- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
Commission File Number 333-57191
EVEREST HEALTHCARE SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-4045521
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 North Scoville, Oak Park, Illinois 60302
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (708) 386-1000
(Additional registrants listed on Exhibit A to this cover page.)
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of May 5, 2000 the number of shares outstanding of the Common Stock of
Everest Healthcare Services Corporation, par value $.001 per share, was
12,854,836.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
EXHIBIT A TO COVER PAGE -- ADDITIONAL REGISTRANTS
ACUTE EXTRACORPOREAL SERVICES, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 36-4265964
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CON-MED SUPPLY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3147024
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CONTINENTAL HEALTH CARE, LTD.
(Exact name of registrant as specified in its charter)
Illinois 36-3084746
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
DIALYSIS SPECIALISTS OF TULSA, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1508212
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
DUPAGE DIALYSIS LTD.
(Exact name of registrant as specified in its charter)
Illinois 36-3029873
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST HEALTHCARE INDIANA, INC.
(Exact name of registrant as specified in its charter)
Indiana 36-3575844
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST HEALTHCARE OHIO, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1418495
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST HEALTHCARE TEXAS HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-4321504
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST HEALTHCARE TEXAS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 36-4321507
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4338092
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST NEW YORK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
New York 36-4276708
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST ONE IPA, INC.
(Exact name of registrant as specified in its charter)
New York 13-3988854
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST THREE IPA, INC.
(Exact name of registrant as specified in its charter)
New York 36-4276711
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EVEREST TWO IPA, INC.
(Exact name of registrant as specified in its charter)
New York 36-4276710
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
HOME DIALYSIS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0711476
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
MERCY DIALYSIS CENTER, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1589773
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
NEW YORK DIALYSIS MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
New York 36-3702390
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
NORTH BUCKNER DIALYSIS CENTER, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4206319
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
NORTHERN NEW JERSEY DIALYSIS, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 36-4291598
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
WSKC DIALYSIS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-2668594
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 North Scoville, Oak Park, Illinois 60302
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (708) 386-1000
PART I--FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 1999 and March 31, 2000 (unaudited)................ 2
Consolidated Statements of Operations--(unaudited)
For the three months and six months ended March 31, 1999 and
2000............................................................. 3
Consolidated Statements of Cash Flows--(unaudited)
For the three months and six months ended March 31, 1999 and
2000............................................................. 4
Notes to Consolidated Financial Statements--(unaudited)............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 2. Changes in Securities and Use of Proceeds..................... 15
Item 3. Defaults Upon Senior Securities............................... 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Item 5. Other Information............................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
1
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PART I--FINANCIAL INFORMATION
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EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
September 30, March 31,
1999 2000
------------- -----------
(unaudited)
ASSETS
- - ------
Current assets:
Cash and cash equivalents.......................... $ 3,381 $ 7,582
Patient accounts receivable, less allowance of
$11,119 and $9,581................................ 47,411 52,202
Refundable income taxes............................ 3,008 3,703
Other receivables.................................. 3,006 2,378
Medical supplies inventories....................... 3,542 4,038
Deferred income taxes.............................. 5,150 5,150
Prepaid expenses and other......................... 311 758
-------- --------
Total current assets............................. 65,809 75,811
Property and equipment, net.......................... 31,665 35,478
Goodwill, net........................................ 73,448 78,448
Deferred financing costs, net........................ 6,563 6,285
Other intangible assets, net......................... 2,671 3,143
Investments in and advances to affiliated companies.. 8,902 7,496
Deferred income taxes................................ 5,998 5,998
Other assets......................................... 1,217 953
-------- --------
$196,273 $213,612
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Accounts payable................................... $ 12,824 $ 19,282
Accrued liabilities................................ 17,206 18,837
Current portion of long-term debt.................. 801 1,537
Current portion of capital lease obligations....... 367 178
-------- --------
Total current liabilities........................ 31,198 39,834
Long-term debt, less current portion ................ 121,653 129,971
Capital lease obligations, less current portion...... 402 245
Minority interests................................... 1,735 2,030
Stockholders' equity:
Common stock, $.001 par value, 20,000,000 shares
authorized; 12,854,836 shares issued and
outstanding....................................... 13 13
Additional paid-in capital......................... 55,171 54,642
Accumulated deficit................................ (13,899) (13,123)
-------- --------
Total stockholders' equity....................... 41,285 41,532
-------- --------
$196,273 $213,612
======== ========
See notes to consolidated financial statements.
