialysis revenue was down $2 million sequentially driven by three fewer treatment days in the quarter offset by the increased in revenue for treatment. Generally the private pricing environment has remained solid, but it is our continuing expectation that pricing is likely to be much softer in the next few years than it has been in the last few.

Operating expenses were up about $450 per treatment, or 2.2% sequentially and 4.8% year over year driven primarily by increased labor, Pharma labor costs , Pharma pricing and mix , higher insurance costs and [inaudible] center openings. More details on operating expenses for labor, Q1 2003 year over year labor rate per hour was up 4.3% and productivity remained relatively flat. And insurance, like other health care providers, we are definitely feeling the effects of a very tight professional and general insurance market, premium increases were significantly higher than they have been in the past, and they were effective beginning this quarter.

On general and administrative expenses , they were down 4.3%

per treatment sequentially and down 2.6% year over year. While our increases in G&A are beginning to moderate , much of the current quarter's decrease is timing related. DSO was 69 days , an improvement of one day from the fourth quarter. And at the lower end of our normal range. With our billing system implementation very much ahead of us still , this number could bounce around little in 2003. Net debt at the end of quarter was approximately $1.2 billion, consistent with last quarter, our current leverage ratio, which is net debt to EBITDA is about 3.0 times and is in line with our long-term target of 3 to 3.5 times, although as we always say , we may be above or below this range for certain period of times. Turning to growth, this quarter we acquired a controlling interest in two centers in which we previously had minority ownership. We have a solid acquisition pipeline and continue to target annual treatment growth from acquisitions to be on average in the 2% to 4% range over the next three years.

As I mentioned previously, we opened seven new centers in Q1. And just to remind you of our progress on Denovo (ph) development over the past couple of years, in 2001 , still very much in the middle of our turnaround, we opened only five centers. Last year we opened 19 centers and this year we plan to open between 20 and 25 centers. As far as the financial outlook, our 2003 EBITDA guidance , which can already cover, but I'll give you details, remains at $380 million to $400 million, operating cash flow guidance is $185 million to $235 million, and free cash flow, $130 to $180. And that free cash flow number, just to remind you, is before acquisition and development spending. Also , the cash flow forecast is below 2002 actual numbers primarily due to approximately $50 million to $60 million more in anticipated cash taxes. And a little bit higher interest expense and some working capital changes, but primarily the tax cash taxes is the issue. Our capital spending guidance for 2003 is $60 million for maintenance capital spending including I.T. spending and another $40 million to $50 million spending for Denovo slow and expansion projects.

Kent has already reiterated '03 to '05 guidance of annual average EBITDA growth of 3 to 8% per year. So what could drive us out of our ranges? Some of the key swing factors for 2003 and beyond are private pay mix and the pricing

environment , EPO reimbursement policies, Medicaid reimbursement rates, labor costs trends, medical director retention, and finally, the availability of attractive acquisitions. Understood, we are anticipating significant legal and other expenses related to the subpoena and expect them to occur throughout 2003 and beyond. The exact timing and amounts of these expenditures are difficult to predict. And now I'd like to turn it back over to Kent for a couple of comments.

I need to make one quick correction that I believe I misspoke and said that the Medicare AWP was known percent of Medicare revenue, it's 7% of total revenue. So just to make that correction. And also , I didn't mean to minimize how bad it could be for us if medicate budgets are slashed across the country. We, in total, earned about $150 million of revenue from Medicaid and so a 10% cut there in terms of eligibility or rate cuts is immaterial the amount of money. Lastly , however, just to summarize, it was a good solid quarter. Clinically, cash flow, revenue , expense, volume. Good solid quarter , and we look forward to a few more of those this year. Operator, could we turn it over for Q & A, please ?

At this time if you would like to ask a question , please press star, then the number one on your telephone keypad. Your first question comes from Bill Bonello(ph) of Wachovia securities.

: Just a couple of follow-up questions. First of all, Rich , I'm wondering if you can give us a little more color on what drove the revenue per treatment increases sort of a split between what was just pure rate increases and what was increased ancillary and Pharma utilization? And then I have a second question, then, too.

Yeah. The three drivers of the 1.8% increase were actually pricing and contracting pair contracting some billing and collection improvements. And really wasn't any significant contribution from changes in ancillaries.

Okay.

But we don't typically break them down in any more detail than that. And I don't have it in front of me.

Okay. And then secondly , just wondering if you can give us any sense of where you stand with Amgen relative to EPO cost increases if you had any EPO cost increase take effect January 1?

Yes. The answer is, we did. We also have a contract in place for the balance of the year. Which gives us price protection until the beginning of '04. And as has been our historical practice , we really don't like to get into exactly what our price increase was versus others et cetera.

Okay. Thanks.

Thanks, Bill.

