- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
(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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of December 27, 2000, there was no established public trading market for
the shares of the Common Stock of Everest Healthcare Services Corporation (the
"Company").
As of December 27, 2000, the number of shares outstanding of the Common Stock
of the Company, par value $.001 per share, was 12,841,414.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 18
Item 3. Legal Proceedings...................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 19
Item 6. Selected Financial Data................................................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 20
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk............................. 29
Item 8. Financial Statements and Supplementary Data............................................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 29
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 30
Item 11. Executive Compensation................................................................. 33
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 38
Item 13. Certain Relationships and Related Transactions......................................... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 42
EVEREST HEALTHCARE SERVICES CORPORATION
101 North Scoville
Oak Park, Illinois 60302
(708) 386-1000
- --------------------------------------------------------------------------------
PART I
- --------------------------------------------------------------------------------
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Form 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 Form, 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 phrases including, but not limited to,
"intended," "will," "should," "may," "expects," "expected," "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.
ITEM 1. 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 6,700 patients through 74 facilities in 11 states. In addition to
its outpatient dialysis center operations, the Company provides acute dialysis
services through contractual relationships with 34 hospitals in five states.
Everest also contracts with 67 hospitals in 13 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 31 nephrologists, primarily in the Chicago and
northwest Indiana areas, and (ii) certain minority-owned or unaffiliated
dialysis facilities. The Company derived 88.8% of its net revenues for fiscal
2000 from chronic and acute dialysis services, 10.1% from Contract Services and
1.1% from management services.
Everest's dialysis operations were founded in 1968 as a single dialysis
center and grew over the next three decades through a combination of de novo
facility development, acquisitions and internal growth. Everest has completed
19 acquisitions encompassing 34 facilities and developed 40 de novo centers
since its inception. Through geographic clustering of its outpatient dialysis
centers, the Company has created regional market positions, particularly in the
Midwest. The Company focuses on accelerating its growth within each market by:
(i) capitalizing on its strong physician and hospital relationships; (ii)
expanding capacity; and (iii) providing high-quality service which leads to new
patient referrals. Everest operates 62 full-service outpatient dialysis centers
which provide on-site dialysis services as well as training for home dialysis
patients. Everest also operates 12 home dialysis training and support centers
which provide services and equipment to home dialysis patients.
Capitalizing on its strong hospital and physician relationships and its core
competencies in blood processing, Everest significantly expanded its Contract
Services business with the completion of three
1
acquisitions in fiscal 1997 and one acquisition in fiscal 1998. The Company
believes it is uniquely positioned as the only company currently offering
hospitals an outsourcing solution to all of their extracorporeal blood
treatment needs.
On November 2, 2000, the Company announced that it had entered into an
Agreement and Plan of Merger, dated November 1, 2000, by and among the Company,
Fresenius Medical Care AG, ("FMC"), Edmund Acquisition Sub, Inc. and certain
stockholders of the Company (the "Merger Agreement"). The Merger Agreement
provides for a merger of the Company with and into Edmund Acquisition Sub, Inc.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Recent Developments" for further information). While the merger
is anticipated by management to be completed in the first calendar quarter of
2001, because all the conditions of the Merger Agreement have not been met, the
exact timing for consummation of the merger is uncertain at this time.
Therefore, the Company's Form 10-K has been prepared so as to describe its
business in an ongoing manner, thus providing an understanding of the Company's
strategies, business and ongoing obligations as they existed at the end of its
fiscal year ended September 30, 2000 for which this report is filed. Further
information can be found in the Form 8-K filed by the Company with respect to
the Merger Agreement on November 14, 2000.
Dialysis Industry Overview
End-Stage Renal Disease. End-Stage Renal Disease ("ESRD") is a chronic
medical condition characterized by the irreversible loss of kidney function
which prevents the removal of waste products and excess water from the blood.
ESRD most commonly results from complications associated with diabetes,
hypertension, certain renal and hereditary diseases, old age and other factors.
In order to survive, ESRD patients must receive dialysis treatments for the
rest of their lives or undergo kidney transplantation. The number of kidney
transplants has been limited due to a shortage of suitable donors along with
growth in the number of ESRD patients, the incidence of rejection of
transplanted organs and the unsuitability of many ESRD patients for
transplantation based on age or health.
Therapeutic Approaches for End-Stage Renal Disease. Currently, three
treatment options exist for patients with ESRD: (i) hemodialysis, which is
performed either in an outpatient dialysis facility, a hospital or a patient's
home; (ii) peritoneal dialysis, which is generally performed in the patient's
home; and (iii) kidney transplant surgery.
Hemodialysis uses a dialyzer, or artificial kidney, to remove certain toxins,
fluids and chemicals from the patient's blood. The dialysis machine controls
external blood flow and monitors certain vital signs of the patient. The
screening process involves a semipermeable membrane that divides the dialyzer
into two chambers; while the blood is circulated through one chamber, a
premixed dialysis fluid is circulated through the adjacent chamber. The toxins
and excess fluid contained in the blood cross the membrane into the dialysis
fluid. Hemodialysis treatment is usually performed three times per week for
three to five hours.
Peritoneal dialysis is generally performed by the patient at home and uses
the patient's peritoneal, or abdominal, cavity to eliminate fluids and toxins
in the patient's blood. There are several variations of peritoneal dialysis,
the most common of which are continuous ambulatory peritoneal dialysis ("CAPD")
and continuous cycling peritoneal dialysis ("CCPD"). CAPD utilizes a sterile
dialysis solution which is introduced through a surgically implanted catheter
into the patient's peritoneal cavity. Toxins in the blood continuously cross
the peritoneal membrane into the dialysis solution. After several hours, the
patient drains the used solution and replaces it with fresh solution. CCPD is
performed in a manner similar to CAPD, but utilizes a mechanical device to
cycle dialysis solution while the patient is sleeping or at rest. Patients
treated at home are monitored monthly at a designated full-service outpatient
facility or by a nurse from a home dialysis training and support facility.
Kidney transplantation, when successful, is the most desirable treatment for
patients with ESRD. However, the shortage of suitable donors severely limits
the availability of this surgical procedure as a viable alternative for many
ESRD patients.
2
New medical therapies that cure or mitigate the primary causative diseases
linked to kidney failure could potentially reduce the ESRD patient population
growth rate. Such new medical therapies include diet control, intensive
diabetes therapy, improved control of hypertension, improved treatment of
causative primary infections and techniques for widening blocked renal
arteries. The Company believes, however, that most of these therapies will only
provide benefits over an extended time horizon and will not, therefore,
significantly reduce the growth of the ESRD patient population in the near
term.
Non-Dialysis Extracorporeal Services Industry Overview
Non-dialysis extracorporeal services include perfusion, apheresis and auto-
transfusion.
Perfusion Services. Cardiovascular perfusion is required during open-heart
surgery to replace the function of the heart and lungs using mechanical
devices. This technique maintains relatively normal physiologic equilibrium
during cardiovascular surgery by providing adequate circulation and
oxygenation. The patient's blood is routed through a system of disposable
extracorporeal circuits that oxygenate, filter, adjust temperature and then
return the blood to the patient.
Apheresis Services. Apheresis is the selective removal of a specific
component (plasma, platelets, or white or red blood cells) of a person's blood.
The two general categories of apheresis include: (i) donor apheresis, which is
the removal of a healthy component of the blood from a patient or third-party
donor for subsequent transfusion to a patient; and (ii) therapeutic apheresis,
which is the removal of a diseased or disease-producing component of a
patient's blood in order to arrest a disease process.
The types of donor apheresis include Autologous Peripheral Blood Stem Cell
("PBSC") and Single Donor Platelets ("SDP"). PBSC is a procedure performed on
cancer patients, including those suffering from leukemia, Hodgkins disease and
breast cancer. These patients undergo intensive chemotherapy and/or radiation
to eliminate the patient's bone marrow. Bone marrow regeneration is
accomplished by the reinfusion of stem cells previously collected from the
patient. SDP is a procedure in which platelets are collected from a single
third-party donor and reinfused into a patient whose platelets have been
depleted through blood loss, cancer, or cancer treatment. Therapeutic apheresis
selectively removes unwanted substances from the blood. These substances
include toxins, metabolic residues and plasma components implicated in disease.
Auto-Transfusion Services. Auto-transfusion is performed during surgery to
collect, filter, clean and reinfuse the patient's own blood as an alternative
to using donor blood. An auto-transfusion device may be utilized in a variety
of surgical procedures, such as open-heart, vascular or orthopedic surgery,
which typically entail blood loss of more than two units. Auto-transfusion
reduces the risks of transfusion error and infection associated with outside
donor blood.
Chronic Dialysis Operations
Facility Information. The Company operates 74 outpatient dialysis facilities,
including 62 full-service dialysis facilities and 12 centers exclusively
providing home dialysis training and support. The facilities are located in
Illinois (19), Indiana (12), Kansas (1), Kentucky (2), New Jersey (5), New York
(8), Ohio (14), Oklahoma (2), South Dakota (2), Texas (8) and Wisconsin (1).
Everest's 62 full-service facilities offer on-site dialysis treatments as
well as home dialysis training and support services. As of September 30, 2000,
the Company operated a total of 1,191 dialysis stations, most of which are
available 16 hours a day, six days a week. As of September 30, 2000, the
Company's utilization rate for its then-existing stations was 79%. Each full-
service facility has patient examination rooms, staff areas and offices, water
treatment areas and amenities such as color televisions for the patients.
Everest also operates 12 facilities that exclusively provide the necessary
equipment, supplies, training and support services to those patients who prefer
and are able to receive their treatments at home.
3
Organizational Structure. Of the Company's 74 facilities, 52 are operated as
wholly-owned subsidiaries, eight are majority-owned, seven are minority-owned,
and seven are unaffiliated and operated pursuant to management contracts in New
York, South Dakota, Ohio and New Jersey.
The terms of these management contracts vary, but they generally extend for
five years with renewal options. Everest's compensation under these agreements
typically consists of a fixed fee. From time to time Everest has entered into
joint ventures with physicians to facilitate the development of outpatient
facilities in new and existing markets and may again in the future.
Everest's dialysis facilities are managed by the Company's Executive Vice
President and Chief Operating Officer, Dialysis Services, who oversees 3
regional Vice-Presidents and eight regional directors. The regional directors
manage the operations of the facilities in their respective regions and are
responsible for staffing, quality outcomes and regional profitability. Each
facility has a facility manager who reports to the regional director. Facility
managers are responsible for facility staffing, quality outcomes, patient
satisfaction results, facility profitability and promoting and maintaining a
strong teamwork environment. Generally, key managers and staff are eligible to
receive incentives based upon the achievement of certain quality measurements,
patient satisfaction results, financial performance goals and teamwork
objectives. See "--Human Resources," and "--Training and Development."
The Company has an expert team of dialysis specialists assigned to assist
each patient in designing a program to fit the patient's lifestyle and to help
patients and families adjust to the changes in their lives. Each team generally
consists of: (i) a nephrologist who oversees the medical care; (ii) a nurse who
assesses the medical condition and coordinates and implements the program;
(iii) a nutritionist who customizes the diet; (iv) a social worker who helps
the family with lifestyle changes and financial planning; and (v) technicians
who provide much of the routine patient care.
Everest's medical directors and local and regional management teams market
the Company's outpatient dialysis services to hospitals, physicians, patients,
health plans and the community at large. In marketing its services, the Company
emphasizes its excellent reputation and tradition of providing high-quality,
consistent patient care, as well as its patient outcomes and the cost savings
that these outcomes can provide.
Physician Relationships. The Company believes that its physician
relationships are a key factor in the success of its dialysis facilities. As
required by the Medicare ESRD program, each of the Company's dialysis
facilities is supervised by a qualified medical director who is a physician.
The medical director at each facility is responsible for patient care and
relationships with referring physicians. Generally, medical directors are board
certified in internal medicine and nephrology and have at least twelve months
of training or experience in the care of patients at ESRD centers. In all
cases, the Company's medical directors refer patients to the Company's centers.
In most cases, the medical director is the sole or substantial source of
referrals to the centers served.
Ancillary Services. In addition to dialysis services, ESRD patients require a
significant amount of ancillary services. The Company has developed a number of
ancillary services to complement its dialysis services to boost patient
satisfaction and to improve quality, facility growth and profitability. The
most significant of the Company's ancillary services is the administration of
Erythropoietin ("EPO") upon a physician's prescription. As the kidney
deteriorates, it loses the ability to regulate the red blood cell count,
causing anemia. EPO is a bio-engineered protein that stimulates the production
of red blood cells and is used in connection with all forms of dialysis to
treat anemia. A majority of the ESRD population requires EPO. Additionally, the
Company interacts with kidney centers nationwide to arrange treatments for
patients traveling in other areas and for non-Everest patients visiting areas
where Everest has facilities.
4
Contract Services Operations
Everest significantly expanded its Contract Services business with the
acquisition of three and one Contract Services providers in fiscal 1997 and
1998, respectively. Everest believes that it can build on its core competencies
in blood processing to market extracorporeal blood services through its
existing relationships and that it can use relationships developed in its
Contract Services business to market dialysis services. The Contract Services
business also provides the Company with a business that is not directly
dependent on government reimbursement.
As of September 30, 2000, the Company had contracts with 67 hospitals in 13
states. Everest acts as the exclusive provider of extracorporeal blood services
for most of these hospitals. Contracts with customer hospitals generally
provide for a portfolio of services including professional staffing, disposable
supplies, inventory management services, clinical quality management services,
and capital equipment. The professional staffing required by the contracts may
include a perfusionist, a registered nurse, or a technician, who are on-call 24
hours a day. The Company typically owns or leases the equipment used in
providing these services, such as heart-lung machines, transfusion machines,
and apheresis machines and supplies the necessary disposable accessories for
these machines and related equipment. This equipment is usually stored at the
hospital, but is operated and maintained by the Company. Everest operates
regional offices in Florida, Illinois, Indiana, Michigan and Texas, where the
Company provides centralized support services for Contract Services.
The Company markets its extracorporeal services to hospital administrators,
physicians, operating room directors and blood banks. Sales contacts result
from referrals from physicians, vendors, current customers and employees. The
Company also solicits direct sales, works closely with pharmaceutical and
equipment companies and cooperates with such companies in regional workshops.
Dialysis Quality Programs
The Company believes that it enjoys a reputation of providing high-quality
care to dialysis patients and that it achieves superior patient outcomes
compared to other providers due to its strong training program and focus on
quality assurance standards.
Continuous Quality Improvement. Everest seeks to deliver high-quality
dialysis services to its patients and engages in systematic efforts to measure,
maintain and improve the quality of the services that it delivers. Quality
assurance and patient data are regularly collected, analyzed and reviewed by
management. An important part of Everest's quality assurance program is its
Continuous Quality Improvement ("CQI") program. The CQI program is overseen by
the Company's Corporate Quality Improvement Committee, whose purpose is to
evaluate quality of care data, set policy and procedures affecting quality,
encourage sharing of techniques and procedures and develop practice guidelines.
This Committee meets quarterly. The CQI Program monitors quality of care
indicators as well as patient satisfaction. The philosophy of CQI encourages
continual and consistent improvement in the quality of care. The Company sets
quality and patient satisfaction objectives, and progress toward such
objectives is routinely measured. The CQI committee at each facility meets
monthly to manage the CQI process for the various indicators.
Outcomes Measurement. Everest's clinical patient data are entered into a
computerized medical record maintained at each local dialysis facility, and
patient chemistry data are downloaded directly from laboratories. Outcomes data
are transmitted to and maintained at Everest's corporate headquarters. The
Company tracks such data by patient, by facility and for the entire corporation
and distributes such data monthly to each facility. Adequacy in hemodialysis is
measured by the Urea Reduction Ratio (URR) and Kt/V and in peritoneal dialysis
by either the Kt/V or creatinine clearance. The Company monitors these data as
well as many other indicators of quality including nutrition, anemia, infection
rates, access patency, patient compliance, hospitalization rates and mortality
rates.
5
Contract Services Quality Programs
The Company has applied its experience in developing quality assurance
programs for its dialysis services business to its Contract Services business,
and has developed software in furtherance of its commitment to provide high-
quality extracorporeal services. This software, which is currently being
implemented throughout the Company's perfusion operations, records
approximately 15 clinical indicators similar to those tracked by the Company's
CQI Committee with respect to the Company's dialysis services. The Company
believes that this software is a factor in its ability to achieve favorable
outcomes for its Contract Services patients. The Company's outcome projections
help predict the anticipated length of patients' stays and probable patient
outcomes, and the Company tracks actual patient outcomes to verify the accuracy
of such predictions. The Company's Contract Services quality assurance
personnel meet monthly to review outcomes data and analyze the Company's
performance. These data are also shared with physicians and hospitals on a
regular basis. The Company believes that the indicators tracked by its software
provide value assessments that can help reduce lengths of stay and improve the
utilization of blood products. The Company believes this software is the most
advanced system of its kind and that the Company's use of the system is a
substantial value-added service for its customers. The Company has similar
programs for its hemodialysis and peritoneal dialysis operations, and is in the
process of writing corresponding programs for use in its inpatient acute
dialysis operations.
Management Information Systems
The Company maintains comprehensive management information systems for
financial systems and for patient care, quality assurance and outcome tracking
purposes, and is continually developing and upgrading such systems. The
Company's Client Tracking System, which keeps a record of each of the Company's
patients, is currently available in almost all facilities. The Company's
chronic dialysis units have systems that track clinical, administrative and
financial activities for a dialysis patient. These systems provide the
patient's medical record and the database for quality programs and performance
indicators.
Sources of Revenue Reimbursement
The following table provides information regarding the percentage of the
Company's net revenues provided with respect to: (i) chronic and acute dialysis
services, by Medicare, Medicaid and other third-party payors such as indemnity
insurers, managed care companies, hospitals and others; (ii) Contract Services,
by hospitals and, to a much lesser extent, other payors; and (iii) management
fees earned through services performed under contract.
Fiscal year ended September 30,
--------------------------------
Payor 1998 1999 2000
----- ---------- ---------- ----------
Chronic and Acute Dialysis:
Medicare............................... 47.7% 49.9% 49.9%
Medicaid............................... 7.4% 7.3% 6.5%
Other payors........................... 30.6% 29.7% 32.4%
Contract Services:
Hospitals and other payors............. 12.5% 11.7% 10.1%
Management Service Fees 1.8% 1.4% 1.1%
---------- ---------- ----------
100.0% 100.0% 100.0%
Under the Medicare ESRD program, Medicare reimburses dialysis providers for
the treatment of individuals who are diagnosed with ESRD and are eligible for
participation in the Medicare program, regardless of age or financial
circumstances. As described in more detail below, for each treatment, Medicare
pays 80% of the amount set by the Medicare prospective reimbursement system. A
secondary payor, usually a Medicare supplemental insurer, a state Medicaid
program or, to a lesser extent, the patient or the patient's private insurer,
is responsible for paying any co-payment (typically 20%), other approved
services not paid by
6
Medicare and the annual deductible. All of the states in which the Company
operates dialysis facilities provide Medicaid benefits to qualified recipients
to supplement their Medicare entitlement. The Medicare and Medicaid programs
are subject to statutory and regulatory changes, administrative rulings,
interpretations of policy and governmental funding restrictions, some of which
may have the effect of decreasing program payments, increasing costs or
modifying how the Company operates its dialysis business. See "--Regulatory
Matters."
Assuming an ESRD patient is eligible for participation in the Medicare
program, the commencement date of Medicare benefits for ESRD patients electing
in-center hemodialysis (and not entering into a self-care training program) is
dependent on several factors. For ESRD patients 65 years of age or older and
already enrolled in the Medicare program due to age entitlement, Medicare
coverage for ESRD services begins immediately. ESRD patients under 65 years of
age who are not covered by an employer group health plan (for example, the
uninsured, those covered by Medicaid and those covered by an individual health
insurance policy) must wait until the first day of the third month after the
month in which a renal dialysis treatment program begins. During this three
month period, the patient, Medicaid or private insurers are responsible for
payment. In the case of the individual covered by private insurance, such
responsibility is limited to the terms of the policy with the patient being
responsible for the balance. ESRD patients under 65 years of age who are
covered by an employer group health plan must wait 30 or 33 months after
commencing dialysis treatments (depending on whether the patient has entered
into a self-care training program) before Medicare becomes the primary payor.
During the 30 to 33-month period, the employer group health plan is responsible
for payment at its negotiated rate or, in the absence of such a rate, at the
company's usual and customary rates, and the patient is responsible for
deductibles and co-payments applicable under the terms of the employer group
health plan.
If an ESRD patient elects to enter into a self-care training program or home
dialysis training program during the first three months of dialysis, the three-
month waiting period is waived. In this case, if the patient has an employer
group health plan, the period for which the health plan will be the primary
payor is 30 months. If the patient has only Medicare coverage, Medicare
immediately becomes the primary payor effective as of the initiation of
dialysis.
Medicare Reimbursement. Each of the Company's dialysis facilities is
certified to participate in the Medicare program. The Company is reimbursed by
Medicare under a reimbursement system for chronic dialysis services provided to
ESRD patients. Under this system, the reimbursement rates are fixed in advance
and have been adjusted from time to time by Congress. Although this form of
reimbursement limits the allowable charge per treatment, it provides the
Company with predictable and recurring per treatment revenues and allows the
Company to retain any profit earned. Medicare has established a composite rate
set by HCFA that governs the Medicare reimbursement available for a designated
group of dialysis services, including the dialysis treatment, supplies used for
such treatment, certain laboratory tests and certain medications. When Medicare
assumes responsibility as the primary payor, it pays for dialysis and related
services (as described below) at 80% of the composite rate. The Medicare
composite rate is subject to regional differences based upon certain factors,
including regional differences in wage earnings. Certain other services and
items are eligible for separate reimbursement under Medicare and are not part
of the composite rate, including certain drugs (including EPO), blood (for
amounts in excess of three units per patient per year), and certain physician-
ordered tests provided to dialysis patients. Claims for Medicare reimbursement
must generally be presented within 15 to 27 months of treatment depending on
the month in which the service was rendered. The Company generally submits
claims monthly and is usually paid by Medicare within 30 days of the
submission. If, in the future, Medicare were to include in its composite
reimbursement rate any of the ancillary services presently reimbursed
separately, the Company would not be able to seek separate reimbursement for
these services, adversely affecting the Company's operating and financial
results.
The Company receives reimbursement for outpatient dialysis services provided
to Medicare-eligible patients at rates that are currently between $118 and $141
per treatment for routine dialysis services, depending upon regional wage
variations. The Medicare reimbursement rate is subject to change by legislation
and recommendations by the Medicare Payment Advisory Commission ("MedPAC").
MedPAC is a new commission that was mandated by the Balanced Budget Act of 1997
to continue and expand upon the work of
7
the Prospective Payment Assessment Commission ("PROPAC"). The Medicare ESRD
reimbursement rate was unchanged from commencement of the program in 1972 until
1983. From 1983 through December 1990 numerous Congressional actions resulted
in net reduction of the average reimbursement rate from a fixed fee of $138 per
treatment in 1983 to approximately $125 per treatment in 1990. Congress
increased the ESRD reimbursement rate, effective January 1, 1991, resulting in
an average ESRD reimbursement rate of $126 per treatment. In 1990, Congress
required that the Department of Health and Human Services ("HHS") and PROPAC
study dialysis costs and reimbursement and make findings as to the
appropriateness of ESRD reimbursement rates. In March 1998, MedPAC recommended
a 2.7% increase in the reimbursement rate. 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.
On June 1, 1989, the FDA approved the production and sale of EPO, and HCFA
approved Medicare reimbursement for EPO's use by dialysis patients. EPO
stimulates the production of red blood cells and is beneficial in the treatment
of anemia, with the effect of reducing or eliminating the need for blood
transfusions for dialysis patients.
From June 1, 1989 through December 31, 1990, the Medicare ESRD program
reimbursed for EPO at the fixed rate of $40.00 per administration of EPO in
addition to the dialysis facility's allowable composite rate for dosages of up
to 9,999 units per administration. For higher dosages, an additional $30.00 per
EPO administration was allowed. Effective January 1, 1991, the Medicare
allowable prescribed rate for EPO was changed to $11.00 per 1,000 units,
rounded to the nearest 100 units. Subsequently, legislation was enacted to
reduce the Medicare prescribed rate for EPO by $1.00 to $10.00 per 1,000 units
after December 31, 1993.
In September 1997, HCFA promulgated a policy that would deny Medicare
reimbursement for EPO where a patient's proportion of red blood cells to total
blood volume exceeds an average of 36.5% during a 90-day period. That rule was
modified effective March 10, 1998, to provide that, if a doctor provides
medical justification for the prescription, Medicare will continue to reimburse
for EPO even if a patient's red blood cell count exceeds the maximum level
otherwise allowed for reimbursement. Further, even if no medical justification
is provided, the reimbursement will be reduced rather than denied, to an amount
equal to the lower of the actual EPO dosage administered or 80% of the
allowable dosage for the previous month.