2
EVEREST HEALTHCARE SERVICES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months
Ended Six Months Ended
March 31, March 31,
----------------- -----------------
1999 2000 1999 2000
------- -------- ------- --------
Net revenues............................. $43,715 $ 56,882 $83,624 $110,313
Operating expenses:
Patient care costs..................... 30,569 41,059 58,453 79,613
General and administrative............. 6,238 6,432 11,427 12,672
Provision for bad debts................ 1,286 1,741 2,124 3,265
Depreciation and amortization.......... 2,586 3,055 4,942 5,813
------- -------- ------- --------
Total operating expenses............. 40,679 52,287 76,946 101,363
------- -------- ------- --------
Income from operations................... 3,036 4,595 6,678 8,950
Nonoperating income (expense):
Interest expense....................... (2,848) (3,763) (5,807) (7,276)
Interest income........................ 342 224 876 431
Equity in earnings of affiliates....... 538 66 664 159
Minority interests in earnings......... (224) (223) (523) (348)
------- -------- ------- --------
(2,192) (3,696) (4,790) (7,034)
------- -------- ------- --------
Income before income taxes............... 844 899 1,888 1,916
Income tax expense....................... 674 601 1,227 1,140
------- -------- ------- --------
Net income............................... $ 170 $ 298 $ 661 $ 776
======= ======== ======= ========
See notes to consolidated financial statements.
3
EVEREST HEALTHCARE SERVICES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
March 31,
------------------
1999 2000
-------- --------
Operating activities
Net income................................................ $ 661 $ 776
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for bad debts................................. 2,124 3,265
Depreciation and amortization........................... 4,942 5,813
Equity in earnings of affiliates........................ (664) (159)
Minority interests in earnings.......................... 523 348
Changes in operating assets and liabilities (net of
effect of acquisitions):
Patient accounts and other receivable................. (6,699) (8,122)
Other assets.......................................... 422 (795)
Accounts payable, accruals, and other liabilities..... 1,687 8,543
-------- --------
Net cash provided by operating activities........... 2,996 9,669
Investing activities
Capital expenditures...................................... (3,522) (5,260)
Acquisition of businesses, net of cash acquired........... (9,032) (7,537)
Decrease in amounts due from affiliates................... 2,825 1,315
-------- --------
Net cash used in investing activities..................... (9,729) (11,482)
Financing activities
Proceeds from long-term debt.............................. 23,400 45,812
Payments on long-term debt................................ (23,685) (39,200)
Payments on capital lease obligations..................... (291) (346)
Deferred financing costs.................................. (435) 277
Issuance of common stock.................................. -- 321
Repurchase of common stock................................ -- (850)
-------- --------
Net cash provided by (used in) financing activities....... (1,011) 6,014
Increase (decrease) in cash and cash equivalents.......... (7,744) 4,201
Cash and cash equivalents, beginning of period............ 12,526 3,381
-------- --------
Cash and cash equivalents, end of period.................. $ 4,782 $ 7,582
======== ========
See notes to consolidated financial statements.
4
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. Interim Consolidated Financial Statements
The financial information at March 31, 2000 and for the three months and six
months ended March 31, 1999 and 2000 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position at such date and
the results of operations and cash flows for those periods. Results of
operations for the six months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the entire year.
The unaudited interim consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and reporting
practices. Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission; however, the Company believes the
disclosures are adequate to make the information not misleading. The unaudited
interim consolidated financial statements contained herein should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Form 10-K as filed with the Securities and
Exchange Commission on December 29, 1999.
2. New Accounting Standards
Effective October 1, 1999, the Company adopted SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The
provisions of SOP 98-1 establish guidance on accounting for the costs incurred
related to internal use software. The provisions of SOP 98-1 specifically
address the accounting for the costs related to designing, developing,
obtaining and modifying and/or implementing internal use software. SOP 98-1
requires that companies capitalize qualifying costs incurred during the
application development stage. All other costs incurred in connection with an
internal use software project are to be expensed as incurred. Application of
the provisions of SOP 98-1 is required for fiscal year 2000. The adoption of
SOP 98-1 did not have a material impact on the Company's results of operations.
3. Reclassifications
Certain reclassifications have been made to the prior period's financial
statements to conform to the 2000 presentation.
5
4. Reportable Segments
The Company has two reportable segments: Dialysis Services and Contract
Services. The Company's Dialysis Services segment consists of 70 outpatient
dialysis treatment centers which primarily provide outpatient chronic dialysis
treatments and 30 contracts with hospitals providing acute dialysis services.
The Company's Contract Services segment provides perfusion, aphersis, and
autotransfusion procedures in 81 hospitals.
The Company evaluates performance and allocates resources based upon profit
or loss before income taxes and extraordinary items. The Company's reportable
segments are independent operating divisions that are managed separately. All
intercompany costs are eliminated.
Contract
Dialysis Services Total
-------- -------- --------
For the six months ended March 31, 2000:
Revenues............................................ $ 99,092 $11,221 $110,313
Segment profit...................................... 9,961 93 10,054
For the six months ended March 31, 1999:
Revenues............................................ 73,436 10,188 83,624
Segment profit...................................... 9,943 550 10,493
A reconciliation of the reportable segments to consolidated income before
income taxes is as follows:
1999 2000
------- --------
Profit:
Total profit for reportable segments......................... $10,493 $ 10,054
Unallocated amounts:
Elimination of corporate administrative expense.............. 7,672 7,927
Interest expense............................................. (5,138) (6,639)
Depreciation and amortization................................ (992) (888)
Interest income.............................................. 822 398
Corporate expenses........................................... (10,969) (8,936)
------- --------
Income before income taxes............................... $ 1,888 $ 1,916
======= ========
5. Other Financial Information
The Company is a holding company with no independent assets or operations.