Your next question comes from Wayne Cooperman of Cobalt Capital (ph).

I think you mentioned this, but is the reason you didn't buy any shares in the quarter because you were negotiating a big acquisition , or are those two separate, non-related event s?

That certainly was a major consideration , yes.

Right. So I guess you also commented that you're happy about all the shares you bought in the past, which is a higher price than where the stock was in the first quarter, implying that you would have been buying if you could have. I just wondering if you might want to confirm or deny that or sort of elaborate on that?

The first two things that you said are factually correct. I wouldn't want to comment on the implications. We have a history of not being very specific about when we intend to buy and at what prices.

Okay. But it's not -- it's fair to say that -- you said you felt happy about paying 24 for the stock in the past, so I could -- if I wanted to , I could infer that 24 seems like a nice price, you know, in general, to buy stock?

Take a long-term view, and the answer to that question over the long term would be yes.

Have you guys , as long as we're on the topic, have you guys , in the pastor contemplate in the future considered converting your convertible securities close to being converted any way plus you could take out the dividend payment in the meantime?

Could you restate the question, please?

Have you in the pastor have you considered repurchasing some of the convertible securities as opposed to equity or in addition to equity?

We haven't purchased any -- repurchased any convertible securities , and at this time we don't have any specific plans to.

But that could certainly change.

Thank you.

And I guess, you know, the other thing, prosecute just from a general standpoint that the

conversion price is substantially above where the current markets are.

Somewhere around 25 or so.

25 .62 for one and $32 and change for the others.

Right. Okay. Thanks.

I'd like to go backward for a second and make sure we're very clear that the exact characterization regarding our recapitalization and repurchase decisions of 2002 is that still today, in retrospect, from a shareholder point of view, we hold the point of view that those were sound decisions. That does not mean that just because you bought a share at $8 one day, that you're going to buy one at $7 the next day. Nor does it mean that you don't wish you had bought it at $7 instead of $8. So I'm going to be totally unambiguous on this point.

Okay.

Your next question comes from Meg Rippeger (ph) of JP Morgan.

You mentioned that there was a large acquisition you were considering and that as of now it doesn't look like it's going to happen. I wanted to see if you'd give some.

As to why you think it's not going to happen. And then related to that if you could comment just broadly on the acquisition environment and whether you're seeing any increased pricing competition from your peers.

As to why the large acquisition didn't take place , we made a very reasonable offer , which was rejected. As to the broader question of what the acquisition environment is like , so far , everybody seems to be behaving in a pretty disciplined manner. From a pricing point of view. And that is a good thing. The bad news, of course, is that there are multiple competing for a relatively small number of fish in the pond. And so even if we get a bit more than our share, it doesn't add up to 40% growth a year.

Okay. Great. The second question I had is just related to the three California payer contracts. I understand that two of them, which were the two smaller contracts, were, you know, up for renewal during the middle part of this year, and then the third one, which was the larger one, effective January of '04. And I just wanted to see if you could provide maybe an update in terms of the status of the two smaller contracts and how the renewal process is going for those.

Okay. You're correct , there were three contracts. One of them we just finished renegotiating of. And we're happy with the result on that. The largest one, which is the one you're most concerned with, we have not completed negotiations on. It does expire at the end of this year. And those are over a course of process. And then the third one we have just begun discussions on renewal terms for the third contract.

Okay. Great. And then last question I had is just about the labor and wage trends. Now , you commented it was up 4% in the quarter. And that the nursing shortage is still very much alive and well. There have been some other providers who have commented that their agency usage and wage trends are decelerating pretty nicely. I just wanted to see if you're seeing any of that on the horizon that could contribute to some large expansion opportunities later this year.

As to the other providers, we're not sure of the data that you have there. Our year over year rate increases that we reported this quarter are very much consistent with what we've seen in the last several quarters. And so as to your question as to whether we're seeing evidence of the decelerate, I suppose the answer to that would be no.

Okay. Great. Thanks very much.

Your next question comes from Nicole Viglucci (ph) of JL Advisors.

Hi. What are your cash plans for the $300 million cash balances given that the acquisition doesn't seem likely now ?

We have not decided yet.

Okay. Thanks.

Your next question comes from Chin Yang of Rockfield (ph)Partners.

Hi. Good afternoon. Two quick questions. One is under the existing credit agreement, are you allowed to borrow funds to either repurchase the converts or make acquisitions ? And the second question is given the low , you know , borrowing cost, why wouldn't you consider buying back some of the converts?

The answer to your first two questions is yes , we are permitted under the credit agreements. To borrow funds to repurchase the converts and to borrow funds to do acquisitions. Of course , there are some limitations and some thresholds , by which we'd need approvals. The full detail of the credit agreement are on file so you can look them up. As this the third question , we haven't made any decisions as to relates to that. However, the one thing I'll

point out is that the effective -- the purchasing the converts back is essentially purchasing equity back at an effective price of slightly below $25 .62 N the case of one, and in the case of the other, slightly below $32 and change , and that right now that doesn't compare favorably to the market price of our equity.