Medicaid Reimbursement. The Company is a certified ESRD Medicaid provider in
all states in which it does business. Medicaid programs are state-administered
programs partially funded by the federal government. These programs are
intended to provide coverage for patients whose income and assets fall below
state-defined levels or who are otherwise uninsured. The programs also serve as
supplemental insurance programs for the Medicare co-insurance portion and
provide certain coverage (e.g., oral medications) that is not provided by
Medicare. State regulations generally follow Medicare reimbursement levels and
coverage without any co-insurance amounts. Certain states, however, require
beneficiaries to pay a monthly share of the cost based upon levels of income or
assets.
Private Reimbursement. Everest derives a portion of its revenues from
reimbursement provided by non-governmental third-party payors. A substantial
portion of third-party health insurance in the U.S. is now furnished through
some type of managed care plan, including HMOs. Managed care plans are
increasing their market share, and this trend may accelerate as a result of the
merger and consolidation of providers and payors in the health care industry,
as well as discussions among members of Congress and the executive branch
regarding ways to increase the number of Medicare and Medicaid beneficiaries
served through managed care plans.
The Company generally is reimbursed for dialysis treatments at higher rates
by non-governmental payors than by governmental payors. However, managed care
plans are becoming more aggressive in selectively contracting with a smaller
number of providers willing to furnish services for lower rates and subject to
a variety of service restrictions. For example, managed care plans and
traditional indemnity third-party payors increasingly are demanding alternative
fee structures, such as capitation arrangements whereby a provider
8
receives a fixed payment per month per enrollee and bears the risk of loss if
the costs of treating such enrollee exceed the capitation payment. These market
forces are creating downward pressure on the reimbursement that Everest
receives for its services and products.
Everest's ability to secure favorable rates with indemnity and managed care
plans has largely been due to the relatively small number of ESRD patients
enrolled in any single HMO. By regulation, ESRD patients have been prohibited
from joining an HMO unless they are otherwise eligible for Medicare coverage,
due to age or disability, and are members of a managed care plan when they
first experience kidney failure. HCFA has implemented a pilot project in which
several managed care companies were allowed to recruit ESRD patients beginning
in 1997 and which, if successful, could result in the opening of the ESRD
treatment market to many managed care companies thereafter. As Medicare HMO
enrollments increase and the number of ESRD patients in managed care plans also
increases, managed care plans may have increased leverage in negotiating lower
rates. In addition, an HMO may contract with another provider for, or may have
tighter utilization controls with respect to, certain ancillary services
typically provided by Everest to ESRD patients, which could limit Everest's
revenues from such services.
As managed care companies expand their market share and gain greater
bargaining power vis-a-vis health care providers, there may be increasing
pressure to reduce the amounts paid for outpatient dialysis services and
products. These trends could be accelerated if future changes to the Medicare
ESRD program require private payors to assume a greater percentage of the cost
of care given to dialysis patients. Everest believes that the historically
higher rates of reimbursement paid by non-governmental payors may not be
maintained at such levels. Everest is presently seeking to expand the portion
of its revenues attributable to non-governmental private payors. However, if
substantially more patients join managed care plans or such plans reduce
reimbursement levels, Everest's business and results of operations could be
materially adversely affected.
Competition
Dialysis Services Market. The dialysis industry is fragmented and highly
competitive, particularly with respect to competition for the acquisition of
existing dialysis centers. Because, in most cases, the prices of dialysis
services and products in the U.S. are directly or indirectly regulated by
Medicare, competition for patients is based primarily on quality and
accessibility of service and the ability to obtain referrals from physicians
and hospitals. Certain of the Company's competitors in the dialysis services
market have greater financial resources than the Company and compete with the
Company for the acquisition of centers in markets targeted by the Company.
Competition for acquisitions has increased the costs of acquiring dialysis
facilities. There is no assurance that the Company can continue to compete
effectively with existing and new competitors.
Competition for recruiting qualified physicians to act as medical directors
is intense. In addition, the Company may experience competition from the
establishment of a facility by a former medical director or referring
physician. In cases where the Company has acquired a facility from one or more
physicians, or where one or more physicians own interests in facilities as
partners or co-shareholders with the Company, such physicians are generally
required to agree to refrain from owning interests in competing facilities for
various periods. Substantially all physicians who provide medical director
services to the Company have also executed non-competition agreements. Such
non-competition agreements may not be enforceable in certain jurisdictions.
Contract Services Market. The Contract Services market is also fragmented and
highly competitive. The Company estimates there are approximately 3,000
perfusionists practicing in the U.S., the majority of whom are employed by
hospitals, with the balance practicing as sole proprietors or employed by
companies offering perfusion services. Most hospitals requiring perfusion
services use their own staff to provide such services and equipment and, as
such, are the largest source of competition for the Company. The Company also
competes in regional markets with other independent providers of perfusion
services and with perfusionists in private practice. The Company's principal
competitor in the perfusion services market is Baxter International Inc. The
Company competes with hospitals and blood banks in the provision of apheresis
and auto-transfusion services. Management believes that the competitive factors
in the Contract Services market are primarily cost, quality
9
and breadth of service. Certain of the Company's competitors in the Contract
Services market have greater financial resources than the Company. There can be
no assurance that Everest will be able to compete effectively with its
competitors or that additional competitors with greater resources will not
enter the Company's markets.
Human Resources
As of September 30, 2000, the Company had 2,020 employees, including a
professional staff of approximately 686 nurses, social workers, dietitians and
perfusionists, a corporate and regional staff of approximately 313 employees
and a facilities support staff of approximately 1,021 employees. The Company
also contracts with numerous health care professionals, including physicians,
nurses, social workers, dietitians, perfusionists and technicians who are not
employees of Everest. Medical directors of the Company's dialysis facilities
are independent contractors rather than employees of the Company, although some
medical directors are employees of either Nephrology Associates of Northern
Illinois Ltd. ("NANI-IL") or Nephrology Associates of Northern Indiana, P.C.
("NANI-IN"), each of which is owned by directors, officers and/or shareholders
of the Company. In these cases, professional service fees for the medical
directors are paid by the Company to NANI-IL and NANI-IN for medical director
services performed for such corporations' dialysis units. See "Certain
Relationships and Related Transactions." In the majority of cases, however, the
fees are payable directly by the Company to the medical directors (or their
physician practices) pursuant to individually negotiated contracts.
Perfusionists generally enter into written agreements with the Company which
specify their duties and establish their compensation. Such agreements are
terminable by either party on advance written notice.
As of September 30, 2000, 119 of the Company's employees were members of
unions. The Company believes that its relationships with its employees are
good.
Training and Development
The Company believes that its dialysis patient care staff, Contract Services
professionals, facility managers and regional directors represent its most
valuable corporate assets. Accordingly, Everest devotes substantial efforts and
resources to recruiting, training and retaining these individuals. The
Company's training emphasizes teamwork to facilitate an environment based upon
skilled individuals working together to provide high-quality care. The Company
trains its patient care staff and requires that such employees undertake
continuing education and meet with trainers who provide ongoing competency
testing. If such testing reveals skills that are below the level required for a
specific employee, the Company implements further training as required.
Liability Insurance
The Company maintains property and general liability insurance, professional
liability insurance and other insurance coverage in amounts deemed adequate by
management based upon historical claims and the nature and risks of the
business. The Company's property, casualty and worker's compensation insurance
is provided by an affiliated entity. See "Certain Relationships and Related
Transactions." The Company's professional liability insurance would provide
coverage, subject to policy limits, in the event the Company is held liable in
a lawsuit for professional malpractice against a physician, however, there can
be no assurance that future claims will not exceed applicable insurance
coverage, that malpractice and other liability insurance will be available at a
reasonable cost or that the Company will be able to maintain adequate levels of
malpractice insurance and other liability insurance in the future or that the
insurers will not be successful in denying claims. Physicians practicing at the
dialysis facilities are required to maintain their own malpractice insurance.
However, the Company maintains coverage for the activities of its medical
directors (but not for their individual private medical practices).
10
Regulatory Matters
General
The Company is subject to extensive federal, state and local governmental
regulations. These regulations require the Company to meet various standards
relating to, among other things, the management of centers, personnel,
maintenance of proper records, equipment and quality assurance programs. The
Company's dialysis centers are subject to periodic inspection by state agencies
and other governmental authorities to determine if the premises, equipment,
personnel and patient care meet applicable standards. To receive Medicare and
Medicaid reimbursement, the Company's dialysis centers must be certified by
HCFA. All of the Company's dialysis centers are so certified.
Any loss by the Company of its federal certifications, its authorization to
participate in the Medicare or Medicaid programs or its licenses under the laws
of any state or other governmental authority from which a substantial portion
of its revenues is derived or any change resulting from health care reform
reducing dialysis reimbursement or reducing or eliminating coverage for
dialysis services would have a material adverse effect on the Company's
operating and financial results. To date, the Company has maintained its
licenses and Medicare and Medicaid authorizations. The Company believes that
the health care services industry will continue to be subject to intense
regulation at the federal, state and local levels, the scope and effect of
which cannot be predicted. No assurance can be given that the activities of the
Company will not be reviewed and challenged by government regulators or that
health care reform will not result in a material adverse effect on the Company.
Furthermore, the Company could be held responsible for actions previously taken
by entities it has acquired. There can be no assurance that previous operating
practices of the Company or the entities it has acquired will not be reviewed
and challenged by governmental regulators or that the Company will not be
liable for such practices.
Federal Fraud and Abuse
The Company's operations are subject to the illegal remuneration provisions
of the Social Security Act (sometimes referred to as the "Anti-Kickback Law")
that impose criminal and civil sanctions on persons who knowingly and willfully
solicit, offer, receive or pay any remuneration, whether directly or
indirectly, in return for, or to induce, the referral of a patient for
treatment, or, among other things, the ordering, purchasing, or leasing, of
items or services that may be paid for in whole or in part by Medicare,
Medicaid or other federal health care programs. Additionally, federal
enforcement officials may attempt to impose civil false claims liability with
respect to claims resulting from an Anti-Kickback Law violation. Violations of
the federal Anti-Kickback Law are punishable by criminal penalties, including
imprisonment, fines and exclusion of the provider from future participation in
the Medicare or Medicaid programs. Civil penalties for violation of the federal
Anti-Kickback Law include assessments of $50,000 per improper claim for payment
plus three times the amount of such claim, as well as suspension from future
participation in Medicare and Medicaid. While the federal Anti-Kickback Law
expressly prohibits transactions that have traditionally had criminal
implications, such as kickbacks, rebates or bribes for patient referrals, its
language has been construed broadly and has not been limited to such obviously
wrongful transactions. Court decisions state that, under certain circumstances,
the Anti-Kickback Law is also violated where any part of the purpose (as
opposed to the "primary" or "material" purpose) of a payment is to induce
referrals. Congress has frequently considered federal legislation that would
expand the federal Anti-Kickback Law to include the same broad prohibitions to
all situations involving the inducement of referrals, regardless of payor
source.
In July 1991, November 1992 and January 1996, the Secretary of Health and
Human Services ("HHS") published regulations that create exceptions or "safe
harbors" for certain business transactions. Transactions that satisfy the
criteria under applicable safe harbors will be deemed not to violate the
federal Anti-Kickback Law. Transactions that do not satisfy all elements of a
relevant safe harbor do not necessarily violate the statute, although such
transactions may be subject to scrutiny by enforcement agencies. The Company
seeks to structure its various business arrangements to satisfy as many safe
harbor elements as possible under the
11
circumstances, although many of the Company's arrangements do not satisfy all
of the elements of a safe harbor. Although the Company has never been
challenged under the Anti-Kickback Law, and the Company believes that it
complies in all material respects with the federal Anti-Kickback Law and all
other applicable related laws and regulations, there can be no assurance that
the Office of Inspector General or other governmental agency will not take a
contrary position or that the Company will not be required to change its
practices or will not experience a material adverse effect as a result of any
such challenge or any sanction that might be imposed. In recent years, new
legislation and amendments to the existing federal fraud and abuse laws have
strengthened the government's enforcement powers, and there has been a
significant increase in the number of health care fraud and abuse
investigations and prosecutions. Some of these new investigations and
prosecutions scrutinize practices that have been widely utilized by health care
providers in the past. The Company is unable to predict whether the enforcement
agencies will ultimately prevail in their stepped-up enforcement activities or
what impact these enforcement activities may ultimately have on the
interpretation of the federal fraud and abuse laws.
On July 21, 1994, the Secretary of HHS proposed a rule that would modify the
original set of safe harbor provisions to give greater clarity to the rule's
original intent. Those rules were published in final form on November 19, 1999.
The final rule makes modifications to the safe harbors on personal services,
management contracts, investment interests, and space rentals, among others.
The Company does not believe that its current operations, as set forth above,
are materially impacted by the final rule.
Physician Ownership. A significant portion of the Company's issued stock is
presently owned or controlled by physicians. The Company has also issued stock
options to various individuals, including many of its medical directors.
Additionally, many of the Company's outpatient dialysis centers are owned on a
joint-venture basis between the Company, or one of its wholly owned
subsidiaries, and local physicians. Because many of these physicians refer
patients to the Company's facilities, the federal Anti-Kickback Law could be
found to apply to referrals by such physicians to the Company's facilities.
However, the Company believes these ownership relationships are in material
compliance with the federal Anti-Kickback Law. The Company believes that the
value of stock issued and options granted to physicians has been consistent
with the fair market value of assets transferred to, or services performed by
such physicians for the Company, and there is no intent to induce referrals to
the Company's facilities. There is a safe harbor for certain investments in
non-publicly traded entities such as the Company, and the Company believes that
its physician ownership and investment relationships meet some of the criteria
for this safe harbor. However, these relationships do not satisfy all of the
criteria for the safe harbor and there can be no assurance that these
relationships will not subject the Company to investigation or prosecution by
enforcement agencies.
Medical Director Relationships. The conditions for coverage under the
Medicare ESRD program mandate that treatment at a dialysis center be under the
general supervision of a medical director who is a licensed physician.
Additionally, the medical director must be board certified or board eligible in
internal medicine or pediatrics and have had at least 12 months of experience
or training in the care of patients at ESRD centers. The medical directors
engaged by the Company typically exceed the Medicare requirements and are
generally board certified nephrologists. The Company has engaged medical
directors at each of its centers under contracts with physicians or their group
practices. The compensation of the medical directors and other physicians under
contract with the Company is separately negotiated and generally depends upon
competitive factors in the local market, the physician's professional
qualifications and responsibilities and the size of the center. The aggregate
compensation of the medical directors and other physicians under contract with
the Company is generally fixed in advance for periods of one year or more by
written agreement, is set to reflect the fair market value of the services
rendered and does not take into account the volume or value of patients
referred to the Company's facilities. Because in all cases the medical
directors and the other physicians under contract with the Company refer
patients to the Company's centers, the federal Anti-Kickback Law could be found
to apply. However, the Company believes that its contractual arrangements with
these physicians are in material compliance with the federal Anti-Kickback Law.
The Company seeks to comply with the requirements of the personal services and
12
management contract safe harbor when entering into agreements with its medical
directors and other physicians. See "Certain Relationships and Related
Transactions--NANI-IL and NANI-IN."
Acute Inpatient Dialysis Services. Under the Company's acute inpatient
dialysis service arrangements, the Company agrees to provide a hospital with
supervised emergency and acute dialysis services, including qualified nursing
and technical personnel, technical services, supplies, and, in many cases,
equipment. Because physicians under contract with the Company, or who have an
ownership interest in the Company and/or its affiliates, may refer patients to
hospitals with which the Company has an acute dialysis service arrangement, the
federal Anti-Kickback Law could be found to apply. However, the Company
believes that its contractual arrangements with hospitals for acute inpatient
dialysis services are in material compliance with the federal Anti-Kickback
Law. In all instances, the Company seeks to comply with the requirements of the
personal services and management contract and equipment lease safe harbors when
entering into agreements or contracts for acute inpatient dialysis services.
The Health Insurance Portability and Accountability Act of 1996. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") was enacted in
August 1996 and substantively changed federal fraud and abuse laws by expanding
their reach to all federal health care programs, establishing new bases for
exclusions and mandating minimum exclusion terms, creating an additional
exception to the anti-kickback penalties for risk-sharing arrangements,
requiring the Secretary of HHS to issue advisory opinions, increasing civil
money penalties to $10,000 (formerly $2,000) per item or service and
assessments to three times (formerly twice) the amount claimed, creating a
specific health care offense and related health fraud crimes, and expanding
investigative authority and sanctions applicable to health care fraud. It also
prohibits provider payments which could be deemed an inducement to patient
selection of a provider.
In addition to establishing minimum periods of exclusion from government
health programs, the statute authorizes exclusion of an individual with a
direct or indirect ownership or control interest in a sanctioned entity if the
individual "knows or should know" of the activity leading to the conviction or
exclusion of the entity or where the individual is an officer or managing
employee of the entity. Significantly, the law expands criminal sanctions for
health care fraud involving any governmental or private health benefit program,
including freezing of assets and forfeiture of property traceable to commission
of a health care offense.
Balanced Budget Act of 1997. In August 1997, President Clinton signed the
Balanced Budget Act of 1997 ("BBA") which contains sweeping adjustments to both
the Medicare and Medicaid programs, as well as further expansion of the fraud
and abuse laws. Specifically, the BBA created a civil monetary penalty for
violations of the federal anti-kickback statute whereby violations will result
in damages equal to three times the amount involved as well as a penalty of
$50,000 per violation. In addition, the new provisions expanded the exclusion
requirements so that any person or entity convicted of three health care
offenses is automatically excluded from federally funded health care programs
for life. Individuals or entities convicted of two offenses are subject to
mandatory exclusion of 10 years, while any provider or supplier convicted of
any felony may be denied entry into the Medicare program by the Secretary of
HHS if deemed to be detrimental to the best interests of the Medicare program
or its beneficiaries.
The BBA also provides that any person or entity that arranges or contracts
with an individual or entity that has been excluded from a federally funded
health care program will be subject to civil monetary penalties if the
individual or entity "knows or should have known" of the sanction. In addition,
the BBA requires HCFA to issue advisory opinions in response to inquiries as to
whether physician referrals for designated health services are prohibited by
the Stark law (hereinafter described).
Finally, the BBA creates a Medicare+Choice Program that is designed to
provide a variety of options to Medicare beneficiaries, almost all of whom may
enroll in a Medicare+Choice Plan. The options include provider sponsored
organizations, coordinated care plans, HMOs with and without point of service
options involving out-of-network providers, and medical savings accounts
offered as a demonstration project.
13
Stark Law
The federal prohibition against self-referral amendments to the Social
Security Act (commonly known as the "Stark" provisions) restricts physician
referrals for certain "designated health services" to entities with which a
physician or an immediate family member has a "financial relationship." The
Stark law was enacted by Congress in two parts, and is commonly referred to
individually as "Stark I" and "Stark II." The Stark I legislation, which became
effective in 1992, was only applicable to clinical laboratory services. The
Stark II legislation, which became effective January 1, 1995, expanded the
self-referral prohibition from only clinical laboratory services to all
"designated health services." Under the Stark provisions, an entity is
prohibited from claiming payment under the Medicare or Medicaid programs for
services rendered pursuant to a prohibited referral and is liable for the
refund of amounts received pursuant to prohibited claims. The Stark provisions
also set forth certain reporting requirements that require entities providing
services to Medicare beneficiaries to report certain ownership arrangements to
the Secretary of HHS. In addition to being obligated to refund any payments
received in violation of the Stark provisions, entities can also incur civil
penalties of up to $15,000 per improper claim, $10,000 per day for each day
that the entities fail to comply with the reporting obligations, and can be
excluded from participation in the Medicare and Medicaid programs.
A "financial relationship" under Stark is defined as an ownership or
investment interest in an entity by a physician (or an immediate family
member), or a compensation arrangement between a physician (or an immediate
family member) and an entity. The Company has entered into compensation
agreements with its medical directors or their respective professional
corporations for the services such physicians provide as medical directors.
Additionally, a number of physicians own shares of the Company or its joint
ventures, and options to purchase shares of stock in the Company. Accordingly,
physicians that have entered into such arrangements with the Company, including
its medical directors, may be deemed to have a "financial relationship" with
the Company for purposes of Stark.
For purposes of Stark, "designated health services" include, among other
things: clinical laboratory services; parenteral and enteral nutrients,
equipment and supplies; prosthetics, orthotics, prosthetic devices and
supplies; physical and occupational therapy services; outpatient prescription
drugs; durable medical equipment and supplies; radiology services (including
MRI, CAT scans and ultrasound services); radiation therapy services and
supplies; home health services; and inpatient and outpatient hospital services.
Dialysis is not a designated health service under Stark. However, the
definition of "designated health services" includes items and services that are
components of dialysis or that may be provided to a patient in connection with
dialysis, if such items and services are considered separately rather than
collectively as dialysis. Under the final Stark I regulations published in
August 1995, HCFA provided an exception from Stark I for clinical laboratory
services reimbursed under the Medicare "composite rate" for dialysis. The
Company believes it likely that, when final Stark II regulations are published,
they will contain a similar exception for the various dialysis related items
that fall within the definition of "designated health services," but that are
reimbursed under the composite rate for dialysis. However, there can be no
assurance that HCFA will adopt such a position.
On January 9, 1998, HCFA issued proposed Stark II regulations (the "1998
Proposed Regulations"). The 1998 Proposed Regulations provide that EPO and
other outpatient drugs used in connection with dialysis treatments, and home
health services and supplies used in home dialysis services are not considered
"designated health services" for purposes of Stark II. There can be no
assurance, however, that final Stark II regulations will adopt such a position.
With respect to the other items and services provided by the Company that are
likely to be deemed to be "designated health services" subject to the Stark II
prohibition, the language of the Stark II amendments and the Stark I final
regulations suggest that the Company will not be permitted to offer, or seek
reimbursement for, such services in the absence of a Stark II exception.
Because physicians under contract with the Company may refer patients to
hospitals with which the Company has a Contract Services arrangement, Stark II
may be interpreted to apply to the Company's Contract Services arrangements
with hospitals. However, Stark II contains exceptions for certain equipment
rental, personal services and fair market value arrangements and the Company
believes that most of its Contract
14
Services arrangements are in material compliance with the requirements of such
exceptions to Stark II. Moreover, the 1998 Proposed Regulations exclude from
the definition of "inpatient hospital services" acute dialysis services
furnished by a physician-owned contractor when the hospital is not certified to
provide ESRD services. There can be no assurance, however, that final Stark II
regulations will adopt such a position.
Stark II contains exceptions for ownership and compensation arrangements that
meet certain specific criteria set forth in the statute or in forthcoming
regulations. With respect to ownership, certain qualifying in-office physician
and ancillary services provided by or under the supervision of physicians in a
single group practice are exempt from both ownership and compensation
arrangement restrictions. With respect to compensation arrangements, the
exceptions available for certain qualifying arrangements include the following
areas: (i) bona fide employment relationships; (ii) personal service
arrangements; (iii) space and equipment leasing arrangements; (iv) certain
group practice arrangements with a hospital that were in existence prior to
December 1989; and (v) purchases by physicians of laboratory services, or other
items and services at fair market value. In order to be exempt from the Stark
II self-referral prohibition, it is necessary to meet all of the criteria of a
particular exception for each financial relationship existing between an entity
and a referring physician. Based on the existing regulations and the 1998
Proposed Regulations, the Company believes that many of its financial
relationships with referring physicians will not be subject to the Stark self-
referral prohibitions. Further, to the extent that some of the Company's
financial arrangements are subject to Stark, the Company believes that all such
financial arrangements meet the criteria for an exception under either the
existing regulations or the 1998 Proposed Regulations.
However, because of its broad language, Stark II may be interpreted to apply
to certain of the Company's operations. Consequently, Stark II may require the
Company to restructure certain existing compensation agreements with its
medical directors, or, in the alternative, to refuse to accept referrals for
designated health services from certain physicians. Moreover, since Stark II
prohibits Medicare or Medicaid reimbursement of items or services provided
pursuant to a prohibited referral, and imposes substantial civil monetary
penalties on entities which present or cause to be presented claims for
reimbursement in such cases, the Company could be required to repay amounts
reimbursed for items and services that HCFA determines to have been furnished
in violation of Stark II, and could be subject to substantial civil monetary
penalties, either or both of which could have a material adverse effect on the
Company's operations and financial results and condition. The Company believes
that if Stark II is interpreted to apply to the Company's operations, it is
likely that the Company will be able on a prospective basis to bring its
financial relationships with referring physicians into material compliance with
the provisions of Stark II, including relevant exceptions. However, prospective
compliance would not affect amounts or penalties determined to be owed for past
conduct, and there can be no assurance that such prospective compliance, if
possible, would not have a material adverse effect on the Company.