Therefore, the Company relies primarily upon payment from its subsidiaries for
the funds necessary to meet its obligations, including the payment of interest.
The ability of the subsidiaries to fund the obligations is subject to
significant restrictions, will be dependent upon the earnings of the
subsidiaries, and will be subject to applicable laws and approval by the
subsidiaries. Full separate statements of the Guarantor Subsidiaries have not
been presented as the guarantors are wholly owned subsidiaries of the Company.
Management does not believe that inclusion of such financial statements would
be material to investors. The guarantees of the Guarantor Subsidiaries are
full, unconditional, and joint and several.
6
The following table sets forth the financial data at March 31, 2000 and for
the six months then ended:
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Balance Sheet Data:
Assets:
Cash and cash
equivalents......... $ 3,827 $ 958 $ 2,797 $ -- $ 7,582
Patient accounts and
other receivable ... 6,735 43,870 7,678 -- 58,283
Other current
assets.............. 4,601 3,939 1,406 -- 9,946
Property and
equipment, net...... 4,718 28,092 2,668 -- 35,478
Goodwill, net........ 12,319 51,578 14,551 -- 78,448
Investment in and
advances to
affiliated
companies........... 69,554 17,455 (1,762) (77,751) 7,496
Other assets......... 12,929 3,205 245 -- 16,379
-------- -------- ------- -------- --------
Total assets......... $114,683 $149,097 $27,583 $(77,751) $213,612
======== ======== ======= ======== ========
Liabilities and
Stockholders' Equity:
Current liabilities.. $ 9,395 $ 24,080 $ 6,359 $ -- $ 39,834
Long-term
liabilities......... 121,216 2,420 8,610 -- 132,246
Stockholders' equity
(deficit)........... (15,928) 122,597 12,614 (77,751) 41,532
-------- -------- ------- -------- --------
Total liabilities and
stockholders'
equity.............. $114,683 $149,097 $27,583 $(77,751) $213,612
======== ======== ======= ======== ========
Statement of Operations
Data:
Net revenues........... $ -- $ 90,374 $19,939 $ -- $110,313
Patient care costs..... -- 64,636 14,977 -- 79,613
General and
administrative........ 8,360 2,744 1,568 -- 12,672
Provision for bad
debts................. -- 2,970 295 -- 3,265
Depreciation and
amortization.......... 888 4,145 780 -- 5,813
-------- -------- ------- -------- --------
Income (loss) from
operations............ (9,248) 15,879 2,319 -- 8,950
Interest expense, net
...................... (6,241) (180) (424) -- (6,845)
Equity in earnings of
affiliate............. -- 159 -- -- 159
Minority interests in
earnings.............. (63) (250) (35) -- (348)
-------- -------- ------- -------- --------
Income (loss) before
income taxes ......... (15,552) 15,608 1,860 -- 1,916
Income tax (benefit)
expense............... (7,942) 8,584 498 -- 1,140
-------- -------- ------- -------- --------
Net income (loss)...... $ (7,610) $ 7,024 $ 1,362 $ -- $ 776
======== ======== ======= ======== ========
Statement of Cash Flows
Data:
Operating activities:
Net income (loss)...... $ (7,610) $ 7,024 $ 1,362 $ -- $ 776
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Provision for bad
debts............... -- 2,970 295 -- 3,265
Depreciation and
amortization........ 888 4,145 780 -- 5,813
Equity in earnings of
subsidiaries........ -- (159) -- -- (159)
Minority interest in
earnings............ 63 250 35 -- 348
Net change in
operating assets and
liabilities (net of
effect of
acquisitions)....... 5,568 (6,542) 600 -- (374)
-------- -------- ------- -------- --------
Net cash provided by
(used in) operating
activities.......... (1,091) 7,688 3,072 -- 9,669
Investing Activities:
Capital
expenditures........ (1,490) (3,222) (548) -- (5,260)
Acquisition of
businesses, net of
cash acquired....... -- (7,537) -- -- (7,537)
Increase (decrease)
in amounts due from
affiliates.......... (529) 4,179 (2,335) -- 1,315
-------- -------- ------- -------- --------
Net cash used in
investing
activities.......... (2,019) (6,580) (2,883) -- (11,482)
Financing Activities:
Proceeds from long-
term debt........... 45,812 -- -- -- 45,812
Payments on long-term
debt................ (38,820) (380) -- -- (39,200)
Other................ -- (598) -- -- (598)
-------- -------- ------- -------- --------
Net cash provided by
(used in) financing
activities.......... 6,992 (978) -- -- 6,014
Increase in cash and
cash equivalents...... 3,882 130 189 -- 4,201
Cash and cash
equivalents (deficit)
at beginning of
period................ (55) 828 2,608 -- 3,381
-------- -------- ------- -------- --------
Cash and cash
equivalents at end of
period................ $ 3,827 $ 958 $ 2,797 $ -- $ 7,582
======== ======== ======= ======== ========
7
The following table sets forth the financial data at March 31, 1999 and for