Got it. You okay. Thanks.

Your next question comes from Bill Bonello of Wachovia security.

Yeah. I had a couple of follow-up questions. You mentioned that your contract Amgen provides you with price protection. I know you're not going to specifically comment on what your increases were, but what does price protection mean ? Are we to assume that you will not have the cost increase in 2004, then?

No. What it means is that our gross price for EPO Gen (ph) is locked in for the balance of the year. Of course the price we experience is dependent upon the details of the contract and the rebates that we earn. So this is similar to last year where we had price protection so therefore our prices did not go up until January of this year despite the fact that Amgen raised prices earlier in 2002.

Got it. So it's just -- and then secondly , just wanted to make sure I understood what you said about the one California contract that you did renegotiate. Were we to assume that that did not contribute in the quarter at all, the increase ? Assuming you got an increase that that didn't contribute to the quarter?

It did contribute in the quarter.

It did? Okay. Thanks.

Your next question comes from Chuck Russ (ph) of Insight.

Great quarter, guys. A couple of quick questions. One is the acquisition environment in general , what kind of multiples are people making acquisitions at?

Yeah. You know, of course , it varies quite a bit, depending upon the specific situation. But I think if you can think about it in terms of a range of four to six times EBITDA.

Okay. Still around there. Does that change much with size? I'm not talking about the one you were looking at, but in general, do the larger ones go for better multiples ?

Size isn't one of the primary drivers of multiple. In our view. It's the other aspects of the acquisition that influence its relative attractiveness.

Okay.

So I wouldn't say that, no.

Okay. And on a different subject , can CMS address your reimbursement at all under the inherent reasonableness rule that I've been reading about?

Just one moment. We can't answer. So can you elaborate?

My understanding is that CMS now has the ability so to reduce some rates, some Medicare reimbursement rates by up to 15% -- and I don't know what all the regulations and hurdles are , but the idea that they can do this without congressional approval, that they can reduce some rates by 15% if they term the reimbursement to be unreasonable.

We have never heard of that in the context of our segment.

Okay.

We will, of course, go check , based on your comment, but no one has ever brought it up with us.

Okay. That's it. Thanks.

Your next question comes from Blake Goodner (ph) of Bridger Capital.

Hey , guys , just a couple questions. First off , after the last year's analysts meeting you talked a little bit about the medical director contracts that posed high risk , medium risk and low risk for 2003. Could you give us a little color in terms of how those contracting processes are going and if they're sort of in line with expectations? I think you originally said that about $2 million of -- was at high risk.

So far , over the last five months , what's happening is consistent with the comments we made and the estimates we made. And as we look out over the next few years, we continue to be comfortable with the words and numbers we used. That we have inherited a portfolio that has some contractual efficiencies that we'll have to deal with a long , long time. And so far it appears that we're dealing with them awfully well.

Okay. Great. My second question relates to just get be an update on BORIS which is the billing process of our I.T. plan. I know that the first that the first two steps have gone pretty much according to plan. Just wanted to get a sense for how many facilities you've rolled the billing system out into and if that's in line with your expectation.

You are right. It is the third big, big component, the first big patient registration, the second being clinical management and documentation and the third being billing and collecting, and there's a lot of lesser modules, but those are the big three. And BORIS Phase III at this point, I'm a couple weeks out of date, but it's probably up and running in about 25 or 30 of our centers, and the testing is all going according to schedule. And so we'll be ramping that out and rolling it out over the balance of '03 as we had previously indicated.

Okay. Great. And my last question just relates to the Florida labs. I know that as they've started to pay you for current periods, they've reserved the right to perform these post-payment reviews and that's why you guys are being relatively conservative and reserving for a portion of those payments. Have you gotten any sense of how they're going and when you think we'll be hearing about those?

The short answer is no. And therefore I wouldn't say we're being conservative, we're just being prudent. But the answer to your question is no. They've provided no information of any significance about what they're thinking about much of anything.

Okay. Great. Thanks.

Sorry we can't give a better answer. Believe me, we wish we could.

Your next question comes from Jeff Gates of Gates Capital Management. Mr. Gates, your line is open.

Yeah. I'm just wondering, given where your convert is currently trading -- or where it's currently callable, why you wouldn't consider doing a new convert. And you could probably do better than 5 3/5 and move that conversion price up closer to where the other one is.

We don't need the money.

Right , but if you could do better than 5 5/8 why wouldn't you take the other one out and eliminate the potential dilution at $25.62?