The Company's certificate of incorporation (the "Certificate") has certain
provisions which are designed to comply with the requirements of the Stark Law.
The Certificate provides that if the holder of the Company's stock or an
immediate family member of the holder is a physician, then the stock will
represent no investment or ownership interest in any entity to which such
physician has made or is in a position to make referrals for designated health
services. The Certificate also contains dividend and transfer policies which
are designed to cure potential violations of the Stark Law which would occur
should a physician with an investment or ownership interest in the Company make
referrals to an entity and indirectly derive financial gain from such
activities. The transfer policies have the additional function of subjecting
future holders of the Company's stock to the same restrictions being imposed
upon current holders.
Other Regulation
False Claims. The Company is also subject to federal and state laws
prohibiting an individual or entity from knowingly and willfully presenting
claims for payment (by Medicare, Medicaid and certain other third-party payors)
that contain false or fraudulent information. These laws provide for both
criminal and civil penalties. Furthermore, providers found to have submitted
claims which they knew or should have known were false or fraudulent, or for
items or services that were not provided, may be excluded from Medicare and
15
Medicaid participation, required to repay previously collected amounts, and/or
subject to substantial civil monetary penalties, resulting in the possibility
of substantial financial penalties for small billing errors repeated over a
large number of claims, as each individual error may be deemed to be a separate
violation of the False Claims Act. Although false claim violations are
generally subject to investigation and prosecution by the applicable
governmental agency, violations of the federal False Claim Act can also be the
subject of Qui Tam (or whistle blower) litigation. In Qui Tam situations,
certain individuals with knowledge of False Claim Act violations can bring
suit, on behalf of the federal government, for such violations. As a "reward"
for bringing successful Qui Tam cases, Qui Tam plaintiffs are entitled to a
significant percentage of any penalties ultimately recovered by the federal
government as a result of the violations prosecuted in the Qui Tam action. The
number of health care Qui Tam cases is growing, and these cases increasingly
involve arguments that a violation of the Anti-Kickback and Stark Laws could
constitute a false claim under the federal False Claims Act, and thus subject
health care providers to Qui Tam actions for alleged Anti-Kickback and Stark
Law violations.
Although dialysis centers are generally reimbursed by Medicare based on
prospective composite rates, the submission of Medicare cost reports and
requests for payment by dialysis centers are covered by these laws. The Company
believes that it has procedures to ensure the accurate completion of cost
reports and requests for payment. However, there can be no assurance that cost
reports or requests for payment filed by the Company will be materially
accurate or will not be subject to challenge under these laws. Furthermore,
there can be no assurance that cost reports or payment requests previously
submitted by any of the entities that the Company has acquired will not be
challenged under these laws. Any such challenges, including any related
sanctions which might be assessed, could have a material adverse effect on the
Company.
State Anti-Kickback Provisions. Many states have enacted statutes prohibiting
health care providers from providing kickbacks or other forms of remuneration
to individuals, including physicians, who induce, or refer patients, to the
provider. Many of these laws have proscriptions similar to the Anti-Kickback
Law, but apply more broadly to all patients, and not just those entitled to
reimbursement under Medicare, Medicaid or other federal health care programs.
The Company has no reason to believe that any of its arrangements with
physicians are not in material compliance with such state laws. However, given
the recent enactment of such state laws, there is an absence of definitive
interpretive guidance in many areas and there can be no assurance that one or
more of the practices of the Company or any of its acquired entities might not
be subject to challenge under such state laws. If one or more of such state
laws is interpreted to apply to the Company and the Company is determined to be
liable for violations of such state laws, the application of such state laws
could have a material adverse effect on the Company.
State Self-Referral Provisions. Numerous states have enacted statutes
prohibiting physicians from holding financial interests in various types of
medical centers or providers to which they refer patients. Many of these laws
have proscriptions similar to the Stark law, but apply more broadly to all
patients, and not just those entitled to reimbursement under the Medicare and
Medicaid programs. The Company has no reason to believe that any of its
arrangements with physicians are not in material compliance with such state
laws. However, given the recent enactment of such state laws, there is an
absence of definitive interpretive guidance in many areas and there can be no
assurance that one or more of the practices of the Company or any of its
acquired entities might not be subject to challenge under such state laws. If
one or more of such state laws is interpreted to apply to the Company and the
Company is determined to be liable for violations of such state laws, the
application of such state laws could have a material adverse effect on the
Company.
State Laws Regarding Provision of Medicine and Insurance. Although the
Company currently has a number of arrangements with insurance companies and
HMOs, these relationships do not account for a significant portion of the
Company's revenues. Notwithstanding these current arrangements, as the managed
care environment evolves, or if there is a legislative change requiring
Medicare ESRD beneficiaries to obtain their care through a managed care
arrangement, such as an HMO, the Company may be forced to revise its current
operations, structure and/or practices to adapt to such an environment. Such
changes may include the development of quasi-managed care entities that could
deliver both dialysis treatment and related physician services through an
integrated system that would share in the financial risk of the integrated
services it
16
provides. However, because the laws of many states prohibit physicians from
splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine, the Company's ability to structure such arrangements may
be severely restricted, if not prohibited. Further, because most states also
have laws regulating insurance companies and HMOs as well as the ability to
enter into certain types of risk spreading and risk sharing arrangements, the
Company may also be restricted in its ability to develop quasi-managed care
entities and/or enter into risk sharing types of arrangements with payors. As a
result of these regulatory constraints, the Company may not be able to quickly
respond or adapt to a rapidly changing marketplace. If the Company is not able
to quickly respond to such changes, it may have a material adverse effect on
the Company. Further, if the Company is able to respond to such changes by
restructuring its operations and/or practices, the Company may be subject to
new intense regulatory oversight which may also have a material adverse effect
on the Company.
Health Care Reform. Members of Congress from both parties and the executive
branch are continuing to consider many health care proposals, some of which are
comprehensive and far-reaching in nature. As noted above, the Medicare+Choice
Program was developed as part of the amendments in the BBA. This program is
designed to expand the options for Medicare beneficiaries and may have a
significant impact on the manner in which health care is delivered in the
future. Several states are also currently considering health care proposals.
The Company is unable to predict what additional action, if any, the federal
government or any state may ultimately take with respect to health care reform
or when any such action will be taken. Health care reform may bring radical
changes in the financing and regulation of the health care industry, which
could have a material adverse effect on the Company.
Other Regulations. The Company's operations are subject to various state
hazardous waste disposal laws. Those laws, as currently in effect, do not
classify most of the waste produced during the provision of dialysis services
to be hazardous, although disposal of non-hazardous medical waste is also
subject to regulation. OSHA regulations require employers of workers who are
occupationally subject to blood or other potentially infectious materials to
provide those workers with certain prescribed protections against blood-borne
pathogens. These regulatory requirements apply to all health care centers,
including dialysis centers, and require employers to make a determination as to
which employees may be exposed to blood or other potentially infectious
materials and to have in effect a written exposure control plan. In addition,
employers are required to provide hepatitis B vaccinations, personal protective
equipment, infection control training, post-exposure evaluation and follow-up,
waste disposal techniques and procedures, and engineering and work practice
controls. Employers are also required to comply with certain record-keeping
requirements. The Company believes that it is in material compliance with the
foregoing laws and regulations.
Some states have established certificate of need ("CON") programs regulating
the establishment or expansion of health care centers, including dialysis
centers. In those states where CON laws apply to dialysis centers, the Company
is required to go through a regulatory process that generally requires the
identification and documentation of "need" for dialysis services, prior to
being able to establish or expand its dialysis operations. The existence of CON
laws and their application by regulatory agencies could have a material impact
on the Company's ability to expand its dialysis operations in those states with
CON requirements.
There can be no assurance that in the future the Company's business
arrangements, past or present, will not be the subject of an investigation or
prosecution by a federal or state governmental authority. Such investigation
could result in any, or any combination, of the penalties discussed above
depending upon the agency involved and such investigation and prosecution. None
of the Company's business arrangements with physicians, vendors, patients or
others have been the subject of investigation by any governmental authority.
The Company monitors legislative developments and would seek to restructure a
business arrangement if the Company determined that one or more of its business
relationships placed it in material noncompliance with applicable law. The
Company believes that in the near future the health care service industry will
continue to be subject to substantial regulation at the federal and state
levels, the scope and effect of which cannot be predicted by the Company. Any
loss by the Company of its various federal certifications, its authorization to
participate in the Medicare and Medicaid programs or its licenses under the
laws of any state or other
17
governmental authority from which a substantial portion of its revenues are
derived would have a material adverse effect on its operating and financial
results.
ITEM 2. PROPERTIES
The Company operates 74 dialysis centers, five of which are located in owned
facilities and the remainder of which are located in leased facilities. Such
facilities range from approximately 2,000 to 17,000 square feet. These leases
generally have terms of 10 years and typically contain renewal options. The
Company owned 13,800 square feet of office space in Oak Park, Illinois as of
September 2000. In October 2000, the Company sold such property to the Oak Park
School District. Currently, the Company leases the property which is used for
its corporate headquarters. In addition, the Company leases approximately
28,000 square feet of space in Bellwood, Illinois which houses corporate
training, purchasing, biomedical, billing, facilities management and medical
records and the Company leases approximately 6,000 square feet of space in
Westbrook, Illinois, which houses dialysis accounting. The Company also leases
space for its regional offices in Tucson, Arizona; Panama City, Florida;
Dearborn, Michigan; and Westchester, Illinois. The regional offices range in
size from 230 square feet to approximately 4,600 square feet under leases with
expiration dates through March 31, 2003.
The Company considers its physical properties to be in good operating
condition and suitable for the purposes for which they are being used.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000. Subsequent to the reporting period, on November 1,
2000, a majority-in-interest of the holders of common stock of the Company
approved, by written consent, the execution of the Merger Agreement by the
Company as well as certain other documents and matters related to the Merger
Agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Developments."
18
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of the
Company.
During fiscal 2000, the Company granted options to purchase 60,000 shares of
common stock pursuant to the Company's stock option plan, in reliance on Rule
701 promulgated under the Securities Act. The Company also issued shares of
common stock of the Company to the following former employees as a result of
the exercise of stock options at an exercise price of $9.10: John Bourke
received 17,625 shares on January 3, 2000, Nicki Norris received 3,603 shares
on February 3, 2000 and Donna Raasch received 600 shares on September 14, 2000.
ITEM 6. SELECTED FINANCIAL DATA
These financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this Report.
Fiscal years ended September 30,
-----------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(in thousands)
Statement of Operations Data:
Net revenues................. $83,171 $113,808 $147,475 $184,918 $233,563
Patient care costs........... 58,854 81,913 102,644 131,634 167,698
General and administrative
expenses.................... 13,494 14,855 23,286 24,328 27,868
Special charges.............. -- -- -- 22,959 --
Provision for bad debts ..... 2,523 714 2,727 7,360 6,302
Depreciation and
amortization................ 3,401 4,940 6,927 10,479 12,285
------- -------- -------- -------- --------
Income (loss) from
operations.................. 4,899 11,386 11,891 (11,842) 19,410
Interest expense, net........ (276) (2,148) (5,932) (11,084) (13,328)
Equity in earnings of
affiliates.................. -- -- 1,784 586 472
Minority interests in
earnings.................... (810) (1,601) (516) (843) (870)
Gain on curtailment of
pension benefits............ 3,044 -- -- -- --
Other income, net............ 39 279 -- -- --
------- -------- -------- -------- --------
Income (loss) before income
taxes and cumulative effect
of change in accounting..... 6,896 7,916 7,227 (23,183) 5,684
Income tax expense
(benefit)................... 2,800 3,689 3,541 (6,827) 3,291
------- -------- -------- -------- --------
Income (loss) before
cumulative effect of change
in accounting............... 4,096 4,227 3,686 (16,356) 2,393
Cumulative effect of change
in accounting............... -- -- -- 615 --
------- -------- -------- -------- --------
Net income (loss)............ $ 4,096 $ 4,227 $ 3,686 $(16,971) $ 2,393
======= ======== ======== ======== ========
Balance Sheet Data:
Working capital.............. $ 8,514 $ 20,412 $ 36,965 $ 34,611 $ 30,536
Total assets................. 64,711 102,208 196,395 196,273 212,931
Long-term liabilities........ 23,366 51,632 111,333 123,790 128,670
Stockholders' equity......... 28,873 32,999 58,256 41,285 43,041
19
ITEM 7. 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.
Overview
Everest 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. The Company is the nation's sixth-largest provider
of chronic dialysis outpatient services and serves over 6,700 patients through
74 facilities in 11 states. In addition to its outpatient dialysis center
operations, the Company provides acute dialysis services through contractual
relationships with 34 hospitals in five states. Everest also contracts with 67
hospitals in 13 states to provide a broad range of other extracorporeal blood
treatment services, including inpatient acute dialysis, perfusion, apheresis
and auto-transfusion (together, "Contract Services"). Pursuant to management
contracts, Everest provides management services to (i) a physician practice
group comprised of 31 nephrologists, primarily in the Chicago and northwest
Indiana areas, and (ii) certain minority-owned or unaffiliated dialysis
facilities. For fiscal 2000, the Company derived 88.8% of its net revenues from
chronic and acute dialysis services, 10.1% from Contract Services and 1.1% from
management services.
Sources of Revenues
The Company's net revenues from chronic and acute dialysis services are
derived from: (i) in-center dialysis and home dialysis services including drugs
and supplies and acute dialysis services performed in hospitals; and (ii)
contracts with hospital-based programs. The majority of the Company's in-center
and home dialysis services are paid for under the Medicare ESRD program in
accordance with rates established by 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. See "Business--Sources of Revenue Reimbursement."
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
Pursuant to a Management Agreement with Montefiore Medical Center ("MMC"),
New York Dialysis Management, Inc., a wholly-owned subsidiary of the Company
("NYDM"), managed four dialysis
20
facilities located in the Bronx, New York (the "Facilities") during fiscal
2000. Under the original Management Agreement, NYDM had a right of first
refusal to purchase the Facilities and the right to operate them (and in effect
terminate the Management Agreement) in the event that MMC received and proposed
to accept a bona fide offer for the purchase of one or all of the Facilities.
After having been informed by MMC of the receipt of such an offer in 1998, NYDM
exercised its right of first refusal and, as a result, in July 1998, the
parties entered into an Agreement to Amend and Not-to-Compete (the "Agreement
to Amend") and Amendment No. 3 to the Management Agreement (the "Amendment").
Pursuant to the Agreement to Amend, NYDM paid an amount equal to $19,216,000 to
MMC in consideration for MMC's covenant not-to-compete and other undertakings,
including MMC's agreement to enter into the Agreement. Contemporaneously with
the execution of the Agreement to Amend and the Amendment, MMC entered into a
Medical Asset Purchase Agreement (the "Purchase Agreement") pursuant to which
it agreed to sell the Facilities' medical assets to Everest Dialysis Services,
Inc. ("EDS"), a corporation formed for this purpose under the laws of the State
of New York, and which is owned by Craig Moore and Paul Balter, M.D., owners of
the Company. The sale of the medical assets to EDS occurred in November 2000.
During Fiscal 1999, the Company acquired additional equity in five entities
in which it previously held a minority interest: (i) Dialysis Specialists of
Topeka, Inc., which owns one outpatient and home dialysis facility in Topeka,
Kansas (the Company's interest was increased from 25% to 75%); (ii) Dialysis
Specialists of Central Cincinnati, Ltd. ("DSCCL"), which owns one outpatient
and home dialysis facility in Norwood, Ohio (the Company's interest was
increased from 37.9% to 100.0%); (iii) Home Dialysis of Fairfield, Inc.
("Fairfield"), which owns one outpatient and home dialysis facility in
Fairfield, Ohio (the Company's interest was increased from 50.0% to 100.0%);
(iv) Home Dialysis of Columbus, Inc ("Columbus"), which owns two outpatient and
home dialysis facilities in Columbus, Ohio (the Company's interest was
increased from 49.0% to 100.0%); (v) Dialysis Specialists of Tulsa, Inc., which
owns one outpatient and home dialysis facility in Tulsa, Oklahoma (the
Company's interest was increased from 33.33% to 100.0%). Additionally, during
Fiscal 1999 the Company acquired a 100.0% interest in Englewood Dialysis
Facility L.L.C., which owns one outpatient and home dialysis facility in
Englewood, New Jersey (the Company previously had no equity interest in this
facility). These acquisitions represented 120 stations and approximately 639
patients in the aggregate.
In November 1999, the Company acquired a 100.0% interest in the non-medical
assets of Western New York Artificial Kidney Center, Inc. ("WAKC") through
NYDM, and entered into an agreement with WAKC whereby EDS would acquire the
medical assets of WAKC. This acquisition relates to three outpatient dialysis
facilities in the Buffalo, New York area (the Company previously had no equity
interest in these facilities). This acquisition represented 45 stations and
approximately 241 patients in the aggregate. The parties have obtained the
approval of the New York Public Health Council required for the consummation of
the transactions contemplated under the purchase agreement with WAKC and the
subsequent operation of the Facilities by EDS.
In December 1999, the Company acquired a 100.0% interest in St. Clare
Dialysis Center located in Dover, New Jersey (the Company previously had no
equity interests in these facilities). This acquisition represented 12 stations
and approximately 65 patients.
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.
21
De Novos
During Fiscal 2000, the Company commenced operations in four De Novo
facilities: (1) Greenwood Avenue Dialysis Center which is comprised of one
outpatient dialysis facility in Chicago, Illinois, (2) North Avenue Dialysis
Center which is comprised of one outpatient dialysis facility in Melrose Park,
Illinois, (3) East Chicago Dialysis Center which is comprised of one outpatient
dialysis facility in East Chicago, Indiana, and (4) Portage Dialysis Center
which is comprised of one outpatient dialysis facility in Portage, Indiana.
These De Novos represent 61 stations and approximately 200 patients in the
aggregate.
Reorganization
In November 1997, in order to simplify its ownership structure and better
position the Company for future growth, the shareholders of the Company entered
into a series of related transactions. Prior to such transactions, the Founding
Directors, who collectively owned approximately 70% of the equity in the
Company, held their equity interest through a limited liability company.
Following these transactions, the Founding Directors now directly hold
approximately 55% of the equity in the Company, and collectively own all of the
membership interests in Peak Liquidating, which in turn owns approximately 15%
of the equity in the Company. See "Certain Relationships and Related
Transactions" and "Security Ownership of Certain Beneficial Owners and
Management."
Consolidations
Effective as of June 30, 1999, in a transaction consummated by the Company to
simplify tax reporting, Northwest Indiana Dialysis Center, Inc. and Lake Avenue
Dialysis Center, Inc., were merged with and into Ohio Valley Dialysis Center,
Inc. ("Ohio Valley"), in a statutory merger with Ohio Valley being the
surviving entity, and the name of Ohio Valley was changed to Everest Healthcare
Indiana, Inc.
Effective as of September 30, 1999, in a transaction consummated by the
Company to simplify tax reporting, Dialysis Specialists of Central Cincinnati,
Ltd., Home Dialysis of Columbus, Inc., and Home Dialysis of Dayton, Inc. were
merged with and into Home Dialysis of Fairfield, Inc. ("Fairfield"), in a
statutory merger with Fairfield being the surviving entity, and the name of
Fairfield was changed to Everest Healthcare Ohio, Inc.
Effective as of October 31, 1999, in a series of transactions consummated by
the Company to simplify tax reporting, Dialysis Specialists of South Texas,
L.L.C., Hemo Dialysis of Amarillo, L.L.C., Amarillo Acute Dialysis Specialists,
L.L.C. and Dialysis Specialists of Corpus Christi, L.L.C., were merged with and
into North Buckner Dialysis Center Inc. ("North Buckner") in a statutory merger
with North Buckner being the surviving entity, and the assets of North Buckner
were contributed to Everest Healthcare Texas, L.P. ("New LP"), a newly formed
limited partnership. New LP is owned by North Buckner (its 1% general partner)
and Everest Healthcare Texas Holding Corp. (its 99% limited partner) a newly
formed, wholly-owned subsidiary of North Buckner.
22
Results of Operations
The following table sets forth for the periods indicated the Company's
results of operations:
Fiscal years ended
September 30,
----------------------------
1998 1999 2000
-------- -------- --------
(in thousands)
Net revenues............................ $147,475 $184,918 $233,563
Patient care costs...................... 102,644 131,634 167,698
General and administrative expenses..... 23,286 24,328 27,868
Special charges......................... -- 22,959 --
Provision for bad debts................. 2,727 7,360 6,302
Depreciation and amortization........... 6,927 10,479 12,285
-------- -------- --------
Income (loss) from operations........... 11,891 (11,842) 19,410
Interest expense, net................... (5,932) (11,084) (13,328)
Equity in earnings of affiliates........ 1,784 586 472
Minority interests in earnings.......... (516) (843) (870)
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting............................. 7,227 (23,183) 5,684
Income tax expense (benefit)............ 3,541 (6,827) 3,291
-------- -------- --------
Income (loss) before cumulative effect
of change in accounting................ 3,686 (16,356) 2,393
Cumulative effect of change in
accounting............................. -- 615 --
-------- -------- --------
Net income (loss)....................... $ 3,686 $(16,971) $ 2,393
======== ======== ========
The following table sets forth for the periods indicated certain statement of
operations items expressed as a percentage of net revenues for such periods:
Fiscal years ended September 30,
-----------------------------------
1998 1999 2000
---------- ---------- ----------
Net revenues............................. 100.0% 100.0% 100.0%
Patient care costs....................... 69.6 71.2 71.8
General and administrative expenses...... 15.8 13.2 11.9
Special charges.......................... -- 12.4 --
Provision for bad debts.................. 1.9 4.0 2.7
Depreciation and amortization............ 4.7 5.6 5.3
---------- ---------- ----------
Income (loss) from operations............ 8.0 (6.4) 8.3
Interest expense, net.................... (4.0) (6.0) (5.7)
Equity in earnings of affiliates......... 1.2 0.3 .2
Minority interests in earnings........... (0.3) (0.4) (.4)
---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of change in
accounting.............................. 4.9 (12.5) 2.4
Income tax expense (benefit)............. 2.4 (3.6) 1.4
---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting.................... 2.5 (8.9) 1.0
Cumulative effect of change in
accounting.............................. -- 0.3 --
---------- ---------- ----------
Net income (loss)........................ 2.5% (9.2)% 1.0%
========== ========== ==========
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September
30, 1999
Net Revenues. Net revenues increased $48.7 million or 26.3% to $233.6 million
for fiscal 2000 from $184.9 million for fiscal 1999. Approximately $18.7
million of the increase was attributable to an increase in
23
the number of treatments at existing dialysis facilities, a shift in revenues
by payor and an increase in the average net revenue per treatment to
approximately $253 for fiscal 2000 from $236 for fiscal 1999. Of the remaining
$30.0 million of the increase, approximately $21.7 million resulted from the
increase in ownership of five dialysis facilities and the acquisition of five
dialysis facilities in fiscal 2000 and fiscal 1999. Approximately $5.7 million
was attributable to revenues generated pursuant to de novo facilities opened by
the Company in fiscal 2000 and 1999 and approximately $2.6 million was
attributable to same store growth in the Contract Services business.
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
also reflect the indirect costs of supporting the facilities such as bio-med
and staff education. Patient care costs increased $36.1 million or 27.4% to
$167.7 million for fiscal 2000 from $131.6 million for fiscal 1999.
Approximately $9.8 million of the increase was attributable to the increase in
the number of treatments at the existing dialysis facilities. Of the remaining
increase, $23.0 million is from opening de novo facilities, the increase in
ownership of five dialysis facilities and the acquisition of five dialysis
facilities in fiscal 2000 and 1999. Approximately $2.3 million was attributable
to the patient care costs incurred by the Contract Services businesses.
General and Administrative Expenses. General and administrative expenses
increased $3.6 million or 14.9% to $27.9 million for fiscal 2000 from $24.3
million for fiscal 1999. The increase was attributable to the growth of the
corporate infrastructure, including the expansion of information systems and
increased professional fees.
Special Charges. Approximately $23.0 million of charges were recognized
during fiscal 1999. These amounts included $22.4 million in impairment of long-
lived assets and $600 in severance costs to two executives of the Company
related to amounts that were due under the individuals' employment contract
upon separating from the Company. No special charges were incurred during
fiscal 2000. Exclusive of special charges, income from operations increased
approximately $8.3 million or 74.6% to $19.4 million for fiscal 2000 from $11.1
million for fiscal 1999.
Provision for Bad Debts. Provision for bad debts decreased $1.1 million or
14.9% to $6.3 million for fiscal 2000 from $7.4 for fiscal 1999. The decrease
was due primarily to improvements in the Company's days sales outstanding of
patient receivables by approximately 20 days.
Depreciation and Amortization. Depreciation and amortization increased
approximately $1.8 million or 17.1% to $12.3 million for fiscal 2000 from $10.5
million for fiscal 1999. The increase was due to increased amortization of
goodwill as a result of business acquisitions and to increased depreciation
expense as a result of fixed asset purchases and denovo developments.