the six months then ended:
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Statement of Operations
Data:
Net revenues........... $ -- $67,236 $16,388 $ -- $ 83,624
Patient care costs..... -- 46,505 11,948 -- 58,453
General and
administrative........ 3,770 6,554 1,103 -- 11,427
Provision for bad
debts................. -- 1,686 438 -- 2,124
Depreciation and
amortization.......... 992 3,252 698 -- 4,942
-------- ------- ------- ----- --------
Income (loss) from
operations............ (4,762) 9,239 2,201 -- 6,678
Interest expense, net.. (4,316) (66) (549) -- (4,931)
Equity in earnings of
affiliate............. -- 664 -- -- 664
Minority interests in
earnings.............. -- (460) (63) -- (523)
-------- ------- ------- ----- --------
Income (loss) before
income taxes.......... (9,078) 9,377 1,589 -- 1,888
Income tax expense..... -- 1,103 124 -- 1,227
-------- ------- ------- ----- --------
Net income (loss)...... $ (9,078) $ 8,274 $ 1,465 $ -- $ 661
======== ======= ======= ===== ========
Statement of Cash Flows
Data:
Operating activities:
Net income (loss)...... $ (9,078) $ 8,279 $ 1,460 $ -- $ 661
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Provision for bad
debts................ -- 1,686 438 -- 2,124
Depreciation and
amortization......... 992 3,252 698 -- 4,942
Equity in earnings of
subsidiaries......... -- (664) -- -- (664)
Minority interest in
earnings............. -- 586 (63) -- 523
Net change in
operating assets and
liabilities (net of
effect of
acquisitions)........ 2,046 (4,408) (2,228) -- (4,590)
-------- ------- ------- ----- --------
Net cash provided by
(used in) operating
activities........... (6,040) 8,731 305 -- 2,996
Investing Activities:
Capital expenditures... (275) (2,760) (487) -- (3,522)
Acquisition of
businesses, net of
cash acquired......... -- (9,032) -- -- (9,032)
Increase (decrease) in
amounts due from
affiliates............ (1,086) 4,247 (336) -- 2,825
-------- ------- ------- ----- --------
Net cash used in
investing activities.. (1,361) (7,545) (823) -- (9,729)
Financing Activities:
Proceeds from long-term
debt.................. 23,400 -- -- -- 23,400
Payments on long-term
debt.................. (23,685) -- -- -- (23,685)
Other.................. -- (726) -- -- (726)
-------- ------- ------- ----- --------
Net cash used in
financing activities.. (285) (726) -- -- (1,011)
Increase (decrease) in
cash and cash
equivalents........... (7,686) 460 (518) -- (7,744)
Cash and cash
equivalents at
beginning of period... 10,731 240 1,555 -- 12,526
-------- ------- ------- ----- --------
Cash and cash
equivalents at end of
period................ $ 3,045 $ 700 $ 1,037 $ -- $ 4,782
======== ======= ======= ===== ========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the more
detailed information contained in the Consolidated Financial Statements and
notes thereto appearing elsewhere in this Report and in the Company's Report on
Form 10-K for the fiscal year ended September 30, 1999.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains certain "forward-looking statements" with respect to
results of operations and businesses of the Company. All statements other than
statements of historical facts included in this Report, including those
regarding market trends, the Company's financial position, business strategy,
projected costs, and plans and objectives of management for future operations,
are forward-looking statements. In general, such statements are identified by
the use of forward-looking words or phases including, but not limited to,
"intended," "will," "should," "may," "expects," "anticipates," and
"anticipated" or the negative thereof or variations thereon or similar
terminology. These forward-looking statements are based on the Company's
current expectations. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to be correct. Because forward-
looking statements involve risks and uncertainties, the Company's actual
results could differ materially. See the "Risk Factors" section of the
Company's Registration Statement on Form S-4 (File No. 333-57191) for a
discussion of certain risks applicable to the Company and its business.
Overview
Everest Healthcare Services Corporation is a leading provider of dialysis and
other blood treatment services. Founded in 1968 and principally owned by
nephrologists, the Company has a long-standing focus on developing strong
relationships with physicians to provide high-quality patient care. Everest is
the nation's sixth-largest provider of chronic dialysis outpatient services and
serves over 6,500 patients through 70 facilities in 11 states. In addition to
its outpatient dialysis center operations, the Company provides acute dialysis
services through contractual relationships with 30 hospitals in four states.