Yeah , I think it's probably not productive to kind of speculate about potential court financing activities, but I think we'd sort of revert to our previous answer when we look at the allocation of our free cash flow and purchasing the converts right now would be purchasing essentially purchasing equity at a price that is substantially higher than the current market price. So I don't know if that answers your question, but -- that's pretty much what I have to offer.

Again, if you would like to ask a question , please press star then the number 1 on your telephone keypad. Your next question comes from Alex Converse of CSFB.

Thanks. Two questions on timing. One on G & A expense, which was down a few million sequentially from your comments should we infer that, say , your average quarterly G & A expense should come in somewhere closer to where fourth quarter was? If so could you give us a little indication on what items be may have been deferred or not incurred that will be incurred later?

Yeah. G & A , you'll notice, if you kind of look back over the last five, six quarters or so it kind of bounces around , the bunch, quarter by quarter. And so I think that's what we're seeing. It was sort of low this quarter,

but there were a number of initiatives that we will spend on later in the year. They just didn't make it into this quarter. So I think what we can say is that our G & A expectations are

the same or consistent with the underling assumptions that we used in our November capital markets guidance and that were embedded in our 2003 short-term guidance. So we're not expecting anything different to happen there. But if you were to look at it sequentially quarter, you'd expect it would be higher throughout the balance of the year than it was in the first quarter because of these timing issues.

Beyond that, I'm not really useful information probably to go down into the details of the kinds of things that were deferred. But to sort of give you one example, to give you a flavor for it, we have our national leadership meeting that takes place once a year, it happens in the second quarter. And so second quarter is always higher than first quarter as a result of that. But it's a lot of things like that that's probably not really useful information for you.

Okay. And just a second question on the cash flow from operations, which was higher on a sort of annualized basis than your full year guidance , and you mentioned the -- for tax item, which might come in, I just -- can you just talk about when that might happen, if you expect that to be sequentially down significantly in Q2 and if there's anything other than the tax issue, are there any other big sort of timing issues or other one-time benefits which might have benefited cash flow in this quarter?

Yeah. Nothing out of the ordinary. I would clarify my comment from earlier. What I was attempting to communicate was that our guidance for cash flow for 2003, you'll notice, is substantially below what our actuals(ph) were from the prior year. And I just wanted to point out that the reason for that is because we weren't really a full cash tax payer in 2002, and we anticipate being so in 2003. So that was just really to bridge the difference between our guidance and where we ran in 2002. As far as the first quarter, really nothing unusual other than our actual cash tax payments tend to be back-loaded during the year. So we're -- you know , at this time we're comfortable with our cash flow guidance that we outlined for you for the year.

Okay. All right. Thanks.

Your next question comes from Anthony Talaro (ph) of Angelo Gordon (ph).

Hi, can you just tell me what the cash tax is and cash interest were in the quarter and also can you give a breakdown of the components of your bank debt please?

Could you repeat actually both questions? We didn't get completely.

Sure. Back taxes and cash something in the quarter? And the secretary question was ? The breakdown or the components of your bank debt revolver on term loan, please?

Okay. Give me a seconds. The cash taxes would take me a minute to figure out. And so I think if you want that number, you can just call in afterward.

Okay. I'll do that.

The breakdown for our debt is as follows. About a billion 450, a little bit more of funded debt and that's made up of $985 million of term loans. The term A and the term B. $125 million of 5% and 5/8% converts and $345 million of 7% converts. And then, of course we mentioned we had about $30 million of cash on hand , which brings you down to your net debt number.

And what was the outstanding under your revolver? Is that the term A component?

No, there's nothing under funded right now that's outstanding. And interest expense , cash interest expense for the quarter -- actually interest expense for the quarter was about $19.5 million. I don't have the cash number in front of me. That's just timing, as you know.

Your next question comes from Tony Rosenthal of Time Square Capital.

Hi. I know it's early in Denovo development, but can you give us a sense of the returns on capital that you hope to achieve from the Denovo? Hello?

Yes. Sorry, Tony. This is Rich. You know , generally speaking --

Is that a tough question ?

What's that?

Was that a tough question?

No. No. Not a tough question. Generally speaking on average , sort of mid to high teens.

Mid to high teens pretax or after tax?

After tax.

And any kind of terminal multiples assumed on the, you know, on sort of year five or year ten cash flow number?

Well , that's why I hesitated a little because there's a lot of ways to measure return, know. We look at it a number of different ways. What I was referring to was sort of an after-tax cash on cash return, once the Denovo is reaching a maturity level.

So year two or three?

More like three, four?

Three , four, okay. So pretty good. And with leverage , those returns are hire.

That's correct.

Okay. Thank you very much.

At this time there are no further questions. Are there any closing remarks, sir?

No , thank you, other than thanks to everyone on the call for their interest, and please call us with any additional questions.

This concludes today's conference call. You may now disconnect.