Income from Operations. Income from operations increased $31.2 million or
264.4% to income of $19.4 million for fiscal 2000 from a loss of $11.8 million
for fiscal 1999. Accordingly, income from operations as a percentage of net
revenues increased to 8.3% for fiscal 2000 as compared to (6.4)% for fiscal
1999 due primarily to the effect of the special charges recorded in fiscal 1999
and the factors discussed above.
Interest Expense, Net. Interest expense, net increased $2.2 million or 19.8%
to $13.3 million for fiscal 2000 from $11.1 million for fiscal 1999. The
increase was primarily attributable to an increase of approximately $6.0
million in the acquisition line under the Credit Facility, increase in interest
rates over prior year and increased amortization of deferred financing costs
over prior years.
Equity in Earnings of Affiliates. Equity in earnings of affiliates represents
the Company's portion of earnings in unconsolidated joint ventures. The Company
recognized equity in earnings of affiliates of approximately $472 in fiscal
2000, and $586 in fiscal 1999. This decrease is primarily due to the Company's
acquisition of the interest not previously owned in the minority joint ventures
over the last several years.
24
Minority Interests in Earnings. Minority interests in earnings represents the
proportionate equity interests of other partners in the Company's entities that
are not wholly owned. The minority interests in earnings increased
approximately $27 to $870 in fiscal 2000 as compared to $843 in fiscal 1999.
Income Taxes. Income taxes increased approximately $10.1 million to a tax
expense of $3.3 million in fiscal 2000 from a tax benefit of $6.8 million in
fiscal 1999 as a result of the factors discussed above.
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September
30, 1998
Net Revenues. Net revenues increased $37.4 million or 25.4% to $184.9 million
for fiscal 1999 from $147.5 million for fiscal 1998. Approximately $11.8
million of the increase was attributable to an increase in the number of
treatments at existing dialysis facilities, a shift in revenues by payor and an
increase in the average net revenue per treatment to approximately $236 for
fiscal 1999 from $229 for fiscal 1998. Of the remaining $25.6 million of the
increase, approximately $20.6 million resulted from the acquisition of 12
dialysis facilities in fiscal 1999 and fiscal 1998 and the acquisition of
Contract Services businesses in fiscal 1998. Approximately $3.2 million was
attributable to revenues generated pursuant to de novo facilities opened by the
Company in fiscal 1998 and 1999 and approximately $2.4 million was attributable
to same store growth in the contract services business.
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
have been adjusted to also reflect the indirect costs of supporting the
facilities such as bio-med and staff education. Patient care costs increased
$29.0 million or 28.3% to $131.6 million for fiscal 1999 from $102.6 million
for fiscal 1998. Approximately $9.7 million of the increase was attributable to
the increase in the number of treatments at the existing dialysis facilities.
Of the remaining increase, $15.5 million is from the opening of de novo
facilities in fiscal 1998 and 1999 and the acquisition of 12 facilities in
fiscal 1999 and fiscal 1998, and approximately $2.5 million was attributable to
the acquisition of Contract Services businesses in fiscal 1998.
General and Administrative Expenses. General and administrative expenses
increased $1.0 million or 4.3% to $24.3 million for fiscal 1999 from $23.3
million for fiscal 1998. The increase was attributable to the growth of the
corporative infrastructure, including the expansion of information systems,
increased professional fees and increased administrative labor costs.
Special Charges. The Company recorded approximately $23.0 million of charges
during fiscal 1999. These amounts have been expensed as special charges and
include $22.4 million in impairment of long-lived assets and $600 in severance
costs.
The impairment of long-lived assets included (i) a $20.5 million write down
of goodwill and other intangible assets, (ii) a $1.4 million write-off of
advances to, and other assets of, certain of the Company's joint ventures and
(iii) the write-down of $500 of fixed assets to fair value. The write-off of
goodwill and other intangible assets was the result of a deterioration in the
profitability and cash flows of certain acquired operations. The deterioration
was due, in part, to continued contractual adjustments and other reductions in
anticipated revenues. As a result of this deterioration, the Company evaluated
the long-lived assets of effected businesses for impairment to determine the
amount of the assets that were not recoverable. As a result of this evaluation,
the Company recorded a write-down of these assets based upon the amount by
which the carrying value of the assets exceeded their fair values as determined
on a discounted cash flows basis. Certain of the Company's joint ventures
encountered similar deterioration in the current fiscal year. As a result, the
Company recorded a write-off of certain advances to and other assets of these
companies.
25
The severance costs to two executives of the Company related to amounts that
were due under the individuals' employment contract upon separating from the
Company.
Provision for Bad Debts. Provision for bad debts increased $4.7 million or
174.1% to $7.4 million for fiscal 1999 from $2.7 for fiscal 1998. The increase
was due to a deterioration of the Company's days sales outstanding of patient
receivables as well as an overall increase in patient receivables due to
increased treatments.
Depreciation and Amortization. Depreciation and amortization increased
approximately $3.6 million or 52.2% to $10.5 million for fiscal 1999 from $6.9
million for fiscal 1998. The increase was due to increased amortization of
goodwill as a result of business acquisitions (including the purchase of
minority interests) and to increased depreciation expense as a result of fixed
asset purchases and denovo developments.
Income from Operations. Income from operations decreased $23.7 million or
199.2% to a loss of $11.8 million for fiscal 1999 from income of $11.9 million
for fiscal 1998. Accordingly, income from operations as a percentage of net
revenues decreased to (6.4)% for fiscal 1999 as compared to 8.0% for fiscal
1998 due to the factors discussed above.
Interest Expense, Net. Interest expense, net increased $5.2 million or 88.1%
to $11.1 million for fiscal 1999 from $5.9 million for fiscal 1998. The
increase was primarily attributable to a full year of interest expense
recognized on the Senior Subordinated Notes in fiscal 1999 versus only five
months of interest expense recognized in fiscal 1998.
Equity in Earnings of Affiliates. Equity in earnings of affiliates represents
the Company's portion of earnings in unconsolidated joint ventures. The Company
recognized equity in earnings of affiliates of approximately $586 in fiscal
1999, and $1.8 million in fiscal 1998. This decrease is primarily due to the
Company's acquisition of the interest not previously owned in four joint
ventures during fiscal 1999, which were previously minority owned, and the
increase from minority ownership (25%) to majority ownership (75%) in one other
entity.
Minority Interests in Earnings. Minority interests in earnings represents the
proportionate equity interests of other partners in the Company's entities that
are not wholly owned. The minority interests in earnings increased
approximately $327 to $843 in fiscal 1999 as compared to $516 in fiscal 1998.
Income Taxes. Income taxes decreased approximately $10.3 million to a tax
benefit of $6.8 million in fiscal 1999 from a tax expense of $3.5 million in
fiscal 1998 as a result of the factors discussed above.
Liquidity and Capital Resources
The Company requires capital primarily for the acquisition and development of
dialysis centers and Contract Services businesses, the purchase of property and
equipment for existing centers and to finance working capital requirements. At
September 30, 2000, the Company's working capital was $30.5 million as compared
to $34.6 million at September 30, 1999.
The Company's net cash provided by operating activities was $17.4 million for
the twelve months ended September 30, 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 Company's net cash used in investing activities was $19.5
million for the twelve months ended September 30, 2000. The
26
Company's principal sources and uses of cash consist of investing activities
related to the development of five facilities and the expansion of four
existing facilities and the purchase of new equipment and leasehold
improvements for existing dialysis centers and the purchase of four independent
dialysis facilities. Net cash provided by financing activities was
approximately $2.9 million for the twelve months ended September 30, 2000. The
primary sources and uses of cash from financing activities were net borrowings
or repayments under the Credit Facility.
The Company does not have any current material commitments for capital
expenditures.
On June 30, 1999, the Company refinanced its Credit Facility with Harris
Trust and Savings Bank as agent bank, the same commercial bank that provided
the Prior Credit Facility. The new Credit Facility consists of three separate
facilities: (i) the $35.0 million Revolving Credit Facility maturing on June
30, 2002; (ii) $65.0 million Acquisition Credit Facility maturing on June 15,
2005, which includes the requirement to convert all of the borrowings
outstanding thereunder on each of June 30, 2000, 2001 and 2002 to one or more
seven-year term loans with balloon payments due on June 15, 2005 (the "Term
Loans"); and (iii) the $40.0 million Year 2000 Credit Facility, available from
January 1, 2000 through June 30, 2000, to finance government related accounts
receivable which are unpaid due to difficulties related to the year 2000. The
total amount drawn under the Credit Facility may not exceed $140.0 million. The
Credit Facility contains operating and financial covenants, including, without
limitation, requirements to maintain leverage and debt service coverage ratios
and minimum tangible net worth. In addition, the Credit Facility includes
customary covenants relating to the delivery of financial statements, reports,
notices and other information, access to information and properties,
maintenance of insurance, payment of taxes, maintenance of assets, nature of
business, corporate existence and rights, compliance with applicable laws,
including environmental laws, transactions with affiliates, use of proceeds,
limitation on indebtedness, limitations on liens, limitations on certain
mergers and sales of assets, limitations on stock repurchases, and limitation
on debt payments and other distributions including prepayment or redemption of
the Company's Senior Subordinated Notes due 2008. The Credit Facility contains
certain events of default after expiration of applicable grace periods,
including defaults relating to: (i) nonpayment of principal, interest, fees or
other amounts; (ii) violation of covenants; (iii) material inaccuracy of
representations and warranties; (iv) bankruptcy; (v) material judgments; (vi)
certain ERISA liabilities; and (vii) actual or asserted invalidity of any loan
documents.
Effective as of October 8, 1999, December 21, 1999 and March 1, 2000 the new
Credit Facility was amended. In addition to approving certain acquisitions by
the Company, the October amendment permits the Company to capitalize and
provide working capital to certain affiliates of the Company which own or
operate a segment of the business in jurisdictions where, pursuant to the laws
of such jurisdictions, the Company itself is not qualified to own or operate
such segments of the business. The December amendment modified the cash
leverage ratio, fixed charge coverage ratio and definition of EBITDA under the
Credit Facility in connection with the charge recognized by the Company in
fiscal 1999 of approximately $23 million, which charge was taken in connection
with the write down by the Company of goodwill and other intangible assets. The
March amendment adjusted the net worth and rescinded the Y2K Revolving Credit
Commitment. See, "--Results of Operations--Special Charges." In connection with
the December amendment, the Company paid Harris Trust and Savings Bank a fee of
$525,000.
In November 1996, the Company issued notes in the aggregate principal amount
of $7.0 million as part of the purchase price for its acquisition of The
Extracorporeal Alliance. The notes bear interest at a variable rate equal to
the five-year Treasury note rate plus three percent and mature on October 31,
2002.
A significant component of the Company's growth strategy is the acquisition
and development of dialysis centers and the acquisition of Contract Services
businesses. 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
27
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 acquire additional
Contract Services businesses which are not directly dependent on reimbursement
from government agencies. The Company believes that the effect of inflation is
further mitigated by a recent change in current governmental health care laws
that extends 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.
Recent Developments
On November 2, 2000, the Company announced that it had entered into an
Agreement and Plan of Merger, dated November 1, 2000, by and among the Company,
Fresenius Medical Care AG, ("FMC"), Edmund Acquisition Sub, Inc. and certain
stockholders of the Company (the "Merger Agreement"). The Merger Agreement
provides for a merger of the Company with and into Edmund Acquisition Sub, Inc.
While the merger is anticipated by management to be completed in the first
calendar quarter of 2001, because all the conditions of the Merger Agreement
have not been met, the exact timing for consummation of the merger is uncertain
at this time. Therefore, the Company's Form 10-K has been prepared so as to
describe its business in an ongoing manner, thus providing an understanding of
the Company's strategies, business and ongoing obligations as they existed at
the end of its fiscal year ended September 30, 2000 for which this report is
filed. Further information can be found in the Form 8-K filed by the Company
with respect to the Merger Agreement on November 14, 2000.
On November 15, 2000, in connection with the Merger Agreement, FMC announced
a tender offer and consent solicitation for the Company's 9 3/4% Senior
Subordinated Notes due 2008 (the "Notes"). On December 1, 2000, following the
tender by holders possessing a majority of the Notes, the Company and its
subsidiaries which are guarantors under the Indenture, dated May 5, 1998 by and
among the Company, the Subsidiary Guarantors and American National Bank and
Trust Company of Chicago, as trustee (the "Subsidiary Guarantors") executed a
Supplemental Indenture which implements amendments to the Indenture. These
amendments to the Indenture shall be effective upon the later of the
consummation of the transactions under the Merger Agreement or the expiration
of the tender offer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. To
reduce such risk, the Company selectively uses financial instruments. All
hedging transactions are authorized and executed pursuant to regularly reviewed
policies and procedures, which prohibit the use of financial instruments for
trading purposes.
A discussion of the Company's accounting policies for derivative financial
instruments is included in Note 3, Summary of Significant Accounting Policies,
in the notes to the consolidated financial statements, and further disclosure
is included in Note 11, Long-Term Debt.
28
The Company's earnings are affected by changes in interest rates as a result
of its variable rate borrowings under the Credit Facility. In August 2000, the
Company entered into an interest rate cap to reduce the impact of increases in
interest rates on its floating rate debt. The differential received under the
agreement is recognized as an adjustment to interest expense. Based on 2000 and
1999 year-end balances, it is estimated that a 1% increase in interest rates
would not have a material impact on interest expense or income before taxes.
This analysis does not take into effect other changes that might occur in the
economic environment as a whole due to such changes in short-term interest
rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule of the Company are annexed to this
Report. An index to such materials appears on page F-1.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Craig W. Moore.......... 56 Chairman of the Board of Directors, Chief Executive Officer
Arthur M. Morris, M.D... 61 President and Director
Martin P. Fox........... 46 Senior Vice President of Strategic Development and Director
Michael J. Carbon,
M.D.................... 60 Senior Vice President and Director
Paul Zabetakis, M.D..... 53 Executive Vice President and Chief Operating Officer, Dialysis Services
James E. Becks.......... 50 Chief Executive Officer, Contract Services
Lawrence D. Damron...... 54 Chief Financial Officer
Paul Balter, M.D........ 61 Chief Medical Officer, Secretary, Treasurer and Director
Thomas D. Creel......... 53 Vice President of Business Development-Northern U.S. and Director
Alan M. Berry........... 56 Director
George Dunea, M.D....... 67 Director
Ashutosh Gupta, M.D..... 53 Director
Douglas Mufuka, M.D..... 60 Director
Mr. Moore is Chairman of the Board of Directors and Chief Executive Officer
of the Company. He has served in those capacities since 1995. Mr. Moore joined
Everest in 1986 as an Executive Vice President. He holds a Bachelor of Arts in
Business and Finance from Adrian College and completed the Institute for
Management at Northwestern University in 1976. He has worked for U.S. Steel
Corporation, American Hospital Supply Corporation and Baxter Healthcare
Corporation in a variety of management assignments including Division President
of American Micro-Surgery Specialties. He served four years in the U.S. Navy as
a line officer. Mr. Moore is a member of the Board of Directors of Biologic
Systems Corporation.
Dr. Morris is the President and a director of the Company. Dr. Morris joined
Everest in 1971. He received his medical degree from the State University of
New York at Buffalo in 1965 and completed a Fellowship in Renal Disease at
Rush-Presbyterian-St. Luke's Hospital in Chicago in 1971. Dr. Morris was board
certified in Internal Medicine in 1971 and in Nephrology in 1972. He has been
on the Board of Directors of the National Kidney Foundation of Illinois since
1973. From 1979 to 1981, he served as Chairman of the ESRD Network 15. In 1984
Dr. Morris was appointed by Governor Thompson to serve on the State of Illinois
Renal Disease Advisory Council, on which he continues to serve. Dr. Morris is a
Fellow in the American College of Physicians, has been a member of the board of
trustees at West Suburban Hospital Medical Center since 1990. He has been in
private practice since 1971.
Mr. Fox is the Senior Vice President of Strategic Development and a director
of the Company. Mr. Fox joined Everest in 1996. He is a graduate of Northern
Arizona University where he earned a Bachelor of Science in Accounting and is a
Certified Public Accountant. Mr. Fox has over ten years of management
experience in the dialysis industry. He began his career in the dialysis
industry as the Chief Financial Officer of Southwest Kidney Institute and
later, beginning in 1992, was named Chief Executive Officer of HDA. Mr. Fox is
a former treasurer of the National Renal Administrators Association.
Dr. Carbon is the Senior Vice President and a director of the Company. Dr.
Carbon joined Everest in 1979. Dr. Carbon received his M.D. from the University
of Illinois in 1965. He completed his fellowship in both Internal Medicine in
1970 and Nephrology in 1971 from the University of Miami, Miami, Florida.
Dr. Carbon served in the U.S. Army Medical Corps from 1966 to 1968. Dr. Carbon
has been in private practice since 1971 specializing in nephrology and
hypertensive disease. Dr. Carbon has been a board member of
30
Central DuPage Hospital since 1994 and formerly served as president of the
hospital's medical staff. He is chief operating officer of NANI-IL and NANI-IN
and medical director of the Company's Contract Services business.
Dr. Zabetakis is the Executive Vice President and Chief Operating Officer of
the Company's Dialysis Services business with responsibility for operations of
the chronic dialysis centers. Dr. Zabetakis joined Everest in this capacity in
November of 1999. Previously, he had served various other roles with the
Company including Vice-Chairman--Quality Improvement Committee, Medical
Director--Peritoneal Dialysis, and Medical Director for Renal Disease
Management Services. Dr. Zabetakis received his undergraduate degree from
Washington and Jefferson College in Washington, Pennsylvania and received his
Doctorate of Medicine from the University of Tennessee College of Medicine in
Memphis. Dr. Zabetakis completed his Fellowship in Nephrology at Yale
University School of Medicine and is a graduate of the Kellogg Graduate School
of Management's Advanced Executive Program. Dr. Zabetakis also has been a
practicing physician in Nephrology at Lenox Hill Hospital in New York City
where he was also the Associate Chief of Nephrology and the Director of Home
Peritoneal Dialysis.
Mr. Becks is Chief Executive Officer of the Company's Contract Services
business and has served in that capacity since 1996. Mr. Becks joined Everest
in 1989. Mr. Becks is a registered nurse and a graduate of Northwestern
University where he earned a Bachelor of Science Degree. Mr. Becks served in
the U.S. Navy following which he worked for American V. Mueller, a division of
American Hospital Supply Corp., in a variety of sales, marketing, and
management assignments including Vice President of Business Development. Mr.
Becks was previously (from 1989 to 1996) a General Manager of the Company's
Continental Healthcare affiliate.
Mr. Damron is the Chief Financial Officer of the Company. Mr. Damron joined
the Company in June 1999. Mr. Damron received his Bachelor of Arts degree in
economics from the University of Cincinnati and his Masters of Arts degree in
international relations from University of Southern California. Mr. Damron
received his Masters of Business Administration from Harvard University and is
also a Certified Public Accountant. Mr. Damron served as senior accountant at
Price Waterhouse from 1975 to 1980 when he left to join American Hospital
Supply Corporation. Mr. Damron had a number of successively more responsible
positions at American Hospital Supply Corporation, which was acquired by Baxter
International in 1985. Mr. Damron spent 12 years in a number of key management
positions at Baxter International including his last position as Treasurer of
Baxter. Mr. Damron most recently held the position of Senior Vice President,
Finance and Treasurer at Evanston Northwestern Healthcare.
Dr. Balter is the Chief Medical Officer, Secretary/Treasurer and a director
of the Company. He also serves as chairman of the Company's Corporate Quality
Improvement Committee. Dr. Balter joined Everest in 1971. Dr. Balter received
his M.D. from Yale University in 1965 and completed his renal fellowship there
in 1969. He served as a nephrologist in the U.S. Army from 1969 to 1971, and
served in the only hemodialysis unit in Vietnam from 1970 to 1971. Dr. Balter
was board certified in Internal Medicine in 1972 and in Nephrology in 1974.
Dr. Balter specializes in systems applications of quality assurance. He has
been in private practice since 1971.
Mr. Creel has been a member of the board of directors of Everest since 1997.
Mr. Creel received his Bachelor of Arts degree from the University of South
Florida. Following two years in the U.S. Army, Mr. Creel began his sales career
in health care with Parke-Davis Pharmaceutical Co. He later joined Baxter
Healthcare Renal Division where he became Vice President of Sales and Service--
U.S. He was one of the founders of Home Dialysis of America, Inc., where he
served since 1992 as Managing Director of Business Development and Operations.
Since June of 1996, Mr. Creel has been the Vice President of Business
Development--North for Everest.
Mr. Berry has been a member of the board of directors of Everest since 1996.
Mr. Berry received his Bachelor of Science degree in 1966 from the University
of Wisconsin and a Juris Doctor degree in 1969 from Boston University. Mr.
Berry is a Partner in the law firm of Katten Muchin Zavis in Chicago, Illinois,
which he joined in 1974. He currently serves on the Board of Directors of the
National Kidney Foundation of Illinois.
31
Mr. Berry also serves on the board of directors of each of Abrix Group, Health
Care Management Consultants and MedOpSys.
Dr. Dunea has been a member of the board of directors of Everest since 1990.
He received his medical degree from University of Sydney Medical School in 1957
and completed nephrology fellowships at the Cleveland Clinic in 1965 and at
Presbyterian St. Luke's and University of Illinois Hospitals in 1966. Dr. Dunea
was board certified in Internal Medicine in 1973 and in Nephrology in 1974.
Since 1969 he has served as the Chairman of the Department of Nephrology-
Hypertension at the Cook County Hospital, a Professor of Clinical Medicine at
the Chicago campus of the University of Illinois College of Medicine and the
Scientific Director of the Hektoen Institute. In addition to an extensive
background of scientific publications including articles, book chapters and
books, Dr. Dunea serves as the editor of Kidney and the coordinating editor of
International Journal of Artificial Organs. Dr. Dunea is a Fellow in the Royal
College of Physicians (London and Edinburgh) and the Royal Society of Medicine
(London).
Dr. Gupta has been a member of the Board of Directors of the Company since
1987. Dr. Gupta received his medical degree at the University of Delhi in
Delhi, India in 1970, and completed his nephrology fellowship at the University
of Chicago in 1978. Dr. Gupta was board certified in Internal Medicine in 1981
and in Nephrology in 1988. His professional memberships include the American
Society of Nephrology, the International Society of Nephrology and the American
Medical Association. He has been in private practice in Internal Medicine and
Nephrology since 1978. Dr. Gupta is a fellow of the American College of
Physicians and serves as an associate editor of Kidney.
Dr. Mufuka has been a member of the board of directors of Everest since 1987.
He received his medical degree from the State University of New York in
Syracuse, New York in 1973 and completed his Nephrology Fellowship at
Northwestern University Medical Center in 1978. Dr. Mufuka is board certified
in Internal Medicine. His professional memberships include the American Society
of Nephrology, International Society of Nephrology, the American Medical
Association and the American College of Physicians. In addition, Dr. Mufuka is
a current director of WSKC Dialysis Services, Inc. He has been in private
practice since 1978.
There is no family relationship among any of the officers and directors.
Messrs. Creel and Fox are each entitled to a seat on the Board of Directors
pursuant to a Shareholders Agreement. See "Certain Relationships and Related
Transactions--Shareholders Agreements."
32
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the cash
compensation paid by the Company for services rendered during the fiscal years
ended September 30, 2000, 1999 and 1998 to the chief executive officer and the
four other most highly compensated executive officers (the "Named Executive
Officers") of the Company:
Summary Compensation Table for the Fiscal Years Ended September 30
Annual Long Term
Compensation Compensation
------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
--------------------------- ---- -------- ------- ----------- ------------
Craig W. Moore,
Chairman and Chief Executive
Officer.............................. 2000 $430,000(1) $ -- $ 6,935(2)
1999 430,000(1) -- -- 13,104(2)
1998 416,000(1) 62,000 -- 19,540(2)
Lawrence D. Damron(4)
Chief Financial Officer.............. 2000 $241,250 $35,000 -- $ 4,881(7)
1999 61,462 -- 70,000 --
1998 -- -- -- --
Martin Fox,
Executive Vice President and General
Manager.............................. 2000 $217,500(1) $ -- $ 7,067(5)
1999 205,000(1) -- -- 13,104(6)
1998 205,000(1) 19,479 -- 21,242(6)
Thomas Creel,
Vice President of Business
Development-- Northern U.S........... 2000 $205,000(1) $ -- $ 7,434(6)
1999 205,000(1) -- -- 13,056(7)
1998 205,000(1) 19,479 -- 17,583(7)
Paul Zabetakis, M.D.
Executive Vice President and Chief
Operating Officer, Dialysis
Services............................. 2000 $193,725 $ -- -- $ 1,661(3)
1999 -- -- -- --
1998 -- -- -- --
- --------
(1) Does not include compensation for service as a director of the Company.