Everest also contracts with 81 hospitals in 12 states to provide a broad range
of other extracorporeal (outside-the-body) blood treatment services, including
perfusion, apheresis and auto-transfusion ("Contract Services"). Pursuant to
management contracts, Everest provides management services to (i) a physician
practice group comprised of 30 nephrologists, primarily in the Chicago and
northwest Indiana areas, and (ii) certain minority-owned or unaffiliated
dialysis facilities. The Company derived 88.6% of its net revenues for the six
months ended March 31, 2000 from chronic and acute dialysis services, 10.2%
from Contract Services and 1.2% from management services.
Sources of Revenues
The Company's net revenues from chronic dialysis services are derived from:
(i) in-center dialysis and home dialysis services including drugs and supplies;
and (ii) acute dialysis services performed in hospitals. The majority of the
Company's in-center and home dialysis services are paid for under the Medicare
End-Stage Renal Disease ("ESRD") program in accordance with rates established
by the Health Care Financing Administration ("HCFA"). Additional payments are
provided by other third party payors (particularly by employer group health
plans during the first thirty months of treatment), generally at rates higher
than those reimbursed by Medicare. Everest is currently seeking to expand the
portion of its revenues attributable to non-government payors by entering into
contracts with managed care companies and other private payors. Because
dialysis is an ongoing, life-sustaining therapy used to treat a chronic
condition, utilization of the Company's chronic dialysis services is generally
predictable and not subject to seasonal or economic fluctuations. ESRD patients
may receive up to 156 dialysis treatments per year; however, due to
hospitalization and no shows the Company's average number of treatments per
patient per year is 140. Unless the patient moves to another dialysis facility,
receives a kidney transplant or dies, the revenues generated per patient per
year can be estimated with reasonable accuracy.
9
The Company's Contract Services revenues are derived from perfusion,
apheresis and auto-transfusion services provided to hospitalized patients
pursuant to contracts with hospitals. Rates paid for such services are
negotiated with individual hospitals. Because extracorporeal blood treatment
services are required for patients undergoing major surgical procedures,
utilization of the Company's Contract Services is not subject to seasonal or
economic fluctuations.
The Company's revenues also include fees paid under management services
contracts. Management service fee revenue is recognized when earned. Management
service fees are based on contracted rates. The contracted rates are estimates
based upon the cost of services provided such as billing, accounting, technical
support, cash management and facilities management.
Acquisitions
Acquisitions of dialysis and Contract Services providers have been recorded
under purchase accounting with the purchase price being principally allocated
to fixed assets, accounts receivable and inventory based on respective
estimated fair market values at the date of acquisition. Any excess of the
purchase price over the fair value of identifiable assets (including
identifiable intangible assets) is allocated to goodwill, which is amortized
over 25 years. The results of these acquisitions have been included in the
results of operations from their respective acquisition dates. The Company
regularly evaluates the potential acquisition of, and holds discussions with,
various potential acquisition candidates; as a general rule, the Company does
not intend to publicly announce such acquisitions until a definitive agreement
has been reached.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Net Revenues. Net revenues increased $13.2 million or 30.2% to $56.9 million
for the three months ended March 31, 2000 from $43.7 million for the three
months ended March 31, 1999. This increase resulted primarily from a 26.3%
increase in the number of treatments to 205,111 for the three months ended
March 31, 2000 from 162,351 for the three months ended March 31, 1999. This
growth in treatments is the result of acquisitions and development of various
dialysis facilities and a 6.5% increase in same store treatments for the three
months ended March 31, 2000 over the three months ended March 31, 1999. The
average net revenue per treatment increased from $236 for the three months
ended March 31, 1999 to $250 for the three months ended March 31, 2000. The
increase in net revenue per treatment was due to a shift in the Company's payor
mix and as a result of an increase in the dosing levels of epogen administered
to patients during dialysis treatments to achieve industry and Company goals of
hematocrit levels.
Patient Care Costs. Patient care costs consist of those directly related to
the care of patients, including direct and indirect labor, drugs and other
medical supplies and operational costs of the facilities and other indirect
costs such as bio-med and staff education. Patient care costs increased $10.5
million or 34.3% to $41.1 million for the three months ended March 31, 2000
from $30.6 million for the three months ended March 31, 1999. This change
resulted primarily from growth in the number of treatments performed during the
period that caused a corresponding increase in the use of labor, drugs and
supplies. In addition, the supply costs increased approximately $8 per
treatment, most of which is attributable to an increase in the dosing levels of
epogen administered to patients during dialysis treatments to achieve industry
and Company goals of hematocrit levels and normal healthcare inflation.
General and Administrative Expenses. General and administrative expenses
include corporate office costs and other administrative costs including
accounting, billing, facility costs, treasury and information systems,
excluding depreciation and amortization amounts which are separately presented.
General and administrative expenses increased approximately $200,000 or 3.2% to
$6.4 million for the three months ended March 31, 2000 from $6.2 million for
the three months ended March 31, 1999. General and administrative expenses as a
percentage of revenue decreased from 14.2% for the three months ended March 31,
1999 to 11.3% for the three
10
months ended March 31, 2000. This decrease was due to the leveraging of
infrastructure costs as well as the increase in net revenues.
Provision for Bad Debts. The Company provides for bad debts in the same
period that revenue is recognized based on management's estimate of the
collectibility of the accounts receivable considering several factors such as
payor mix and billing practices. Provision for bad debts increased
approximately $400,000 or 30.8% to $1.7 million for the three months ended
March 31, 2000 from $1.3 million for the three months ended March 31, 1999.
Depreciation and amortization. Depreciation and amortization increased
approximately $500,000 or 19.2% to $3.1 million for the three months ended
March 31, 2000 from $2.6 million for the three months ended March 31, 1999.
This change was due to increased depreciation expense as a result of fixed
asset purchases and de novo developments and the amortization of goodwill and
other intangible assets associated with acquisitions.
Income from Operations. Income from operations increased approximately $1.6
million or 53.3% to $4.6 million for the three months ended March 31, 2000 from
$3.0 million for the three months ended March 31, 1999. Income from operations
as a percentage of net revenues increased to 8.1% for the three months ended
March 31, 2000 as compared to 6.9% for the three months ended March 31, 1999.
Interest Expense, Net. Interest expense, net of interest income, increased
approximately $1.0 million or 40.0% to $3.5 million for the three months ended
March 31, 2000 from $2.5 million for the three months ended March 31, 1999. The
increase in interest expense, net of interest income, was attributable to the
interest associated with the amortization of deferred financing costs as well
as interest incurred on borrowings under the Credit Facility.
Equity in Earnings of Affiliates. Equity in earnings of affiliates represents
the Company's portion of earnings in unconsolidated joint ventures. The Company
recognized approximately $66,000 from unconsolidated joint ventures for the
three months ended March 31, 2000 as compared to $538,000 for the three months
ended March 31, 1999. This change in the equity in earnings was due to the
Company's strategy of rolling-up the more profitable unconsolidated joint
ventures during fiscal 1999 and prior.
Minority Interests in Earnings. Minority interests in earnings represents the
proportionate equity interests of other partners in the Company's consolidated
entities that are not wholly owned. The minority interests in earnings remained
constant at approximately $223,000 for the three months ended March 31, 2000
and 1999.
Income Tax Expense. Income tax expense decreased to approximately $601,000
for the three months ended March 31, 2000 from $674,000 for the three months
ended March 31, 1999 as a result of the factors described above.
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
Net Revenues. Net revenues increased $26.7 million or 31.9% to $110.3 million
for the six months ended March 31, 2000 from $83.6 million for the six months
ended March 31, 1999. This increase resulted primarily from a 26.5% increase in
the number of treatments to 401,425 for the six months ended March 31, 2000
from 317,377 for the six months ended March 31, 1999. This growth in treatments
is the result of acquisitions and development of various dialysis facilities
and a 6.5% increase in same store treatments for the six months ended March 31,
2000 over the six months ended March 31, 1999. The average net revenue per
treatment increased from $229 per treatment for the six months ended March 31,
1999 to $245 per treatment for the six months ended March 31, 2000. The
increase in net revenue per treatment was due to a shift in the Company's payor
mix and as a result of an increase in the dosing levels of epogen administered
to patients during dialysis treatments to achieve industry and Company goals of
hematocrit levels.
11
Patient Care Costs. Patient care costs consist of costs directly related to
the care of patients, including direct and indirect labor, drugs and other
medical supplies and operational costs of the facilities. Patient care costs
increased $21.1 million or 36.1% to $79.6 million for the six months ended
March 31, 2000 from $58.5 million for the six months ended March 31, 1999. This
increase resulted primarily from an increase in the
number of treatments performed during the period that caused a corresponding
increase in the use of labor, drugs and supplies. In addition, the supply costs
increased approximately $11 per treatment, most of which is attributable to an
increase in the dosing levels of epogen administered to patients during
dialysis treatments and normal healthcare inflation. Patient care costs as a
percentage of net revenues increased from 70% for the six months ended March
31, 1999 to 72.2% for the six months ended March 31, 2000.
General and Administrative Expenses. General and administrative expenses
include corporate office costs and other administrative costs including
accounting, billing, quality assurance, facility costs, treasury and
information systems. General and administrative expenses increased $1.3 million
or 11.4% to $12.7 million for the six months ended March 31, 2000 from $11.4
million for the six months ended March 31, 1999. General and administrative
expenses as a percentage of revenue decreased from 13.6% for the six months
ended March 31, 1999 to 11.5% for the six months ended March 31, 2000. This
decrease was due to the leveraging of infrastructure costs as well as the
increase in net revenues.