Director compensation is set forth below.
(2) Includes profit sharing contributions of $0, $8,104 and $15,533 in fiscal
2000, 1999 and 1998, respectively and 401(k) plan matching contributions of
$6,935, $5,000 and $4,007 in fiscal 2000, 1999 and 1998, respectively.
(3) Includes profit sharing contributions of $0 in fiscal 2000 and 401(k) plan
matching contributions of $1,661 in fiscal 2000.
(4) Mr. Damron was hired by the Company as its Chief Financial Officer,
effective June 28, 1999.
(5) Includes profit sharing contributions of $0 $8,104 and $15,533 in fiscal
2000, 1999 and 1998, respectively and 401(k) plan matching contributions of
$7,067, $5,000 and $5,709 in fiscal 2000, 1999 and 1998, respectively.
(6) Includes profit sharing contributions of $0, $8,104 and $15,533 in fiscal
2000, 1999 and 1998, respectively and 401(k) plan matching contributions of
$7,434, $4,952 and $2,050 in fiscal 2000, 1999 and 1998, respectively.
(7) Includes profit sharing contributions of $0 in fiscal 2000, 1999 and 1998,
and 401(k) plan matching contributions of $4,881, $0 and $0 in fiscal 2000,
1999 and 1998 respectively.
33
Certain executive officers of the Company, including Drs. Morris, Carbon and
Balter, are compensated by NANI. The Company pays fees to NANI for medical
director and other services provided by these physicians and other NANI
employees. See "Certain Relationships and Related Transactions--NANI-IL and
NANI-IN."
Director Compensation
The Company has quarterly directors' meetings and pays each of its 10
directors $8,000 per year. Certain directors also provide consulting services
to the Company through NANI. See "Certain Relationships and Related
Transactions--NANI-IL and NANI-IN."
Employment Agreements
The Company and Mr. Moore entered into an employment agreement effective
January 1, 1997 and continuing on a year-to-year basis thereafter, subject to
termination by either party on 48 hours' notice. The agreement provides for an
annual salary of $440,000 in addition to health insurance, disability insurance
and other standard benefits. If the agreement is terminated by the Company for
any reason or by Mr. Moore for any reason upon at least 45 days' prior notice,
Mr. Moore will be entitled to severance pay in the amount of $598,833, as well
as life, health and disability insurance and other benefits for nine months
after the termination date. The agreement contains restrictive covenants that
prohibit Mr. Moore from competing with the Company for a period of two years
following his termination of employment. Pursuant to Company policy, Mr. Moore
is entitled to a personal expense account, funded from a portion of his salary,
to be used for legitimate business expenses, provided that all monies not used
in the account at each year end will be returned to Mr. Moore.
The Company and Mr. Damron entered into an employment agreement dated June
28, 1999. The contract covers a five-year period from the effective date,
subject to prior termination upon the employee's resignation or death (or, at
the option of the Company, upon the employee's permanent disability). The
agreement calls for a base salary at the rate of $235,000 per year (or a
greater amount as determined by the Board in its discretion), in addition to
bonus compensation, insurance and certain other benefits including a possible
success bonus of $400,000 if the Company is sold before September 30, 2002, and
if Mr. Damron is employed by the Company at such time. In connection with his
employment Mr. Damron also received options to purchase 70,000 shares of common
stock of the Company at an exercise price of $13.05 per share. The agreement
also provides for a two-year post termination covenant not to compete.
In connection with the acquisition of Home Dialysis of America, Inc. ("HDA"),
the Company entered into employment agreements with Messrs. Fox and Creel. Each
of these agreements was effective June 20, 1996 and provides for an initial
term of three years, subject to (i) an automatic two-year extension if certain
revenue goals are achieved, and (ii) two-year extensions from time to time at
the option of the Company. Messrs. Fox and Creel are each entitled to receive
an annual salary of $205,000 for the first five years. Mssr. Fox's annual
salary was increased to $230,000 effective March 2000 to compensate for
additional management responsibilities. The agreements provide for a 10% salary
increase if the agreement is extended on the fifth anniversary of its effective
date and a 6% salary increase if the agreement is extended on the seventh or
any later anniversary of the effective date. The agreements also provide that
Messrs. Fox and Creel are entitled to participate in Everest's general bonus
plan as well as a special incentive plan pursuant to which the former
shareholders of HDA (including Messrs. Fox and Creel) in the aggregate may be
entitled to receive up to 2% of Everest's common stock. The agreements provide
for insurance and other benefits commensurate with those generally provided to
officers of the Company. If either of these agreements is terminated: (i) by
the Company without cause (as defined); (ii) due to the employee's permanent
disability; or (iii) by the employee for good reason (as defined), the employee
will be entitled to receive as severance (A) his base salary for the greater of
one year or the then remaining employment period and (B) if the employment
agreement is terminated after the sixth month of any fiscal year, his prorated
bonus for such partial fiscal year; provided, however, that if the agreement is
terminated prior to June 20, 1999 by the Company without cause or by the
employee for good reason, the employee will be entitled to receive his base
salary through June 19, 2001 as
34
well as the amount, if any, payable pursuant to clause (A) above. If an
agreement expires on the fifth anniversary of the effective date and the
Company has not offered the employee an extension, the employee will be
entitled to his base salary for one year following the expiration date, in
addition to any bonus payable in accordance with the preceding sentence. The
agreements contain restrictive covenants that prohibit Messrs. Fox and Creel
from competing with the Company for at least two years following termination of
employment.
The Company and Mr. Becks entered into an employment agreement dated August
10, 1998, covering an employment term extending until November 1, 2001. The
agreement provides for an annual salary of $126,500 (or a greater amount as
determined by the Board), in addition to potential bonus compensation,
insurance and certain other benefits including a possible success bonus of
$150,000 if the Company is sold. In December 2000, the Company amended Mr.
Becks' employment agreement to clarify that the success bonus will be payable
regarding of the closing date if such sale is pursuant to the Merger Agreement.
The agreement also provides for a two-year post termination covenant not to
complete.
The Company and Dr. Zabetakis entered into an employment agreement dated
November 15, 1999, covering an employment term extending until November 15,
2004, subject to prior termination upon the employee's resignation or death
(or, at the option of the Company, upon the employee's permanent disability).
The agreement calls for a base salary at the rate of $225,000 per year (or a
greater amount as determined by the Board in its sole discretion), in addition
to bonus compensation, insurance and other benefits including a possible
success bonus of $200,000 if the Company is sold before September 30, 2002, and
if Dr. Zabetakis is employed by the Company at such time. In connection with
his employment, Dr Zabetakis also received options to purchase 60,000 shares of
common stock of the Company at an exercise price of $13.05 per share. The
agreement also provides for a covenant not to compete extending until two years
from the termination of employment. In November 2000, the Company and Dr.
Zabetakis amended this employment agreement to narrow the scope of activities
covered by the covenant not to compete.
Stock Option Plans
Pursuant to the Company's 1998 Stock Award Plan (the "Plan"), the Company has
granted to certain employees and medical directors options to purchase shares
of the Company's common stock. As of September 30, 2000, options to purchase a
total of 526,500 shares of common stock had been granted and are outstanding
under the Plan at an exercise price of $7.50 per share, options to purchase a
total of 1,111,800 shares of common stock had been granted and are outstanding
under the Plan at an exercise price of $9.10 per share, and options to purchase
a total of 315,119 shares of common stock had been granted under the Plan at an
exercise price of $13.05 per share. Such options vest in four equal increments
on each of the first four anniversaries of their respective grant dates. Such
options expire after a ten-year period, or earlier if an employee is terminated
for cause or voluntarily terminates employment other than through retirement.
The options will become fully exercisable upon termination of employment by
reason of death, disability or retirement or upon a change of control of the
Company. In the case of an employee whose employment is terminated for a reason
other than cause, the Company may in its sole discretion purchase the option
for an amount equal to the aggregate per share fair market value minus the
aggregate per share exercise price.
Option Grants in Last Fiscal Year
There were 60,000 stock options granted by the Company to the Named Executive
Officers during the fiscal year ended September 30, 2000.
35
Fiscal Year-End Option Values
The following table contains information regarding the Named Executive
Officers' unexercised options as of September 30, 2000. None of the Named
Executive Officers exercised any options during the fiscal year ended September
30, 2000:
Number of Shares Underlying Value of Unexercised in-the-
Unexercised Options as of Money Options as of September
September 30, 2000 (#) (1) 30, 2000 ($)
------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Craig W. Moore(2)....... 45,499 5,085 -- (4)
Lawrence D. Damron...... 17,500 52,500 -- (4)
Paul Zabetakis,
M.D.(3)................ -- 60,000 -- (4)
Martin Fox.............. -- -- -- --
Thomas Creel............ -- -- -- --
- --------
(1) These options were originally issued in February 1997 and were subsequently
terminated and replaced by options with identical terms on February 5, 1998
pursuant to the reorganization of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation--
Reorganization" and "Certain Relationships and Related Transactions--Peak."
(2) The options shown for Mr. Moore represent the maximum number of options
indirectly granted to him through Peak Liquidating. The actual number of
options Mr. Moore is entitled to receive will vary depending on the
valuation of certain assets of Peak Liquidating or Peak.
(3) Dr. Zabetakis was hired by the Company as its Executive Vice President and
Chief Operating Officer, Dialysis Services effective November 15, 1999.
(4) Everest is a privately held company. There is no market for its securities,
and no valuation of Everest for the purpose of determining its value as of
September 30, 2000 has been undertaken.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors, consisting of Craig
Moore, Martin Fox and Doctors Morris, Carbon and Balter, recommends to the
Board the policies that govern the annual and long-term compensation of the
executive officers of the Company. Mr. Moore and Mr. Fox do not participate in
decisions affecting their own compensation.
Compensation Policies Toward Executive Officers. The Compensation Committee
aims to provide competitive levels of compensation that relate compensation
with the Company's annual and long-term performance goals, reward above average
corporate performance, recognize individual initiative and achievements, and
assist the Company in attracting and retaining qualified executives. The
Compensation Committee attempts to achieve these objectives through a
combination of base salary, stock options, and cash bonus awards. In making its
determination, the Compensation Committee utilizes outside information to
obtain compensation information concerning comparable companies in the dialysis
and blood services industry.
Base Salary. The base salaries for the Named Executive Officers were governed
by the terms of their respective employment agreements with the Company.
Incentive Stock Options. Stock options are granted to executive officers and
other employees of the Company as a means of providing long-term incentives.
The Compensation Committee believes that stock options encourage increased
performance by the Company's employees, including its officers, and align the
interests of the Company's employees with the interests of the Company's
stockholders. Dr. Paul Zabetakis received 60,000 stock options in fiscal 2000.
Cash Bonus Awards. The Compensation Committee considers on an annual basis
whether to pay cash bonuses to some or all of the Company's employees,
including the Company's executive officers.
36
Chief Executive Officer's Compensation. The base salary for Mr. Moore
($430,000) for fiscal 2000 was governed by the terms of an employment agreement
effective January 1, 1997. See "--Employment Agreements." Mr. Moore received no
stock options or cash bonus during fiscal 2000.
COMPENSATION COMMITTEE
Arthur M. Morris, M.D.
Paul Balter, M.D.
Michael J. Carbon, M.D.
Craig W. Moore
Martin Fox
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of common stock
beneficially owned as of December 27, 2000 by: (i) each person who is known by
the Company to beneficially own more than 5% of the outstanding common stock;
(ii) each director of the Company; (iii) each Named Executive Officer; and (iv)
all directors and executive officers of the Company as a group. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. The number of shares beneficially owned by a person and
the percentage ownership of that person includes shares of common stock subject
to options held by that person that are currently exercisable or exercisable
within 60 days of December 27, 2000.
Number of Percent
Shares of
Name Owned Total
---- --------- -------
Peak Liquidating, L.L.C.(1)(2)(3).................... 2,880,600 21.0%
Arthur M. Morris, M.D.(3)(4)(5)(6)................... 1,966,901 15.3
Paul Balter, M.D.(3)(4)(5)........................... 824,226 6.4
Michael J. Carbon, M.D.(3)(4)(5)..................... 811,043 6.3
George Dunea, M.D. Revocable Trust(3)(4)(5).......... 811,043 6.3
Ashutosh Gupta, M.D.(3)(4)(5)........................ 811,043 6.3
Douglas Mufuka, M.D.(3)(4)(5)........................ 811,043 6.3
Fox-McCarthy Family Limited Partnership,
L.L.P.(7)(8)........................................ 797,500 6.2
AJ BCA, Ltd.(7)(9)................................... 780,000 6.1
Craig W. Moore(3)(4)(10)............................. 615,201 4.8
Thomas Creel(7)...................................... 532,366 4.1
Paul Zabetakis, M.D.(13)............................. 140,000 1.1
James E. Becks(11)................................... 47,100 *
Alan M. Berry(12).................................... -- --
Lawrence D. Damron................................... 17,500 *
All executive officers and directors as a
group(14)(15)....................................... 11,845,566 85.8
- --------
* Less than 1.0%.
(1) The members of Peak Liquidating are Arthur M. Morris, M.D., Paul Balter,
M.D., Michael J. Carbon, M.D., George Dunea, M.D. Revocable Trust,
Ashutosh Gupta, M.D., Douglas Mufuka, M.D., and Craig W. Moore.
(2) Includes options to purchase 880,600 shares which are exercisable within
60 days of December 27, 2000.
(3) Subject to the Shareholders Agreement dated as of November 30, 1997 and
the Restricted Stock Agreement dated as of November 30, 1997. See "Certain
Relationships and Related Transactions--Shareholders Agreements."
(4) Does not include shares beneficially owned by Peak Liquidating, of which
shares the members of Peak Liquidating share voting and dispositive
control and may be deemed to be beneficial owners.
(5) Does not include options to purchase shares indirectly granted through
Peak Liquidating.
(6) Includes 1,000,000 shares held by KC Partners, a nominee of Dr. Morris and
966,901 shares held by the Arthur M. Morris, M.D. Revocable Trust.
38
(7) Subject to the Shareholders Agreement dated as of November 30, 1997. See
"Certain Relationships and Related Transactions--Shareholders Agreements."
(8) The Fox Revocable Trust (the "Fox Trust") is the general partner of Fox-
McCarthy Family Limited Partnership, L.L.P. Martin P. Fox is a trustee of
the Fox Trust.
(9)AJ BCA, Ltd. is a Partnership of which Anthony Unruh is the general
partner.
(10) Includes 1,532 shares held by each of (i) Lauren Moore and (ii) Jeffrey
Moore, and 612,137 shares held by Moore Investments, LLC.
(11) Includes options to purchase 47,100 shares which are exercisable within 60
days of December 27, 2000.
(12) Excludes participations in value of Peak Liquidating to which such person
may be entitled pursuant to an agreement with members of Peak Liquidating.
(13) Includes options to purchase 15,000 shares which are exercisable within 60
days of December 27, 2000.
(14) Includes shares held indirectly through Peak Liquidating.
(15) Includes options to purchase 960,200 shares which are exercisable within
60 days of December 27, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is subject to various actual and potential conflicts of interest
arising out of its relationships and related transactions with the Company's
directors and officers and other entities controlled by them. While the Company
believes these transactions generally provide for financial terms that would be
obtainable from an unaffiliated third party, the agreements and transactions
described below were not the result of arm's-length negotiations.
Peak. In November 1997, in order to simplify its ownership structure and
better position the Company for future growth, the shareholders of the Company
entered into a series of related transactions. See "Management's Discussion and
Analysis--Reorganization" and "Security Ownership of Certain Beneficial Owners
and Management." Peak sold Continental Healthcare, Ltd. ("Continental") to the
Company. See "--Continental Healthcare." The members of Peak (Arthur Morris,
Paul Balter, Michael Carbon, Douglas Mufuka, Ashutosh Gupta, George Dunea and
Craig W. Moore, referred to herein as the "Founding Directors") contributed
their membership interests in Peak to a new limited liability company, Peak
Liquidating, in exchange for all of its outstanding membership interests. Peak
Liquidating contributed all of its interest in Peak to a newly formed
corporation, Everest Healthcare II, Inc. ("EHII"), in exchange for common stock
of EHII. The shareholders of Everest Healthcare Services Corporation other than
Peak exchanged all of their shares for shares of EHII, and Peak Liquidating
distributed to its members approximately 55% of the outstanding common stock of
EHII. Peak was then liquidated. In March 1998, Everest Healthcare Services
Corporation was merged with and into EHII, which changed its name to "Everest
Healthcare Services Corporation."
Peak Notes. Through 1995, the Founding Directors advanced funds to the
Company's predecessor evidenced by promissory notes which the Founding
Directors contributed to Peak in 1995. The Founding Directors also contributed
funds to Peak which were advanced to Everest. The aggregate principal amount of
these advances (the "Peak Notes") was $5,118,809. In connection with the 1997
reorganization, the Peak Notes (together with the note issued in connection
with the purchase of Continental described below) were distributed by Peak to
the Founding Directors individually (in the principal amount of (i) $767,822
each to Drs. Morris, Balter, Carbon, Dunea, Gupta and Mufuka, and (ii) $511,877
to Mr. Moore). The Peak Notes bore interest at the prime rate plus 1% per annum
and matured at various times throughout 1998. The Company repaid the Peak Notes
with a portion of the net proceeds of the Initial Offering. See "Market for
Registrant's Common Equity and Related Stockholder Matters."
NANI-IL and NANI-IN. Nephrology Associates of Northern Indiana, P.C. ("NANI-
IN") and Nephrology Associates of Northern Illinois, Ltd. ("NANI-IL" and,
together with NANI-IN, "NANI") are medical service corporations which employ
physicians and personnel to engage in the business of providing dialysis and
39
dialysis related services. The shareholders of NANI are the Founding Directors,
excluding Mr. Moore. On January 1, 1997, Mr. Moore, who was previously an
employee of NANI, became an employee of the Company.
The Company and NANI-IL have entered into a medical director and
administrative services agreement (the "Administrative Services Agreement").
Under the terms of the Administrative Services Agreement, NANI-IL provides
services to the Company relating to the development and implementation of
medical policies and procedures, as well as medical director services to
certain chronic dialysis facilities operated by the Company and its
subsidiaries. The Company pays NANI-IL an annual consulting fee of $1,284,920,
plus an incentive amount for medical director services not greater than $80,080
(25% of the calculated value of the medical director component) in any year in
the event the medical directors cause the facilities for which they provide
medical director services to meet certain quality, utilization and other
performance measurements. Additionally, individual NANI physicians have their
Everest medical director fees paid directly to NANI. In fiscal 2000, the total
of the above fees paid to NANI-IL was $2,535,716.
Pursuant to a management service agreement (the "Management Agreement"), the
Company provides certain administrative and accounting services to NANI-IL,
including services related to billing and collections. Under the terms of the
Management Agreement, NANI-IL pays the Company an annual fee of $825,000, plus
a fixed fee for each acute treatment billed and administered by the Company on
behalf of NANI-IL. In fiscal 2000, NANI-IL paid the Company $1,600,000 pursuant
to the terms of the Management Agreement.
Each of the above-described agreements between the Company and NANI-IL is for
a period of five years, renewable for consecutive one-year periods thereafter.
After the initial five-year period which will end on October 1, 2002, the
agreements may be terminated upon 90 days' notice by either party. NANI-IL also
has an outstanding loan payable to the Company of approximately $6,811,000 plus
short-term working capital advances of approximately $929,000 outstanding as of
September 30, 2000. The loan payable bears interest at prime plus 1% and is due
on demand.
Pursuant to a lease assigned to the Company in June 1998, the Company leases
2,284 square feet of office space to NANI-IL at an annual rent of $38,348,
payable monthly. The lease term expires in October 2002.
Pursuant to a letter agreement originally dated October 1, 1995, as amended
and restated as of November 30, 1997, the Founding Directors have agreed that
as soon as practicable and as permitted by law, they will cause the business of
providing dialysis services to hospital patients to be sold by NANI-IL to the
Company at fair market value.
Continental Healthcare. On November 30, 1997 Peak, which was wholly owned by
the Founding Directors, sold all of the stock of Continental to the Company for
a promissory note in the amount of $2,090,000 and cash in the amount of
$110,000. The Note was to mature on November 29, 2000 with interest to be paid
at the prime rate plus 1% per annum. The Company repaid such note with a
portion of the net proceeds of the Initial Offering. See "Market for
Registrant's Common Equity and Related Stockholder Matters." Continental owns
and leases dialysis equipment to the Company.
ARE Partnership. The Founding Directors, together with Sandra Gadson and
Thomas Golubski, two shareholders of the Company, are also partners in ARE
Partnership, an Illinois general partnership ("ARE"). Prior to June 1998, ARE
owned real property and improvements which it leased to the Company and certain
of its subsidiaries, and which are used primarily for the corporate
headquarters and certain dialysis facilities. In fiscal 1998 the Company and
its subsidiaries paid ARE $491,519 under the leases. In June 1998, the Company
and its Subsidiaries purchased substantially all of ARE's assets, for an
aggregate purchase price of approximately $4,800,000. In July 1999, one of the
parcels of real property was sold by the Company for a loss of approximately
$70,000.
Three M&L Partnership. Three M&L Partnership, an Illinois general partnership
("3M&L"), owns various properties on which certain dialysis facilities of the
Company and its subsidiaries are located. The
40
partners of 3M&L are Arthur Morris, the President and a director of the
Company, and Robert Muehrcke, a shareholder of the Company. Pursuant to the
terms of the lease arrangements with 3M&L, the Company and its subsidiaries, in
fiscal 2000, collectively paid 3M&L $132,000. All leases are currently in
month-to-month renewal periods.
Security General. An Illinois general partnership, Security General
Partnership ("Security General") is owned collectively by the Founding
Directors and John Bourke, the Company's former Chief Financial Officer.
Security General owns a 6.67% interest in Infinity Insurance, Ltd.,
("Infinity") an entity which provides property and casualty and workers
compensation insurance to the Company and its subsidiaries. The annual premiums
paid by the Company and its subsidiaries to Infinity in the last policy year
were approximately $2,206,000.
Shareholders Agreements. The Shareholders Agreement, dated as of November 30,
1997, by and among EHII, Peak Liquidating, the Founding Directors and Martin
Fox, individually, and as agent for the HDA shareholders, Thomas Creel, Paul
Zabetakis, M.D. and Anthony Unruh (collectively, the "HDA Shareholders"),
established certain rights and restrictions with respect to the management of
the Company and the voting and transfer of the Company's common stock. A five
member voting committee was established consisting of Craig Moore, Arthur
Morris, M.D., Michael Carbon, M.D. and Paul Balter, M.D., and one designee of
the HDA Shareholders, Martin Fox. The members of the Voting Committee, aside
from the designee of the HDA Shareholders, are obligated to vote in accordance
with any other agreements among the Founding Directors, including the Operating
Agreement of Peak Liquidating described below. Decisions of the Voting
Committee are binding upon the remaining shareholders signatory to the
agreement. The agreement also sets forth various share transfer restrictions.
Upon the termination of an HDA Shareholder's employment with the Company, each
share held by such HDA Shareholder is subject to repurchase by, in order of
priority, the other HDA Shareholders, Peak Liquidating, the Founding Directors
and the Company.
Under a Restricted Stock Agreement dated as of November 30, 1997 by and among
the Founding Directors and the Company, and the Operating Agreement of Peak
Liquidating, the Founding Directors have agreed to vote their shares together
with respect to certain corporate transactions or events including mergers,
dispositions, a public offering, other issuances of securities, distributions,
indebtedness and liens, liquidation and related party transactions. The
approval of Dr. Morris is required for any sale of Peak Liquidating to a third
party, or any sale of the Company to a third party for consideration less than
a specified amount. In addition, the approval of Dr. Morris and two other
voting members is required for a merger or consolidation of the Company, a
disposition of more than 10% of its stock, a public offering and certain other
specified events.
All shareholders of the Company, other than Paul Zabetakis, Anthony Unruh and
the Company's directors, are party to one or more restricted stock agreements
which grant the Company a right of first refusal with respect to any proposed
transfer of Company shares by such shareholders. Such restricted stock
agreements also grant the Company a repurchase right upon the occurrence of
certain events. Such restricted stock agreements also contain provisions
requiring the shareholder to cooperate and consent to any sale of the Company
to a third party.
Thomas D. Creel. Pursuant to a redemption agreement effective as of October
19, 1999, the Company redeemed 65,134 shares of common stock formerly held by
Mr. Creel for an aggregate redemption price of approximately $850,000.