Provision for Bad Debts. The Company provides for doubtful accounts in the
same period that revenue is recognized based on management's estimate of the
collectibility of the accounts receivable based upon several factors such as
payor mix and billing practices. Provision for bad debts increased $1.2 or
57.1% to $3.3 million for the six months ended March 31, 2000 from $2.1 million
for the six months ended March 31, 1999.
Depreciation and Amortization. Depreciation and amortization increased
approximately $900,000 or 18.4% to $5.8 million for the six months ended March
31, 2000 from $4.9 million for the six months ended March 31, 1999. The
increase was due to increased depreciation expense as a result of fixed asset
purchases and the development of facilities and the amortization of goodwill
and other intangible assets associated with acquisitions.
Income from Operations. Income from operations improved to $8.9 million for
the six months ended March 31, 2000 from $6.7 million for the six months ended
March 31, 1999. Income from operations as a percentage of net revenues remained
constant at approximately 8.0% for the six months ended March 31, 2000 and
1999.
Interest Expense, Net. Interest expense, net of interest income, increased
$1.9 million or 38.8% to $6.8 million for the six months ended March 31, 2000
from $4.9 million for the six months ended March 31, 1999. The increase in
interest expense, net of interest income, was attributable to the interest
associated with the amortization of deferred financing costs as well as
interest incurred on borrowings under Credit Facility borrowings.
Equity in Earnings of Subsidiaries. Equity in earnings of subsidiaries
represents the Company's portion of earnings in unconsolidated joint ventures.
The Company recognized equity in earnings of subsidiaries of approximately
$159,000 for the six months ended March 31, 2000 as compared to $664,000 for
the six months ended March 31, 1999. This change in the equity in earnings was
due to the Company's strategy of rolling-up the more profitable unconsolidated
joint ventures in fiscal 1999 and prior.
Minority Interests in Earnings. Minority interests in earnings represents the
proportionate equity interests of other partners in the Company's consolidated
entities that are not wholly owned. The minority interests in earnings
decreased approximately $175,000 to $348,000 for the six months ended March 31,
2000 as compared to $523,000 for the six months ended March 31, 1999.
Income Taxes. Income taxes remained relatively constant at approximately $1.1
million for the six months ended March 31, 2000 and $1.2 million for the six
months ended March 31, 1999. The Company's effective tax rate was 60% as of
March 31, 2000 compared to 65% as of March 31, 1999. The decrease in the
effective tax rate was due to the factors described above.
12
Year 2000 Compliance by the Company and Others
The Company has addressed Year 2000 compliance concerns. This included its
formation of a Year 2000 Task Force to study and address Year 2000 issues, the
hiring of consultants to assist the Year 2000 Task Force in its review of
Company systems, the establishment and implementation of a Year 2000 compliance
plan, the establishment of a Year 2000 contingency plan, the upgrading of the
Company's major information technology systems into Year 2000 Compliance, and a
full review of the Company's non-information technology systems (i.e., embedded
technology such as micro-controllers). The Company incurred approximately $1.4
million related to Year 2000 and does not expect additional expenditures to
materially impact the Company's operations. For a more detailed description of
the Company's Year 2000 compliance efforts, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Compliance
by the Company and Others" in the Company's Form 10-K filed December 29, 1999.
Liquidity and Capital Resources
The Company requires capital primarily for the acquisition and development of
dialysis centers, the purchase of property and equipment for existing centers
and to finance working capital requirements. At March 31, 2000, the Company's
working capital was $36.0 million.
The Company's net cash provided by operations was $9.7 million for the six
months ended March 31, 2000. Cash provided by operating activities consists of
net income increased by non-cash expenses such as depreciation, amortization
and the provision for bad debts and adjusted by the changes in components of
working capital, primarily receivables, payables and accrued expenses. The cash
provided by operations was mainly due to increased accounts receivable balances
as a result of increased treatment volume and increased revenue per treatment
which was offset by increased accounts payable balances due to improved vendor
terms. The Company's net cash used in investing activities was $11.5 million
for the six months ended March 31, 2000. The Company's principal uses of cash
consist of investing activities related to purchases of new equipment and
leasehold improvements for new and existing dialysis centers and the
acquisition of dialysis centers. Net cash provided by financing activities was
approximately $6.0 million for the six months ended March 31, 2000. The primary
sources and uses of cash from financing activities were net borrowings under
the Credit Facility.
The Company does not have any current material commitments for capital
expenditures.
A significant component of the Company's growth strategy is the acquisition
and development of dialysis centers. The Company believes that the existing
cash and funds from operations, together with funds available under the Credit
Facility, will be sufficient to meet the Company's acquisition, development,
expansion, capital expenditure and working capital needs for at least the next
twelve months. In order to finance certain strategic acquisition opportunities,
the Company may from time to time incur additional short and long-term bank
indebtedness and may issue equity or debt securities, the availability and
terms of which will depend on market and other conditions. There can be no
assurance that the Company will be successful in implementing its growth
strategy or that adequate sources of capital will be available in the future as
needed on terms acceptable to the Company.