Dialysis Specialists of Central Cincinnati, Ltd. Effective February 18, 1999,
the Company's wholly-owned subsidiary, Home Dialysis of America, Inc. ("HDA")
purchased 62.1% of the membership units of Dialysis Specialists of Central
Cincinnati, Ltd. ("DSCCL") for an aggregate purchase price of approximately
$5.5 million. The transaction increased HDA's percentage ownership in DSCCL
from 37.9% to 100%. In connection with the transaction, 9.5% of the membership
units of DSCCL were purchased from S-F Holdings, Inc., which entity is wholly-
owned by a grantor trust, with Sandy Fritzsch as trustee and as sole
beneficiary, for an aggregate purchase price of approximately $845,400. Ms.
Fritzsch is an employee of the Company.
41
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements and schedule (Schedule II; Valuation &
Qualifying Accounts) filed as part of this report are listed in the
accompanying Index to Financial Statements and Schedule.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(b) The exhibits filed as a part of this report are listed in the
accompanying Index to Exhibits.
(c) In November 2000, the Company filed Form 8-K announcing the Company's
proposed merger with Fresenius.
42
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 27th day of
December, 2000.
Everest Healthcare Services
Corporation
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board, December 27, 2000
____________________________________ Chief Executive Officer
Craig W. Moore (principal executive
officer)
/s/ Arthur M. Morris Director December 27, 2000
____________________________________
Arthur M. Morris, M.D.
/s/ Martin P. Fox Director December 27, 2000
____________________________________
Martin P. Fox
/s/ Michael J. Carbon Director December 27, 2000
____________________________________
Michael J. Carbon, M.D.
/s/ Lawrence D. Damron Chief Financial Officer December 27, 2000
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer)
/s/ Paul Balter Director December 27, 2000
____________________________________
Paul Balter, M.D.
/s/ Thomas D. Creel Director December 27, 2000
____________________________________
Thomas D. Creel
/s/ Alan M. Berry Director December 27, 2000
____________________________________
Alan M. Berry
/s/ George Dunea Director December 27, 2000
____________________________________
George Dunea, M.D.
/s/ Ashutosh Gupta Director December 27, 2000
____________________________________
Ashutosh Gupta, M.D.
/s/ Douglas Mufuka Director December 27, 2000
____________________________________
Douglas Mufuka, M.D.
43
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 27th day of
December, 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
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chairman of the Board, Chief December 27, 2000
____________________________________ Executive Officer
Craig W. Moore (principal executive
officer)
/s/ Lawrence D. Damron Chief Financial Officer December 27, 2000
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer) and a Director
/s/ Paul Balter Director December 27, 2000
____________________________________
Paul Balter
44
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 27th day of
December, 2000.
Acute Extracorporeal Services,
L.L.C.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer December 27, 2000
____________________________________ (principal executive
Craig W. Moore officer)
/s/ Lawrence D. Damron Chief Financial Officer December 27, 2000
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer)
Home Dialysis of America, Inc.
/s/ Craig W. Moore Sole Member December 27,
By:____________________________ 2000
Craig W. Moore Chairman and
Chief Executive Officer
45
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 27th day of
December, 2000.
Everest Healthcare Texas, L.P.
/s/ Craig W. Moore
By: _____________________________
Craig W. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer December 27, 2000
____________________________________ (principal executive
Craig W. Moore officer)
/s/ Lawrence D. Damron Chief Financial Officer December 27, 2000
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer)
North Buckner Dialysis Center, Inc.
/s/ Craig W. Moore General Partner December 27,
By:____________________________ 2000
Craig W. Moore Chairman and
Chief Executive Officer
46
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 27th day of
December, 2000.
Northern New Jersey Dialysis, L.L.C.
/s/ Craig W. Moore
By: _________________________________
Craig W. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Craig W. Moore Chief Executive Officer December 27, 2000
____________________________________ (principal executive
Craig W. Moore officer)
/s/ Lawrence D. Damron Chief Financial Officer December 27, 2000
____________________________________ (principal financial
Lawrence D. Damron officer and accounting
officer)
Everest Healthcare Services Corporation
/s/ Craig W. Moore Sole Member December 27,
By: ___________________________ 2000
Craig W. Moore
Chairman and Chief Executive
Officer
47
EXHIBIT INDEX
EXHIBIT
NO.
-------
*2.1 Plan and Agreement of Merger dated June 28, 1999 by and
between Ohio Valley Dialysis Centers, Inc., Northwest Indiana
Dialysis Centers, Inc. and Lake Avenue Dialysis Centers, Inc.
*2.2 Certificate of Merger and Agreement of Merger dated September
30, 1999 by and between Home Dialysis of Fairfield, Inc., Home
Dialysis of Columbus, Inc., Home Dialysis of Dayton, Inc. and
Dialysis Specialists of Central Cincinnati, Ltd.
*2.3 Agreement and Plan of Merger dated October 31, 1999 by and
between North Buckner Dialysis Center, Inc., Hemo Dialysis of
Amarillo, LLC, Dialysis Specialists of South Texas, LLC,
Amarillo Acute Dialysis Specialists, LLC and Dialysis
Specialists of Corpus Christi, LLC.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-laws of the Company, as amended.
*3.3 Articles of Incorporation of Con-Med Supply Company, Inc.
*3.4 By-laws of Con-Med Supply Company, Inc.
*3.5 Articles of Incorporation of Continental Health Care, Ltd.
*3.6 By-laws of Continental Health Care, Ltd.
*3.7 Articles of Incorporation of DuPage Dialysis, Ltd.
*3.8 By-laws of DuPage Dialysis, Ltd.
*3.9 Certificate of Incorporation of Everest Management, Inc.
*3.10 By-laws of Everest Management, Inc.
*3.11 Articles of Incorporation of Home Dialysis of America, Inc.
*3.12 By-laws of Home Dialysis of America, Inc.
*3.13 Articles of Incorporation of Home Dialysis of Dayton, Inc.
*3.14 By-laws of Home Dialysis of Dayton, Inc.
*3.15 Articles of Incorporation of Mercy Dialysis Center Inc.
*3.16 By-laws of Mercy Dialysis Center Inc.
*3.17 Articles of Incorporation of New York Dialysis Management,
Inc.
*3.18 By-laws of New York Dialysis Management, Inc.
*3.19 Certificate of Incorporation of North Buckner Dialysis Center,
Inc.
*3.20 By-laws of North Buckner Dialysis Center, Inc.
*3.21 Articles of Incorporation of Ohio Valley Dialysis Center,
Inc.(1)
*3.22 By-laws of Ohio Valley Dialysis Center, Inc.(1)
*3.23 Articles of Incorporation of WSKC Dialysis Services, Inc.
*3.24 By-laws of WSKC Dialysis Services, Inc.
*3.25 Certificate of Incorporation of Everest New York Holdings,
Inc.
*3.26 By-laws of Everest New York Holdings, Inc.
*3.27 Certificate of Incorporation of Everest One IPA, Inc.
*3.28 By-laws of Everest One IPA, Inc.
48
EXHIBIT
NO.
-------
*3.29 Certificate of Incorporation of Everest Two IPA, Inc.
*3.30 By-laws of Everest Two IPA, Inc.
*3.31 Certificate of Incorporation of Everest Three IPA, Inc.
*3.32 By-laws of Everest Three IPA, Inc.
*3.33 Certificate of Formation of Acute Extracorporeal Services,
L.L.C.
*3.34 Articles of Incorporation of Home Dialysis of Fairfield,
Inc.(2)
*3.35 Code of Regulations of Home Dialysis of Fairfield, Inc.(2)
*3.36 Certificate of Incorporation of Dialysis Specialists of Tulsa,
Inc.
*3.37 By-laws of Dialysis Specialists of Tulsa, Inc.
*3.38 Certificate of Formation of Northern New Jersey Dialysis,
L.L.C.
*3.39 Certificate of Incorporation of Everest Healthcare Texas
Holding Corp.
*3.40 By-laws of Everest Healthcare Texas Holding Corp.
*3.41 Certificate of Limited Partnership of Everest Healthcare
Texas, L.P.
*3.42 Limited Partnership Agreement of Everest Healthcare Texas,
L.P.
*4.1 Indenture dated as of May 5, 1998, among the Company, the
Subsidiary Guarantors and American National Bank and Trust
Company of Chicago, as Trustee.
*4.2 Purchase Agreement dated April 30, 1998, among the Company,
the Subsidiary Guarantors and BT Alex. Brown Incorporated.
*4.3 Registration Rights Agreement dated May 5, 1998, among the
Company, the Subsidiary Guarantors and BT Alex. Brown
Incorporated.
*4.4 Form of Exchange Note (included in Exhibit 4.1).
*4.5 Form of Guarantee (included in Exhibit 4.1).
*4.6 Second Amended and Restated Credit Agreement dated as of May
18, 1998, among the Company, Harris Trust and Savings Bank,
and the Lenders identified therein.
*4.7 Revolving Credit Note, between the Company and Harris Trust
and Savings Bank.
*4.8 Acquisition Financing Note, between the Company and Harris
Trust and Savings Bank.
*4.9 Supplemental Revolving Credit Note, between the Company and
Harris Trust and Savings Bank.
*4.10 Amended and Restated Security Agreement, by and among the
Company, the Debtors (as defined therein) and Harris Trust and
Savings Bank.
*4.11 Amended and Restated Guaranty Agreement, by and among the
Guarantors (as defined therein) and Harris Trust and Savings
Bank.
*4.12 Amended and Restated Pledge Agreement, by and among the
Company, the Pledgors (as defined therein) and Harris Trust
and Savings Bank.
*4.13 Supplemental Indenture dated as of June 18, 1998, between
Everest New York Holdings, Inc. and American National Bank and
Trust Company of Chicago, as trustees (the "Trustee").
*4.14 Supplemental Indenture dated as of June 18, 1998, between
Everest One IPA, Inc., and the Trustee.
*4.15 Supplemental Indenture dated as of December 1, 1998, between
Everest Two IPA, Inc. and the Trustee.
49
EXHIBIT
NO.
-------
*4.16 Supplemental Indenture dated as of December 1, 1998, between
Everest Three IPA and the Trustee.
*4.17 Supplemental Indenture dated as of December 1, 1998, between
Acute Extracorporeal Services, L.L.C. and the Trustee.
*4.18 Supplemental Indenture dated as of February 28, 1999, between
Dialysis Specialists of Central Cincinnati, Ltd. and the
Trustee.
*4.19 Supplemental Indenture dated as of March 1, 1999, between Home
Dialysis of Fairfield, Inc. and the Trustee.
*4.20 Supplemental Indenture dated as of March 1, 1999, between Home
Dialysis of Columbus, Inc. and the Trustee.
*4.21 Third Amendment to Second Amended and Restated Credit
Agreement.
*4.22 Supplemental Indenture dated as of April 30, 1999 between
Dialysis Specialists of Tulsa, Inc. and the Trustee.
*4.23 Supplemental Indenture dated as of June 30, 1999 between
Northern New Jersey Dialysis, L.L.C. and the Trustee.
*4.24 Amended and Restated Credit Agreement.
*4.25 Supplemental Indenture dated as of October 31, 1999 between
Everest Healthcare Texas, L.P., and American National Bank and
Trust Company of Chicago, as Trustee.
*4.26 Supplemental Indenture dated as of October 31, 1999 between
Everest Healthcare Texas Holding Corp. and American National
Bank and Trust Company of Chicago, as Trustee.
*4.27 First Amendment to Amended and Restated Credit Agreement dated
as of October 8, 1999.
*4.28 Second Amendment to Amended and Restated Credit Agreement
dated as of December 21, 1999.
4.29 Third Amendment to Amended and Restated Credit Agreement.
*9 Restricted Stock Agreement dated as of November 30, 1997.
*10.1 Employment Agreement with Craig W. Moore dated January 1,
1997.
*10.2 Employment Agreement with Martin Fox dated June 20, 1996.
*10.3 Employment Agreement with Thomas Creel dated June 20, 1996.
*10.4 Stock Award Plan dated January 15, 1997.
*10.5 Peak Liquidating, L.L.C. Operating Agreement dated November
30, 1997.
*10.6 Administrative Services Agreement dated October 1, 1997,
between the Company and NANI-IL.
*10.7 Management Agreement dated October 1, 1997, between the
Company and NANI-IL.
*10.8 Shareholders Agreement dated as of November 30, 1997.
*10.9 Form of Individual Restricted Stock Agreements.
*10.10 Agreement to Provide Management Services for Dialysis
Facilities.
*10.11 Agreement to Amend and Not-to-Compete.
*10.12 Amendment No. 3 to the Agreement to Provide Management
Services for Dialysis Facilities.
50
EXHIBIT
NO.
-------
*10.13 Medical Asset Purchase Agreement.
*10.14 Employment and Non-Competition Agreement with James E. Becks
dated August 10, 1998.
*10.15 Employment and Non-Competition Agreement with Nicki M. Norris
dated August 10, 1998.
*10.16 1998 Stock Award Plan.
*10.17 Employment Agreement of Lawrence D. Damron.
*10.18 Employment Agreement effective November 15, 1999 by and
between Paul Zabetakis, M.D. and the Company.
21 Subsidairies of the Company.
27 Financial Data Schedule.
- --------
*Previously filed with the Securities and Exchange Commission as an Exhibit
incorporated herein by reference.
(1) The name of Ohio Valley Dialysis Center, Inc. was changed to Everest
Healthcare Indiana, Inc.
(2) The name of Home Dialysis of Fairfield, Inc. was changed to Everest
Healthcare Ohio, Inc.
51
EVEREST HEALTHCARE SERVICES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1998, 1999 and 2000
Report of Independent Auditors.............................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Everest Healthcare Services Corporation
We have audited the accompanying consolidated balance sheets of Everest
Healthcare Services Corporation and subsidiaries (the Company) as of September
30, 1999 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Everest Healthcare Services Corporation and subsidiaries at September 30,
1999 and 2000, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Chicago, Illinois
December 8, 2000
F-2
EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
September 30,
------------------
1999 2000
-------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents................................ $ 3,381 $ 4,222
Patient accounts receivable, less allowance of $11,119
and $9,869.............................................. 47,411 54,440
Refundable income taxes.................................. 3,008 2,150
Other receivables........................................ 3,006 2,248
Medical supplies inventories............................. 3,542 4,493
Deferred income taxes.................................... 5,150 3,596
Prepaid expenses and other............................... 311 607
-------- --------
Total current assets................................... 65,809 71,756
Property and equipment, net................................ 31,665 38,321
Goodwill, net.............................................. 73,448 76,618
Deferred financing costs, net.............................. 6,563 5,770
Other intangible assets, net............................... 2,671 3,615
Investments in and advances to affiliated companies........ 8,902 8,773
Deferred income taxes...................................... 5,998 6,888
Other assets............................................... 1,217 1,190
-------- --------
$196,273 $212,931
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable......................................... $12,824 $ 19,021
Accrued liabilities...................................... 17,206 17,285
Current portion of long-term debt........................ 801 4,760
Current portion of capital lease obligations............. 367 154
-------- --------
Total current liabilities.............................. 31,198 41,220
Long term debt, less current portion ...................... 121,653 126,223
Capital lease obligations, less current portion............ 402 159
Minority interests......................................... 1,735 2,288
Stockholders' equity:
Common stock, $.001 par value, 20,000,000 shares
authorized; 12,841,414 shares issued and outstanding.... 13 13
Additional paid-in capital............................... 55,171 54,534
Accumulated deficit...................................... (13,899) (11,506)
-------- --------
Total stockholders' equity............................. 41,285 43,041
-------- --------
$196,273 $212,931
======== ========
See notes to consolidated financial statements.
F-3
EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
Years ended September 30,
----------------------------
1998 1999 2000
-------- -------- --------
Net revenues.................................... $147,475 $184,918 $233,563
Operating expenses:
Patient care costs............................ 102,644 131,634 167,698
General and administrative.................... 23,286 24,328 27,868
Special charges............................... -- 22,959 --
Provision for bad debts....................... 2,727 7,360 6,302
Depreciation and amortization................. 6,927 10,479 12,285
-------- -------- --------
Total operating expenses.................... 135,584 196,760 214,153
-------- -------- --------
Income (loss) from operations................... 11,891 (11,842) 19,410
Nonoperating income (expense):
Interest expense.............................. (7,884) (12,567) (14,299)
Interest income............................... 1,952 1,483 971
Equity in earnings of affiliates.............. 1,784 586 472
Minority interests in earnings................ (516) (843) (870)
-------- -------- --------
(4,664) (11,341) (13,726)
-------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting................. 7,227 (23,183) 5,684
Income tax expense (benefit).................... 3,541 (6,827) 3,291
-------- -------- --------
Income (loss) before cumulative effect of change
in accounting.................................. 3,686 (16,356) 2,393
Cumulative effect of change in accounting ...... -- 615 --
-------- -------- --------
Net income (loss)............................... $ 3,686 $(16,971) $ 2,393
======== ======== ========
See notes to consolidated financial statements.
F-4
EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share and per share data)
Retained
Additional Earnings
Common Paid-In (Accumulated Equity
Stock Capital Deficit) Interests Total
------ ---------- ------------ --------- -------
Balance at September 30,
1997...................... $-- $ -- $ -- $ 32,998 $32,998
Distributions to members... -- -- -- (7,808) (7,808)
Net income October 1, 1997
to November 30, 1997...... -- -- -- 614 614
Reorganization............. 9 25,795 -- (25,804) --
Acquisition of minority
interests................. 4 26,606 -- -- 26,610
Issuance of common stock
for acquisitions.......... -- 2,770 -- -- 2,770
Net income December 1, 1997
to September 30, 1998..... -- -- 3,072 -- 3,072
---- ------- -------- -------- -------
Balance at September 30,
1998...................... 13 55,171 3,072 -- 58,256
Net loss................... -- -- (16,971) -- (16,971)
---- ------- -------- -------- -------
Balance at September 30,
1999...................... 13 55,171 (13,899) -- 41,285
Redemption of common
stock..................... -- (850) -- -- (850)
Issuance of common stock... -- 213 -- -- 213
Net income................. -- -- 2,393 -- 2,393
---- ------- -------- -------- -------
Balance at September 30,
2000...................... $ 13 $54,534 $(11,506) $ -- $43,041
==== ======= ======== ======== =======
See notes to consolidated financial statements.
F-5
EVEREST HEALTHCARE SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except share and per share data)
Years ended September 30,
-----------------------------
1998 1999 2000
--------- -------- --------
Operating activities
Net income (loss).............................. $ 3,686 $(16,971) $ 2,393
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for bad debts...................... 2,727 7,360 6,302
Depreciation and amortization................ 6,927 10,479 12,285
Amortization of deferred financing costs..... 466 1,418 1,318
Special charges.............................. -- 22,959 --
Cumulative effect of change in accounting.... -- 615 --
Deferred income taxes........................ (1,760) (10,163) 664
Equity in earnings of affiliates............. (1,784) (586) (472)
Minority interests in earnings............... 516 843 870
Changes in operating assets and liabilities
(net of effect of acquisitions):
Patient and other accounts receivable...... (13,550) (1,981) (11,664)
Medical supply inventories, prepaid
expenses, and other assets................ (33) (8,159) (1,079)
Accounts payable, accrued liabilities, and
other liabilities......................... 10,575 541 6,818
--------- -------- --------
Net cash provided by operating activities...... 7,770 6,355 17,435
Investing activities
Capital expenditures........................... (12,164) (6,888) (11,267)
Acquisition of intangible assets............... (19,507) -- (615)
Acquisition of businesses, net of cash
acquired...................................... (17,371) (26,158) (7,444)
(Increase) decrease in amounts due from
affiliates.................................... (3,954) 6,569 (131)
--------- -------- --------
Net cash used in investing activities.......... (52,996) (26,477) (19,457)
Financing activities
Proceeds from long term debt................... 191,531 60,316 41,512
Payments on long term debt..................... (129,194) (46,954) (36,675)
Payments on capital lease obligations.......... (766) (516) (456)
Deferred financing costs....................... (5,676) (1,869) (525)
Distributions to members....................... (600) -- --
Proceeds from sale of common stock............. -- -- 213
Distributions to minority shareholders......... -- -- (356)
Purchase of common stock for treasury.......... -- -- (850)
--------- -------- --------
Net cash provided by financing activities...... 55,295 10,977 2,863
--------- -------- --------
Increase (decrease) in cash and cash
equivalents................................... 10,069 (9,145) 841
Cash and cash equivalents at beginning of
year.......................................... 2,457 12,526 3,381
--------- -------- --------
Cash and cash equivalents at end of year....... $ 12,526 $ 3,381 $ 4,222
========= ======== ========
See notes to consolidated financial statements.
F-6
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1999 and 2000
(in thousands, except for share and per share data)
1. Organization
Peak Healthcare, L.L.C. (Peak) was formed, as a limited liability company, on
October 1, 1995. Effective November 30, 1997, Peak was reorganized whereby the
following transactions occurred simultaneously. The members of Peak contributed
all of their interests in Peak for an equal number of membership interests in
Peak Liquidating, L.L.C. (Peak Liquidating), a newly formed limited liability
company. The operating agreement and number and classes of interests of Peak
Liquidating were identical to Peak. Upon the exchange, Peak Liquidating, the
sole member of Peak, contributed its interests in Peak for shares of common
stock of Everest Healthcare II, Inc, (Everest II) a newly-formed subchapter C
Corporation. The number of shares of common stock of Everest II received by
Peak Liquidating was equal to the number of shares of Everest held by Peak. The
number and class of authorized shares of Everest II upon formation was
identical to that of Everest. Following the exchange, Peak was liquidated. Upon
the consummation of these transactions, Everest II issued shares of common
stock, representing approximately 30% of the shares of the Company, to the
minority interest holders in Everest in exchange for their shares of Everest
common stock. The acquisition of minority interest was treated as a purchase in
accordance with generally accepted accounting principles and goodwill of
approximately $12,400 was recognized. Upon the consummation of these
transactions, Everest became a wholly owned subsidiary of Everest II. In March
1998, Everest was merged into Everest II. Upon the merger, Everest II (the
surviving entity) changed its name to Everest Healthcare Services Corporation.
All references hereinafter to Everest or the Company refer to Everest
Healthcare Services Corporation, its subsidiaries and its predecessors.
2. Nature of Business
The Company provides dialysis services to patients with chronic kidney
failure, also known as end-stage renal disease ("ESRD"). As of September 30,
2000, the Company provided dialysis and ancillary services to approximately
6,700 patients through 74 outpatient dialysis centers in 11 states. In addition
to its outpatient dialysis center operations, the Company provides acute
dialysis services through contractual relationships with 34 hospitals in five
states. The Company also operates a business providing extracorporeal services
through contractual relationships with 67 hospitals in 13 states.
3. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts and transactions
of Everest Healthcare Services Corporation and its subsidiaries. All
intercompany accounts and transactions are eliminated in consolidation. The
Company also performs certain administrative services under management
agreements with affiliated and unaffiliated entities. The Company does not have
a controlling financial interest in the entities for which it has management
contracts and, as such, the Company does not consolidate these entities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Medical Supplies Inventories
Medical supplies inventories consist of drugs, supplies, and parts used in
treatments and are stated at the lower of cost or market. Cost is determined
principally on a first in, first out (FIFO) basis.
F-7
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. Medical
equipment and furniture and fixtures are depreciated over five to ten years.
Buildings are depreciated over 40 years. Leasehold improvements are amortized
over the respective lease terms or the service lives of the improvements,
whichever is shorter. Depreciation expense was $4,213, $6,610 and $8,463 for
the years ended September 30, 1998, 1999 and 2000, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair
value of the net assets acquired in the Company's business combinations. The
amounts are being amortized over the estimated remaining economic lives of 25
years. Accumulated amortization of goodwill amounted to approximately $7,032
and $10,487 at September 30, 1999 and 2000, respectively.
Other Intangible Assets
Other intangible assets is comprised primarily of covenants not to compete.
The covenants not to compete are being amortized over the periods of the
agreements (See Note 9). Accumulated amortization of other intangible assets
was approximately $224 and $727 at September 30, 1999 and 2000, respectively.
Deferred Financing Costs
The costs of obtaining financing are capitalized and are being amortized as
interest expense over the term of the related financing using a method which
approximates the interest method. Accumulated amortization was $893 and $2,210
as of September 30, 1999 and 2000, respectively.
Income Taxes
Deferred taxes have been recognized for the tax consequences of temporary
differences by applying the enacted statutory income tax rates applicable to
future years of differences between the financial statement carrying amounts
and the tax basis of the existing assets and liabilities. A valuation allowance
is provided for any deferred tax asset for which it is more likely than not
that the asset will not be realized. Changes in the valuation allowance are
recognized as a component of income.
Stock Options
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). In accordance with APB 25, compensation expense is recognized based
upon the excess of fair value of the underlying stock over the option exercise
price on the measurement date, the date at which both the exercise price and
the number of shares to be issued are known. The Company has elected to
continue to measure compensation expense under the provisions of APB 25;
however, in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" (SFAS 123), an estimate of the
fair value of the stock options has been made by the Company to determine the
pro forma effect on earnings had the provisions of SFAS 123 been applied in the
financial statements (see Note 14).
Revenue Recognition
Net revenue is recorded at the estimated net realizable amount from Medicare,
Medicaid, commercial insurers and other third-party payors for services
rendered and includes estimated revenue adjustments due to
F-8
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
future audits, reviews and investigations. Estimated revenue adjustments are
recorded in the period the related services are rendered and such amounts are
adjusted in future periods as adjustments become known or as years are no
longer subject to audits, reviews and investigations. The Medicare and Medicaid
programs reimburse the Company at amounts that are different from the Company's
established rates. Contractual adjustments are recorded under these programs
for the difference between the amounts billed for these services and the
amounts that are reimbursable by third-party payors. A summary of the basis for
reimbursement with these payors follows:
Medicare. The Company is reimbursed by the Medicare program predominantly on
a prospective payment system for dialysis services. Under the prospective
payment system, each facility receives a composite rate per treatment that is
adjusted to account for geographic differences in the cost of labor. Drugs and
other ancillary services are reimbursed on a fee for service basis.
Medicaid. Medicaid is a state administered program with reimbursements
varying by state. The Medicaid programs administered in each state, in which
the Company operates, reimburse the Company predominantly on a prospective
payment system for dialysis services rendered.
Other Payors. Other payments from patients, commercial insurers and other
third-party payors are received pursuant to a variety of reimbursement
arrangements, which are generally higher than those payments received from the
Medicare and Medicaid programs.
Reimbursements from Medicare and Medicaid at established rates approximated
55.1%, 57.2% and 56.4% of net revenues for the years ended September 30, 1998,
1999 and 2000, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Laws & regulations covering the Medicare and Medicaid programs, are
extremely complex. Accordingly, there is at least a reasonable possibility that
recorded estimates will change by a material amount in the near term. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents approximates fair value. The carrying amounts reported in the
Company's balance sheets for variable-rate long-term debt approximate fair
value, as the underlying long-term debt instruments are comprised of notes that
are repriced on a short-term basis. The carrying amounts of the amounts due to
and from affiliated companies bear interest at prime plus 1% and approximate
fair value. The fair value of the Company's 9 3/4% Senior Subordinated Notes,
Series B was $86 million at September 30, 2000 based upon trading in the public
debt market.
Long-Lived Assets
The Company evaluates its long-lived assets (including goodwill) on an
ongoing basis. Identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
related asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to future
undiscounted cash flows expected to be generated by the asset. If the asset is
determined to be impaired, the impairment recognized is measured by the amount
by which the carrying value of the asset exceeds its fair value as determined
on a discounted cash flows basis.
F-9
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
The Company derives a significant portion of its revenues from Medicare and
Medicaid (or comparable state benefits) and as such, a significant portion of
patient accounts receivable is from those payors. The Company is reimbursed for
dialysis services primarily at fixed rates established in advance under the
Medicare End-Stage Renal Disease Program. All of the states in which the
Company operates provide Medicaid or comparable benefits to qualified
recipients. The Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretation of policy and
government funding restrictions, all of which may have the effect of decreasing
program payments. The Company believes that risks associated with the Medicare
and Medicaid programs are related to future revenues and that the concentration
of credit risk within current patient accounts receivable is limited.
At September 30, 1999 and 2000, the Company maintained cash deposits with
certain financial institutions which were in excess of federally insured
limits.
Retrospectively Rated Insurance Policy
The Company is insured under a retrospectively rated policy of a
multiemployer captive insurance company for property, casualty, workers
compensation and professional liability coverage. Future claims are accrued
based on the captive insurance company's experience to date.
New Accounting Standards
Effective October 1, 1998, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities (SOP 98-5)." SOP 98-5 requires
that costs related to start up activities be expensed as incurred. Prior to
adoption of SOP 98-5, the Company capitalized certain external costs related to
the establishment of new dialysis facilities. The effect of adoption of SOP 98-
5 was to record a charge for the cumulative effect of an accounting change of
$615 in fiscal 1999, to expense costs that had been previously capitalized.
There were no income tax implications to the write-off as these amounts are not
deductible for income tax purposes.
In March, 1998, the AICPA issued 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. As a result of adopting SOP
98-1, $1.66 million of software costs were capitalized in the year ended
September 30, 2000, resulting in an increase of net income of $687.
Pending Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (as amended by
Statement No. 137, Accounting for Derivative Instruments and Hedging Activities
- -- Deferral of the Effective Date of FASB Statement No. 133 issued June 1999,
and amended by Statement No. 138, Accounting for certain Derivative Instruments
and certain Hedging Activities-- An amendment to FASB Statement 133 issued June
2000), effective for periods beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated a part of a hedge and, if it is, the type of hedge
transaction. Adoption of SFAS No. 133 will not have a significant effect on the
Company's results of operations or its financial position. The Company is
required to adopt SFAS No. 133 on October 1, 2000.
F-10
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest Rate Cap Agreement
The Company purchased an interest-rate cap agreement in August 2000 that is
designed to limit its exposure to increasing interest rates on a portion of its
term loan under the Credit Facility through August 2003. The interest rate cap
entitles the Company to receive a payment from the counterparty equal to the
excess, if any, of the hypothetical interest expense (strike price) on the
specified notional amount ($10 million) at a current market interest rate over
an amount specified in the agreement (7.0%). The only amount the Company is
obligated to pay to the counterparty is a yearly premium. The interest rate
index specified by the agreement has been and is expected to be highly
correlated with the interest rate the Company incurs on the term loan. Payments
to be received as a result of the specified interest rate index exceeding the
strike price are accrued in other assets and are recognized as a reduction of
interest expense (the accrual accounting method). The cost of these agreements
is included in other assets and amortized to interest expense ratably during
the life of the agreement. The fair value of the interest rate cap, if the
Company were to terminate the agreements, was not material at September 30,
2000.
Reclassifications
Certain reclassifications have been made to prior years' financial statements
to conform to the 2000 presentation.
4. Net Revenues
The Company provides dialysis and perfusion services to certain patients
under government-sponsored programs such as Medicare and Medicaid, as well as
other insurance reimbursement arrangements. Provision has been made in the
financial statements for the estimated contractual adjustment, representing the
difference between the Company's standard charges for services and the
estimated payments from the various third-party payors. Gross and net patient
service revenues for the years ended September 30 include the following:
1998 1999 2000
-------- -------- --------
Medicare/Medicaid............................. $ 81,406 $105,840 $131,793
Other payors.................................. 77,328 103,289 134,245
-------- -------- --------
Gross revenues................................ 158,734 209,129 266,038
Contractual allowances........................ 14,144 26,736 35,059
-------- -------- --------
Net patient revenues.......................... 144,590 182,393 230,979
Management fee revenues....................... 2,885 2,525 2,584
-------- -------- --------
Total net revenues............................ $147,475 $184,918 $233,563
======== ======== ========
5. Investments In and Advances to Affiliated Companies
The Company uses the equity method of accounting for its investments in the
common stock of various companies. Investments in these companies at September
30, 1999, and 2000, amounted to approximately $868 and $625, respectively.
Additionally, the Company had approximately $8,034 and $8,148 of advances due
from affiliates as of September 30, 1999 and 2000, respectively (see Note 15).
The percentages of ownership in these companies range from 10% to 50%.
Aggregate balance sheet information of these companies at September 30 is as
follows:
1999 2000
------ ------
Current assets............................................. $3,674 $2,825
Noncurrent assets.......................................... 1,285 1,090
Current liabilities........................................ 1,062 1,237
Noncurrent liabilities..................................... 2,106 1,644
F-11
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aggregate statement of income information of these companies is as follows
for the year ended September 30:
1998 1999 2000
------- ------- -------
Net revenues..................................... $24,063 $10,341 $11,077
Income from operations........................... 4,466 2,924 3,515
Net income ...................................... 3,473 869 1,832
6. Business Combinations
In January 1998, the Company acquired the remaining outstanding equity
interests in Hemo Dialysis of Amarillo, LLC (Amarillo), an outpatient and home
dialysis facility located in Amarillo, Texas. Prior to the acquisition, the
Company owned a 30% interest in Amarillo and accounted for the investment under
the equity method of accounting. The purchase price of the acquisition,
including costs of the transaction, was approximately $2,900. Goodwill
recognized in the acquisition was approximately $2,500.
In January 1998, the Company increased its investment in Home Dialysis of
Mount Auburn, Inc. (Mount Auburn), a home dialysis facility located in
Cincinnati, Ohio, in exchange for the issuance of 52,399 shares of common stock
of Everest Healthcare Services Corporation with a fair value of approximately
$377. Through the purchase, the Company increased its investment in Mount
Auburn from 50% to 80.5% and recognized goodwill of $266. Prior to the
acquisition, the Mount Auburn investment was accounted for under the equity
method of accounting.
In February 1998, the Company acquired the remaining outstanding equity
interests in Dialysis Specialist of South Texas, LLC (South Texas), which owns
and operates three outpatient and home dialysis facilities in Corpus Christi,
Texas. Prior to the acquisition, the Company owned a 33% interest in South
Texas and accounted for the investment under the equity method of accounting.
The purchase price of the acquisition was $7,600, including costs of the
transaction. The consideration for the purchase was financed through the
issuance of 179,300 shares of common stock of Everest Healthcare Services
Corporation with a fair value of approximately $1,300 and cash of approximately
$6,300. Goodwill recognized in the acquisition was approximately $7,100.
In March 1998 Alliance acquired a 70% interest in Perfusion Resource
Association LLC (PRA), a contract services provider located in Tampa, Florida.
The purchase price of the acquisition, including costs of the transaction, was
approximately $1,400. Goodwill recognized in the acquisition was approximately
$1,300.
In April 1998, the Company acquired North Buckner Dialysis Center, a dialysis
service provider located in Dallas, Texas. The purchase price of the
acquisition was approximately $5,100, including costs of the transaction. The
consideration for the purchase price of the acquisition was financed through
the issuance of 153,021 shares of common stock of Everest Healthcare Services
Corporation with a fair value of approximately $1,100 and cash of $4,000.
Goodwill recognized in the acquisition was approximately $4,100.
In February 1999, the Company acquired the remaining outstanding equity
interest in Dialysis Specialists of Central Cincinnati, Ltd. (Central
Cincinnati), an outpatient dialysis facility located in Norwood, Ohio. Prior to
the acquisition, the Company owned a 37.9% interest in Central Cincinnati and
accounted for the investment under the equity method of accounting. The
purchase price, including costs of the transaction, was approximately $5,600.
Goodwill recognized in the acquisition was approximately $4,800.
In February 1999, the Company increased its investment in Dialysis
Specialists of Topeka, Inc. (Topeka) from 25% to 75%. Topeka is an outpatient
dialysis facility located in Topeka, Kansas. Prior to the acquisition, the
Topeka investment was accounted for under the equity method of accounting. The
purchase price, including costs of the transaction, was approximately $1,300.
Goodwill recognized in the acquisition was approximately $600.
F-12
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1999, the Company acquired the remaining outstanding equity interest
in Home Dialysis of Fairfield, Inc. (Fairfield), a home dialysis facility
located in Fairfield, Ohio. Prior to the acquisition, the Company owned a 50%
interest in Fairfield and accounted for the investment under the equity method
of accounting. The purchase price, including costs of the transaction, was
approximately $2,800. Goodwill recognized in the acquisition was approximately
$1,900.
In March 1999, the Company acquired the remaining outstanding equity interest
in Home Dialysis of Columbus, Inc. (Columbus), an outpatient dialysis facility
and a home dialysis facility located in Columbus, Ohio. Prior to the
acquisition, the Company owned a 49% interest in Columbus and accounted for the
investment under the equity method of accounting. The purchase price, including
costs of the transaction, was approximately $500. Goodwill recognized in the
acquisition was approximately $500.
In May 1999, the Company acquired the remaining outstanding equity interest
in the Dialysis Specialists of Tulsa, Inc. (Tulsa), an outpatient dialysis
facility located in Tulsa, Oklahoma. Prior to this transaction, the Company
owned a 33% interest in Tulsa, and accounted for the investment under the
equity method of accounting. The purchase price, including the costs of the
transaction, was approximately $4,400. Goodwill recognized in the acquisition
was approximately $3,600.
In July 1999, the Company purchased certain assets and operations of
Englewood Dialysis Facility, LLC an outpatient dialysis facility located in
Englewood, New Jersey. The purchase price, including costs of the transaction,
was approximately $10,000. This transaction was accounted for as a purchase
which resulted in the recording of goodwill of approximately $7,000 and
covenant not to compete of $931.
In November 1999, the Company acquired a 100% interest in the non-medical
assets of Western New York Artificial Kidney Centers, which consists of three
outpatient dialysis facilities located in the Buffalo, New York area. The
purchase price, including costs of the transaction, was approximately $6,400.
Goodwill of approximately $5,100 and a covenant not to compete of $600 were
recognized in the acquisition.
In December 1999, the Company acquired St. Clare's Dialysis Facility, an
outpatient dialysis facility located in Dover, New Jersey. The purchase price,
including costs of the transaction, was approximately $1,500. Goodwill of
approximately $1,300 and a covenant not to compete of $135 were recognized in
the acquisition.
These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the excess of the purchase price over the fair value
of identifiable assets (including identifiable intangible assets) is allocated
to goodwill and other identifiable intangibles. The consolidated financial
statements include the operating results of each business from the respective
dates of acquisition.
7. Leases and Related Party Transactions
Capital Leases
Property under capital leases included within property and equipment at
September 30 are as follows:
1999 2000
------ ----
Furniture and fixtures....................................... $ 604 $614
Medical equipment............................................ 1,004 77
------ ----
1,608 691
Less: Accumulated depreciation............................... 694 335
------ ----
$ 914 $356
====== ====
F-13
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest rates on the capital lease obligations ranged from 8.0% to 14.0%.
Future minimum lease payments under capital leases with initial or remaining
terms of one year or more consisted of the following at September 30, 2000:
2001................................................................ $154
2002................................................................ 139
2003................................................................ 37
----
Total minimum lease payments........................................ 330
Amounts representing interest....................................... 17
----
Present value of minimum lease payments............................. 313
Less: Current portion............................................... 154
----
$159
====
Operating Leases
Prior to June 1998, the Company leased land and building space under
operating leases for some of its dialysis centers and its corporate offices
from ARE Partnership and Three M&L Partnership, related parties with common
ownership. In June 1998, the Company purchased the land and buildings from ARE
Partnership. For the year ended September 30, 1998, rents of approximately $616
were paid to these related parties. For the years ended September 30, 1999 and
2000, rents of approximately $149 and $132, respectively were paid to Three M&L
Partnership, which leases are in month-to-month renewal periods.
Additionally, the Company leases land and building space under operating
leases from unaffiliated entities for certain of its dialysis facilities. For
the years ended September 30, 1998, 1999, and 2000, approximately $4,451,
$4,137, and $5,898, respectively, were recorded as rent expense for such
leases. Expiration dates for these leases continue through 2009.
Future minimum rental commitments under non-cancelable operating leases with
terms in excess of one year are as follows:
2001.............................................................. $ 5,740
2002.............................................................. 5,283
2003.............................................................. 5,004
2004.............................................................. 4,509
2005.............................................................. 4,126
2006 and thereafter............................................... 11,165
-------
$35,827
=======
8. Property and Equipment
Property and equipment consist of the following at September 30:
1999 2000
------- -------
Leasehold improvements................................... $20,116 $26,489
Medical equipment........................................ 18,654 24,325
Furniture and fixtures................................... 10,804 12,132
Software................................................. 2,386 4,816
Building................................................. 4,082 4,138
Land..................................................... 216 216
Construction-in-progress................................. 1,235 53
------- -------
Less: Accumulated depreciation and amortization.......... 57,493 72,169
25,828 33,848
------- -------
$31,665 $38,321
======= =======
F-14
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Other Intangible Assets
Other intangibles consist of the following at September 30:
1999 2000
------ ------
Covenants not to compete................................... $2,632 $2,953
Other...................................................... 39 662
------ ------
$2,671 $3,615
====== ======
10. Accrued Expenses
Accrued expenses consist of the following at September 30:
1999 2000
------- -------
Compensation and benefits................................ $ 7,374 $ 6,853
Reimbursements to third party payors..................... 3,221 1,884
Interest................................................. 4,063 4,062
Professional fees........................................ 753 1,641
Other.................................................... 1,795 2,845
------- -------
$17,206 $17,285
======= =======
11. Long-Term Debt
Long-term debt consists of the following at September 30:
1999 2000
-------- --------
9 3/4% senior subordinated notes due 2008, Series B... $100,000 $100,000
Acquisition funding facility.......................... 13,916 20,161
Acquisition term notes................................ 7,000 7,000
Installment notes payable............................. 1,538 3,822
-------- --------
122,454 130,983
Less: Current maturities.............................. 801 4,760
-------- --------
$121,653 $126,223
======== ========
9 3/4% Senior Subordinated Notes due 2008, Series B
On May 5, 1998, the Company completed a private placement issuance of
$100,000 in principal amount of 9 3/4% Senior Subordinated Notes due 2008 (the
Offering). The Offering was made to qualified institutional buyers pursuant to
Rule 144A of the Securities and Exchange Commission (SEC). Effective September
2, 1998 the Company registered the senior subordinated notes with the SEC. Upon
the effectiveness of the registration, the Company exchanged the 9 3/4% Senior
Subordinated Notes due 2008, Series B for the notes sold in the Offering.
The 9 3/4% Senior Subordinated Notes, Series B (the Notes) mature on May 1,
2008. Interest is payable semi-annually in arrears each November 1 and May 1,
commencing November 1, 1998. On or after May 1,
F-15
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2003, the Notes may be redeemed at the option of the Company, in whole or in
part, at specified redemption prices plus accrued and unpaid interest:
Redemption
Year Price
---- ----------
2003........................................................... 104.875%
2004........................................................... 103.250%
2005........................................................... 101.625%
2006 and thereafter............................................ 100.000%
In addition, at any time on or prior to May 1, 2001, the Company may, subject
to certain requirements, redeem up to $35,000 aggregate principal amount of the
Notes with the net cash proceeds of one or more public equity offerings, at a
price equal to 109.75% of the principal amount to be redeemed plus accrued and
unpaid interest. In the event of a change in control, the Company is required
to offer to repurchase the Notes at a price equal to 101.0% of the principal
amount plus accrued and unpaid interest (see Note 20).
The Notes are general obligations of the Company, subordinated in right of
payment to all existing and future senior debt and are guaranteed by the
Company's wholly-owned subsidiaries (the Guarantor Subsidiaries). Each of the
Guarantor Subsidiaries' guarantees of the Notes are full, unconditional, and
joint and several. The Company may incur additional indebtedness, including
borrowings under its Credit Facility (see below), subject to certain
limitations. See Note 19 for guarantor financial information as of September
30, 1998, 1999 and 2000.
The indenture under which the Notes were issued contains certain covenants
that were met at September 30, 2000.
Credit Facilities
The Company has a Credit Facility consisting of two separate facilities; a
revolving credit facility and an acquisition credit facility.
The revolving credit facility of $35,000, including letters of credit of up
to $858, matures on June 30, 2002 (the "Revolving Credit Facility"). The
borrowings on the Revolving Credit Facility are limited to 75% of eligible
accounts receivable and up to 50% of eligible inventory. Interest is payable at
the Company's option of either the higher of the bank's prime rate (9.50% at
September 30, 2000) or the Federal Funds rate plus 1/2 of 1%, plus 0.00%-1.00%,
or the London Interbank Offered Rate (LIBOR) (6.80% at September 30, 2000) plus
2.00-2.75%. Commitment fees of 0.50% of the unused portion of the Revolving
Credit Facility are payable quarterly. No amounts were drawn on the revolving
credit facility at September 30, 2000.
The acquisition credit facility of $65,000 matures on June 15, 2005 (the
"Acquisition Credit Facility"). Under the Acquisition Credit Facility, all of
the borrowings outstanding thereunder on each of June 30, 2000, 2001 and 2002
must be converted to one or more seven-year term loans with balloon payments
due on June 15, 2005. On June 30, 2000, the Company converted $20,908 to a
seven-year term loan, principal and interest payments due quarterly, 10.75%
annual interest rate. Interest is payable at the Company's option of either the
higher of the bank's prime rate or the Federal Funds rate plus 1/2 of 1%, plus
0.25%-1.25%, or LIBOR plus 2.25%-3.00%. Commitment fees of 0.75% of the unused
portion of the Acquisition Credit Facility are payable quarterly. Excluding the
term loan, no amounts were drawn on the acquisition credit facility at
September 30, 2000.
F-16
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company purchased an interest-rate cap agreement in August 2000 to limit
its exposure to increasing interest rates on $10.0 million of its Acquisition
Credit Facility.
Acquisition Term Notes
In connection with the acquisition of the Extracorporeal Alliance, LLC (the
"Alliance"), the Company incurred $7,000 in notes payable to the former owners
of Alliance. These notes mature on October 31, 2002, and bear interest at the
5-year Treasury Note rate (5.9% as of September 30, 2000) (as determined on
November 1 of each year) plus 3.0%. Interest is payable monthly.
Installment Notes Payable
The Company has entered into various installment notes payable which are
payable to a vendor of medical equipment through September 2004, and bear
interest at 9.0% to 9.5% per annum. The notes are collateralized by medical
equipment.
Annual Maturities
Maturities of long term debt at September 30, 2000, are as follows:
2001............................................................. $ 4,760
2002............................................................. 4,177
2003............................................................. 10,604
2004............................................................. 3,228
2005............................................................. 2,987
2006 and thereafter.............................................. 105,227
--------
$130,983
========
12. Special Charges
The Company recorded approximately $23,000 of charges during fiscal 1999.
These amounts have been expensed as special charges and include $22,400 in
impairment of long-lived assets and $600 in severance costs.
The impairment of long-lived assets included (i) a $20,500 writedown of
goodwill and other intangible assets, (ii) a $1,400 write-off of advances to,
and other assets of, certain of the Company's joint ventures and (iii) the
writedown of $500 of fixed assets to fair value. The write-off of goodwill and
other intangible assets was the result of a deterioration in the profitability
and cash flows of certain acquired operations. The deterioration was due, in
part, to continued contractual adjustments and other reductions in anticipated
revenues. As a result of this deterioration, the Company evaluated the long-
lived assets that were not recoverable. As a result of this evaluation, the
Company recorded a write down of these assets based upon the amount by which
the carrying value of the assets exceeded their fair values as determined on a
discounted cash flow basis. Certain of the Company's joint ventures encountered
similar deterioration. As a result, the Company recorded a write-off of certain
advances to and other assets of these companies in fiscal 1999.
The severance costs to two executives of the Company related to amounts that
were due under the individuals' employment contract upon separating from the
Company. At September 30, 2000, the remaining liability under the employment
contracts is $128.
F-17
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred income taxes at September 30 were as follows:
1999 2000
------- -------
Allowance for uncollectible accounts.................... $ 4,709 $ 3,568
Tax deductible goodwill amortization.................... 6,496 7,090
Accrued vacation........................................ 965 1,547
Net operating loss carryforwards........................ 29 658
Other................................................... 170 168
------- -------
Total deferred tax assets............................... 12,369 13,031
Valuation allowance..................................... (134) (506)
------- -------
12,235 12,525
Patient accounts receivable basis difference............ (959) (529)
Basis difference in fixed assets........................ (128) (1,512)
------- -------
Total deferred tax liabilities.......................... (1,087) (2,041)
------- -------
Net deferred tax asset.................................. $11,148 $10,484
======= =======
The Company has net operating loss carryforwards at approximately $5.1
million which may be used to reduce future New York state income taxes, which
expire through 2010.
Income taxes consist of the following at September 30:
1998 1999 2000
------- -------- ------
Current:
Federal....................................... $ 4,120 $ 2,580 $1,434
State......................................... 1,181 756 1,193
Deferred........................................ (1,760) (10,163) 664
------- -------- ------
$ 3,541 $ (6,827) $3,291
======= ======== ======
Federal income taxes at the statutory rate are reconciled with the Company's
income tax provision at September 30 as follows:
1998 1999 2000
---- ----- ----
Federal statutory rate................................ 34.0% (34.0)% 34.0%
State income taxes, net of federal benefit............ 7.0 (4.3) 14.8
Nondeductible goodwill amortization................... 10.1 9.4 13.1
Other, net............................................ (2.1) 0.2 (3.3)
---- ----- ----
49.0% (28.7)% 58.6%
==== ===== ====
F-18
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Stock Options
The Company has stock options outstanding as follows:
Exercise
Options Price
--------- ----------
Balance at September 30, 1997....................... 1,756,100 7.50-9.10
Granted............................................. 140,000 13.05
Forfeitures......................................... (31,200) 9.10
---------
Balance at September 30, 1998....................... 1,864,900 7.50-13.05
Granted............................................. 135,181 13.05
Forfeitures......................................... (16,600) 9.10-13.05
---------
Balance at September 30, 1999....................... 1,983,481
Granted............................................. 60,000 13.05
Forfeitures......................................... (68,234) 9.10-13.05
Exercises........................................... (21,828) 9.10
---------
Balance at September 30, 2000....................... 1,953,419
=========
Included in the stock options outstanding are 526,500 stock options issued on
October 1, 1995 and 354,100 stock options issued in 1997 to the CEO of the
Company. In connection with the reorganization on November 30, 1997, these
880,600 stock options were assigned to Peak Liquidating, LLC (a shareholder of
the Company) and, as such, have been reflected as outstanding in all periods
subsequent to their original grant. The 526,500 options were issued upon the
formation of the Company and are currently exercisable. The remaining 1,426,919
options outstanding were issued under the Everest Healthcare Services
Corporation 1996 Stock Award Plan (the 1996 Plan). The 1996 Plan permits the
granting of stock options to certain key executive, managerial, and
administrative employees of the Company to purchase shares of the Company's
common stock. The stock options awarded vest ratably over a four year period in
25% increments. The stock options awarded expire ten years from the date of
grant. Of the stock options outstanding under the 1996 Plan, 930,000 are
exercisable at September 30, 2000.
In connection with the Company's reorganization, the Company cancelled all
stock options outstanding and subsequently reissued them under the Everest
Healthcare Services Corporation 1998 Stock Award Plan (the 1998 Plan). The 1998
Plan contains the same provisions as the 1996 Plan and the reissuance of stock
options had no effect on the options previously issued.
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB25), as permitted in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). Had
the provisions of SFAS 123 been used in the calculation of compensation expense
(calculated using the minimum value method for nonpublic companies), pro forma
net income would have been approximately $254 and $281 lower than the net
income reported in the statement of operations for the years ended September
30, 1999 and 2000, respectively.
15. Related Party Transactions
The Company provides administrative and purchasing services to several of its
unconsolidated affiliates, all of which are owned, or substantially owned, by
the majority equity holders of the Company. Fees charged to affiliates for
services were approximately $1,939, $998 and $984 during the years ended
September 30, 1998, 1999, and 2000, respectively, and are included in the
accompanying consolidated statement of operations.
F-19
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, the Company provides advances to certain affiliates. Amounts due
from unconsolidated affiliates at September 30 were as follows:
1999 2000
------- ------
Nephrology Associates of Northern Illinois, Ltd........... $ 7,526 $7,479
Unconsolidated Joint Ventures............................. 483 669
Others.................................................... 25 --
------- ------
$ 8,034 $8,148
======= ======
Nephrology Associates of Northern Illinois, Ltd., an unconsolidated affiliate
substantially owned by the majority equity holders of the Company, provides
management and physician supervisory services to the Company's outpatient
maintenance dialysis operations. Total fees incurred for such services amounted
to approximately $1,536, $1,536 and $1,600 during the years ended September 30,
1998, 1999, and 2000, respectively, and are included in the accompanying
consolidated statement of operations.
The Company earned interest on outstanding balances due from unconsolidated
affiliates of approximately $1,261, $904 and $776 during the years ended
September 30, 1998, 1999 and 2000, respectively.
Insurance premiums totalling approximately $480, $1,233, and $2,206 were paid
during the years ended September 30, 1998, 1999 and 2000, respectively to a
multiemployer captive insurance company. Certain stockholders of the Company
own a 6.67% interest in the multiemployer insurance company.
16. Significant Vendor
For the years ended September 30, 1998 and 1999, purchases from two vendors
accounted for 46% and 40% of total purchases, respectively. For the year ended
September 30, 2000, purchases from one vendor accounted for 54% of total
purchases.
17. Supplemental Cash Flow Information
The following table provides supplemental cash flow data in addition to the
information provided in the consolidated statements of cash flows for the years
ended September 30:
1998 1999 2000
------- ------- -------
Cash paid for:
Income taxes........................................ $ 7,176 $ 3,263 $ 2,615
Interest............................................ 4,246 12,459 12,982
Supplemental disclosure of non-cash activity:
Fair value of common stock issued in business
acquisitions......................................... 2,770 -- --
Fair value of common stock issued in connection with
the acquisition of minority interests................ 26,610 -- --
Distribution of notes receivable to members........... 7,209 -- --
18. Reportable Segments
The Company has two reportable segments: Dialysis Services and Contract
Services. The Company's Dialysis Services segment consists of 74 outpatient
dialysis treatment centers in 11 states, which primarily provide outpatient
chronic dialysis treatments and 34 hospital based treatment centers that
provide acute dialysis treatments. The Company's Contract Services segment
provides perfusion, apheresis, and autotransfusion treatments in 67 hospitals
in 13 states.
The Company evaluates performance and allocates resources based upon profit
or loss before income taxes and extraordinary items. The reportable segment's
accounting policies are the same as those described in the
F-20
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
summary of significant accounting policies (see Note 3). The Company's
reportable segments are independent operating divisions that are managed
separately. All intercompany costs are eliminated.
Contract
Dialysis Services Total
-------- -------- --------
As of and for the year ended September 30, 2000:
Revenues........................................ $209,985 $23,578 $233,563
Interest expense................................ 276 630 906
Depreciation and amortization................... 9,515 882 10,397
Equity in earnings of unconsolidated
subsidiaries................................... 472 -- 472
Segment profit.................................. 24,500 747 25,247
Segment assets.................................. 180,938 19,784 200,722
Investments in and advances to affiliated
entities....................................... 626 1,239 1,865
Expenditures for long-lived assets.............. 16,267 768 17,035
As of and for the year ended September 30, 1999:
Revenues........................................ $163,228 $21,690 $184,918
Interest expense................................ 4 755 759
Depreciation and amortization................... 7,989 786 8,775
Equity in earnings of unconsolidated
subsidiaries................................... 586 -- 586
Special charges................................. 20,827 -- 20,827
Segment profit (loss)........................... (6,120) 779 (5,341)
Segment assets.................................. 141,659 18,855 160,514
Investments in and advances to affiliated
entities....................................... 868 1,239 2,107
Expenditures for long-lived assets.............. 30,952 430 31,382
Contract
Dialysis Services Total
-------- -------- --------
As of and for the year ended September 30, 1998:
Revenues........................................ $129,017 $18,458 $147,475
Interest expense................................ 246 790 1,036
Depreciation and amortization................... 5,170 602 5,772
Equity in earnings of unconsolidated
subsidiaries................................... 1,784 -- 1,784
Segment profit (loss)........................... 14,788 (66) 14,722
Segment assets.................................. 122,765 18,935 141,700
Investments in and advances to affiliated
entities....................................... 1,690 -- 1,690
Expenditures for long-lived assets.............. 42,547 1,695 44,242
F-21
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the reportable segments to consolidated income (loss)
before income taxes and cumulative effect of change in accounting and
consolidated assets are as follows:
1998 1999 2000
-------- -------- --------
Profit (loss):
Total profit (loss) for reportable segments...... $ 14,722 $ (5,341) $ 25,247
Unallocated amounts:
Elimination of corporate administrative expense.. 14,486 15,345 15,855
Interest expense................................. (6,848) (11,808) (13,393)
Depreciation and amortization.................... (1,155) (1,704) (1,888)
Special charges.................................. -- (2,132) --
Interest income.................................. 1,952 1,483 971
Corporate expenses............................... (15,930) (19,026) (21,108)
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in accounting... $ 7,227 $(23,183) $ 5,684
======== ======== ========
Assets:
Total assets for reportable segments............. $141,700 $160,514 $200,722
Elimination of intercompany accounts............. (41,796) (37,040) (49,818)
Unallocated assets............................... 96,491 72,799 62,027
-------- -------- --------
Consolidated assets.......................... $196,395 $196,273 $212,931
======== ======== ========
Other significant items as disclosed within the reportable segments are
reconciled to the consolidated totals as follows:
Other Significant Items:
Segment
Totals Adjustments Consolidated
------- ----------- ------------
For the year ended September 30, 2000
Interest expense............................ $ 906 $13,393 $14,299
Depreciation and amortization............... 10,397 1,888 12,285
Interest income............................. -- 971 971
Investments in and advances to affiliated
entities................................... 1,865 6,908 8,773
Expenditures for long-lived assets.......... 17,035 1,714 18,749
For the year ended September 30, 1999
Interest expense............................ $ 759 $11,808 $12,567
Depreciation and amortization............... 8,775 1,704 10,479
Special charges............................. 20,827 2,132 22,959
Interest income............................. -- 1,483 1,483
Investments in and advances to affiliated
entities................................... 2,107 6,795 8,902
Expenditures for long-lived assets.......... 31,382 1,664 33,046
For the year ended September 30, 1998
Interest expense............................ $ 1,036 $ 6,848 $ 7,884
Depreciation and amortization............... 5,772 1,155 6,927
Interest income............................. -- 1,952 1,952
Investments in and advances to affiliated
entities................................... 1,690 16,643 18,333
Expenditures for long-lived assets.......... 44,242 4,800 49,042
F-22
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. 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.
The following sets forth the financial data at September 30, 2000 and for the
year then ended:
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Statement of Operations
Data
Net revenues............ $ -- $192,460 $41,103 $ -- $233,563
Patient care costs...... -- 134,889 32,809 -- 167,698
General and
administrative
expenses............... 20,687 5,514 1,667 -- 27,868
Provision for bad
debts.................. -- 5,777 525 -- 6,302
Depreciation and
amortization........... 1,890 8,793 1,602 -- 12,285
-------- -------- ------- -------- --------
Income (loss) from
operations............. (22,577) 37,487 4,500 -- 19,410
Interest income
(expense), net......... (12,586) 31 (773) -- (13,328)
Equity in earnings of
affiliate.............. -- 472 -- -- 472
Minority interests in
earnings............... (211) (360) (299) -- (870)
-------- -------- ------- -------- --------
Income (loss) before
income taxes expense .. (35,374) 37,630 3,428 -- 5,684
Income tax expense
(benefit).............. (14,150) 17,081 360 -- 3,291
-------- -------- ------- -------- --------
Net income (loss)....... $(21,224) $ 20,549 $ 3,068 $ -- $ 2,393
======== ======== ======= ======== ========
Balance Sheet Data
Assets:
Cash and cash
equivalents........... $ 667 $ 114 $ 3,441 $ -- $ 4,222
Patient accounts and
other receivables .... 16,570 34,668 7,836 (236) 58,838
Other current assets... 544 6,622 1,530 -- 8,696
Property and equipment,
net................... 5,976 29,582 2,763 -- 38,321
Goodwill, net.......... 12,042 50,232 14,344 -- 76,618
Investments in and
advances to affiliated
companies............. 59,363 25,398 2,258 (78,246) 8,773
Other assets........... 6,411 9,770 1,282 -- 17,463
-------- -------- ------- -------- --------
Total assets........... $101,573 $156,386 $33,454 $(78,482) $212,931
======== ======== ======= ======== ========
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities.... $ 11,289 $ 23,777 $ 6,390 $ (236) $ 41,220
Long-term liabilities.. 120,465 (4,539) 12,744 -- 128,670
Total stockholders'
equity (deficit)...... (30,181) 137,148 14,320 (78,246) 43,041
-------- -------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit)............. $101,573 $156,386 $33,454 $(78,482) $212,931
======== ======== ======= ======== ========
F-23
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Statement of Cash Flows
Data
Operating activities:
Net income (loss)....... $(21,224) $20,549 $3,068 $-- $ 2,393
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Provision for bad
debts................. -- 5,777 525 -- 6,302
Depreciation and
amortization.......... 1,890 8,793 1,602 -- 12,285
Amortization of
deferred financing
costs................. 1,318 -- -- -- 1,318
Deferred income taxes.. 664 -- -- -- 664
Equity in earnings of
subsidiaries.......... -- (472) -- -- (472)
Minority interests in
earnings.............. 211 360 299 -- 870
Net change in operating
assets and liabilities
(net of effect of
acquisitions)......... (2,493) 1,301 (4,733) -- (5,925)
-------- ------- ------ ---- ---------
Net cash provided by
(used in) operating
activities............ (19,634) 36,308 761 -- 17,435
Investing activities:
Additions to property
and equipment......... (1,714) (8,422) (1,131) -- (11,267)
Acquisition of
intangible assets..... -- (615) -- -- (615)
Acquisition of
businesses, net of
cash acquired......... -- (7,444) -- -- (7,444)
(Increase) decrease in
amounts due from
affiliates............ 17,262 (18,596) 1,203 -- (131)
-------- ------- ------ ---- ---------
Net cash provided by
(used in) investing
activities............ 15,548 (35,077) 72 -- (19,457)
Financing activities:
Proceeds from long term
debt.................. 41,512 -- -- -- 41,512
Payments on long term
debt.................. (35,186) (1,489) -- -- (36,675)
Other.................. (1,518) (456) -- -- (1,974)
-------- ------- ------ ---- ---------
Net cash provided by
(used in) financing
activities............ 4,808 (1,945) -- -- 2,863
-------- ------- ------ ---- ---------
Increase (decrease) in
cash and cash
equivalents............ 722 (714) 833 -- 841
Cash (overdraft) and
cash equivalents at
beginning of year...... (55) 828 2,608 -- 3,381
-------- ------- ------ ---- ---------
Cash and cash
equivalents at end of
year................... $ 667 $ 114 $3,441 -- $ 4,222
======== ======= ====== ==== =========
F-24
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth the financial data at September 30, 1999 and for the
year then ended:
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Statement of Operations
Data
Net revenues............ $ -- $149,203 $35,715 $ -- $184,918
Patient care costs...... -- 105,075 26,559 -- 131,634
General and
administrative
expenses............... 19,703 2,439 2,186 -- 24,328
Special charges......... 2,132 20,548 279 -- 22,959
Provision for bad
debts.................. -- 6,176 1,184 -- 7,360
Depreciation and
amortization........... 2,600 6,496 1,383 -- 10,479
-------- -------- ------- -------- --------
Income (loss) from
operations............. (2,435) 8,469 4,124 -- (11,842)
Interest income
(expense), net......... (10,328) 271 (1,027) -- (11,084)
Equity in earnings of
affiliate.............. -- 586 -- -- 586
Minority interests in
earnings............... (153) (286) (404) -- (843)
-------- -------- ------- -------- --------
Income (loss) before
income taxes expense
and cumulative effect
of change in
accounting............. (34,916) 9,040 2,693 -- (23,183)
Income tax expense
(benefit).............. (14,030) 5,875 1,328 -- (6,827)
-------- -------- ------- -------- --------
Income (loss) before
cumulative effect of
change in accounting... (20,886) 3,165 1,365 -- (16,356)
Cumulative effect of
change in accounting... 341 126 148 -- 615
-------- -------- ------- -------- --------
Net income (loss)....... $(21,227) $ 3,039 $ 1,217 $ -- $(16,971)
======== ======== ======= ======== ========
Balance Sheet Data
Assets:
Cash (overdraft) and
cash equivalents...... $ (55) $ 828 $ 2,608 $ -- $ 3,381
Patient accounts and
other receivables .... 10,891 36,226 7,174 (866) 53,425
Other current assets... 192 7,579 1,232 -- 9,003
Property and equipment,
net................... 5,598 23,499 2,568 -- 31,665
Goodwill, net.......... 12,596 46,164 14,688 -- 73,448
Investments in and
advances to affiliated
companies............. 73,703 4,474 1,056 (70,331) 8,902
Other assets........... 13,293 1,884 1,272 -- 16,449
-------- -------- ------- -------- --------
Total assets........... $116,218 $120,654 $30,598 $(71,197) $196,273
======== ======== ======= ======== ========
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities.... $ 10,201 $ 16,156 $ 5,761 $ (920) $ 31,198
Long-term liabilities.. 114,336 (4,130) 13,584 -- 123,790
Total stockholders'
equity (deficit)...... (8,319) 108,628 11,253 (70,277) 41,285
-------- -------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit)............. $116,218 $120,654 $30,598 $(71,197) $196,273
======== ======== ======= ======== ========
F-25
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Statement of Cash Flows
Data
Operating activities:
Net income (loss)....... $(21,227) $ 3,039 $1,217 $-- $(16,971)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Provision for bad
debts................. -- 6,176 1,184 -- 7,360
Depreciation and
amortization.......... 2,600 6,496 1,383 -- 10,479
Amortization of
deferred financing
costs................. 1,418 -- -- -- 1,418
Special Charges........ 2,132 20,548 279 -- 22,959
Cumulative effect of
accounting change..... 341 126 148 -- 615
Deferred income taxes.. (10,163) -- -- -- (10,163)
Equity in earnings of
subsidiaries.......... -- (586) -- -- (586)
Minority interests in
earnings.............. 153 286 404 -- 843
Net change in operating
assets and liabilities
(net of effect of
acquisitions)......... (26,689) 19,285 (2,195) -- (9,599)
-------- ------- ------ ---- --------
Net cash provided by
(used in) operating
activities............ (51,435) 55,370 2,420 -- 6,355
Investing activities:
Additions to property
and equipment......... (1,828) (3,661) (1,399) -- (6,888)
Acquisition of
businesses, net of
cash acquired......... -- (25,408) (750) -- (26,158)
(Increase) decrease in
amounts due from
affiliates............ 30,430 (24,643) 782 -- 6,569
-------- ------- ------ ---- --------
Net cash provided by
(used in) investing
activities............ 28,602 (53,712) (1,367) -- (26,477)
Financing activities:
Proceeds from notes
payable............... 60,316 -- -- -- 60,316
Payments on notes
payable............... (46,400) (554) -- -- (46,954)
Other.................. (1,869) (516) -- -- (2,385)
-------- ------- ------ ---- --------
Net cash provided by
(used in) financing
activities............ 12,047 (1,070) -- -- 10,977
-------- ------- ------ ---- --------
Increase (decrease) in
cash and cash
equivalents............ (10,786) 588 1,053 -- (9,145)
Cash and cash
equivalents at
beginning of year...... 10,731 240 1,555 -- 12,526
-------- ------- ------ ---- --------
Cash (overdraft) and
cash equivalents at end
of year................ $ (55) $ 828 $2,608 $-- $ 3,381
======== ======= ====== ==== ========
F-26
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth the financial data at September 30, 1998 and for the
year then ended:
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Statement of Operations
Data
Net revenues............ $ -- $118,926 $28,549 $-- $147,475
Patient care costs...... -- 81,141 21,503 -- 102,644
General and
administrative
expenses............... 4,509 15,985 2,792 -- 23,286
Provision for bad
debts.................. -- 2,462 265 -- 2,727
Depreciation and
amortization........... 595 5,184 1,148 -- 6,927
------- -------- ------- ---- --------
Income (loss) from
operations............. (5,104) 14,154 2,841 -- 11,891
Interest expense, net... (3,727) (1,025) (1,180) -- (5,932)
Equity in earnings of
affiliates............. -- 1,784 -- -- 1,784
Minority interests in
earnings............... (315) (237) 36 -- (516)
------- -------- ------- ---- --------
Income (loss) before
income tax expense..... (9,146) 14,676 1,697 -- 7,227
Income tax expense...... -- 3,368 173 -- 3,541
------- -------- ------- ---- --------
Net income (loss)....... $(9,146) $ 11,308 $ 1,524 $-- $ 3,686
======= ======== ======= ==== ========
F-27
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Statement of Cash Flows
Data
Operating activities:
Net income (loss)....... $ (9,146) $ 11,308 $ 1,524 $-- $ 3,686
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Provision for bad
debts.................. -- 2,462 265 -- 2,727
Depreciation and
amortization........... 595 5,184 1,148 -- 6,927
Amortization of deferred
financing costs........ 466 -- -- -- 466
Deferred income taxes... -- (1,760) -- -- (1,760)
Equity in earnings of
affiliates............. -- (1,784) -- -- (1,784)
Minority interests in
(earnings) loss........ 315 237 (36) -- 516
Net change in operating
assets and liabilities
(net of effect of
acquisitions).......... (1,702) 667 (1,973) -- (3,008)
--------- -------- ------- ---- ---------
Net cash provided by
(used in) operating
activities............. (9,472) 16,314 928 -- 7,770
Investing activities:
Capital expenditures.... (4,834) (6,633) (697) -- (12,164)
Acquisition of
intangible assets...... -- (19,507) -- -- (19,507)
Acquisition of
businesses, net of cash
acquired............... -- (17,371) -- -- (17,371)
Increase (decrease) in
amounts due from
affiliates............. (32,112) 28,158 -- -- (3,954)
--------- -------- ------- ---- ---------
Net cash used in
investing activities... (36,946) (15,353) (697) -- (52,996)
Financing activities:
Proceeds from long term
debt................... 191,531 -- -- -- 191,531
Payments on long term
debt................... (128,922) (272) -- -- (129,194)
Other................... (6,276) (766) -- -- (7,042)
--------- -------- ------- ---- ---------
Net cash provided by
(used in) financing
activities............. 56,333 (1,038) -- -- 55,295
--------- -------- ------- ---- ---------
Increase (decrease) in
cash and cash
equivalents............ 9,915 (77) 231 -- 10,069
Cash and cash
equivalents at
beginning of year...... 816 317 1,324 -- 2,457
--------- -------- ------- ---- ---------
Cash and cash
equivalents at end of
year................... $ 10,731 $ 240 $ 1,555 $-- $ 12,526
========= ======== ======= ==== =========
20. Subsequent Events
Sale of Company
On November 2, 2000, the Company announced that it had entered into an
Agreement and Plan of Merger, dated November 1, 2000, by and among the Company,
Fresenius Medical Care AG ("FMC"), Edmund Acquisition Sub, Inc. and certain
stockholders of the Company (the "Merger Agreement"). The Merger Agreement
provides for a merger of the Company with and into Edmund Acquisition Sub, Inc.
While the merger is anticipated by management to be completed in the first
calendar quarter of 2001, because all the conditions of the Merger Agreement
have not been met, the exact timing for consummation of the merger is uncertain
at this time. The purchase price of $343 million will be comprised of $240
million cash and 2.25
F-28
EVEREST HEALTHCARE SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million Fresenius Medical Care AG preference shares. The cash portion of the
purchase price is subject to increase or decrease if the net worth of the
company is above or below a specified target.
Tender Offer of the 9 3/4% Senior Subordinated Notes due 2008
On November 15, 2000, in connection with the Merger Agreement, FMC announced
a tender offer and consent solicitation for the Company's 9 3/4% Senior
Subordinated Notes due 2008 (the "Notes"). On December 1, 2000, following the
tender by holders possessing a majority of the Notes, the Company and its
subsidiaries which are guarantors under the Indenture, dated May 5, 1998 by and
among the Company, the Subsidiary Guarantors and American National Bank and
Trust Company of Chicago, as trustee (the "Subsidiary Guarantors") executed a
Supplemental Indenture which implements amendments to the Indenture. These
amendments to the Indenture shall be effective upon the later of the
consummation of the transactions under the Merger Agreement or the expiration
of the tender offer on December 22, 2000.
21. Selected Quarterly Data
Quarter
--------------------------------
1999 First Second Third Fourth
- ---- ------- ------- ------- --------
Net revenues................................ $39,908 $43,715 $49,228 $ 52,067
Income from operations...................... 3,641 3,036 4,617 (23,136)
Net income (loss) before cumulative effect
of change in accounting.................... 490 170 344 (17,360)
Net income (loss)........................... 490 170 344 (17,975)
2000
- ----
Net revenues................................ $53,431 $56,882 $59,049 $ 64,201
Income from operations...................... 4,355 4,595 4,785 5,675
Net income (loss)........................... 478 298 551 1,066
F-29
SCHEDULE II
Valuation & Qualifying Accounts
Everest Healthcare Services Corporation
(in thousands)
Balance Reclassed Balance
at Charged Charged from at End
Beginning to to Other Other of
of Period Expense Accounts Recoveries Accounts Period
--------- ------- -------- ---------- --------- -------
Year ended September 30,
1998
Deducted from asset
accounts:
Allowance for patient
accounts receivable.. $ 2,791 $2,727 $ 5,558 $2,295 $ -- $ 8,781
------- ------ -------- ------ ------ -------
Total............... $ 2,791 $2,727 $ 5,558 $2,295 $ -- $ 8,781
======= ====== ======== ====== ====== =======
Year ended September 30,
1999
Deducted from asset
accounts:
Allowance for patient
accounts receivable.. $ 8,781 $7,360 $ (5,022) $ -- $ -- $11,119
------- ------ -------- ------ ------ -------
Total............... $ 8,781 $7,360 $ (5,022) $ -- $ -- $11,119
======= ====== ======== ====== ====== =======
Year ended September 30,
2000
Deducted from asset
accounts:
Allowance for patient
accounts receivable.. $11,119 $7,614 $(10,739) $ -- $1,875 $ 9,869
------- ------ -------- ------ ------ -------
Total............... $11,119 $7,614 $(10,739) $ -- $1,875 $ 9,869
======= ====== ======== ====== ====== =======
1