Impact of Inflation
A substantial portion of the Company's net revenues is subject to
reimbursement rates that are regulated by the federal government and do not
automatically adjust for inflation. The Company is unable to increase the
amount it receives for the services provided by its dialysis businesses that
are reimbursed under the Medicare composite rate. Increased operating costs due
to inflation, such as labor and supply costs, without a corresponding increase
in reimbursement rates, may adversely affect the Company's earnings in the
future. However, part of the Company's growth strategy is to expands its
Contract Services business which is not directly dependent on reimbursement
from government agencies. In addition, the Company believes that the
13
effect of inflation is further mitigated by the change in governmental health
care laws that extended the coordination of benefits period for ESRD patients
who are covered by an employer group health plan from 18 to 21 months to 30 to
33 months before Medicare becomes the primary payor. In addition, the Balanced
Budget Refinement Act of 1999 updated the composite rate for payment by 1.2%
for renal dialysis services furnished in 2000 and an additional 1.2% for such
services furnished in 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in hedging or other market structure derivative
trading activities. Additionally, the Company's debt obligations are primarily
fixed-rate in nature and, as such, are not sensitive to changes in interest
rates. The Company does not believe that its market risk financial instruments
on March 31, 2000 would have a material effect on future operations or cash
flow.
14
- - --------------------------------------------------------------------------------
PART II--OTHER INFORMATION
- - --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatment. The Company believes
it will be covered by malpractice insurance with respect to these claims and
does not believe that the ultimate resolution of pending proceedings will have
a material adverse effect on the Company. However, claims against the Company,
regardless of their merit or eventual outcome, could require management to
devote time to matters unrelated to the operation of the Company's business,
and may also have a material adverse effect on the Company's ability to attract
patients or expand its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On May 5, 1998, the Company sold (the "Initial Offering") its
$100,000,000 9 3/4% Senior Subordinated Notes due 2008, Series A (the "Private
Notes"). On October 2, 1998, the Company delivered in exchange (the "Exchange")
for the Private Notes its $100,000,000 9 3/4% Senior Subordinated Notes due
2008, Series B (the "Notes"). The net proceeds to the Company from the Initial
Offering were $95.2 million, after deducting the initial purchaser's discount
and offering expenses. The Company used $48.4 million of the net proceeds to
repay indebtedness under the Company's prior credit facility that bore interest
at a weighted average rate of 8.99% per annum as of June 30, 1998 and was to
mature in May 2000. $7.2 million of the net proceeds were used to repay loans
made to the Company by certain of its shareholders. $5.1 million of these loans
bore interest at the prime rate plus 1% per annum and matured at various times
throughout 1998. $2.1 million of these loans bore interest at the prime rate
plus 1% per annum and matured on November 29, 2000. The Company used $19.2
million of net proceeds to acquire a management services agreement and $4.7
million to acquire land and buildings. The Company used approximately $10.0
million to acquire controlling interests in four dialysis facilities.
Additionally, the Company used the remaining $5.7 million of the net proceeds
for working capital purposes.
ITEM 3. NOT APPLICABLE
ITEM 4. NOT APPLICABLE
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibit
--- ----------- -------
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter for
which this form 10-Q is filed.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 5th day of
May, 2000.
Everest Healthcare Services
Corporation
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
/s/ Lawrence D. Damron
By: _________________________________
Lawrence D. Damron
Chief Financial Officer
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 5th day of
May, 2000.
Con-Med Supply Company, Inc.
Continental Health Care, Ltd.
Dialysis Specialists of Tulsa, Inc.
Dupage Dialysis, Ltd.
Everest Healthcare Indiana, Inc.
Everest Healthcare Ohio, Inc.
Everest Healthcare Texas Holding
Corp.
Everest Management, Inc.
Everest New York Holdings, Inc.
Everest One IPA, Inc.
Everest Three IPA, Inc.
Everest Two IPA, Inc.
Home Dialysis of America, Inc.
Mercy Dialysis Center, Inc.
New York Dialysis Management, Inc.
North Buckner Dialysis Center, Inc.
WSKC Dialysis Services, Inc.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive
Officer
/s/ Lawrence D. Damron
By: _________________________________
Lawrence D. Damron
Chief Financial Officer
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 5th day of
May, 2000.
Northern New Jersey Dialysis, L.L.C.
Acute Extracorporeal Services,
L.L.C.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chief Executive Officer
/s/ Lawrence D. Damron
By: _________________________________
Lawrence D. Damron
Chief Financial Officer
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 5th day of
May, 2000.
Everest Healthcare Texas, L.P.
North Buckner Dialysis Center,
Inc.
By: _________________________________
General Partner
/s/ Craig W. Moore
By: _______________________________
Craig W. Moore
Chief Executive Officer
/s/ Lawrence D. Damron
By: _______________________________
Lawrence D. Damron
Chief Financial Officer
19
INDEX TO EXHIBITS
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule.